SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended September 30,
2011OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
2014 Commission File Number: 0-25233
PROVIDENT NEW YORK001-35385
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(Exact name of Registrant as Specified in its Charter)
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| Delaware | | 80-0091851 |
(State or Other Jurisdiction of
Incorporation onor Organization) | | (IRS Employer
Identification Number) |
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| 400 Rella Blvd., Montebello, New York | | 10901 |
| (Address of Principal Executive Office) | | (Zip Code) |
(Registrant’s Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Class | | Name of Each Exchange On Which Registered |
| Common Stock, par value $0.01 per share | | The NASDAQ Global Select MarketNew York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
____________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act YES ý NO ¨ NO x Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO xý 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 xý NO ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files) YES xý 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. x¨ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer — See definition of “accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).
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| Large Accelerated Filer | x | ¨ | | Accelerated Filer | | xo |
| Non-Accelerated Filer | o | ¨ | | Smaller Reporting Company | | ¨o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO xý 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 March 31,
20112014 was
$343,678,848.$1,057,670,927
As of December 5, 2011November 25, 2014 there were 83,899,070 outstanding 37,883,008 shares of the Registrant’s common stock.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s fiscal year ended September 30, 2011.2014.
PROVIDENT NEW YORK
FORM 10-K TABLE OF CONTENTS
PART I
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Sterling Bancorp
PART IITEM 1. Business
Provident New York Bancorp
Provident New YorkSterling Bancorp (“Provident Bancorp”Sterling” or the “Company”) is a Delaware corporation that owns all of the outstanding shares of common stock of ProvidentSterling National Bank (the “Bank”)., which is the Company’s principal subsidiary. At September 30, 2011, Provident Bancorp2014, the Company had, on a consolidated basis, $7.3 billion in assets, of $3.1$5.3 billion in deposits, of $2.3 billion and stockholders’ equity of $431.1 million. As of September 30, 2011, Provident Bancorp had 37,864,008$961.1 million and 83,628,267 shares of common stock outstanding.
Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank.
On October 31, 2013, Provident New York Bancorp (“Legacy Provident”) and the former Sterling Bancorp (“Legacy Sterling”) merged.
In connection with the merger, the Company completed the following corporate actions:
Legacy Sterling merged with and into Legacy Provident, the accounting acquirer and the surviving entity.
The Company changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding company, as defined by the Bank
Holding Company Act of 1956, as amended.
Sterling National Bank, which was owned by Legacy Sterling, merged into Provident Bank, which was owned by Legacy Provident.
The Bank changed its legal entity name to Sterling National Bank.
We refer to the transactions detailed above collectively as the “Merger”.
The Merger was a stock-for-stock transaction valued at $457.8 million based on the closing price of Legacy Provident’s common stock on October 31, 2013. Under the terms of the Merger, each share of Legacy Sterling was converted into the right to receive 1.2625 shares of Legacy Provident’s common stock. Consistent with our strategy of expanding in the greater New York metropolitan region, we believe the Merger has created a larger, more diversified company and accelerated the build-out of our differentiated strategy targeting small-to-middle market commercial clients and consumers. See additional disclosure regarding the Merger in Note 2. “Acquisitions” to the consolidated financial statements.
Pending Acquisition of Hudson Valley Holding Corp.
On November 5, 2014, the Company announced it had entered into a definitive merger agreement with Hudson Valley Holding Corp. (NYSE: HVB) (the “HVB Merger”). In the HVB Merger, which is a stock-for-stock transaction valued at approximately $539 million based on the closing price of Company common stock on November 4, 2014, Hudson Valley Holding Corp. shareholders will receive a fixed ratio of 1.92 shares of Company common stock for each share of Hudson Valley Holding Corp. common stock. Upon closing, the Company’s shareholders will own approximately 69% of stock in the combined company and Hudson Valley Holding Corp. shareholders will own approximately 31%.
On a pro forma combined basis, for the twelve months ended September 30, 2014, the companies had revenue of $363 million and $22 million in net income. Upon completion of the HVB Merger, the combined company is expected to have approximately $10.7 billion in assets, $6.6 billion in gross loans, and deposits of $8.1 billion. The HVB Merger will further the Company’s strategy of expanding in the greater New York metropolitan region by providing the Company with a significant presence and deposit market share in Westchester County, New York, and will create an independent,opportunity to realize significant operating expense savings. The transaction is expected to be accretive to earnings per share in fiscal 2015 and 2016.
The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions, and is expected to close in the second calendar quarter of 2015.
Senior Notes Capital Raise
In connection with the Merger, the Company completed the offering of $100 million of its senior notes due 2018 (the “Senior Notes”) on July 2, 2013. The Senior Notes, which bear interest at 5.50% annually, were issued under an indenture dated July 2, 2013 (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Senior Notes were sold in a private placement
and resold by the initial purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).
The Senior Notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries. Interest on the Senior Notes is payable on January 2 and July 2 and began January 2, 2014. Interest is calculated on the basis of a 360-day year of twelve 30-day months. The Senior Notes will mature on July 2, 2018.
Acquisition of Gotham Bank of New York
On August 10, 2012, the Company acquired Gotham Bank of New York (“Gotham”), a New York state-chartered banking corporation with approximately $431.5 million in assets, $205.5 million in loans, and $368.9 million in deposits and one branch location in midtown Manhattan. At the closing, Gotham was merged with and into the Bank, with the Bank as the surviving entity. The shareholders of Gotham received cash equal to 125% of adjusted tangible net worth, subject to fair value adjustments. The aggregate cash consideration to Gotham shareholders and option holders was approximately $41 million.
Common Equity Capital Raise
On August 7, 2012, the Company sold directly to several institutional investors an aggregate of 6,258,504 shares of its common stock at a price of $7.35 per share. The Company received net proceeds of approximately $46 million, which were used to fund the acquisition of Gotham and for general corporate purposes.
Sterling National Bank
The Bank is a growing full-service regional bank founded in 1888, is headquartered1888. Headquartered in Montebello, New York, the Bank specializes in the delivery of services and issolutions to business owners, their families and consumers within the principal bank subsidiarycommunities we serve through teams of Provident Bancorp. With $3.1 billion in assetsdedicated and 513 full-time equivalent employees, Provident Bank accounts for substantially all of Provident Bancorp’s consolidated assets and net income. We operate 37 full servicing banking offices consisting of 30 retail branches and 7 commercial banking centers which serve the Hudson Valley region. There are 13 offices located in Rockland, New York, 14 offices in Orange County, New York, 8 offices in contiguous Sullivan, Ulster, Westchester and Putnam Counties in New York, and two offices in Bergen County, New Jersey which operate under the name PBNY Bank, a division of Provident Bank, New York. Providentexperienced relationship managers. Sterling National Bank offers a complete line of commercial, community business, (small business) and retailconsumer banking products and services. Additionally,As of September 30, 2014, the Bank had $7.3 billion in assets, $5.3 billion in deposits and 836 full-time equivalent employees.
Subsidiaries
The Company
announced on October 31, 2011 its intention to expand into New York City, withand the
employmentBank maintain a number of
a market area president and intends to staff a commercial banking center with several teams of relationship bankers servicing middle market clients commercial business.We also offer deposit services to municipalities located in the State of New York through Provident Bank’s wholly-owned subsidiary, Provident Municipal Bank.
Provest Services Corporation I issubsidiaries, including a wholly-owned subsidiary of Provident Bank, holding an investment in a limited partnership that 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 Provident Bank that has engaged a third-party provider to sell annuities, life and health insurance products to Provident Bank’s customers. The activities of these subsidiaries have had an insignificant effect on our consolidated financial condition and results of operations to date. Provident REIT, Inc. and WSB Funding are subsidiaries in the form of real estate investment trusts and hold commercialtrust that holds real estate loans. Also, the Bank maintainsmortgage loans, several corporations whichsubsidiaries that hold foreclosed properties acquired by Provident Bank.
Provident Bank’sthe Bank, a Vermont captive insurance company and other subsidiaries that have an immaterial impact on the financial condition or results of operations of the Company.
Additional Information
The Company’s website
(www.providentbanking.com)(www.sterlingbancorp.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission
(“SEC”), including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings,
registration statements on Form S-4, as well as ownership reports on Forms 3, 4 and 5 filed by the Company’s directors and executive officers. Copies may also be obtained, without charge, by written request to
Provident New YorkSterling Bancorp,
Investor Relations, 400 Rella Boulevard, Montebello, New York 10901, Attention:
Miranda Grimm. Provident Bank’sInvestor Relations. Sterling’s website is not part of this Annual Report on Form 10-K.
Non-Bank Subsidiaries
In addition to Provident
Strategy
Through its subsidiary Sterling National Bank, the Company owns Hardenburgh Abstract Company, Inc. (“Hardenburgh”) that was acquiredoperates as a regional bank providing a broad offering of deposit, lending and wealth management products to commercial, consumer and municipal clients in connection withits market area. The Bank seeks to differentiate itself by focusing on the acquisitionfollowing principles:
Prioritize client relationships over transactions.
Compete on service experience versus price superiority.
Deploy a single point of Warwick Community Bancorp (“WSB”)contact, relationship-based distribution strategy through our commercial banking teams and Hudson Valley Investment Advisors, LLC, an investment advisory firm that generates investmentfinancial centers.
Focus on specific customer segments and geographic markets.
Maximize efficiency through a technology enabled, low-cost operating platform.
Maintain strong risk management
fees. Hardenburgh had gross revenue from title insurance policies and abstracts of $1.2 million and net income of$220,000systems.
Our strategic objectives include generating sustainable growth in
2011, Hudson Valley Investment Advisors, LLC generated $2.4 million in fee income in 2011 and net income of $276,000 and Provident Risk Management, Inc. a captive insurance company, generated $1.2 million in intercompany revenues and
$980,000 in net income.Provident Municipal Bank
Provident Municipal Bank,earnings by expanding client acquisitions, improving asset quality and increasing operating efficiency. To achieve these goals we are: 1) focusing on high value client segments; 2) expanding our
delivery and distribution channels; 3) creating a wholly-owned subsidiary of Provident Bank,high productivity and performance culture; 4) controlling our operating costs; and 5) proactively managing enterprise risk.
We focus on delivering products and services to small and middle market commercial businesses and affluent consumers. We believe that this is a New York State-chartered commercialclient segment that is underserved by larger bank which is engaged in the business of accepting deposits from municipalitiescompetitors in our market area.
The Bank targets the following geographic markets: the New York
State law requires municipalities located inMetro Market, which includes Manhattan and Long Island; and the
State of New York
to deposit funds with commercial banks, effectively forbidding these municipalities from depositing funds with savings banks, including federally chartered savings associations, such as Provident Bank.Forward-Looking Statements
From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impactSuburban Market, which consists of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A. and our Cautionary Statement Regarding Forward-Looking Information included in Item 7.
Market Area
We operate 37 full servicing banking offices consisting of 30 retail branches and 7 commercial banking centers which serve the Hudson Valley region. There are 13 offices located in Rockland, New York, 14 offices in Orange, County, New York, 8 offices in contiguous Sullivan, Ulster, Putnam and Westchester and Putnam Countiescounties in New York and two offices in Bergen County in New JerseyJersey. We believe the Bank operates in an attractive footprint that presents us with significant opportunities to execute our strategy. Based on data from Oxxford Information Technology, we estimate the total number of small and middle market businesses in our footprint exceeds 550 thousand.
We deploy a team-based distribution strategy in which
operate underclients are served by a focused and experienced group of relationship managers that are responsible for all aspects of the
name PBNY Bank, a divisionclient relationship and delivery of
Provident Bank, New York. Provident Bank offers a complete line of commercial, community business (small business) and retail bankingour products and services.
Additionally,A significant portion of the
Company announced on October 31, 2011 its intention to expand into New York City, withBank’s organic growth in 2014 was driven by the
employmentrecruitment of
a market area president and intend to staff anew teams. As of September 30, 2014, the Bank had 21 commercial banking
center with several teams of relationship bankers servicing middle market client’s commercial business.Our primary lending area consists of Rocklandteams. We expect to continue to grow deposits and Orange Counties as well as contiguous counties. Rockland and Orange Counties represent a suburban area with a broad employment base. These counties also serve as bedroom communities for nearby New York City and other suburban areas including Westchester County and northern New Jersey. According to data published by the Federal Deposit Insurance Corporation (“FDIC”) as of June 30, 2011, Provident Bank holds the #2 share of deposits in Rockland County and #3 share of deposits in Orange County, and overall has the combined #2 share of deposits in Rockland and Orange Counties, New York.
Management Strategy
We operate as an independent bank that offers a broad range of customer-focused financial services as an alternative to large regional, multi-state, and international banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area focusing on core deposit generation, especially transaction accounts and quality loan growth with emphasis on growing commercial loan balances which provides a favorable platform for long-term sustainable growth. We seekthrough the addition of new teams.
The Bank focuses on building client relationships that allow us to
maintaingather low cost, core deposits and originate high quality loans. The Bank maintains a disciplined pricing strategy on
deposit generationdeposits that
will allowallows us to compete for
high quality loans while maintaining an appropriate spread over funding costs.
Imperatives for the Company will be to grow revenue and earnings by expanding client acquisitions, continuing to improve credit metrics and to significantly improve efficiency levels. To achieve these goals we will focus on high value clientsegments, expand delivery channels and distribution to increase client acquisitions, execute effectively by creating a highly productive performance culture, reduce operating costs, and to proactively manage enterprise risk. Highlights of management’s business strategy are as follows:
Operating within a defined market.As an independent bank, we emphasize the local nature of our decision-making to respond more effectively to the needs of our customers while providing a full range of financial services to the businesses, individuals, and municipalities in our market area. We offer a broad range of financial products to meet the changing needs of the marketplace, including internet banking, cash management services and, on a selective basis, sweep accounts. In addition, we offer asset management services to meet the investing needs of individuals, corporations and not-for-profit entities. As a result, we are able to provide, at the local level, the financial services required to meet the needs of the majority of existing and potential customers in our market.
Enhancing Customer Service.We are committed to providing superior customer service as a way to differentiate us from our competition. As part of our commitment to service, we have been engaged in Sunday banking since 1995. In addition, we offer multiple access channels to our customers, including our branch and ATM network, internet banking, our Customer Care Telephone Center and our Automated Voice Response system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards. Initiated in 2006, our Service Excellence Program is an active part of the culture of the bank, designed to maintain the highest level of service to our customer base.
Growing and maintaining a Diversified Loan Portfolio.We offer a broad range ofdiverse loan products to commercial businesses, real estate owners, real estate developers and individuals. To support this activity,consumers. In 2014, we maintain commercial, consumer and residential loan departments staffed with experienced professionalscontinued to promote the continued growth and prudent management of loan assets. We have experienced consistent and significantemphasize growth in our commercial loan portfolio while continuing to provide our residential mortgage and consumer lending services. Asbalances; as a result, we believe that we have developed a high quality, diversified loan portfolio with a favorable mix of loan types, maturities and yields. We
The Company augments organic growth with opportunistic acquisitions. Between fiscal 2002 and October 2013, the Company completed seven acquisitions, including: National Bank of Florida in 2002; Ellenville National Bank in 2004; Warwick Community Bancorp in 2005; a branch office of HSBC Bank USA in 2005; Hudson Valley Investment Advisors in 2007; Gotham Bank of New York in August 2012; and Legacy Sterling on October 31, 2013. These acquisitions have
currently deemphasized acquisition and development lending for residential housing development of single family homes, as this area has been the most affected by the economy of the region.Expanding our Banking Franchise.Management intends to continuesupported the expansion of the Company into attractive markets and diversified businesses. See additional disclosure of our acquisitions in Note 2. “Acquisitions” to the consolidated financial statements.
On November 5, 2014, the Company announced its pending acquisition of Hudson Valley Holding Corp. which is detailed previously in this section.
Competition
The greater New York metropolitan region is a highly competitive market area with a concentration of financial institutions, many of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking franchisecompanies, credit unions, insurance companies and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as mutual funds, securities and brokerage firms and insurance companies. We have emphasized relationship banking and the advantage of local decision-making in our banking business. We do not rely on any individual, group, or entity for a material portion of our deposits. Net interest income could be adversely affected should competitive pressures cause us to increase the interest rates paid on deposits in order to maintain our market share.
Employees
As of September 30, 2014, we had 836 full-time equivalent employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.
Supervision and Regulation
General
Sterling Bancorp and Sterling National Bank are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of stockholders and creditors.
Significant elements of the laws and regulations applicable to the Company and the Bank are described below. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and
policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Sterling and its subsidiaries could have a material effect on the business, financial condition and results of operations of the Company. While the Bank currently has less than $10 billion in assets, after the completion of the HVB Merger, the Bank’s total assets could exceed $10 billion, thus subjecting it to additional supervision and regulation, including by the Consumer Financial Protection Bureau (“CFPB”), with such additional supervision and regulation discussed throughout this section.
Regulatory Reforms
The Dodd-Frank Act significantly restructures the financial regulatory regime in the United States, and will continue to affect, into the immediate future, the lending and investment activities and general operations of depository institutions and their holding companies. This will particularly be the case for the Company and the Bank if, as anticipated, the Bank’s total assets exceed $10 billion as a result of the HVB Merger.
The Dodd-Frank Act made many changes in banking regulation, including:
forming the CFPB with broad powers to adopt and enforce consumer protection regulations;
the standard maximum amount of deposit insurance per customer was permanently increased to $250,000;
the assessment base for determining deposit insurance premiums has been expanded from domestic deposits to average assets minus average tangible equity; and
the Federal Reserve Board (the “FRB”) has imposed on financial institutions with assets of $10 billion or more a cap on the debit card interchange fees the financial institutions may charge.
In addition, the Dodd-Frank Act requires that the FRB establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions, and that the components of Tier 1 capital be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million, or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with assets of less than $15 billion.
Many of the provisions of the Dodd-Frank Act are not yet effective. The Dodd-Frank Act requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although it is difficult to predict at this time what impact the Dodd-Frank Act and the implementing regulations will have on the Company and the Bank, they may have a material impact on operations through, among other things, heightened regulatory supervision and increased compliance costs. The Company continues to analyze the impact of rules adopted under the Dodd-Frank Act on the Company’s business. However, the full impact will not be known until the rules, and other regulatory initiatives that overlap with the rules, are finalized and their combined impacts can be understood.
Regulatory Agencies
Sterling Bancorp is a legal entity separate and distinct from Sterling National Bank and its other subsidiaries. As bank and a financial holding company, Sterling Bancorp is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and its subsidiaries are subject to inspection, examination and supervision by the FRB as its primary federal regulator.
As a national bank, the Bank is principally subject to the supervision, examination and reporting requirements of the Office of the Comptroller of the Currency (the “OCC”), as its primary federal regulator, as well as the Federal Deposit Insurance Corporation (the “FDIC”). Insured banks, including the Bank, are subject to extensive regulations that relate to, among other things: (a) the nature and amount of loans that may be made by the Bank and the rates of interest that may be charged; (b) types and amounts of other investments; (c) branching; (d) permissible activities; (e) reserve requirements; and (f) dealings with officers, directors and affiliates.
Bank Holding Company Activities
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as the Company, may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section captioned “Prompt Corrective Action.” A depository institution subsidiary is considered “well
managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed” under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of banks and banking companies. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by the Company of more than 5% of the voting shares or substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior approval of the FRB or other appropriate bank regulatory authority is required for the Bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.
Capital Requirements
As a bank holding company, the Company is subject to consolidated regulatory capital requirements administered by the FRB. The Bank is subject to similar capital requirements administered by the OCC. The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee, which are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A banking organization’s capital, in turn, is classified in tiers, depending on type:
Core Capital (Tier 1)
Currently, Tier 1 capital includes common equity, retained earnings, qualifying noncumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries, and, under existing standards, a limited amount of qualifying trust preferred securities, and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill, most intangible assets and certain other assets.
Supplementary Capital (Tier 2)
Currently, Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.
Under the existing risk-based capital rules, the Company and the Bank are currently required to maintain Tier 1 capital and total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). For a depository institution to be considered “well capitalized,” its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.
The elements currently comprising Tier 1 capital and Tier 2 capital and the minimum Tier 1 capital and total capital ratios may in the future be subject to change, as discussed in more detail below.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements
necessitate a minimum leverage ratio of 3.0% for financial holding companies and banking organizations that have the highest supervisory rating. All other banking organizations are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized,” its leverage ratio must be at least 5.0%. The bank regulatory agencies have encouraged banking organizations to operate with capital ratios substantially in excess of the stated ratios required to maintain “well capitalized” status. In light of the foregoing, the Company and the Bank expect that they will maintain capital ratios in excess of well capitalized requirements.
Prompt Corrective Action
The Federal Deposit Insurance Act (“FDIA”) requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.
Currently, a depository institution will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any regulatory order agreement or written directive to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of total assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
Sterling believes that, as of September 30, 2014, its bank subsidiary, Sterling National Bank, was “well capitalized” based on the aforementioned ratios. For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see the discussion under the section captioned “Capital and Liquidity” included in Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Note 14. “Stockholder’s Equity - Regulatory Capital Requirements” in the notes to consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”, elsewhere in this report.
Basel III Capital Rules
In July 2013, the Company’s and the Bank’s primary federal regulators, the FRB and the OCC, respectively, approved final rules known as the “Basel III Capital Rules” that substantially revise the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions with total consolidated assets of $500 million or more, including the Company and the Bank. The Basel III Capital Rules address the components of capital and other issues affecting the numerator in banking institutions’ regulatory capital ratios. Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules will come into effect for the Company and the Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules, among other things, (i) introduce as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the adjustments as compared to existing regulations. CET1 capital consists of common stock instruments that meet the eligibility criteria in the final rules, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interest.
When fully phased-in on January 1, 2019, Basel III Capital Rules require banking organizations to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased-in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased-in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 risk-based capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio and still be well-capitalized.
Management believes that, as of September 30, 2014, the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income.
Dividend Restrictions
The Company depends on funds maintained or generated by its subsidiaries, principally the Bank, for its cash requirements. Various legal restrictions limit the extent to which the Bank can pay dividends or make other distributions to the Company. All national banks are limited in the payment of dividends without the approval of the OCC to an amount not to exceed the net profits (as defined by OCC regulations) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and while maintaining its “well capitalized” status, as of September 30, 2014, the Bank could pay dividends of approximately $47.9 million to the Company, without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future periods.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution, such as the Bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit such payment. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Source of Strength Doctrine
FRB policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks.
Deposit Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and the Bank is subject to deposit insurance assessments to maintain the DIF. Due to the decline in economic conditions, the deposit insurance provided by the FDIC per account owner was raised to $250,000 for all types of accounts. That change, initially intended to be temporary, was made permanent by the Dodd-Frank Act.
As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, DIF-insured institutions. It also may prohibit any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Under the Federal Deposit Insurance Act, as amended (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based upon supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain other factors. Historically, assessment rates ranged from seven to 77.5 basis points of each institution’s deposit assessment base. On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changed the assessment base used for calculating deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base.
As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, an institution must pay an additional premium equal to 50 basis points on every dollar (above 3% of an institution’s Tier 1 capital) of long-term, unsecured debt held that was issued by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program). The FDIC has the authority to raise or lower assessment rates, subject to limits, and to impose special additional assessments.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more, as expected the Bank will reach after the completion of the HVB Merger, are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, leaving it, instead, to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long-range fund ratio of 2%, which could result in our paying higher deposit insurance premiums in the future.
FDIC deposit insurance expense totaled $5.0 million, $2.4 million and $2.5 million in fiscal 2014, 2013 and 2012, respectively. FDIC deposit insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding bonds issued by FICO in the late 1980s to recapitalize the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessments will continue until the bonds mature in 2017 to 2019.
Safety and Soundness Regulations
In accordance with the FDIA, the federal banking agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking agencies authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Incentive Compensation
The Dodd-Frank Act requires the federal bank regulatory agencies and the Securities and Exchange Commission (the “SEC”) to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been finalized. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives.
In June 2010, the FRB, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, discussed above.
The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
Loans to One Borrower
The Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2014, the Bank was in compliance with the loans-to-one-borrower limitations.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings that must be publicly disclosed. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received
a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of certain applications. The Bank received a rating of “satisfactory” in its most recent CRA exam.
Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations of financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Stress Testing
On October 9, 2012, the FDIC and the FRB issued final rules requiring certain large insured depository institutions and bank holding companies to conduct annual capital-adequacy stress tests. Recognizing that banks and their parent holding companies may have different primary federal regulators, the FDIC and FRB have attempted to ensure that the standards of the final rules are consistent and comparable in the areas of scope of application, scenarios, data collection, reporting, and disclosure. To implement section 165(i) of the Dodd-Frank Act, the rules would apply to FDIC-insured state non-member banks and bank holding companies with total consolidated assets of more than $10 billion (“covered institutions”). While the Bank currently has less than $10 billion in assets, after completion of the HVB Merger, the Bank’s total assets could exceed $10 billion. The final rule requirement for public disclosure of a summary of the stress testing results for $10 billion to $50 billion covered institutions is being implemented starting with the 2014 stress test, with the disclosure occurring by June 30, 2015. The final rules define a stress test as a process to assess the potential impact of economic and financial scenarios on the consolidated earnings, losses and capital of the covered institution over a set planning horizon, taking into account the current condition of the covered institution and its risks, exposures, strategies and activities.
Under the rules, each covered institution with between $10 billion and $50 billion in assets would be required to conduct annual stress tests using the bank’s and the bank holding company’s financial data as of September 30 of that year to assess the potential impact of different scenarios on the consolidated earnings and capital of that bank and its holding company and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. On or before March 31 of each year, each covered institution, including the Bank and the Company, would be required to report to the FDIC and the FRB, respectively, in the manner and form prescribed in the rules, the results of the stress tests conducted by the covered institution during the immediately preceding year. Based on the information provided by a covered institution in the required reports to the FDIC and the FRB, as well as other relevant information, the FDIC and FRB would conduct an analysis of the quality of the covered institution’s stress test processes and related results. The FDIC and FRB envision that feedback concerning such analysis would be provided to a covered institution through the supervisory process. Consistent with the requirements of the Dodd-Frank Act, the rule would require each covered institution to publish a summary of the results of its annual stress tests within 90 days of the required date for submitting its stress test report to the FDIC and the FRB.
Volcker Rule
The Dodd-Frank Act amended the BHC Act to require the federal bank regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investmentcompanies (defined as hedge funds and private equity funds), commonly referred to as the “Volcker Rule.” The Volcker Rule also requires covered banking entities to implement certain compliance programs, and the complexity and rigor of such programs is determined based on the asset size of the covered company. Upon completion of the HVB Merger, we will be subject to heightened compliance requirements as a covered
banking entity with over $10 billion in assets. The rules were effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. We continue to evaluate the impact of the Volcker Rule and the final rules adopted by the Federal Reserve thereunder, and whether it will require the Bank to divest any securities in its portfolio as a result of the Volcker Rule. The Bank may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule.
Durbin Amendment
The Dodd-Frank Act included provisions which restrict interchange fees to those which are “reasonable and proportionate” for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. This statutory provision is known as the “Durbin Amendment.” The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points in order to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. The interchange fee restrictions contained in the Durbin Amendment, and the rules promulgated thereunder, only apply to debit card issuers with $10 billion or more in total consolidated assets, which we expect the Bank will reach after the completion of the HVB Merger.
Transactions with Affiliates
Transactions between the Bank and its affiliates are regulated by the FRB under sections 23A and 23B of the Federal Reserve Act and related FRB regulations. These regulations limit the types and amounts of covered transactions engaged in by the Bank and generally require those transactions to be on an arm’s-length basis. The term “affiliate” is defined to mean any company that controls or is under common control with the Bank and includes the Company and its non-bank subsidiaries. “Covered transactions” include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.
Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York (“FHLBNY”), the Bank is required to acquire and hold shares of capital stock of the FHLBNY in an amount at least equal to the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. For the Bank, the membership stock purchase requirement is 0.15% of the Mortgage-Related Assets, as defined by the FHLBNY, which consists principally of residential mortgage loans and mortgage-backed securities, held by the Bank. The activity-based stock purchase requirement is equal to the sum of: (1) a specified percentage ranging from 4.0% to 5.0%, which for the Bank is 4.5%, of outstanding borrowings from the FHLBNY; (2) a specified percentage ranging from 4.0% to 5.0%, which for the Bank is inapplicable, of the outstanding principal balance of Acquired Member Assets, as defined by the FHLBNY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which for the Bank is inapplicable; and (4) a specified percentage ranging from 0% to 5%, which for the Bank is inapplicable, of the carrying value on the FHLBNY’s balance sheet of derivative contracts between the FHLBNY and the Bank. The FHLBNY can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLBNY capital plan. As of September 30, 2014, the Bank was in compliance with the minimum stock ownership requirement.
Federal Reserve System
FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $13.3 million and $89.0 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $89.0 million. The first $13.3 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements.
Consumer Protection Regulations
The Bank is subject to federal consumer protection statutes and regulations promulgated under those laws, including, but not limited to the following:
Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans;
Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;
Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and the use of consumer information; and
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.
Deposit operations are also subject to:
The Truth in Savings Act and Regulation DD, which requires disclosure of deposit terms to consumers;
Regulation CC, which relates to the availability of deposit funds to consumers;
The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
Electronic Funds Transfer Act and Regulation E, governing automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
In addition, the Bank may be subject to certain state laws and regulations designed to protect consumers.
Many of the foregoing laws and regulations are subject to change resulting from the provisions in the Dodd-Frank Act, which in many cases calls for revisions to implementing regulations. In addition, oversight responsibilities of these and other consumer protection laws and regulations will, in large measure, transfer from the Bank’s primary regulators to the CFPB, which will have supervisory authority over the Bank if, as anticipated, the Bank’s assets exceed $10 billion after the completion of the HVB Merger. We cannot predict the effect that being regulated by the CFPB, or any new or revised regulations that may result from its establishment, will have on our businesses.
Consumer Financial Protection Bureau
Created under the Dodd-Frank Act, and given extensive implementation and enforcement powers over all banks with over $10 billion in assets, which the Bank expects to reach with the HVB Merger, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices. Abusive acts or practices are defined as those that (1) materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s (a) lack of financial savvy, (b) inability to protect himself in the selection or use of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB has the authority to investigate possible violations of federal consumer financial law, hold hearings and commence civil litigation. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or an injunction.
ITEM 1A. Risk Factors
Changes in laws, government regulation and monetary policy may have a material effect on our results of operations
Financial institutions are the subject of significant legislative and regulatory laws, rules and regulations and may be subject to further additional legislation, rulemaking or regulation in the future, none of which is within our control. Significant new laws, rules or regulations or changes in, or repeals of, existing laws, rules or regulations, including, but not limited to, those with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, the costs and burden of compliance have significantly increased and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for the Bank, as well as for our borrowers, particularly as implemented through the Federal Reserve System, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on the Bank or our borrowers, and therefore on our results of operations.
Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business.
The Dodd-Frank Act and the rules and regulations promulgated thereunder have and continue to significantly impact the United States bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
The Dodd-Frank Act broadens the base for FDIC insurance assessments. The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. In addition, the Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits and the FDIC must seek to achieve the 1.35% ratio by September 30, 2020. The FDIC has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute, although there is no implementation deadline for the 2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the statutory target level. The Bank’s FDIC insurance premiums increased substantially beginning in 2009, and we continue to expect to pay high premiums in the future. Any increase in our FDIC premiums could have a materially adverse effect on the Bank’s financial condition, results of operations and its ability to pay dividends.
Additionally, on December 10, 2013, five financial regulatory agencies, including the Bank’s primary federal regulator, the OCC, adopted final rules implementing a provision of the Dodd-Frank Act, commonly referred to as the Volcker Rule. The Volcker Rule prohibits banking entities from, among other things, engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; or owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds.” The Volcker Rule also requires covered banking entities to implement certain compliance programs, policies and procedures. The complexity and rigor of such programs is determined based on the asset size of the covered company. Upon completion of the HVB Merger, we will be subject to heightened compliance requirements as a covered banking entity with over $10 billion in assets. The rules were effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. We are currently evaluating the Volcker Rule. If we are required to divest any securities in our portfolio, hire additional compliance or personnel, design and implement additional internal controls or incur other significant expenses as a result of the Volcker Rule, it could result in impairments that could materially adversely affect our financial condition, results of operations and our ability to pay dividends or repurchase shares.
The Dodd-Frank Act also significantly impacts the various consumer protection laws, rules and regulations applicable to financial institutions. First, it rolls back the federal preemption of state consumer protection laws that was enjoyed by national banks by (1) requiring that a state consumer financial law prevent or significantly interfere with the exercise of a national bank’s powers before it can be preempted, (2) mandating that any preemption decision be made on a case by case basis rather than a blanket rule, and (3) ending the applicability of preemption to subsidiaries and affiliates of national banks. As a result, we may now be subject to state consumer protection laws in each state where we do business, and those laws may be interpreted and enforced differently in each state. In addition, the Dodd-Frank Act created the CFPB, which has assumed responsibility for supervising financial institutions which have assets of $10 billion or more for their compliance with the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Savings Act, among others (institutions which have assets of $10 billion or less will continue to be supervised in this area by their primary federal regulators) . While the Bank currently has less than $10 billion in assets, after the completion of the HVB Merger we believe that the Bank’s total assets will exceed $10 billion, thus making it subject to the CFPB’s supervision. Thus, in addition to a variety of new consumer protection laws, rules and regulations that we may be subject to, the Bank may also be subject to a new agency with evolving regulations and practices.
The scope and impact of many of the Dodd-Frank Act provisions, including the authority provided to the CFPB, will continue to be determined over time as rules and regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition, results of operations and our ability to pay dividends or repurchase shares. However, it is expected that at a minimum they will increase our operating and compliance costs. Compliance with these requirements may necessitate that we hire additional compliance or other personnel, design and implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations and our ability to pay dividends or repurchase shares.
We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive supervision and regulation. The Company is supervised and regulated by the Federal Reserve and the Bank is supervised and regulated by the OCC. The application of laws, rules and regulations may vary as administered by the Federal Reserve and the OCC. In addition, the Company is subject to consolidated capital requirements and must serve as a source of strength to the Bank.
As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the DIF and our depositors, as well as other consumers and not to benefit our shareholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes, all of which can have a material adverse effect on our financial condition, results of operations and our ability to pay dividends or repurchase shares. Our regulators have also intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with laws, rules, regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place to ensure compliance are without error and there is no assurance that in every instance we are in full compliance with these requirements.
Our failure to comply with applicable laws, rules and regulations could result in a range of sanctions, legal proceedings and enforcement actions, including the imposition of civil monetary penalties, formal agreements and cease and desist orders. In addition, the OCC and the FDIC have specific authority to take “prompt corrective action,” depending on our capital levels. For example, currently, we are considered “well-capitalized” for prompt corrective action purposes. If we are designated by the OCC as “adequately capitalized,” we would become subject to additional restrictions and limitations, such as the Bank’s ability to take brokered deposits becoming limited. If we were to be designated by the OCC in one of the lower capital levels (such as “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized”) we would be required to raise additional capital and also would be subject to progressively more severe restrictions on our operations, management and capital distributions; replacement of senior executive officers and directors; and, if we became “critically undercapitalized,” to the appointment of a conservator or receiver.
In addition, and as mentioned above in “Risk Factors - Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business,” the Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements and annual stress testing requirements. Compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or our customers served and, products usedas a result, may adversely affect our stock price or our ability to retain our customers or effectively compete for new business opportunities. To ensure compliance with these heightened requirements when effective, our regulators may require us to fully comply with these requirements or take actions to prepare for compliance even before the completion of the HVB Merger, when our or the Bank’s total assets could equal or exceed $10 billion. As a result, we may incur compliance-related costs before we might otherwise be required. Our regulators may also consider our preparation for compliance with these regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters.
New capital rules that were recently issued generally require insured depository institutions and their holding companies to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.
In 2013, the Federal Reserve, the FDIC and the OCC adopted final rules for the Basel III capital framework. These rules substantially amend the regulatory risk-based capital rules applicable to us. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The rules apply to the Company as well as to the Bank. Beginning in 2015, our minimum capital requirements will be
(i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus Additional Tier 1 capital) of 6% and (iii) a total capital ratio of 8% (the current requirement). Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.
General economic conditions in our market area could adversely affect us.
We are affected by the general economic conditions in the local markets in which we operate. When the recession began in 2008, the market experienced a significant downturn in which we saw falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. Although economic conditions have improved, many businesses and consumersindividuals are still experiencing difficulty as a result of the recent economic downturn and protracted recovery. If economic conditions do not continue to improve, we could experience further adverse consequences, including a decline in demand for our products and services and an increase in problem assets, foreclosures and loan losses. Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation, any of which could negatively affect our performance and financial condition.
An inadequate allowance for loan losses would negatively impact our results of operations.
We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and/or borrower defaults result in losses exceeding our allowance for loan losses, our results of operations could be significantly and adversely affected. We cannot assure you that our allowance will be adequate to cover probable loan losses inherent in our portfolio.
The need to account for assets at market prices may adversely affect our results of operations.
We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the assets in question present minimal credit risk. We may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.
Changes in the value of goodwill and intangible assets could reduce our earnings.
The Company accounts for goodwill and other intangible assets in accordance with GAAP (as defined below), which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2014, the fair value of Sterling Bancorp shares exceeds the recorded book value. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.
Commercial real estate, commercial & industrial and ADC loans expose us to increased risk and earnings volatility.
We consider our commercial real estate loans, commercial & industrial loans and ADC loans to be higher risk categories in our loan portfolio. These loans are particularly sensitive to economic conditions. At September 30, 2014, our portfolio of commercial real estate loans, including multi-family loans, totaled $1.8 billion, or 38.1% of total loans, our portfolio of commercial & industrial loans totaled $2.1 billion, or 43.7% of total loans, and our portfolio of ADC loans totaled $92.1 million, or 1.9% of total loans. We plan to continue to emphasize the origination of these types of loans, other than ADC loans, which we now make only on an exception basis.
Commercial real estate loans generally involve a higher degree of credit risk than residential loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend on the successful operation and management of the businesses which hold the loans, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. In the case of commercial & industrial loans, although we strive to maintain high credit standards and limit exposure to any one borrower, the collateral for these loans often consists of accounts receivable, inventory and equipment. This type of collateral typically does not yield substantial recovery in the event we need to foreclose on it and may rapidly deteriorate, disappear, or be misdirected in advance of foreclosure. This adds to the potential that our charge-offs will be more volatile than we have experienced in the past, which could significantly negatively affect our earnings in any quarter. In addition, some of our ADC loans pose higher risk levels than the levels expected at origination, as projects may stall or sell at prices lower than expected. We continue to seek pay downs on loans with or without sales activity. While this portfolio may cause us to incur additional bad debt expense even if losses are not realized, such loans only comprise 1.9% of our loan portfolio.
In addition, many of our borrowers also have more than one commercial real estate, commercial business or ADC loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss.
Our continuing concentration of loans in our primary market area may increase our risk.
Our success depends primarily on the general economic conditions in the counties in which we conduct most of our business. Most of our loans and deposits are generated from customers primarily in the New York City metropolitan region and in Rockland and Orange Counties in New York. We also have a presence in Ulster, Sullivan, Westchester and Putnam Counties in New York and in Bergen County, New Jersey. Our expansion into New York City and continued growth in Westchester County and Bergen County has helped us diversify our geographic concentration with respect to our lending activities. Deterioration in economic conditions in our market area would adversely affect our results of operations and financial condition.
Changes in market interest rates could adversely affect our financial condition and results of operations.
Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. In recent years, our balance sheet has become more asset sensitive because our assets mature or re-price at a faster pace than our liabilities. If interest rates were to continue at existing levels or decline, net interest income would be adversely affected as asset yields would be expected to decline at faster rates than deposit or borrowing costs. A decline in net interest income may also occur, offsetting a portion or all gains in net interest income from assets re-pricing and increases in volume, if competitive market pressures limit our ability to maintain or lag deposit costs. Wholesale funding costs may also increase at a faster pace than asset re-pricing. As of September 30, 2014, we have $200.0 million in structured advances with the FHLB at an average cost of 4.23%. If interest rates were to approach or exceed this level, the FHLB may call those borrowings and offer replacement borrowings at current market rates which would be higher.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and securities. Decreases in interest rates often result in increased prepayments of loans and securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans.
Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value of our securities fluctuates inversely with changes in interest rates. At September 30, 2014, our available for sale securities portfolio totaled $1.1 billion. Unrealized losses on securities available for sale, net of tax, amounted to $2.8 million and are reported as part of other comprehensive income (loss), included as a separate component of stockholders’ equity. Further decreases in the fair value of securities available for sale could have an adverse effect on stockholders’ equity.
Our ability to pay dividends is subject to regulatory limitations and other limitations which may affect our ability to pay dividends to our stockholders or to repurchase our common stock.
Sterling Bancorp is a separate legal entity from its subsidiary, Sterling National Bank, and does not have significant operations of its own. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Bank’s regulators could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, under the Dodd-Frank Act, Sterling Bancorp is subjected to consolidated capital requirements
and must serve as a source of strength to the Bank. If the Bank is unable to pay dividends to Sterling Bancorp or Sterling Bancorp is required to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.
A breach of information security could negatively affect our earnings.
Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the Internet from both internal sources and external, third-party vendors. While to date we have not been subject to material cyber-attacks or other cyber incidents, we cannot guarantee all our systems are free from vulnerability to attack, despite safeguards we and our vendors have instituted. In addition, disruptions to our vendors’ systems may arise from events that are wholly or partially beyond our and our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). If information security is breached, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated, resulting in financial losses or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings. In addition, our reputation could be damaged which could result in loss of customers, greater difficulty in attracting new customers, or an adverse effect on the value of our common stock.
We are subject to competition from both banks and non-bank companies.
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks, savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, real estate investment trusts (REITs), private issuers of debt obligations, venture capital firms, and suppliers of other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and have advantages over us in providing certain services. Many of our competitors are significantly larger than we are and have greater access to capital and other resources. Also, our ability to compete effectively is dependent on our ability to adapt successfully to technological changes within the banking and financial services industry.
Various factors may make takeover attempts more difficult to achieve.
Our Board of Directors (the “Board”) has no current intention to sell control of Sterling Bancorp. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of Sterling Bancorp without the consent of our Board. A shareholder may want a takeover attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:
(a) Certificate of Incorporation and statutory provisions.
Provisions of the certificate of incorporation and bylaws of Sterling Bancorp and Delaware law may make it more difficult and expensive to pursue a takeover attempt that our Board opposes. These provisions also would make it more difficult to remove our current Board, or to elect new directors. These provisions also include limitations on voting rights of beneficial owners of more than 10% of our common stock, super majority voting requirements for certain business combinations, and plurality voting. Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the Board.
(b) Required change in control payments and issuance of stock options and recognition and retention plan shares.
We have entered into employment agreements with executive officers, which require payments to be made to them in the event their employment is terminated following a change in control of Sterling Bancorp or Sterling National Bank. We have issued stock grants and stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan and the Sterling Bancorp 2014 Stock Incentive Plan. In the event of a change in control, the vesting of stock and option grants would accelerate. In 2006, we adopted the Provident Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of the Company.
Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time to time that we expect may further our business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, difficulties and costs associated with consolidation and streamlining inefficiencies, diversion of management’s attention from other business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful
in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into operations. Our ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.
Moreover, as noted previously, Hudson Valley and the Company have entered into a definitive agreement to merge the two companies. The HVB Merger will be subject to regulatory approval and the approval of both companies’ shareholders, and there can be no assurance that such approvals will be obtained in a timely manner or at all. Even if the approvals are obtained, the success of the HVB Merger, including anticipated benefits and cost savings, will depend, in part, on the Company’s ability to successfully combine and integrate the businesses of the predecessor companies in a manner that permits growth opportunities and does not result in the loss of key employees, the disruption of either company’s ongoing businesses, including existing customer relationships, or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the HVB Merger. Such integration will likely require the consolidation of financial centers in overlapping market areas to reduce redundancy and promote efficiency. As was the case with the Merger in the first quarter of fiscal 2014, consolidation of overlapping financial centers following the HVB Merger may result in restructuring charges, charges for asset write-downs and severance costs that we may not recoup until a date in the future, if at all. If the Company experiences difficulties with the integration process, the anticipated benefits of the HVB Merger may not be realized fully or at all, or may take longer to realize than expected.
Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.
Over the past few years, foreclosure time lines have increased due to, among other reasons, delays associated with the significant increase in the number of foreclosure cases as a result of the economic downturn, federal and state legal and regulatory actions, including additional consumer protection initiatives related to the foreclosure process and voluntary and, in some cases, mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure. Residential mortgages in particular may present us with foreclosure process issues. Residential mortgages, for example, are 12% of our total loan portfolio, but constitute 32.1% of our non-accrual loans. Collateral for many of our residential loans is located within the State of New York, where there may continue to deliver exceptional customer service, whichbe foreclosure process and timeline issues. Further increases in the foreclosure time-line may have an adverse effect on collateral values and our ability to minimize our losses.
The Company depends on up-to-date technologyits executive officers and multiple access channels,key personnel to continue the implementation of its long-term business strategy and could be harmed by the loss of their services.
The Company believes that its continued growth and future success will depend in large part on the skills of its management team and its ability to motivate and retain these individuals and other key personnel. In particular, the Company relies on the leadership of its Chief Executive Officer, Jack Kopnisky. The loss of service of Mr. Kopnisky or one or more of the Company’s other executive officers or key personnel could reduce the Company’s ability to successfully implement its long-term business strategy, its business could suffer and the value of the Company’s common stock could be materially adversely affected. Leadership changes will occur from time to time and the Company cannot predict whether significant resignations will occur or whether the Company will be able to recruit additional qualified personnel. The Company believes its management team possesses valuable knowledge about the banking industry and the Company’s markets and that their knowledge and relationships would be very difficult to replicate. Although the Chief Executive Officer, Chief Financial Officer and other executive officers have entered into employment agreements with the Company, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. The Company’s success also depends on the experience of its branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact the Company’s banking operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business, financial condition or operating results.
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| ITEM 1B. | Unresolved Staff Comments |
Not Applicable.
We maintain our executive offices, commercial lending division and wealth management and back office operations departments at a leased facility located at 400 Rella Boulevard, Montebello, New York consisting of 48,623 square feet. At September 30, 2014, we conducted our business through 32 full-service financial centers which serve the New York Metro Market and the New York Suburban Market. Of these financial centers, seven are located in Orange County, New York and nine in Rockland County, New York. We operate five offices in Ulster, Sullivan, Westchester and Putnam Counties in New York, seven offices in New York City, three offices in Long Island and 1 office in Bergen County, New Jersey. Additionally, 12 of our financial centers are owned and 20 are leased.
In addition to our financial center network and corporate headquarters, we lease four additional properties which are used for general corporate purposes and 26 other real estate owned properties located in Putnam, Orange, Rockland, Sullivan and Ulster counties. See Note 5. “Premises and Equipment, net” to the consolidated financial statements for further detail on our premises and equipment.
Item 3. Legal Proceedings
Note 16. “Commitments and Contingencies - Litigation” to the consolidated financial statements contained in Item 8. hereof is incorporated herein by reference. The Company does not anticipate that the aggregate liability arising out of litigation pending against the Company and its subsidiaries will be material to its consolidated financial statements.
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| ITEM 4. | Mine Safety Disclosures |
Not Applicable.
PART II
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| ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock Market Prices and Dividends
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “STL”. The following table sets forth the high and low intra-day sales prices per share of Sterling Bancorp common stock and the cash dividends declared per share for the past two fiscal years.
|
| | | | | | | | | | | |
| Quarter ended | High | | Low | | Cash dividends declared |
| September 30, 2014 | $ | 13.34 |
| | $ | 11.60 |
| | $ | 0.07 |
|
| June 30, 2014 | 13.00 |
| | 10.84 |
| | 0.07 |
|
| March 31, 2014 | 13.34 |
| | 11.73 |
| | 0.07 |
|
| December 31, 2013 | 13.52 |
| | 10.71 |
| | — |
|
| September 30, 2013 | 11.32 |
| | 9.36 |
| | 0.12 |
|
| June 30, 2013 | 9.55 |
| | 8.69 |
| | 0.06 |
|
| March 31, 2013 | 9.71 |
| | 8.59 |
| | 0.06 |
|
| December 31, 2012 | 9.83 |
| | 8.62 |
| | 0.06 |
|
As of September 30, 2014, there were 83,628,267 shares of the Company’s common stock outstanding held by 5,471 holders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms). The closing price per share of common stock on September 30, 2014, the last trading day of the Company’s fiscal year, was $12.79.
The Board is committed to continuing to pay regular cash dividends; however, there can be no assurance as wellto future dividends because they are dependent upon the Company’s future earnings, capital requirements and financial condition. In connection with the Merger, the Company accelerated the dividend that would have been regularly declared in the quarter ended December 31, 2013 to the quarter ended September 30, 2013. Therefore, the Company declared cash dividends of $0.12 per share in the quarter ended September 30, 2013 and did not declare a dividend in the quarter ended December 31, 2013.
See the section captioned “Regulation” included in Item 1. “Business”, the section captioned “Capital and Liquidity” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14. “Stockholders’ Equity” to the consolidated financial statements all of which are included elsewhere in this report, for additional information regarding our common stock and our ability to pay dividends.
Performance Graph
Set forth below is a stock performance graph comparing the cumulative total shareholder return on Sterling Bancorp common stock with (a) the cumulative total return on the S&P 500 Composite Index and (b) the SNL Mid-Atlantic Bank Index, measured as courteous personal contactof the last trading day of each year shown. The graph assumes an investment of $100 on September 30, 2009 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered to be an indication of future stock performance.
|
| | | | | | | | | | | | | | | | | |
| | Performance at September 30, |
| Index | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 |
| Sterling Bancorp | 100.00 |
| | 90.20 |
| | 64.30 |
| | 107.17 |
| | 127.21 |
| | 152.93 |
|
| S&P 500 Index | 100.00 |
| | 110.16 |
| | 111.42 |
| | 145.07 |
| | 173.13 |
| | 207.30 |
|
| SNL Mid-Atlantic Bank Index | 100.00 |
| | 89.97 |
| | 71.02 |
| | 94.54 |
| | 127.03 |
| | 145.65 |
|
This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K under the Securities Act, or the Securities Exchange Act of 1934, as amended, except to the extent that Sterling Bancorp specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
Issuer Purchases of Equity Securities
The following table reports information regarding purchases of the Company’s common stock during the fourth fiscal quarter of 2014 and the stock repurchase plan approved by the Board:
|
| | | | | | | | | | | | |
| Total Number of shares (or units) purchased | | Average price paid per share (or unit) | | Total number of shares (or units) purchased as part of publicly announced plans or programs (1) | | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (1) |
| Period (2014) | | | | | | | |
| July 1 — July 31 | — |
| | $ | — |
| | — |
| | 776,713 |
|
| August 1 — August 31 | — |
| | — |
| | — |
| | 776,713 |
|
| September 1 — September 30 | — |
| | — |
| | — |
| | 776,713 |
|
| Total | — |
| | $ | — |
| | — |
| | |
|
| |
1 | The Company announced its fifth repurchase program on December 17, 2009 authorizing the repurchase of 2,000,000 shares of which 776,713 remain available for repurchase. |
| |
| ITEM 6. | Selected Financial Data |
The following summary data is based in part on the consolidated financial statements and accompanying notes, and other schedules appearing elsewhere in this Form 10-K. Comparability of the selected financial data at or for the year ended September 30, 2014 to earlier periods is affected by the Merger. See discussion of the Merger in Item 1. “Business”, in Item 7. “Management’s Discussion and Analysis, and in Note 2. “Acquisitions” in the consolidated financial statements. Historical data is also based in part on, and should be read in conjunction with, prior filings with the SEC. 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 or for the year ended September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (Dollars in thousands) |
| Selected financial condition data: | | | | | | | | | |
| Period end: | | | | | | | | | |
| Total assets | $ | 7,337,387 |
| | $ | 4,049,172 |
| | $ | 4,022,982 |
| | $ | 3,137,402 |
| | $ | 3,021,025 |
|
Loans, net (1) | 4,719,826 |
| | 2,384,021 |
| | 2,091,190 |
| | 1,675,882 |
| | 1,670,698 |
|
| Securities available for sale | 1,110,813 |
| | 954,393 |
| | 1,010,872 |
| | 739,844 |
| | 901,012 |
|
| Securities held to maturity | 579,075 |
| | 253,999 |
| | 142,376 |
| | 110,040 |
| | 33,848 |
|
| Deposits | 5,298,654 |
| | 2,962,294 |
| | 3,111,151 |
| | 2,296,695 |
| | 2,142,702 |
|
| Borrowings | 939,069 |
| | 560,986 |
| | 345,176 |
| | 323,522 |
| | 363,751 |
|
Stockholders’ equity | 961,138 |
| | 482,866 |
| | 491,122 |
| | 431,134 |
| | 430,955 |
|
| Average: | | | | | | | | | |
| Total assets | $ | 6,757,094 |
| | $ | 3,815,609 |
| | $ | 3,195,299 |
| | $ | 2,949,251 |
| | $ | 2,913,560 |
|
Loans, net (1) | 4,120,749 |
| | 2,216,871 |
| | 1,806,136 |
| | 1,665,360 |
| | 1,656,016 |
|
| Securities available for sale | 1,175,618 |
| | 950,628 |
| | 801,792 |
| | 880,624 |
| | 836,130 |
|
| Securities held to maturity | 517,270 |
| | 172,642 |
| | 165,722 |
| | 28,787 |
| | 42,903 |
|
| Deposits | 4,921,930 |
| | 2,856,640 |
| | 2,366,263 |
| | 2,082,727 |
| | 1,978,380 |
|
| Borrowings | 814,409 |
| | 446,916 |
| | 356,296 |
| | 422,816 |
| | 488,330 |
|
| Stockholders’ equity | 906,134 |
| | 489,412 |
| | 447,065 |
| | 427,290 |
| | 425,408 |
|
| Selected income statement data: | | | | | | | | | |
| Interest and dividend income | $ | 246,906 |
| | $ | 132,061 |
| | $ | 115,037 |
| | $ | 112,614 |
| | $ | 119,774 |
|
| Interest expense | 28,918 |
| | 19,894 |
| | 18,573 |
| | 21,324 |
| | 26,440 |
|
| Net interest income | 217,988 |
| | 112,167 |
| | 96,464 |
| | 91,290 |
| | 93,334 |
|
| Provision for loan losses | 19,100 |
| | 12,150 |
| | 10,612 |
| | 16,584 |
| | 10,000 |
|
| Net interest income after provision for loan losses | 198,888 |
| | 100,017 |
| | 85,852 |
| | 74,706 |
| | 83,334 |
|
| Non-interest income | 47,370 |
| | 27,692 |
| | 32,152 |
| | 29,951 |
| | 27,201 |
|
| Non-interest expense | 208,428 |
| | 91,041 |
| | 91,957 |
| | 90,111 |
| | 83,170 |
|
| Income before income tax expense | 37,830 |
| | 36,668 |
| | 26,047 |
| | 14,546 |
| | 27,365 |
|
| Income tax expense | 10,152 |
| | 11,414 |
| | 6,159 |
| | 2,807 |
| | 6,873 |
|
| Net income | $ | 27,678 |
| | $ | 25,254 |
| | $ | 19,888 |
| | $ | 11,739 |
| | $ | 20,492 |
|
| Per share data: |
|
| | | | | | | | |
| Basic earnings per share | $ | 0.34 |
| | $ | 0.58 |
| | $ | 0.52 |
| | $ | 0.31 |
| | $ | 0.54 |
|
| Diluted earnings per share | 0.34 |
| | 0.58 |
| | 0.52 |
| | 0.31 |
| | 0.54 |
|
| Dividends declared per share | 0.21 |
| | 0.30 |
| | 0.24 |
| | 0.24 |
| | 0.24 |
|
| Dividend payout ratio | 61.8 | % | | 51.7 | % | | 45.2 | % | | 77.4 | % | | 44.4 | % |
| Book value per share | $ | 11.49 |
| | $ | 10.89 |
| | $ | 11.12 |
| | $ | 11.39 |
| | $ | 11.26 |
|
| Common shares outstanding: | | | | | | | | | |
| Weighted average shares basic | 80,268,970 | | 43,734,425 | | 38,227,653 |
| | 37,452,596 | | 37,161,180 |
| Weighted average shares diluted | 80,534,043 | | 43,783,053 | | 38,248,046 |
| | 37,453,542 | | 38,185,122 |
_________________________
See legend on the following page.
|
| | | | | | | | | | | | | | | | | | | |
| | At or for the year ended September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (Dollars in Thousands) |
| Performance ratios: | | | | | | | | | |
| Return on assets (ratio of net income to average total assets) | 0.41 | % | | 0.63 | % | | 0.62 | % | | 0.40 | % | | 0.70 | % |
| Return on equity (ratio of net income to average equity) | 3.1 |
| | 5.2 |
| | 4.5 |
| | 2.8 |
| | 4.8 |
|
Net interest margin (2) | 3.74 |
| | 3.37 |
| | 3.51 |
| | 3.65 |
| | 3.78 |
|
Core operating efficiency ratio(3) | 59.4 |
| | 63.7 |
| | 69.7 |
| | 72.1 |
| | 69.1 |
|
Capital ratios (Company):(4) | | | | | | | | | |
| Equity to total assets at end of period | 13.10 | % | | 11.90 | % | | 12.21 | % | | 13.74 | % | | 14.27 | % |
| Average equity to average assets | 13.41 |
| | 12.82 |
| | 13.99 |
| | 14.49 |
| | 14.60 |
|
| Tier 1 leverage ratio | 8.12 |
| | — |
| | — |
| | — |
| | — |
|
| Tier 1 risk-based capital ratio | 10.33 |
| | — |
| | — |
| | — |
| | — |
|
| Total risk-based capital ratio | 11.10 |
| | — |
| | — |
| | — |
| | — |
|
| Regulatory capital ratios (Bank): | | | | | | | | | |
| Tier 1 leverage ratio | 9.34 | % | | 9.33 | % | | 7.56 | % | | 8.14 | % | | 8.43 | % |
| Tier 1 risk-based capital ratio | 11.94 |
| | 13.18 |
| | 12.16 |
| | 11.85 |
| | 12.09 |
|
| Total risk-based capital ratio | 12.71 |
| | 14.24 |
| | 13.36 |
| | 13.03 |
| | 13.34 |
|
| Asset quality data and ratios: | | | | | | | | | |
| Allowance for loan losses | $ | 40,612 |
| | $ | 28,877 |
| | $ | 28,282 |
| | $ | 27,917 |
| | $ | 30,843 |
|
| Non-performing loans | 50,963 |
| | 26,906 |
| | 39,814 |
| | 40,567 |
| | 26,840 |
|
| Non-performing assets | 58,543 |
| | 32,928 |
| | 46,217 |
| | 45,958 |
| | 30,731 |
|
| Net charge-offs | 7,365 |
| | 11,555 |
| | 10,247 |
| | 19,510 |
| | 9,207 |
|
| Non-performing assets to total assets | 0.80 | % | | 0.81 | % | | 1.15 | % | | 1.46 | % | | 1.02 | % |
Non-performing loans to total loans (1) | 1.07 |
| | 1.12 |
| | 1.88 |
| | 2.38 |
| | 1.58 |
|
| Allowance for loan losses to non-performing loans | 80 |
| | 107 |
| | 71 |
| | 69 |
| | 115 |
|
| Allowance for loan losses to total loans | 0.85 |
| | 1.20 |
| | 1.47 |
| | 1.64 |
| | 1.81 |
|
| Net charge-offs to average loans | 0.24 |
| | 0.52 |
| | 0.56 |
| | 1.17 |
| | 0.56 |
|
| | | | | | | | | | |
| |
| (1) | Excludes loans held for sale. |
| |
| (2) | The net interest margin represents net interest income as a percent of average interest-earning assets for the period. Net interest income is commonly presented on a tax-equivalent basis. This is to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g., was received as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. |
| |
| (3) | The core operating efficiency ratio is a non-GAAP measure and is reconciled on page 27. |
| |
| (4) | Prior to the Merger, the Company was a unitary savings and loan holding company and as a result was not required to maintain or report regulatory capital ratios. The Company became a bank holding company in connection with the Merger and has maintained and reported regulatory capital ratios since December 31, 2013. |
The following tables show the reconciliation of the core operating efficiency ratio, core net income and core earnings per share which are non-GAAP financial measures:
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (Dollars in Thousands) |
| Net interest income | $ | 217,988 |
| | $ | 112,167 |
| | $ | 96,464 |
| | $ | 91,290 |
| | $ | 93,334 |
|
| Non-interest income | 47,370 |
| | 27,692 |
| | 32,152 |
| | 29,951 |
| | 27,201 |
|
| Total net revenues | 265,358 |
| | 139,859 |
| | 128,616 |
| | 121,241 |
| | 120,535 |
|
| Tax equivalent adjustment on securities interest income | 5,628 |
| | 3,060 |
| | 3,498 |
| | 4,007 |
| | 4,186 |
|
| Net (gain) on sale of securities | (641 | ) | | (7,391 | ) | | (10,452 | ) | | (10,011 | ) | | (8,157 | ) |
| Other than temporary loss on securities | — |
| | 32 |
| | 47 |
| | 278 |
| | — |
|
| Other (other gains and fair value loss on interest rate caps) | (93 | ) | | 77 |
| | (12 | ) | | 197 |
| | 1,160 |
|
| Core total revenues | 270,252 |
| | 135,637 |
| | 121,697 |
| | 115,712 |
| | 117,724 |
|
| Non-interest expense | 208,428 |
| | 91,041 |
| | 91,957 |
| | 90,111 |
| | 83,170 |
|
| Merger-related expense | (9,455 | ) | | (2,772 | ) | | (5,925 | ) | | (255 | ) | | — |
|
| Charge for asset write-downs, banking systems conversion, retention and severance | (26,590 | ) | | (564 | ) | | — |
| | (3,201 | ) | | — |
|
| Gain on sale of financial center and redemption of TRUPs | 1,637 |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of intangible assets | (9,408 | ) | | (1,296 | ) | | (1,245 | ) | | (1,426 | ) | | (1,849 | ) |
| Charge on benefit plan settlement | (4,095 | ) | | — |
| | — |
| | (1,772 | ) | | — |
|
| Core non-interest expense | $ | 160,517 |
| | $ | 86,409 |
| | $ | 84,787 |
| | $ | 83,457 |
| | $ | 81,321 |
|
| Core operating efficiency ratio | 59.4 | % | | 63.7 | % | | 69.7 | % | | 72.1 | % | | 69.1 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (Dollars in Thousands) |
| Income before income tax expense | $ | 37,830 |
| | $ | 36,668 |
| | $ | 26,047 |
| | $ | 14,546 |
| | $ | 27,365 |
|
| Income tax expense | 10,152 |
| | 11,414 |
| | 6,159 |
| | 2,807 |
| | 6,873 |
|
| Net income | 27,678 |
| | 25,254 |
| | 19,888 |
| | 11,739 |
| | 20,492 |
|
| | | | | | | | | | |
| Net (gain) on sale of securities | (641 | ) | | (7,391 | ) | | (10,452 | ) | | (10,011 | ) | | (8,157 | ) |
| Gain on sale of financial center and redemption of TRUPs | (1,637 | ) | | — |
| | — |
| | — |
| | — |
|
| Merger-related expense | 9,455 |
| | 2,772 |
| | 5,925 |
| | 255 |
| | — |
|
| Charge for asset write-downs, banking systems conversion, retention and severance | 26,591 |
| | 564 |
| | — |
| | 3,201 |
| | — |
|
| Charge on benefit plan settlement | 4,095 |
| | — |
| | — |
| | 1,772 |
| | — |
|
| Amortization of non-compete agreements | 5,489 |
| | — |
| | — |
| | — |
| | — |
|
| Total charges (gains) | 43,352 |
| | (4,055 | ) | | (4,527 | ) | | (4,783 | ) | | (8,157 | ) |
| Income tax (benefit) | (13,188 | ) | | 1,245 |
| | 1,070 |
| | 923 |
| | 2,049 |
|
| Total non-core charges (gains) net of taxes | 30,164 |
| | (2,778 | ) | | (3,457 | ) | | (3,860 | ) | | (6,108 | ) |
| Core net income | $ | 57,842 |
| | $ | 22,476 |
| | $ | 16,431 |
| | $ | 7,879 |
| | $ | 14,384 |
|
| Weighted average diluted shares | 80,534,043 |
| | 43,783,053 |
| | 38,248,046 |
| | 37,453.542 |
| | 38,185,122 |
|
| Diluted EPS as reported | $ | 0.34 |
| | $ | 0.58 |
| | $ | 0.52 |
| | $ | 0.31 |
| | $ | 0.54 |
|
| Core diluted EPS (excluding total charges) | 0.72 |
| | 0.51 |
| | 0.43 |
| | 0.21 |
| | 0.38 |
|
| |
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
We make statements in this Report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting Sterling Bancorp that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project” by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared.
Forward-looking statements are subject to numerous assumptions, risks (both known and unknown) and uncertainties, and other factors which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions, risks, uncertainties, and other factors actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.
The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:
our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions generally;
continued implementation of our team based business strategy, including customer acceptance of our products and services and the perceived overall value, pricing and quality of them, compared to our competitors;
the possibility that the benefits anticipated from the HVB Merger will not be fully realized, the possibility the HVB Merger may not close, and other risks in connection with the proposed transaction and integration of HVB;
legislative and regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our business, including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;
adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services industry in general and a trainedfailure to satisfy regulatory standards;
the effects of and motivated workforce. This approach has resultedchanges in a relatively highmonetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees; and
our success at managing the risks involved in the foregoing and managing our business.
Additional factors that may affect our results are discussed in this Report on Form 10-K under “Item 1A, Risk Factors” and elsewhere in this Report or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. You should read such statements carefully.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income.
Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by the Company to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, review their risk components, the carrying value of loans as a part of that evaluation and the allowance is adjusted accordingly. 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, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
See Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” to our notes to the consolidated financial statements for a discussion of the risk components. We consistently review the risk components to identify any changes in trends.
Business Combinations. The Company accounts for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.
Goodwill, Trade Names and Other Intangible Assets. The Company accounts for goodwill, trade names and other intangible assets in accordance with GAAP, which, in general, requires that goodwill and trade names not be amortized, but rather that they be tested for impairment at least annually. The Company assesses qualitative factors to determine whether it is more likely than not (i.e., a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances (e.g., macroeconomic conditions, industry and market considerations, overall financial performance and other relevant Company-specific events). If, after assessing the totality of events or circumstances such as those described above, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. Testing for impairment of goodwill, trade names and other intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.
We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which drivesthose temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a lower overall costcontinual basis as regulatory and business factors change.
Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless the Company considers the collection of funds. Management intendsinterest to maintainbe doubtful. Loans are placed on non-accrual status upon the earlier of (i) when payments are contractually past due 90 days or more, or (ii) when we have determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful. Loans the Company acquired in mergers are initially
recorded at fair value which involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. The Company continues to evaluate reasonableness of expectations for the timing and amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired.
General
The following discussion and analysis presents the more significant factors affecting the Company’s financial condition as of September 30, 2014 and 2013 and results of operations for each of the years in the three-year period ended September 30, 2014. The Merger was effective October 31, 2013, which significantly impacts comparisons to earlier periods. The Merger and the acquisition of Gotham Bank of New York were accounted for as purchase transactions, and accordingly, their related results of operations are included from the date of acquisition. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.
On October 31, 2013, we completed the Merger of Legacy Sterling and Legacy Provident. This acquisition was consistent with our strategy which will require ongoing investmentof expanding in banking locations and technology to support exceptional service levels for Provident Bank’s customers. Recent expansion efforts have been focused on the greater New York areametropolitan region and focusing on commercial banking. We believe the Merger has created a larger, more a more profitable company by combining Legacy Provident’s differentiated team-based distribution channels with Legacy Sterling’s diverse commercial and consumer lending product capabilities. The Merger has allowed us to accelerate loan growth, improve our ability to gather low cost core deposits and generate substantial cost savings and revenue enhancement opportunities.
The Merger has significantly diversified our business. Legacy Sterling was predominately a commercial & industrial lender which has complemented our loan portfolio, which was substantially collateralized by real estate. Further, Legacy Sterling provides us greater non-interest income revenue streams. On a combined basis, we anticipate greater than 20% of our total revenues will consist of non-interest income over time.
Results of Operations
In fiscal 2014, the Company reported net income of $27.7 million, or $0.34 per diluted common share, compared to net income of $25.3 million, or $0.58 per diluted common share, in fiscal 2013 and $19.9 million, or $0.52 per diluted common share in fiscal 2012. In connection with the Merger, the Company issued 39.1 million common shares, which increased weighted average diluted shares outstanding from 43.8 million in fiscal 2013 to 80.5 million in fiscal 2014.
The table below summarizes the Company’s results of operations on a tax-equivalent basis. Tax equivalent adjustments are the result of increasing income from tax-free securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
Selected income statement data, net interest margin, return on average assets, return on average common equity and dividends per common share for the comparable periods follows:
|
| | | | | | | | | | | |
| | For the fiscal year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| | (Dollars in Thousands) |
| Tax equivalent net interest income | $ | 223,616 |
| | $ | 115,227 |
| | $ | 99,962 |
|
| Less tax equivalent adjustment | (5,628 | ) | | (3,060 | ) | | (3,498 | ) |
| Net interest income | 217,988 |
| | 112,167 |
| | 96,464 |
|
| Provision for loan losses | 19,100 |
| | 12,150 |
| | 10,612 |
|
| Non-interest income | 47,370 |
| | 27,692 |
| | 32,152 |
|
| Non-interest expense | 208,428 |
| | 91,041 |
| | 91,957 |
|
| Income before income tax expense | 37,830 |
| | 36,668 |
| | 26,047 |
|
| Income tax expense | 10,152 |
| | 11,414 |
| | 6,159 |
|
| Net income | $ | 27,678 |
| | $ | 25,254 |
| | $ | 19,888 |
|
| | | | | | |
| Earnings per common share - basic | $ | 0.34 |
| | $ | 0.58 |
| | $ | 0.52 |
|
| Earnings per common share - diluted | 0.34 |
| | 0.58 |
| | 0.52 |
|
| Dividends per common share | 0.21 |
| | 0.30 |
| | 0.24 |
|
| Return on assets | 0.41 | % | | 0.63 | % | | 0.62 | % |
| Return on common equity | 3.1 |
| | 5.2 |
| | 4.5 |
|
| Average equity to average assets | 13.4 |
| | 12.8 |
| | 14.0 |
|
Net income increased $2.4 million in fiscal 2014 compared to fiscal 2013. Results in fiscal 2014 were positively impacted by the Merger and organic growth generated through our commercial banking teams. This resulted in a $108.4 million increase in tax equivalent net interest income and a $19.7 million increase in non-interest income between the periods. Results in fiscal 2014 were also impacted by merger-related expenses associated with the Merger, and charges for asset write-downs, the settlement of benefit plan obligations, costs associated with our banking systems conversion and other charges, which totaled $45.6 million. Excluding the impact of these items, net income was $57.8 million, and diluted earnings per share were $0.72 in fiscal 2014. Please refer to Item 6. “Selected Financial Data” for a reconciliation of this non-GAAP financial measure.
Details of the changes in the various components of net income are further discussed below.
Net Interest Income is the the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company’s largest source of revenue, representing 82.1% of total revenue in fiscal 2014. Net interest margin is the ratio of taxable equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest bearing liabilities impact net interest income and net interest margin.
The Company is primarily funded by core deposits, with non-interest bearing demand deposits being a significant source of funding. This lower cost funding base has had a positive impact on the Company’s net interest income and net interest margin and is expected to do so in a rising interest rate environment.
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. All average balances are 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 or expense.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| | Average balance | | Interest | | Yield/Rate | | Average
balance | | Interest | | Yield/Rate | | Average
balance | | Interest | | Yield/Rate |
| | (Dollars in thousands) |
| Interest earning assets: | | | | | | | | | | | | | | | | | |
Loans (1) | $ | 4,120,749 |
| | $ | 202,982 |
| | 4.93 | % | | $ | 2,216,871 |
| | $ | 107,810 |
| | 4.86 | % | | $ | 1,806,136 |
| | $ | 91,010 |
| | 5.04 | % |
| Securities taxable | 1,371,703 |
| | 30,067 |
| | 2.19 | % | | 948,884 |
| | 17,509 |
| | 1.85 | % | | 778,994 |
| | 16,537 |
| | 2.12 | % |
| Securities tax exempt | 321,185 |
| | 16,081 |
| | 5.01 | % | | 174,386 |
| | 8,742 |
| | 5.01 | % | | 188,520 |
| | 9,996 |
| | 5.30 | % |
| Interest earning deposits | 109,626 |
| | 292 |
| | 0.27 | % | | 59,375 |
| | 193 |
| | 0.33 | % | | 51,351 |
| | 127 |
| | 0.25 | % |
| FRB and FHLB Stock | 56,104 |
| | 3,112 |
| | 5.55 | % | | 23,905 |
| | 867 |
| | 3.63 | % | | 18,901 |
| | 865 |
| | 4.58 | % |
| Total interest earnings assets | 5,979,367 |
| | 252,534 |
| | 4.22 | % | | 3,423,421 |
| | 135,121 |
| | 3.95 | % | | 2,843,902 |
| | 118,535 |
| | 4.17 | % |
| Non-interest earning assets | 777,727 |
| | | | | | 392,188 |
| | | | | | 351,397 |
| | | | |
| Total assets | $ | 6,757,094 |
| | | | | | $ | 3,815,609 |
| | | | | | $ | 3,195,299 |
| | | | |
| Interest bearing liabilities: | | | | | | | | | | | | | | | | | |
| Demand deposits | $ | 706,160 |
| | $ | 571 |
| | 0.08 | % | | $ | 466,110 |
| | $ | 391 |
| | 0.08 | % | | $ | 399,819 |
| | $ | 483 |
| | 0.12 | % |
Savings deposits (2) | 622,414 |
| | 876 |
| | 0.14 | % | | 572,246 |
| | 973 |
| | 0.17 | % | | 485,624 |
| | 393 |
| | 0.08 | % |
| Money market deposits | 1,458,852 |
| | 5,096 |
| | 0.35 | % | | 819,442 |
| | 2,436 |
| | 0.30 | % | | 671,325 |
| | 2,194 |
| | 0.33 | % |
| Certificates of deposit | 554,396 |
| | 2,421 |
| | 0.44 | % | | 352,469 |
| | 2,123 |
| | 0.60 | % | | 289,230 |
| | 2,511 |
| | 0.87 | % |
Senior notes(3) | 98,202 |
| | 4,401 |
| | 5.98 | % | | 24,478 |
| | 1,431 |
| | 5.85 | % | | 19,136 |
| | 753 |
| | 3.93 | % |
| Other borrowings | 716,207 |
| | 15,553 |
| | 2.17 | % | | 422,438 |
| | 12,540 |
| | 2.97 | % | | 337,160 |
| | 12,239 |
| | 3.65 | % |
| Total interest bearing liabilities | 4,156,231 |
| | 28,918 |
| | 0.70 | % | | 2,657,183 |
| | 19,894 |
| | 0.75 | % | | 2,202,294 |
| | 18,573 |
| | 0.84 | % |
| Non-interest bearing deposits | 1,580,108 |
| | | | | | 646,373 |
| | | | | | 520,265 |
| | | | |
| Other non-interest bearing liabilities | 114,621 |
| | | | | | 22,641 |
| | | | | | 25,675 |
| | | | |
| Total liabilities | 5,850,960 |
| | | | | | 3,326,197 |
| | | | | | 2,748,234 |
| | | | |
| Stockholders’ equity | 906,134 |
| | | | | | 489,412 |
| | | | | | 447,065 |
| | | | |
| Total liabilities and Stockholders’ equity | $ | 6,757,094 |
| | | | | | $ | 3,815,609 |
| | | | | | $ | 3,195,299 |
| | | | |
Net interest rate spread (4) | | | | | 3.52 | % | | | | | | 3.20 | % | | | | | | 3.33 | % |
Net interest earning assets (5) | $ | 1,823,136 |
| | | | | | $ | 766,238 |
| | | | | | $ | 641,608 |
| | | | |
| Net interest margin | | | 223,616 |
| | 3.74 | % | | | | 115,227 |
| | 3.37 | % | | | | 99,962 |
| | 3.51 | % |
| Less tax equivalent adjustment | | | (5,628 | ) | | | | | | (3,060 | ) | | | | | | (3,498 | ) | | |
| Net interest income | | | $ | 217,988 |
| | | | | | $ | 112,167 |
| | | | | | $ | 96,464 |
| | |
| Ratio of interest earning assets to interest bearing liabilities | | | 143.9 | % | | | | | | 128.8 | % | |
| | | | 129.1 | % | | |
| |
| (1) | Includes the effect of net deferred loan origination fees and costs, allowance for loan losses, and non-accrual loans. Includes prepayment fees and late charges. |
| |
| (2) | Includes club accounts and interest bearing mortgage escrow balances. |
| |
| (3) | Senior notes for fiscal 2014 and 2013 represent the notes issued July 2, 2013, as described in Note 8. “Borrowings and Senior Notes” in the consolidated financial statements. The balance of senior notes shown in fiscal 2012 represents FDIC insured senior unsecured debt that was repaid in February 2012. |
| |
| (4) | Net interest rate spread represents the difference between the tax equivalent yield on average interest earning assets and the cost of average interest bearing liabilities. |
| |
| (5) | Net interest earning assets represents total interest earning assets less total interest bearing liabilities. |
The following table presents the dollar amount of changes in interest income (on a fully tax equivalent basis) and interest expense for the major categories of our 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 vs. 2013 | | 2013 vs. 2012 |
| | Increase (Decrease) due to | | Total increase | | Increase (Decrease)
due to | | Total increase |
| | Volume | | Rate | | (decrease) | | Volume | | Rate | | (decrease) |
| | (Dollars in thousands) |
| Interest earning assets: | | | | | | | | | | | |
| Loans | $ | 95,915 |
| | $ | (743 | ) | | $ | 95,172 |
| | $ | 20,489 |
| | $ | (3,689 | ) | | $ | 16,800 |
|
| Securities taxable | 8,891 |
| | 3,667 |
| | 12,558 |
| | 3,269 |
| | (2,297 | ) | | 972 |
|
| Securities tax exempt | 7,339 |
| | — |
| | 7,339 |
| | (725 | ) | | (529 | ) | | (1,254 | ) |
| Interest earning deposits | 141 |
| | (42 | ) | | 99 |
| | 22 |
| | 44 |
| | 66 |
|
| FRB and FHLB Stock | 1,612 |
| | 633 |
| | 2,245 |
| | 180 |
| | (178 | ) | | 2 |
|
| Total interest earning assets | 113,898 |
| | 3,515 |
| | 117,413 |
| | 23,235 |
| | (6,649 | ) | | 16,586 |
|
| Interest bearing liabilities: | | | | | | | | | | | |
| NOW deposits | 180 |
| | — |
| | 180 |
| | 76 |
| | (168 | ) | | (92 | ) |
| Savings deposits | 82 |
| | (179 | ) | | (97 | ) | | 79 |
| | 501 |
| | 580 |
|
| Money market deposits | 2,192 |
| | 468 |
| | 2,660 |
| | 456 |
| | (214 | ) | | 242 |
|
| Certificates of deposit | 973 |
| | (675 | ) | | 298 |
| | 485 |
| | (873 | ) | | (388 | ) |
| Senior notes | 3,378 |
| | (408 | ) | | 2,970 |
| | 247 |
| | 431 |
| | 678 |
|
| Other borrowings | 6,508 |
| | (3,495 | ) | | 3,013 |
| | 2,764 |
| | (2,463 | ) | | 301 |
|
| Total interest bearing liabilities | 13,313 |
| | (4,289 | ) | | 9,024 |
| | 4,107 |
| | (2,786 | ) | | 1,321 |
|
| Less tax equivalent adjustment | 2,568 |
| | — |
| | 2,568 |
| | (245 | ) | | (193 | ) | | (438 | ) |
| Change in net interest income | $ | 98,017 |
| | $ | 7,804 |
| | $ | 105,821 |
| | $ | 19,373 |
| | $ | (3,670 | ) | | $ | 15,703 |
|
Tax equivalent net interest income in fiscal 2014 increased $108.4 million, or 94.1%, compared to fiscal 2013. The increase was the result of an increase in average balances in interest earning assets due to the Merger and organic growth generated by our commercial banking teams. The average volume of interest earning assets increased $2.6 billion, or 74.7% in fiscal 2014 relative to the prior year. In addition, net interest margin increased 37 basis points to 3.74% in fiscal 2014 from 3.37% in fiscal 2013. The increase in net interest margin was mainly due to an increase in the yield on interest earning assets which was 4.22% in fiscal 2014 compared to 3.95% in fiscal 2013. The increase was principally the result of higher yielding loans acquired in the Merger and a rebalancing of earning assets from investment securities to higher yielding loans. For the fiscal year ended September 30, 2014, our securities to earning assets ratio was 28.3% versus 32.8% at September 30, 2013.
Tax equivalent net interest income increased $15.3 million in fiscal 2013 compared to the prior year. The increase was due to an increase in average loan balances of $410.7 million to $2.2 billion, which increased interest income by $20.5 million. This was partially offset by an 18 basis points decline in the yield on loans to 4.86% in fiscal 2013 as compared to 5.04% in fiscal 2012 which reduced interest income on loans by $3.7 million. The increase in loan volume was due to organic growth generated by our commercial banking teams and our successful retention of Gotham Bank clients and interest earning assets; the decline in loan yields reflects mainly the repayment of loans originated in prior periods that were replaced with new loan originations at lower rates of interest in the current market environment.
The balance of average loans outstanding increased $1.9 billion, or 85.9% in fiscal 2014. In connection with the Merger, we acquired $1.7 billion of loans on October 31, 2013 and increased average loans outstanding during the year through organic growth. Loans accounted for 68.9% of average interest earning assets in fiscal 2014 compared to 64.8% in fiscal 2013 and 63.5% in fiscal 2012. The average yield on loans was 4.93% in fiscal 2014 compared to 4.86% in fiscal 2013 and 5.04% in fiscal 2012.
Tax equivalent interest income on securities increased $19.9 million, or 75.8% in fiscal 2014, which was mainly the result of an increase of $569.6 million, or 50.7% in the average balance of securities over the period. In connection with the Merger, we acquired $607.9 million of securities on October 31, 2013. The tax equivalent yield on securities was 2.73% in fiscal 2014 compared to 2.34% in fiscal 2013 and 2.74% in fiscal 2012. The increase in tax equivalent yield in fiscal 2014 was mainly due to the proportion of tax exempt securities which comprised 19.0% of average securities in fiscal 2014 compared to 15.5% in fiscal 2013 and a rebalancing of the securities portfolio due to the Merger, which increased the yield on taxable securities in fiscal 2014 to 2.19% compared to 1.85% in fiscal 2013. The 40 basis point decline in the tax equivalent yield on securities between fiscal 2012 and 2013 was due to overall declines in market rates of interest.
Average deposits increased $2.1 billion, or 72.3% in fiscal 2014 and were $4.9 billion compared to $2.9 billion in fiscal 2013 and $2.4 billion in fiscal 2012. The increase in the average balance of deposits was mainly due to the Merger, as we assumed $2.3 billion in deposits on October 31, 2013. Average interest bearing deposits increased $1.1 billion, or 51.2%, in fiscal 2014 and $364.3 million, or 19.7%, in fiscal 2013 compared to fiscal 2012. Average non-interest bearing deposits increased $933.7 million and were $1.6 billion in fiscal 2014 compared to $646.4 million in fiscal 2013 and $520.3 million in fiscal 2012. The average cost of interest bearing deposits was 0.27% in fiscal 2014 and 2013 and was 0.30% in fiscal 2012. The cost of deposits reflects the current low interest rate environment.
Average borrowings increased $367.5 million, or 82.2% in fiscal 2014 and were $814.4 million compared to $446.9 million in fiscal 2013 and $356.3 million in fiscal 2012. The increase in average borrowings in fiscal 2014 was required to fund loan growth and included the $100.0 million of senior notes issued in connection with the Merger. Average borrowings also included $25.7 million of subordinated debentures which were redeemed in June 2014. The average cost of borrowings was 2.45% for fiscal 2014 compared to 3.13% in fiscal 2013 and 3.65% in fiscal 2012. The decline in the average cost of borrowings between the periods was mainly due to an increase in short-term FHLB borrowings as a percentage of total average borrowings.
Provision for Loan Losses. The provision for loan losses is determined by the Company as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level that is the Company’s best estimate of probable incurred credit losses inherent in the outstanding loan portfolio. The provision for loan losses totaled $19.1 million in fiscal 2014 compared to $12.2 million in fiscal 2013 and $10.6 million in fiscal 2012. See the section captioned “Loans - Provision for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.
Non-interest income. The components of non-interest income were as follows:
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| | (Dollars in Thousands) |
| Accounts receivable management / factoring commissions and other related fees | $ | 13,146 |
| | $ | — |
| | $ | — |
|
| Mortgage banking income | 8,086 |
| | 1,979 |
| | 1,897 |
|
| Deposit fees and service charges | 15,595 |
| | 10,964 |
| | 11,377 |
|
| Net gain on sale of securities | 641 |
| | 7,391 |
| | 10,452 |
|
| Bank owned life insurance | 3,080 |
| | 1,998 |
| | 2,050 |
|
| Investment management fees | 2,209 |
| | 2,413 |
| | 3,143 |
|
| Other | 4,613 |
| | 2,947 |
| | 3,233 |
|
| Total non-interest income | $ | 47,370 |
| | $ | 27,692 |
| | $ | 32,152 |
|
Non-interest income was $47.4 million in fiscal 2014, compared to $27.7 million in fiscal 2013 and $32.2 million in fiscal 2012. Included in non-interest income is net gain on sale of securities which was $641 thousand in fiscal 2014, compared to $7.4 million in fiscal 2013 and $10.5 million in fiscal 2012. Net gain on sale of securities is impacted significantly by changes in market interest rates and strategies we use to manage liquidity and interest rate risk. Excluding net gain on sale of securities, non-interest income was $46.7 million in fiscal 2014 compared to $20.3 million in fiscal 2013 and $21.7 million in fiscal 2012. The main driver of growth between fiscal 2013 and fiscal 2014 were fees generated in accounts receivable management and mortgage banking income as a result of the Merger. Our goal is to grow non-interest income excluding securities gains to over 20% of net interest income plus non-interest income excluding securities gains. This ratio was 17.7% in fiscal 2014 compared to 15.3% in fiscal 2013 and 18.4% in fiscal 2012.
Accounts receivable management / factoring commissions and other related fees represents fees generated in our factoring and payroll finance businesses. In factoring, we receive a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume and is designed to compensate us for the bookkeeping and collection services provided and, if applicable, the credit review of the client’s customer and assumption of customer credit risk. In payroll finance, we provide outsourcing support services for clients in the temporary staffing industry. We generate fee income in exchange for providing full back-office, payroll, tax and accounting services to independently-owned temporary staffing companies. Accounts receivable management / factoring commissions and other related fees totaled $13.1 million in fiscal 2014.
Mortgage banking income represents mortgage banking and brokerage business conducted through loan production offices located principally in New York City and through our financial centers. The Merger substantially increased our mortgage banking volume; mortgage banking revenue was $8.1 million in fiscal 2014 compared to $2.0 million in fiscal 2013 and $1.9 million in fiscal 2012.
Deposit fees and service charges increased by $5.6 million to $15.6 million in fiscal 2014, as the average balance of deposits increased by $2.1 billion over average balances in fiscal 2013. The decline in deposit fees and service charges of $413 thousand in fiscal 2013 compared to fiscal 2012 was mainly caused by a change in the composition of our deposits, as deposits gathered by our commercial banking teams are generally higher balance deposits but typically generate lower levels of fees and service charges than retail deposits.
Bank owned life insurance(“BOLI”) income represents the change in the cash surrender value of life insurance policies owned by the Bank. BOLI income increased by $1.1 million and was $3.1 million in fiscal 2014, as we acquired Legacy Sterling’s BOLI balances in connection with the Merger. The decrease in BOLI income between fiscal 2013 and fiscal 2012 was due to a decline in the interest crediting rate we receive from the insurance carriers given the current low interest rate environment.
Investment management fees principally represent fees from the sale of mutual funds and annuities and were $2.2 million in fiscal 2014 compared to $2.4 million in fiscal 2013 and $3.1 million in fiscal 2012. In fiscal 2012, we sold the assets of our former subsidiary that was active in the investment management business. We commenced a new wealth management initiative in fiscal 2013 focused on partnering with a third-party vendor to deliver wealth management products through our financial centers and commercial banking teams.
Other non-interest income principally includes loan servicing revenues, miscellaneous loan fees earned, letter of credit fees, and safe deposit box rentals. Other non-interest income increased by $1.7 million to $4.6 million in fiscal 2014 as a result of the Merger.
Non-interest expense. The components of non-interest expense were as follows:
|
| | | | | | | | | | | |
| | For the fiscal year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| | (Dollars in Thousands) |
| Compensation and employee benefits | $ | 94,310 |
| | $ | 47,833 |
| | $ | 46,038 |
|
| Stock-based compensation plans | 3,703 |
| | 2,239 |
| | 1,187 |
|
| Occupancy and office operations | 27,726 |
| | 14,953 |
| | 14,457 |
|
| Amortization of intangible assets | 9,408 |
| | 1,296 |
| | 1,245 |
|
| FDIC insurance and regulatory assessments | 6,146 |
| | 3,010 |
| | 3,096 |
|
| Other real estate owned expense | (237 | ) | | 1,562 |
| | 1,618 |
|
| Merger-related expense | 9,455 |
| | 2,772 |
| | 5,925 |
|
| Other | 57,917 |
| | 17,376 |
| | 18,391 |
|
| Total non-interest expense | $ | 208,428 |
| | $ | 91,041 |
| | $ | 91,957 |
|
Non-interest expense in fiscal 2014 increased $117.4 million to $208.4 million compared to $91.0 million fiscal 2013 and $92.0 million in fiscal 2012. The changes in the various components of non-interest expense between fiscal 2014 and fiscal 2013 were mainly the result of the Merger, which significantly increased the Company’s personnel, facilities and operating expense base. The decline in non-interest expense between fiscal 2012 and fiscal 2013 is mainly due to lower merger-related expenses. Merger-related expenses in fiscal 2012 of $5.9 million included expenses related to due diligence, restructuring costs and other charges in connection with the acquisition of Gotham Bank in August 2012.
Compensation and employee benefits in fiscal 2014 increased $46.5 million, or 97.2% to $94.3 million compared to $47.8 million in the prior year. At September 30, 2014, we had 21 commercial banking teams, as compared to September 30, 2013 and 2012 when we had 16 commercial banking teams. Our full-time equivalent employees were 836 at September 30, 2014 compared to 477 at September 30, 2013 and 493 at September 30, 2012. The increase in personnel in fiscal 2014 was due to the Merger. The decline in personnel between fiscal 2012 and fiscal 2013 was the result of operational efficiencies generated by the acquisition of Gotham Bank and the consolidation of several financial centers.
Included in compensation and employee benefits expense are expenses associated with the Company’s defined benefit pension plan and ESOP plan. During fiscal 2014, we merged the Legacy Provident defined benefit pension plan and the Legacy Sterling defined benefit pension plan and settled $44.8 million of the merged plan benefit obligations through the additionpurchase of commercial teams.annuities for certain retirees. We intend to concentratealso terminated the Company’s ESOP plan in fiscal 2014. Compensation and employee benefits expense in fiscal 2014 included a charge of $3.9 million on certain segmentsthe purchase of the market,annuities referenced above.
Stock-based compensation plans were $3.7 million in particular focusing on business with revenuesfiscal 2014 compared to $2.2 million in fiscal 2013 and $1.2 million in fiscal 2012. The increase in fiscal 2014 was mainly due to an increase in personnel due to the Merger. The increase between fiscal 2012 and fiscal 2013 was mainly due to a shift in our compensation plans which increased the proportion of $5stock-based compensation to total compensation for key personnel and the number of key personnel receiving stock-based compensation.
For additional information related to the Company’s employee benefit plans and stock-based compensation, see Note 11. “Employee Benefit Plans and Stock-Based Compensation Plans” in the consolidated financial statements included elsewhere in this Report.
Occupancy and office operations increased $12.8 million to $100$27.7 million small businessin fiscal 2014 compared to $15.0 million in fiscal 2013 and $14.5 million in fiscal 2012. The increase between fiscal 2013 and fiscal 2014 was due to an increase in financial centers and other locations acquired in the Merger. As discussed below, we moved certain financial center locations to other real estate owned and are actively marketing these properties and other leased locations with revenuesthe objective of $500,000reducing our occupancy and office operations expense over time.
Amortization of intangible assets mainly includes amortization of core deposit intangible assets and non-compete agreements. Amortization of intangible assets increased $8.1 million to $5$9.4 million in fiscal 2014 compared to $1.3 million in fiscal 2013 and $1.2 million in fiscal 2012. The increase in fiscal 2014 was a result of core deposit intangibles and non-compete agreement intangibles recorded in connection with the Merger. Amortization of intangible assets is expected to be $6.1 million in fiscal 2015. See Note 6. “Goodwill and Other Intangible Assets” in the consolidated financial statements included elsewhere in this Report.
FDIC insurance and regulatory assessments expense increased $3.1 million and financially savvy families.Lending Activities
General.was $6.1 million in fiscal 2014 compared to $3.0 million in fiscal 2013 and $3.1 million in fiscal 2012. The increase in deposit insurance and regulatory fees in fiscal 2014 was due to the Merger as these assessments are mainly based on the average balance of total assets on a quarterly basis. The decline during fiscal 2013 relative to fiscal 2012 was mainly due to a change in the deposit insurance assessment base.
Other real estate owned expense (“OREO”) includes maintenance costs, taxes, insurance, write-downs (subsequent to any write-down at the time of foreclosure or transfer to OREO), and gains and losses from the disposition of OREO. OREO includes real estate assets foreclosed and financial center locations that are held for sale. OREO expense declined $1.8 million in fiscal 2014 compared to fiscal 2013 and declined $56 thousand in fiscal 2013 compared to fiscal 2012. The net benefit of $237 thousand in fiscal 2014 was due to a $925 thousand gain on the sale of a financial center location that was acquired in the Merger.
Merger-related expense was $9.5 million in fiscal 2014, $2.8 million in fiscal 2013 and $5.9 million in fiscal 2012. Merger-related expense in fiscal 2013 included due diligence costs and financial advisor fees only, which were incurred due to the Merger. Merger-related expense in fiscal 2014 and fiscal 2012 included due diligence, restructuring costs and other charges incurred in connection with the Merger and the acquisition of Gotham Bank, respectively.
Other non-interest expense for fiscal 2014 increased $40.5 million to $57.9 million compared to $17.4 million in fiscal 2013 and $18.4 million in fiscal 2012. Included in other non-interest expense for fiscal 2014 were charges of $26.6 million that included asset write-downs to consolidate our financial center and other locations, retention and severance payments and charges incurred on the conversion of our banking systems. Excluding these charges, other non-interest expense was $31.3 million in fiscal 2014 compared to $17.4 million in fiscal 2013 and $18.4 million in fiscal 2012. Other non-interest expense mainly includes professional fees, data processing, insurance, communications, advertising, supplies, loan processing and postage. The increase in fiscal 2014 compared to fiscal 2013 was principally due to the Merger.
Income Tax expense was $10.2 million for fiscal 2014, compared to $11.4 million for fiscal 2013, and $6.2 million for fiscal 2012. This represented an effective tax rate of 26.8%, 31.1%, and 23.6%, respectively. The effective income tax rates differed from the 35% federal statutory rate during the periods primarily due to the effect of tax exempt income from securities and BOLI income. The effective tax rate in fiscal 2014 was the result of a higher proportion of income being tax exempt given the Merger-related expenses and other charges detailed above. The higher effective tax rate recognized in fiscal 2013 was mainly the result of Merger-related expenses incurred that were fully non-tax deductible and a higher proportion of taxable vs. non-taxable income versus fiscal 2012.
Sources and Uses of Funds
The following table illustrates the mix of the Company’s funding sources and the assets in which those funds are invested as a percentage of the Company’s total assets for the period indicated. Average assets totaled $6.8 billion in fiscal 2014 compared to $3.8 billion in fiscal 2013 and $3.2 billion in fiscal 2012.
|
| | | | | | | | |
| | For the fiscal year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Sources of Funds: | | | | | |
| Non-interest bearing deposits | 23.4 | % | | 17.0 | % | | 16.3 | % |
| Interest bearing deposits | 49.5 |
| | 57.9 |
| | 57.8 |
|
| FHLB and other borrowings | 10.4 |
| | 11.1 |
| | 10.5 |
|
| Subordinated debentures | 0.2 |
| | — |
| | — |
|
| Senior notes | 1.4 |
| | 0.6 |
| | 0.6 |
|
| Other non-interest bearing liabilities | 1.7 |
| | 0.6 |
| | 0.8 |
|
| Stockholders’ equity | 13.4 |
| | 12.8 |
| | 14.0 |
|
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | |
| Uses of Funds: | | | | | |
| Loans | 61.0 | % | | 58.1 | % | | 56.5 | % |
| Securities | 25.1 |
| | 29.4 |
| | 30.3 |
|
| Interest bearing deposits | 1.6 |
| | 1.6 |
| | 1.6 |
|
| FHLBNY and FRB stock | 0.8 |
| | 0.6 |
| | 0.6 |
|
| Other non-interest earning assets | 11.5 |
| | 10.3 |
| | 11.0 |
|
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
General. Deposits, borrowings, repayments and prepayments of loans we originateand securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are our primary sources of funds for use in lending, investing and for other general corporate purposes. Average deposits increased $2.1 billion, or 72.3%, in fiscal 2014 compared to fiscal 2013 and increased $490.3 million, or 20.7% in fiscal 2013 compared to fiscal 2012. Non-interest bearing deposits and low cost deposits are a significant source of our general market are;funding, and generating and maintaining these deposits through our commercial banking teams and financial centers is key to our strategy. Average non-interest bearing deposits were 32.1% of total average deposits in fiscal 2014 compared to 22.6% in fiscal 2013 and 22.0% in fiscal 2012.
The Company primarily commercialinvests funds in loans and securities. Average loans increased $1.9 billion, or 85.9% compared to fiscal 2013 and increased $410.7 million, or 22.7% in fiscal 2013 compared to fiscal 2012. Average securities increased $569.6 million or 50.7% in fiscal 2014 compared to fiscal 2013 and increased $155.8 million or 16.1% in fiscal 2013 compared to fiscal 2012.
Loans
The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| | (Dollars in thousands) |
| Commercial: | | | | | | | | | | | | | | | | | | | |
| Commercial & industrial | $ | 1,164,537 |
| | 24.5 | % | | $ | 434,932 |
| | 18.0 | % | | $ | 343,307 |
| | 16.2 | % | | $ | 209,923 |
| | 12.3 | % | | $ | 217,927 |
| | 12.8 | % |
| Payroll finance | 145,474 |
| | 3.1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Warehouse lending | 192,003 |
| | 4.0 |
| | 4,855 |
| | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Factored receivables | 181,433 |
| | 3.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equipment finance | 393,027 |
| | 8.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total commercial | 2,076,474 |
| | 43.7 |
| | 439,787 |
| | 18.2 |
| | 343,307 |
| | 16.2 |
| | 209,923 |
| | 12.3 |
| | 217,927 |
| | 12.8 |
|
| Commercial mortgage: | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | 1,449,052 |
| | 30.4 |
| | 969,490 |
| | 40.2 |
| | 896,746 |
| | 42.3 |
| | 592,201 |
| | 34.8 |
| | 535,227 |
| | 31.5 |
|
| Multi-family | 368,524 |
| | 7.7 |
| | 307,547 |
| | 12.7 |
| | 175,758 |
| | 8.3 |
| | 111,155 |
| | 6.6 |
| | 44,005 |
| | 2.5 |
|
| Acquisition, development & construction | 92,149 |
| | 1.9 |
| | 102,494 |
| | 4.2 |
| | 144,061 |
| | 6.8 |
| | 175,931 |
| | 10.3 |
| | 231,258 |
| | 13.6 |
|
| Total commercial mortgage | 1,909,725 |
| | 40.0 |
| | 1,379,531 |
| | 57.1 |
| | 1,216,565 |
| | 57.4 |
| | 879,287 |
| | 51.7 |
| | 810,490 |
| | 47.6 |
|
| Residential mortgage | 570,431 |
| | 12.0 |
| | 400,009 |
| | 16.6 |
| | 350,022 |
| | 16.5 |
| | 389,765 |
| | 22.9 |
| | 434,900 |
| | 25.5 |
|
| Consumer | 203,808 |
| | 4.3 |
| | 193,571 |
| | 8.1 |
| | 209,578 |
| | 9.9 |
| | 224,824 |
| | 13.1 |
| | 238,224 |
| | 14.1 |
|
| Total loans | 4,760,438 |
| | 100.0 | % | | 2,412,898 |
| | 100.0 | % | | 2,119,472 |
| | 100.0 | % | | 1,703,799 |
| | 100.0 | % | | 1,701,541 |
| | 100.0 | % |
| Allowance for loan losses | (40,612 | ) | | | | (28,877 | ) | | | | (28,282 | ) | | | | (27,917 | ) | | | | (30,843 | ) | | |
| Total loans, net | $ | 4,719,826 |
| | | | $ | 2,384,021 |
| | | | $ | 2,091,190 |
| | | | $ | 1,675,882 |
| | | | $ | 1,670,698 |
| | |
Overview. Total loans increased $2.3 billion to $4.7 billion at September 30, 2014 compared to $2.4 billion at September 30, 2013. Prior to fiscal 2014, the Bank’s loan portfolio was concentrated in real estate loans, multifamilymainly commercial mortgages, residential mortgages and other consumer loans collateralized by real estate. In connection with the Merger, the Bank became a national bank and more evenly balanced its loan portfolio between commercial loans and real estate loans. At September 30, 2014, commercial businessloans comprised 43.7% of the loan portfolio compared to 18.2% at September 30, 2013 and commercial mortgage loans comprised 40.0% of the loan portfolio, compared to 57.1% a year ago.
General. Our commercial banking teams focus on the origination of commercial loans and are deemphasizing acquisition, development and construction loans (“loan portfolio”).commercial mortgage loans. We also originate loans in our market area on a fixed-rate and adjustable-rate (“ARM”) basis residential mortgage loans collateralized by one- to four-family residential real estate, and consumer loans such as home equity lines of credit, homeowner loans and personal loans.loans in our market area. We retain mostsell many of the residential mortgage loans we originate althoughand we may sell longer-term one- to four-family residential loans andenter into loan participations in some commercial loans.loans for portfolio management purposes.
Commercial Real Estate LendingLoan Approval/Authority and Underwriting. The Board has established the Credit Risk Committee (the “CRC”) a sub-committee of the Company’s Enterprise Risk Committee, to oversee the lending functions of the Bank. The CRC oversees the performance of the Bank’s loan portfolio and its various components, assists in the development of strategic initiatives to enhance portfolio performance, and considers loans for approval and recommendation to the Board.
The Senior Credit Committee (the “SCC”) consists of the Chief Executive Officer, Chief Banking Officer, Chief Credit Officer, and other senior lending personnel. The SCC is authorized to approve all loans within the legal lending limit of the Bank.
The SCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. Other than overdrafts, the only single initial lending authorities are for credit secured small business loans up to $250,000 and up to $500,000 if secured by residential property.
We
originate real estatehave established a risk rating system for our commercial & industrial loans,
secured predominantly by first liens on commercial real estate. The commercial 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 assisted living and nursing homes, churches, mobile home parks, restaurants and motel/hotels. We may, from time to time, purchase commercial real estate loan participations. Recently we began seeking multifamily properties to diversify the portfolio. We target commercial real estate loans
and ADC loans. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with
initial principal balances between $1.0 million and $15.0 million. At September 30, 2011, loans securedthe loan. These ratings are assessed by commercial
real estate totaled $703.4 million, or 41.4% ofcredit personnel who do not have responsibility for loan originations. We determine our
total loan portfolio and consisted of 982 loans outstanding, although there are a large number of loans with balances substantially greater than the average. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.The majority of our commercial real estate loans are written as five-year adjustable-rate or ten-year fixed-rate mortgages and typically have balloon maturities up to ten years. Amortization on these loans is typicallymaximum loan-to-one-borrower limits based on 25-year payout schedules. Margins generally range from 200 basis points to 300 basis points above the applicable Federal Home Loan Bank advance rate.
rating of the loan and the relative risk associated with the borrower’s portfolio type.
In
the underwriting ofconnection with our residential mortgage and commercial real estate loans, we generally
lend uprequire property appraisals to
75% ofbe performed by independent appraisers who are approved by the
property’s appraised value. Decisions to lendBoard. Appraisals are
based onthen reviewed by the
economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estateappropriate loan
we primarily emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally targeting a minimum ratio of 120%), computed after deductionunderwriting areas. Under certain conditions, appraisals may not be required for
a vacancy factor and property expenses we deem appropriate. In addition, a personal guarantee of the loanloans under $250,000 or
a portion thereof is generally required from the principal(s) of the borrower.in other limited circumstances. We
also require title insurance,
insuring the priority of our lien, fire and extended coverage casualtyhazard insurance and,
if indicated, flood insurance
if appropriate,on property securing mortgage loans. Title insurance is not required for consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in
order to protect our security interest in the underlying property.Commercial real estate loans generally carry higher interest rates and have shorter terms than one-to four-familyconnection with certain residential mortgage loans. refinances.
Commercial real estate loans typically involve significant 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 adverse conditions in the real estate market and in the general economy. For commercial real estate loans in which the borrower is the primary occupant, repayment experience also depends on the successful operation of the borrower’s underlying business.& Industrial Lending
Commercial Business Loans.We make various types of secured and unsecured commercial & industrial loans to customerssmall and medium-sized businesses in our market area for the purpose of financingincluding loans collateralized by assets, such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment acquisition, expansion, working capital and other general business purposes.assets. The terms of these loans generally range from less than one year to seven years. The loans are either negotiatedstructured on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index. At September 30, 2011,2014, commercial loans totaled $2.1 billion, or 43.7% of our total loan portfolio.
In the Merger, we had 1,871acquired the following commercial lending businesses:
Payroll Finance Lending. The Bank provides financing and human resource business process outsourcing support services to the temporary staffing industry. The Bank provides full back-office, computer and tax accounting services, and financing to independently-owned staffing companies located throughout the United States. Loans typically are structured as an advance used by our clients to fund their payroll and are outstanding on average for 40 to 45 days.
Warehouse Lending. The Bank provides residential mortgage warehouse funding services to mortgage bankers. These loans outstanding with an aggregate balanceconsist of $209.9a line of credit used by the mortgage banker as a form of temporary financing during the period between the closing of a mortgage loan until its sale into the secondary market, which typically lasts from 15 to 30 days. The Bank provides warehouse lines ranging from $5 million or 12.3%to $35 million. The warehouse lines are collateralized by high quality first mortgage loans, which include mainly conventional Fannie Mae and Freddie Mac, jumbo and FHA loans.
Factored Receivables Lending. We provide accounts receivable management services. The purchase of a client’s accounts receivable is traditionally known as “factoring” and results in payment by the client of a nonrefundable factoring fee, which is generally a percentage of the total loan portfolio. Asfactored receivables or sales volume and is designed to compensate the Bank for the bookkeeping and collection services provided and, if applicable, its credit review of September 30, 2011, the average commercialclient’s customer and assumption of customer credit risk. When the Bank “factors” (i.e., purchases) an account receivable from a client, it records the receivable as an asset (included in “Gross loans” ), records a liability for the funds due to the client (included in “Other liabilities”) and credits to non-interest income the nonrefundable factoring fee (included in “Accounts receivable management/factoring commissions and other fees”). The Bank also may advance funds to its client prior to the collection of receivables, charging interest on such advances (in addition to any factoring fees) and normally satisfying such advances by the collection of receivables. The accounts receivable factoring is primarily for clients engaged in the apparel and textile industries.
Equipment Finance Lending. The Bank offers equipment financing across the United States through direct lending programs, third-party sources and vendor programs. The Bank finances full payout leases and secured loans for various types of business loan balance was approximately $111,800, although there areequipment, generally written on a large numberrecourse basis—with personal guarantees of the principals, with terms generally ranging from 24 to 60 months.
The above four categories of loans
with balances substantially greater than this average.Commercial credit decisionsacquired in the Merger, plus our commercial & industrial loans are referred to as commercial loans in the discussion below.
Underwriting of a commercial loan is based on a creditan assessment of the loan applicant. A determination is made as to the applicant’s willingness and ability to repay in accordance with the proposed terms, as well as an overall assessment of the risks involved. AnThis includes an evaluation is made of the applicant to determine character and capacity to manage. Personal guarantees of the principals are generally required, except in the case of certain factored receivables the Bank accepts on a non-recourse basis from publicly owned and not-for-profit corporations. In addition to an evaluation of the loan applicant’s financial statements, a determination is made ofwe analyze 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 supplement the analysis of the applicant’s creditworthiness. Checking with other banks and trade investigations may also be conducted. Collateral supporting a secured transaction also is analyzed to determine its marketability. For small business
Commercial Real Estate and Multi-Family Lending. We originate real estate loans secured predominantly by first liens on commercial real estate and linesmulti-family properties. The underlying collateral of credit,our commercial real estate loans consists of multi-family properties, retail properties including shopping centers and strip centers, office buildings, nursing homes, industrial and warehouse properties, hotels, motels, restaurants, and schools. To a lesser extent, we originate commercial real estate loans for medical use, non-profits, gas stations
and other categories. We may, from time to time, purchase commercial real estate loan participations. At September 30, 2014, loans secured by commercial real estate and multi-family properties totaled $1.8 billion, or 38.2% of our total loan portfolio. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.
The majority of our commercial real estate loans have a term of ten years and are structured as five-year fixed rate loans with a rate adjustment for the second five-year period or as ten-year fixed-rate loans. Amortization on these loans is typically based on 20 to 25 year terms with balloon maturities generally those not exceeding $100,000,in five or ten years. Interest rates on commercial real estate loans generally range from 200 basis points to 300 basis points above a reference index.
In the underwriting of commercial real estate loans, we
usegenerally lend up to 75% of the appraised value. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a
modified credit scoring system that enables usproposed commercial real estate loan, we primarily emphasize the ratio of the projected net cash flow to
processthe debt service requirement (generally targeting a minimum ratio of 120%), computed after deductions for a vacancy factor and property expenses we deem appropriate. In addition, a personal guarantee of the loan
requests more quickly and efficiently.Commercial business loans generally bear higher interest rates than residential loans of like duration because they involveor a higher risk of default since their repaymentportion thereof is generally dependentrequired from the principal(s) of the borrower, except for loans secured by multi-family properties, which meet certain debt service coverage and loan to value thresholds. We require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property.
Commercial real estate loans typically involve significant 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 may be subject to adverse conditions in the real estate market and in the general economy. For commercial real estate loans in which the borrower is a significant tenant, repayment experience also depends on the successful operation of the borrower’s businessunderlying business.
Acquisition, Development and Construction Lending. We originate acquisition, development and construction (“ADC”) loans to selected builders in our market area. Since 2011, the Company has deemphasized this lending activity and we currently originate ADC loans on an exception basis.
ADC loans help finance the purchase of land intended for further development, including single-family homes, multi-family housing, and commercial income properties. Historically, we have made an acquisition loan before the borrower received approval to develop the land as planned; however, we did not originate any such loans in fiscal 2014 or 2013. In general, the maximum loan-to-value ratio for a land acquisition loan is 50% of the appraised value of the property, although higher loan-to-value ratios may be allowed for certain borrowers we deem to be lower risk. We also fund development loans to builders in our market area to finance improvements to real estate, consisting mainly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum loan amount is generally limited to the cost of the improvements plus limited approval of soft costs subject to an overall loan-to-value limitation. In general, we do not originate loans with interest reserves. Advances are made in accordance with a schedule reflecting the cost of the improvements.
We also make construction loans to finance the cost of completing homes on the improved property. 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 except in cases of owner occupied construction loans. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We provide permanent mortgage financing on most of our construction loans on income-producing property. Collateral coverage and risk profile are maintained by restricting the number of model or speculative units in each project.
ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans generally depends on the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make 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 sufficiencycollateral value of collateral,the property. Development and construction loans also expose us 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.
Large Credit Relationships. The Company originates and maintains large credit relationships with numerous commercial customers in the ordinary course of business. The Company considers large credit relationships to be those with commitments equal to or in excess of $10.0 million, prior to any portion being sold. Large relationships also include loan participations purchased if any. the credit relationship
with the agent is equal to or in excess of $10.0 million. In addition to the Company’s normal policies and procedures related to the origination of large credits, the Senior Credit Committee of the Bank must approve all new and renewed credit facilities which are part of large credit relationships. The Senior Credit Committee meets regularly and reviews large credit relationship activity and discusses the current loan pipeline, among other things. The following table provides additional information on the Company’s large credit relationships outstanding at September 30:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
Number of Relationships | | Period end balances | | Number of Relationships | | Period end balances |
| | Committed | | Outstanding | | | Committed | | Outstanding |
| | (Dollars in Thousands) |
| Committed amount: | | | | | | | | | | | |
| $20.0 million and greater | 45 | | $ | 1,256,487 |
| | $ | 681,187 |
| | 4 |
| | $ | 92,630 |
| | $ | 87,261 |
|
| $10.0 million to $19.9 million | 78 | | 1,055,628 |
| | 835,360 |
| | 48 |
| | 613,865 |
| | 543,933 |
|
The average commitment per large credit relationship in excess of $20.0 million totaled $27.9 million at September 30, 2014 and $23.2 million at September 30, 2013. The average outstanding balance per large credit relationship with a commitment in excess of $20.0 million totaled $15.1 million at September 30, 2014 and $21.8 million at September 30, 2013. The average commitment per large credit relationship between $10.0 million and $19.9 million totaled $13.5 million at September 30, 2014 and $12.8 million at September 30, 2013. The average outstanding balance per large credit relationship with a commitment between $10 million and $19.9 million totaled $10.7 million at September 30, 2014 and $11.3 million at September 30, 2013.
Industry concentrations. As of September 30, 2014 and 2013, there were no concentrations of loans within any single industry in excess of 10% of company total loans, as segregated by Standard Industrial Classification code (“SIC code”). The SIC code is a federally designed standard industrial numbering system used by the Company to categorize loans by the borrower’s type of business. The majority of the Bank’s loans are to borrowers located in the greater New York metropolitan region. The Bank has no foreign loans.
One-To Four-Family Real EstateResidential Mortgage Lending.We offer conforming and non-conforming, fixed-rate and adjustable-rate (“ARM”) residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally up to $1.1$4.0 million that are fully amortizing with monthly or bi-weekly loan payments. ThisOur residential mortgage loan portfolio totaled $389.8$570.4 million, or 22.9%12.0% of our total loan portfolio at September 30, 2011.2014.One- to four-family residential
Residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as acceptable for purchase. Loans that conform to such guidelines are referred to as “conforming loans.” We generally originate fixed-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently
$417,000 for single-family homes or higher$417 thousand in
certainmany locations in the continental U.S. and are $625.5 thousand in high-cost areas
such as
determined by the Federal Housing Finance Agency.New York City and surrounding counties. Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%.
The Bank operates a residential mortgage banking and brokerage business through offices located in the greater New York Metropolitan area, Virginia, and other mid-Atlantic states. In order to
reducemanage our exposure to rising interest rates, we
sold or securitized a portionsell the majority of
our conforming fixed rate
1-4 family residential
mortgage loans,
originated, totaling $52.5 millionin the secondary market to nationally known entities including government sponsored entities such as Fannie Mae and
$49.0 million in proceeds for the fiscal years ending September 30, 2011 and 2010, respectively.Freddie Mac.
We also originate loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to substantially the same credit standards as conforming loans. These loans are generally intended to be held in our
portfolios.We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and our capital and liquidity position, we may retain all of our newly originated longer term fixed-rateresidential mortgage loan portfolio. Our bi-weekly residential mortgage loans or from time to time we may decide to sell all or a portion of such loans in the secondary mortgage market to government sponsored entities such as Fannie Mae and Freddie Mac or other purchasers. Our bi-weekly one- to four-family residential mortgage loans that are retained in our portfolio result in shorter repayment schedules than conventional monthly mortgage loans, and are repaid through an automatic deduction from the borrower’s savings or checking account. As of September 30, 2011, bi- weekly loans totaled $89.5 million, or 23% of our residential loan portfolio. We retainretained the servicing rights on a largeportion of loans sold; however, in fiscal 2014 the majority of loans sold to generate fee income and reinforce our commitment to customer service, although we may also sell non-conforming loans to mortgage banking companies, generally on a servicing-released basis.were sold with servicing rights released. As of September 30, 2011,2014, residential mortgage loans serviced for others, excluding loan participations, totaled $173.8approximately $234.4 million.
Effective October 1, 2013, we transferred the servicing function for residential mortgage loans we own and service for others to a nationally recognized mortgage loan servicer.
We currently offer several ARM loan products secured by residential properties with rates that are fixed for a period ranging from six months to ten years. After the initial term, if the loan is not already refinanced, the interest rate on these loans generally resets every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. 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, 2011, our ARM portfolio included $2.2 million in loans that re-price every six months, $42.5 million in loans that re-price once a year, $19.1 million in loans that re-price periodically after an initial fixed-rate period of one year or more and $429,000 that re-price based upon other miscellaneous re-pricing terms. Our adjustable rate loans do not have interest-only or negative amortization features. We do not nor have we in the past originated “subprime” loans, i.e., loans to borrowers with subprime credit scores combined with either high loan-to-value or high debt-to-income ratios.
We require title insurance on all of our
one- to four-familyresidential mortgage loans, and we also require that borrowers maintain fire and extended coverage or all risk casualty insurance (and, if appropriate, flood insurance) in an
amount at least equal to the lesser of the loan balance or the replacement cost of the improvements, but in any event in an amount calculated to avoid the effect of any coinsurance clause. Nearly all residential firstResidential mortgage loans generally are required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance.
Acquisition, DevelopmentConsumer Lending. We originate a variety of consumer loans, including homeowner loans, home equity lines of credit, new and Construction Loans.Historically, we originated land acquisition, developmentused automobile loans, and construction (“ADC”)personal unsecured loans, to builders in our market area. In the past year, we have deemphasized this lending due to the economic slow downincluding fixed-rate installment loans and declines in the real estate market. Effective August 2011, our policy is to consider acquisition or development loans only on an exception basis. Thesevariable lines of credit. As of September 30, 2014, consumer loans totaled $175.9$203.8 million, or 10.3%4.3%, of the total loan portfolio.
We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit secured by junior liens on residential properties. As of September 30, 2014, homeowner loans totaled $23.9 million or 0.5% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $59.9 million, or 3.4%, of our total loan portfolio at September 30, 2011,2014, with $99.0 million remaining undisbursed.
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2014. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Weighted average rates are computed based on the rate of the loan at September 30, 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than one year | | One to five years | | Over five years | | Total |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| | (Dollars in thousands) |
| Commercial: | | | | | | | | | | | | | | | |
| Commercial & industrial | $ | 696,389 |
| | 4.13 | % | | $ | 362,907 |
| | 3.90 | % | | $ | 105,241 |
| | 4.12 | % | | $ | 1,164,537 |
| | 4.06 | % |
| Payroll finance | 145,474 |
| | 9.00 |
| | — |
| | — |
| | — |
| | — |
| | 145,474 |
| | 9.00 |
|
| Warehouse lending | 192,003 |
| | 3.34 |
| | — |
| | — |
| | — |
| | — |
| | 192,003 |
| | 3.34 |
|
| Factored receivables | 181,433 |
| | 5.00 |
| | — |
| | — |
| | — |
| | — |
| | 181,433 |
| | 5.00 |
|
| Equipment financing | 21,296 |
| | 4.26 |
| | 338,369 |
| | 4.38 |
| | 33,362 |
| | 4.30 |
| | 393,027 |
| | 4.37 |
|
| Total commercial | 1,236,595 |
| | 4.71 |
| | 701,276 |
| | 4.13 |
| | 138,603 |
| | 4.16 |
| | 2,076,474 |
| | 4.48 |
|
| Commercial mortgage: | | | | | | | | | | | | | | | |
| Commercial real estate | 114,678 |
| | 4.83 |
| | 654,341 |
| | 4.37 |
| | 680,033 |
| | 4.47 |
| | 1,449,052 |
| | 4.45 |
|
| Multi-family | 14,153 |
| | 5.14 |
| | 174,188 |
| | 3.88 |
| | 180,183 |
| | 4.04 |
| | 368,524 |
| | 4.01 |
|
| Acquisition, development & construction | 44,259 |
| | 4.36 |
| | 38,187 |
| | 4.29 |
| | 9,703 |
| | 3.40 |
| | 92,149 |
| | 4.23 |
|
| Total commercial mortgage | 173,090 |
| | 4.74 |
| | 866,716 |
| | 4.27 |
| | 869,919 |
| | 4.37 |
| | 1,909,725 |
| | 4.35 |
|
| Residential mortgage | 8,855 |
| | 4.81 |
| | 36,148 |
| | 4.59 |
| | 525,428 |
| | 4.22 |
| | 570,431 |
| | 4.25 |
|
| Consumer | 4,274 |
| | 13.82 |
| | 9,343 |
| | 6.52 |
| | 190,191 |
| | 4.14 |
| | 203,808 |
| | 4.45 |
|
| Total loans | $ | 1,422,814 |
| | 4.74 | % | | $ | 1,613,483 |
| | 4.23 | % | | $ | 1,724,141 |
| | 4.28 | % | | $ | 4,760,438 |
| | 4.40 | % |
The following table sets forth the composition of fixed-rate and adjustable-rate loans at September 30, 2014 that are contractually due after September 30, 2015:
|
| | | | | | | | | | | |
| | Fixed | | Adjustable | | Total |
| | (Dollars in thousands) |
| Commercial & industrial | $ | 284,166 |
| | $ | 183,982 |
| | $ | 468,148 |
|
| Equipment financing | 371,731 |
| | — |
| | 371,731 |
|
| Commercial real estate | 733,681 |
| | 600,693 |
| | 1,334,374 |
|
| Multi-family | 171,339 |
| | 183,032 |
| | 354,371 |
|
| Acquisition, development & construction | 7,053 |
| | 40,837 |
| | 47,890 |
|
| Residential mortgage | 284,811 |
| | 276,765 |
| | 561,576 |
|
| Consumer | 28,553 |
| | 170,981 |
| | 199,534 |
|
| Total loans | $ | 1,881,334 |
| | $ | 1,456,290 |
| | $ | 3,337,624 |
|
All payroll finance, warehouse lending and factored receivables are contractually due within 12 months.
Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets
Loan Portfolio Delinquencies. The following table sets forth certain information on our loan portfolio delinquencies at the dates indicated.
|
| | | | | | | | | | | | | | | | | |
| | Loans delinquent for | | | | |
| | 30-89 Days | | 90 days or more still accruing & non-accrual | | Total |
| | Number | | Amount | | Number | | Amount | | Number | | Amount |
| | (Dollars in thousands) |
| At September 30, 2014: | | | | | | | | | | | |
| Commercial & industrial | 15 | | $ | 9,359 |
| | 8 | | $ | 4,324 |
| | 23 | | $ | 13,683 |
|
| Payroll finance | 1 | | 99 |
| | 2 | | 346 |
| | 3 | | 445 |
|
| Factored receivables | — | | — |
| | 2 | | 370 |
| | 2 | | 370 |
|
| Equipment finance | 2 | | 851 |
| | 1 | | 262 |
| | 3 | | 1,113 |
|
| Commercial real estate | 6 | | 4,281 |
| | 36 | | 10,966 |
| | 42 | | 15,247 |
|
| Multi-family | — | | — |
| | 2 | | 131 |
| | 2 | | 131 |
|
| Acquisition, development & construction | 1 | | 56 |
| | 21 | | 12,361 |
| | 22 | | 12,417 |
|
| Residential mortgage | 41 | | 6,059 |
| | 97 | | 16,460 |
| | 138 | | 22,519 |
|
| Consumer | 48 | | 4,574 |
| | 61 | | 5,743 |
| | 109 | | 10,317 |
|
| | 114 | | $ | 25,279 |
| | 230 | | $ | 50,963 |
| | 344 | | $ | 76,242 |
|
| At September 30, 2013: | | | | | | | | | | | |
| Commercial & industrial | 5 | | $ | 180 |
| | 8 | | $ | 789 |
| | 13 | | $ | 969 |
|
| Commercial real estate | 8 | | 4,335 |
| | 26 | | 8,769 |
| | 34 | | 13,104 |
|
| Acquisition, development & construction | 2 | | 768 |
| | 11 | | 5,420 |
| | 13 | | 6,188 |
|
| Residential mortgage | 6 | | 621 |
| | 52 | | 9,316 |
| | 58 | | 9,937 |
|
| Consumer | 14 | | 566 |
| | 28 | | 2,612 |
| | 42 | | 3,178 |
|
| Total | 35 | | $ | 6,470 |
| | 125 | | $ | 26,906 |
| | 160 | | $ | 33,376 |
|
| At September 30, 2012: | | | | | | | | | | | |
| Commercial & industrial | 7 | | $ | 237 |
| | 2 | | $ | 344 |
| | 9 | | $ | 581 |
|
| Commercial real estate | 7 | | 1,875 |
| | 30 | | 10,453 |
| | 37 | | 12,328 |
|
| Acquisition, development & construction | 9 | | 7,067 |
| | 29 | | 15,404 |
| | 38 | | 22,471 |
|
| Residential Mortgage | 10 | | 1,352 |
| | 56 | | 11,314 |
| | 66 | | 12,666 |
|
| Consumer | 22 | | 1,816 |
| | 21 | | 2,299 |
| | 43 | | 4,115 |
|
| Total | 55 | | $ | 12,347 |
| | 138 | | $ | 39,814 |
| | 193 | | $ | 52,161 |
|
| At September 30, 2011: | | | | | | | | | | | |
| Commercial & industrial | 2 | | $ | 490 |
| | 3 | | $ | 243 |
| | 5 | | $ | 733 |
|
| Commercial real estate | 4 | | 1,105 |
| | 34 | | 13,214 |
| | 38 | | 14,319 |
|
| Acquisition, development & construction | 4 | | 4,265 |
| | 24 | | 16,984 |
| | 28 | | 21,249 |
|
| Residential mortgage | 8 | | 1,212 |
| | 40 | | 7,976 |
| | 48 | | 9,188 |
|
| Consumer | 20 | | 794 |
| | 26 | | 2,150 |
| | 46 | | 2,944 |
|
| Total | 38 | | $ | 7,866 |
| | 127 | | $ | 40,567 |
| | 165 | | $ | 48,433 |
|
| At September 30, 2010: | | | | | | | | | | | |
| Commercial & industrial | 2 | | $ | 3,403 |
| | 6 | | $ | 1,376 |
| | 8 | | $ | 4,779 |
|
| Commercial real estate | 4 | | 1,469 |
| | 26 | | 9,857 |
| | 30 | | 11,326 |
|
| Acquisition, development & construction | 2 | | 6,681 |
| | 11 | | 5,730 |
| | 13 | | 12,411 |
|
| Residential mortgage | 1 | | 113 |
| | 36 | | 8,033 |
| | 37 | | 8,146 |
|
| Consumer | 27 | | 681 |
| | 22 | | 1,844 |
| | 49 | | 2,525 |
|
| Total | 36 | | $ | 12,347 |
| | 101 | | $ | 26,840 |
| | 137 | | $ | 39,187 |
|
Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans. A late payment notice is generated after the 16th day of the loan payment due date requesting the payment due plus any late charge assessed. Legal action, notwithstanding ongoing collection efforts, is generally initiated after 90 days of the original due date for failure to make payment. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending on individual circumstances.
Past Due, Non-Performing Loans, Non-Performing Assets (Risk Elements). The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (Dollars in thousands) |
| Non-accrual loans: | | | | | | | | | |
| Commercial & industrial | $ | 4,324 |
| | $ | 500 |
| | $ | 344 |
| | $ | 243 |
| | $ | 1,376 |
|
| Factored receivables | 370 |
| | — |
| | — |
| | — |
| | — |
|
| Equipment finance | 262 |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate | 10,445 |
| | 5,573 |
| | 7,319 |
| | 11,225 |
| | 6,886 |
|
| Multi-family | 131 |
| | 1,622 |
| | 1,496 |
| | — |
| | — |
|
| Acquisition, development & construction | 12,361 |
| | 5,420 |
| | 15,404 |
| | 16,538 |
| | 5,730 |
|
| Residential mortgage | 15,926 |
| | 7,484 |
| | 9,051 |
| | 7,485 |
| | 6,080 |
|
| Consumer | 5,743 |
| | 2,208 |
| | 1,830 |
| | 986 |
| | 1,341 |
|
| Accruing loans past due 90 days or more | 1,401 |
| | 4,099 |
| | 4,370 |
| | 4,090 |
| | 5,427 |
|
| Total non-performing loans | 50,963 |
| | 26,906 |
| | 39,814 |
| | 40,567 |
| | 26,840 |
|
| OREO | 7,580 |
| | 6,022 |
| | 6,403 |
| | 5,391 |
| | 3,891 |
|
| Total non-performing assets | $ | 58,543 |
| | $ | 32,928 |
| | $ | 46,217 |
| | $ | 45,958 |
| | $ | 30,731 |
|
| TDRs accruing and not included above | $ | 17,653 |
| | $ | 23,895 |
| | $ | 14,077 |
| | $ | 8,470 |
| | $ | 16,047 |
|
| Ratios: | | | | | | | | | |
| Non-performing loans to total loans | 1.07 | % | | 1.12 | % | | 1.87 | % | | 2.38 | % | | 1.58 | % |
| Non-performing assets to total assets | 0.80 |
| | 0.81 |
| | 1.15 |
| | 1.46 |
| | 1.02 |
|
Loans are reviewed on a declineregular basis and are placed on non-accrual status upon the earlier of $55.3 million as we have de-emphasized this business. Acquisition loans help finance(i) when full payment of principal or interest is in doubt, or (ii) when either principal or interest is 90 days or more past due, unless the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income property. In some cases, we may make an acquisition loan before the borrower has received approval to develop the land as planned. In general, the maximum loan-to-value ratio for a land acquisition loan is 50%well secured and in the process of collection. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed against interest income. Interest payments received on non-accrual loans are generally applied to the principal balance of the appraised valueoutstanding loan. However, based on an assessment of the property, although for certain borrowers we deem to be our lowest risk, higher loan-to-value ratiosborrower’s financial condition and payment history, an interest payment may be allowed. We also make development loansapplied to builders in our market area to finance improvements to real estate, consisting mainly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally relyinterest income 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 plus limited approval of soft costs. In general, we do not originate loans with interest reserves. A portion of our ADC loans acquired through the purchase of participations do carry interest reserves. The total of these ADC participation loans with interest reservesa cash basis. Appraisals are performed at least annually on classifieds loans. At September 30, 20112014, we had non-accrual loans of $49.6 million, and we had $1.4 million of loans 90 days past due and still accruing interest which were $12.6 million. Advances are madewell secured and in accordance with a schedule reflecting the costprocess of the improvements.We also make constructioncollection. At September 30, 2013, we had non-accrual loans of $22.8 million and $4.1 million of loans 90 days past due and still accruing interest.
Non-performing loans (“NPLs”) increased $24.1 million to area builders which are not affected by our new policy. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. 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$51.0 million at September 30, 2014 compared to individual purchasers except in cases of owner occupied construction loans. Owner occupied commercial construction loans totaled $6.9$26.9 million at September 30, 2011.2013. Included in this increase are $3.8 million of loans acquired in the Merger that were identified as purchased credit impaired loans, of which $1.5 million were commercial & industrial loans, $2.1 million were residential mortgage loans and $139 thousand were commercial real estate loans. Non-performing loans in the ADC portfolio increased by $6.9 million in fiscal 2014 to $12.3 million; the increase consisted of three loans which are well secured and one loan which has performed as expected in fiscal 2014. We continue to actively manage and reduce outstanding balances in the ADC portfolio. Residential mortgage non-performing loans increased $8.4 million and consumer non-performing loans increased $3.5 million at September 30, 2014 as compared to September 30, 2013. This increase is mainly attributed to the extended period of time necessary to foreclose on residential mortgages in New York state. In fiscal 2014, we outsourced all residential mortgage servicing activities to a third-party vendor, which we anticipate will allow us to better service our residential mortgage portfolio and reduce non-performing balances over time.
Troubled Debt Restructuring. The Company has formally modified loans to certain borrowers who experienced financial difficulty. If the terms of the modification include a concession, as defined by GAAP, the loan is considered a troubled debt restructuring (“TDR”), which are also considered impaired loans. Nearly all of these loans are secured by real estate. Total TDRs were $29.6 million at September 30, 2014, of which $11.9 million were non-accrual and $17.7 million were performing according to terms and still accruing interest income. TDRs still accruing interest income are loans modified for borrowers that have experienced one or more financial
difficulties and are still performing in accordance with the terms of their loan prior to the modification. Loan modifications include actions such as extension of maturity date or the lowering of interest rates and monthly payments. As of September 30, 2014, there were no commitments to lend additional funds to borrowers with loans that have been modified.
Other Real Estate Owned. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until such time as it is sold. In addition, financial centers that were closed or consolidated due to the Merger that are held for sale are also classified as OREO. When real estate is transfered to OREO, it is recorded at the lower of our investment in the loan/asset or fair value less cost to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the allowance for loan losses. If the fair value of a financial center that we hold for sale is less than its prior carrying value, we recognize a charge included in other operating expense to reduce the recorded value of the investment to fair value, less costs to sell. At September 30, 2014, we had 34 OREO properties with a recorded balance of $7.6 million. After transfer to OREO, we regularly update the fair value of the property. Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of OREO expense.
Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality such 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 Bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses 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 and are charged-off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention”. As of September 30, 2014, we had $39.6 million of assets designated as “special mention”.
Our determination as to the classification of our assets and the amount of our loan loss allowance are subject to review by our regulators, which can order the establishment of an additional valuation allowance. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2014, classified assets consisted of loans of $73.1 million, OREO of $5.2 million and $2.9 million of private label mortgage-backed securities.
For the year ended September 30, 2014, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to approximately $1.5 million. Interest income actually recognized on such loans totaled $425 thousand.
Allowance for Loan Losses. We believe the allowance for loan losses is critical to the understanding of our financial condition and results of operations. Selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to occur, and depending upon the severity of such changes, materially different financial conditions or results of operations is a reasonable possibility. In addition, as an integral part of their examination process, our regulatory agencies periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
We maintain our allowance for loan losses at a level that the Company believes is adequate to absorb probable losses inherent in the existing loan portfolio based on an evaluation of the collectibility of loans, underlying collateral, geographic and other concentrations, and prior loss experience. We use a risk rating system for all commercial loans, including commercial real estate loans, to evaluate the adequacy of the allowance for loan losses. With this system, each loan, with the exception of those included in large groups of smaller-balance homogeneous loans, is risk rated between one and ten, by credit administration, loan review or loan committee, with one being the best case and ten being a loss or the worst case. Loans with risk ratings between seven and nine are monitored more closely by the credit administration team and may result in specific valuation allowances. We calculate an average loss experience by loan type that is a twelve quarter average for commercial loans and eight quarter average for consumer loans. To the loss experience, we apply individual qualitative loss factors that result in an overall loss factor at an appropriate level for the allowance for loan losses for a particular loan type. These qualitative loss factors are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:
levels of, and trends in, delinquencies and non-accruals;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
experience, ability, and depth of lending management and staff;
national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
for commercial loans, trends in risk ratings.
The allowance for loan losses also includes an element for estimated probable but undetected losses. The Company analyzes loans by two broad segments or classes: real estate secured loans and loans that are either unsecured or secured by other collateral. The segments or classes considered real estate secured are: residential mortgage loans; commercial real estate loans; multi-family loans; ADC loans; homeowner loans; and home equity lines of credit. The segments or classes considered unsecured or secured by other than real estate collateral are: commercial & industrial loans, including payroll finance; warehouse lending; factored receivables; and equipment finance and consumer loans. Commercial loan segments and residential mortgage loans over $500,000 are reviewed for impairment once they are past due 90 days or more. If a loan is deemed to be impaired in one of the real estate secured segments, and it is anticipated that our ultimate source of repayment will be through foreclosure and sale of the underlying collateral, it is generally considered collateral dependent. If the value of the collateral securing a collateral dependent impaired loan is less than the carrying value of the loan, a charge-off is recognized equal to the difference between the appraised value and the book value of the loan. In addition, included in impairment losses are charges recognized for estimated costs to hold and to liquidate the collateral. The ranges for the costs to hold and liquidate are 12-22% for the following segments: commercial real estate, residential and ADC loans and 7-13% for homeowner loans and home equity lines of credit.
For loans in the consumer segment,we charge-off the full amount of the loan when it becomes 90 to 120 days or more past due, or earlier in the case of income-producing property, repayment is usually expected from permanent financing upon completionbankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For loans in the commercial & industrial loan segment, we conduct a cash flow projection, and charge-off the difference between the net present value of construction. We committhe cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize an additional impairment reserve to provideaccount for the permanent mortgage financing on mostimprecision of our construction loans on income-producing property. Collateral coverage and risk profile is maintained by restricting the number of model or speculative units in each project.estimates.
ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans depends
uponon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make 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 us 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. In recent years as a result of the economic downturn, most projects have performed behind schedule, requiring the borrowers to carry these projects for a longer period than was originally contemplated when we approved the credit facilities. As a result many of the borrowers have been utilizing other sources to maintain debt service or have been unable to maintain debt service requirements. As of September 30, 2011 $11.7 million of acquisition and development loans are being amortized from outside sources of cash flow.Consumer Loans.We originate 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 variable lines of credit. As of September 30, 2011, consumer loans totaled $224.8 million, or 13.1% of the total loan portfolio.
We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit secured by junior liens on residential properties. As of September 30, 2011, homeowner loans totaled $41.0 million or 2.4% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $174.5 million, or 10.2% of our total loan portfolio at September 30, 2011, with $129.0 million remaining undisbursed.
Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2011, these loans totaled $9.3 million, or less than 1% of our total loan portfolio. We originate consumer loans directly to our customers or on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee. Personal loans also include secured and unsecured installment loans for other purposes. Unsecured installment loans, which include most personal 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. We also offer overdraft lines of credit on an unsecured basis; outstanding balances on these loans included above totaled $4.2 million with additional undrawn lines totaling $14.2 million.
Our 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. We generally lend at an 80% loan-to-value ratio for home equity loans, but will go to 90% loan-to-value with a strong loan profile and higher pricing.
Consumer loans generally entail greater risk than residential mortgage loans. Loans secured by junior liens have been more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy than a single family mortgage loan.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| | | (Dollars in thousands) | |
One-to four-family residential mortgage loans | | $ | 389,765 | | | | 22.9 | % | | $ | 434,900 | | | | 25.5 | % | | $ | 460,728 | | | | 27.0 | % | | $ | 513,381 | | | | 29.6 | % | | $ | 500,825 | | | | 30.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate loans | | | 703,356 | | | | 41.4 | | | | 579,232 | | | | 34.0 | | | | 546,767 | | | | 32.6 | | | | 554,811 | | | | 32.0 | | | | 535,003 | | | | 32.8 | |
Commercial business loans | | | 209,923 | | | | 12.3 | | | | 217,927 | | | | 12.8 | | | | 242,629 | | | | 14.2 | | | | 243,642 | | | | 14.1 | | | | 207,156 | | | | 12.6 | |
Acquisition, development, construction | | | 175,931 | | | | 10.3 | | | | 231,258 | | | | 13.6 | | | | 201,611 | | | | 11.4 | | | | 170,979 | | | | 9.9 | | | | 153,074 | | | | 9.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total commercial loans | | | 1,089,210 | | | | 64.0 | | | | 1,028,417 | | | | 60.4 | | | | 991,007 | | | | 58.2 | | | | 969,432 | | | | 56.0 | | | | 895,233 | | | | 54.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines of credit | | | 174,521 | | | | 10.2 | | | | 176,134 | | | | 10.4 | | | | 180,205 | | | | 10.6 | | | | 166,491 | | | | 9.6 | | | | 162,669 | | | | 9.9 | |
Homeowner loans | | | 40,969 | | | | 2.4 | | | | 48,941 | | | | 2.9 | | | | 54,941 | | | | 3.2 | | | | 58,569 | | | | 3.4 | | | | 59,705 | | | | 3.6 | |
Other consumer loans | | | 9,334 | | | | 0.5 | | | | 13,149 | | | | 0.8 | | | | 16,376 | | | | 1.0 | | | | 23,680 | | | | 1.4 | | | | 19,626 | | | | 1.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total consumer loans | | | 224,824 | | | | 13.1 | | | | 238,224 | | | | 14.1 | | | | 251,522 | | | | 14.8 | | | | 248,740 | | | | 14.4 | | | | 242,000 | | | | 14.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | | 1,703,799 | | | | 100.0 | % | | | 1,701,541 | | | | 100.0 | % | | | 1,703,257 | | | | 100.0 | % | | | 1,731,553 | | | | 100.0 | % | | | 1,638,058 | | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | (27,917 | ) | | | | | | | (30,843 | ) | | | | | | | (30,050 | ) | | | | | | | (23,101 | ) | | | | | | | (20,389 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans, net | | $ | 1,675,882 | | | | | | | $ | 1,670,698 | | | | | | | $ | 1,673,207 | | | | | | | $ | 1,708,452 | | | | | | | $ | 1,617,669 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2011. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Weighted average rates are computed based on the rate of the loan at September 30, 2011.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Residential Mortgage | | | Commercial Real Estate | | | Commercial Business | | | ADC | | | Consumer | | | Total | |
| | | Amount | | | Weighted
Average
Rate | | | Amount | | | Weighted
Average
Rate | | | Amount | | | Weighted
Average
Rate | | | Amount | | | Weighted
Average
Rate | | | Amount | | | Weighted
Average
Rate | | | Amount | | | Weighted
Average
Rate | |
| | | (Dollars in thousands) | |
Due During the Years
Ending September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2012 | | $ | 7,097 | | | | 4.44 | % | | $ | 30,413 | | | | 5.20 | % | | $ | 56,728 | | | | 4.09 | % | | $ | 119,055 | | | | 4.48 | % | | $ | 1,800 | | | | 5.92 | % | | $ | 215,093 | | | | 4.49 | % |
2013 to 2016 | | | 24,016 | | | | 5.06 | | | | 255,305 | | | | 5.66 | | | | 85,200 | | | | 4.59 | | | | 50,289 | | | | 4.23 | | | | 10,838 | | | | 8.45 | | | | 425,648 | | | | 5.31 | |
2016 and beyond | | | 358,652 | | | | 5.40 | | | | 417,638 | | | | 5.61 | | | | 67,995 | | | | 4.49 | | | | 6,587 | | | | 3.20 | | | | 212,186 | | | | 4.67 | | | | 1,063,058 | | | | 5.26 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 389,765 | | | | 5.56 | % | | $ | 703,356 | | | | 5.60 | % | | $ | 209,923 | | | | 4.42 | % | | $ | 175,931 | | | | 4.14 | % | | $ | 224,824 | | | | 4.87 | % | | $ | 1,703,799 | | | | 5.20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2011 that are contractually due after September 30, 2012.
| | | | | | | | | | | | |
| | | Fixed | | | Adjustable | | | Total | |
| | | (Dollars in thousands) | |
Residential mortgage loans | | $ | 323,446 | | | $ | 59,222 | | | $ | 382,668 | |
| | | | | | | | | | | | |
Commercial real estate loans | | | 293,956 | | | | 378,987 | | | | 672,943 | |
Commercial business loans | | | 47,962 | | | | 105,233 | | | | 153,195 | |
ADC | | | 1,838 | | | | 55,038 | | | | 56,876 | |
| | | | | | | | | | | | |
Total commercial loans | | | 343,756 | | | | 539,258 | | | | 883,014 | |
| | | | | | | | | | | | |
Consumer loans | | | 53,677 | | | | 169,347 | | | | 223,024 | |
| | | | | | | | | | | | |
Total loans | | $ | 720,879 | | | $ | 767,827 | | | $ | 1,488,706 | |
| | | | | | | | | | | | |
Loan Originations, Purchases, Sales and Servicing.While we originate both fixed-rate and adjustable-rate loans, our 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 our market area. These include competing banks, savings banks, credit unions, mortgage banking companies, life insurance companies and similar financial services firms. Loan originations are derived from a number of sources, including branch office personnel, commercial banking officers, existing customers, borrowers, builders, attorneys, real estate broker referrals and walk-in customers.
Our loan origination and sales activity may be adversely affected by a rising interest rate environment or period of falling house prices, which typically result 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, and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold, the sales are conducted generally using standard Fannie Mae/Freddie Mac purchase contracts and master commitments as applicable. One- to four-family mortgage loans may be sold to Fannie Mae or Freddie Mac on a non-recourse basis whereby foreclosure losses are generally the responsibility of the purchaser and not Provident Bank. Consistent with its long-standing credit policies, Provident Bank does not originate or hold subprime mortgage loans. We also hold no subprime loans through our investment portfolio.
During fiscal year 2011, $3.0 million in loans were sold as participation certificates whereby such loans were retained as mortgage backed securities guaranteed by Freddie Mac. In addition we sold $49.5 million as whole loans to Freddie Mac. We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our policy generally has been to retain the servicing rights for all conforming loans sold. We therefore continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings, if necessary. We retain a portion of the interest paid by the borrower on the loans as consideration for our servicing activities.
Loan Approval/Authority and Underwriting.The Board of Directors has established the Credit Risk Committee (the “CRC”) to oversee the lending functions of the Bank. The CRC reviews loans approved by the Bank’s Management Credit Committee, oversees the performance of the Bank’s loan portfolio and its various components, assists in the development of strategic initiatives to enhance portfolio performance, and considers matters for approval and recommendation to the Board of Directors.
The Management Credit Committee (the “MCC”) consists of the President and Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, and other senior lending personnel. The MCC is authorized to approve loans within the existing policy limits established by the Board. For loans that contain any policy exception but are nonetheless deemed desirable, the MCC may recommend approval to the CRC, which in turn may recommend approval to the Board.
The MCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. The maximum single initial authority for commercial loans is $50,000 ($100,000 for credit-scored small business loans); and for other consumer loans, primarily equity loans, $100,000. All residential lending authority requires dual signatures. Two loan officers with sufficient authority acting together may approve loans up to $1 million.
We have established a risk rating system for our commercial business loans, commercial and multi-family real estate loans, and ADC 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. We determine our maximum loan-to-one-borrower limits based upon the rating of the loan. The large majority of loans fall into four categories. The maximum for the best-rated borrowers is $20 million, $15 million for the next group of borrowers, $12 million for the third group and $6 million for the last group. Sub-limits apply based on reliance on any single property, and for commercial business loans. On occasion, the Board of Directors may approve higher exposure limits for loans to one borrower in an amount not to exceed the legal lending limit of the Bank. The Board may also authorize the Director of the Credit Risk Committee or Management credit committee to approve loans for specific borrowers up to a designated Board approved limit in excess of the policy limit, for that borrower.
In connection with our residential and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas. Under certain conditions, appraisals may not be required for loans under $250,000 or in other limited circumstances. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in connection with certain residential mortgage refinances.
Loan Origination Fees and Costs.In addition to interest earned on loans, we receive 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. We defer loan origination fees and costs, and amortize 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 $308,000 at September 30, 2011.
To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale. 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. Originated mortgage servicing rights with an amortized cost of $1.5 million are included in other assets at September 30, 2011. See also Notes 2 and 5 of the “Notes to Consolidated Financial Statements”.
Loans to One Borrower.At September 30, 2011, our five largest aggregate amounts loaned to any one borrower and certain related interests (including any unused lines of credit) consisted of secured and unsecured financing of $22.5 million, $19.5 million, $17.6 million, $16.6 million and $16.0 million. See “Regulation — Regulation of Provident Bank — Loans to One Borrower” for a discussion of applicable regulatory limitations.
Delinquent Loans, Troubled Debt Restructure, Impaired Loans, Other Real Estate Owned and Classified Assets
Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans.A computer-generated late notice is sent by the 16th day after the payment due date on a loan requesting the payment due plus any late charge that was assessed. Accounts are distributed to a collector or account officer to contact borrowers, determine the reason for delinquency and seek payment, and accounts are monitored electronically for receipt of payments. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If payment is not received within 60 days of the due date,
loans are generally accelerated and payment in full is demanded. Failure to pay within 90 days of the original due date generally results in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending upon individual circumstances.
Loans Past Due and Non-Performing Assets.Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due, unless well secured and in the process of collection. 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 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 related to current year income and charged to the allowance for loan losses with respect to income that was recorded in the prior fiscal year. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower’s financial condition and payment record. Appraisals are performed at least annually on criticized/classifieds loans. At September 30, 2011, we had non-accrual loans of $36.5 million and $4.1 million of loans 90 days past due and still accruing interest, which were well secured and in the process of collection. At September 30, 2010 we had non-accrual loans of $21.4 million and $5.4 million of loans 90 days past due and still accruing interest.
Impaired Loans. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are 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, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at its measured value. Impaired loans substantially consist of non-performing loans and accruing and performing troubled debt restructured loans. At September 30, 2011, we had $55.0 million in impaired loans with $3.8 million in specific allowances.
Other Real Estate Owned.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 the lower of book value or fair value less cost to sell. 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, 2011 we had 17 foreclosed properties with a recorded balance of $5.4 million. In addition, $9.8 million in loan balances was considered troubled debt restructures which are still accruing interest income.
Troubled Debt Restructure.The Company may modify loans to certain borrowers who are experiencing financial difficulty. If the terms of the modification include a concession, as defined by US GAAP guidance, the loan as modified is considered a trouble debt restructuring (“TDR”). Nearly all these loans are secured by real estate. Total TDR’s were $17.6 million at September 30, 2011, of which $7.8 million were classified as nonaccrual and $9.1 million were performing according to terms and still accruing interest income. TDR’s still accruing interest income were modified for a troubled borrower, who was still performing in accordance with the terms of their loan. The majority of TDR’s consisted of four relationships totaling $8.0 million, $3.6 million, $1.0 million and $853,000 respectively. Included in the total of $13.5 million of these four relationships are $6.6 million of non performing loans. The loan modifications included actions such as extension of maturity date or the lowering of interest rates and monthly payments. The amount of commitments to lend borrowers with loans that have been modified is $4.2 million at September 30, 2011. The commitments to lend on the restructured debt is contingent on clear title and a third party inspection to verify completion of work and is associated with loans that are considered to be performing.
Classification of Assets.Our 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 bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “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 and are charged off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, designated as “special mention”. As of September 30, 2011, we had $23.0 million of assets designated as “special mention”.
Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2011, classified assets consisted of substandard assets of $94.0 million and there were not any classified as doubtful.
Loan Portfolio Delinquencies. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Loans Delinquent For | | | | | | | |
| | | 30-89 Days | | | 90 Days & over still
accruing & non-
accrual | | | Total | |
| | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | |
| | | (Dollars in thousands) | |
At September 30, 2011 | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 8 | | | $ | 1,212 | | | | 40 | | | $ | 7,976 | | | | 48 | | | $ | 9,188 | |
Real estate — commercial mortgage | | | 4 | | | | 1,105 | | | | 18 | | | | 9,655 | | | | 22 | | | | 10,760 | |
Real estate — commercial mortgage (CBL) | | | — | | | | — | | | | 16 | | | | 3,559 | | | | 16 | | | | 3,559 | |
Commercial business loans | | | 2 | | | | 490 | | | | 2 | | | | 168 | | | | 4 | | | | 658 | |
Commercial business loans (CBL) | | | — | | | | — | | | | 1 | | | | 75 | | | | 1 | | | | 75 | |
Acquisition, development & construction loans | | | 4 | | | | 4,265 | | | | 24 | | | | 16,984 | | | | 28 | | | | 21,249 | |
Consumer, including home equity loans | | | 20 | | | | 794 | | | | 26 | | | | 2,150 | | | | 46 | | | | 2,944 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 38 | | | $ | 7,866 | | | | 127 | | | $ | 40,567 | | | | 165 | | | $ | 48,433 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 1 | | | $ | 113 | | | | 36 | | | $ | 8,033 | | | | 37 | | | $ | 8,146 | |
Real estate — commercial mortgage | | | 4 | | | | 1,469 | | | | 26 | | | | 9,857 | | | | 30 | | | | 11,326 | |
Commercial business loans | | | 2 | | | | 3,403 | | | | 6 | | | | 1,376 | | | | 8 | | | | 4,779 | |
Acquisition, development & construction loans | | | 2 | | | | 6,681 | | | | 11 | | | | 5,730 | | | | 13 | | | | 12,411 | |
Consumer, including home equity loans | | | 27 | | | | 681 | | | | 22 | | | | 1,844 | | | | 49 | | | | 2,525 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 36 | | | $ | 12,347 | | | | 101 | | | $ | 26,840 | | | | 137 | | | $ | 39,187 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 2 | | | $ | 390 | | | | 32 | | | $ | 7,357 | | | | 34 | | | $ | 7,747 | |
Real estate — commercial mortgage | | | 2 | | | | 398 | | | | 24 | | | | 6,803 | | | | 26 | | | | 7,201 | |
Commercial business loans | | | 18 | | | | 999 | | | | 8 | | | | 457 | | | | 26 | | | | 1,456 | |
Acquisition, development & construction loans | | | 1 | | | | 366 | | | | 20 | | | | 11,270 | | | | 21 | | | | 11,636 | |
Consumer, including home equity loans | | | 22 | | | | 494 | | | | 13 | | | | 582 | | | | 35 | | | | 1,076 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 45 | | | $ | 2,647 | | | | 97 | | | $ | 26,469 | | | | 142 | | | $ | 29,116 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 19 | | | $ | 4,106 | | | | 19 | | | $ | 4,218 | | | | 38 | | | $ | 8,324 | |
Real estate — commercial mortgage | | | 8 | | | | 1,666 | | | | 12 | | | | 3,832 | | | | 20 | | | | 5,498 | |
Commercial business loans | | | 29 | | | | 1,318 | | | | 35 | | | | 2,811 | | | | 64 | | | | 4,129 | |
Acquisition, development & construction loans | | | — | | | | — | | | | 9 | | | | 5,596 | | | | 9 | | | | 5,596 | |
Consumer, including home equity loans | | | 43 | | | | 435 | | | | 41 | | | | 421 | | | | 84 | | | | 856 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 99 | | | $ | 7,525 | | | | 116 | | | $ | 16,878 | | | | 215 | | | $ | 24,403 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2007 | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 28 | | | $ | 4,829 | | | | 15 | | | $ | 1,899 | | | | 43 | | | $ | 6,728 | |
Real estate — commercial mortgage | | | 31 | | | | 3,387 | | | | 8 | | | | 2,586 | | | | 39 | | | | 5,973 | |
Commercial business loans | | | 9 | | | | 357 | | | | 19 | | | | 1,683 | | | | 28 | | | | 2,040 | |
Acquisition, development & construction loans | | | — | | | | — | | | | 2 | | | | 689 | | | | 2 | | | | 689 | |
Consumer, including home equity loans | | | 49 | | | | 835 | | | | 30 | | | | 401 | | | | 79 | | | | 1,236 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 117 | | | $ | 9,408 | | | | 74 | | | $ | 7,258 | | | | 191 | | | $ | 16,666 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Risk elements.The table below sets forth the amounts and categories of our assets with various risk levels at the dates indicated.
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | Non- Accrual | | | Non-
Accrual | | | Non-
Accrual | | | Non-
Accrual | | | Non-
Accrual | |
Non-performing loans: | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 7,485 | | | $ | 6,080 | | | $ | 4,425 | | | $ | 1,731 | | | $ | — | |
Real estate — commercial mortgage | | | 8,016 | | | | 6,886 | | | | 5,826 | | | | 3,100 | | | | 1,099 | |
Real estate — commercial mortgage (CBL) | | | 3,209 | | | | — | | | | — | | | | — | | | | — | |
Commercial business loans | | | 168 | | | | 1,376 | | | | 457 | | | | 2,811 | | | | 1,637 | |
Commercial business loans CBL) | | | 75 | | | | — | | | | — | | | | — | | | | — | |
Acquisition, land and development | | | 16,538 | | | | 5,730 | | | | 10,830 | | | | 5,596 | | | | 644 | |
Consumer, including home equity loans | | | 986 | | | | 1,341 | | | | 371 | | | | 351 | | | | 129 | |
Accruing loans past due 90 days or more | | | 4,090 | | | | 5,427 | | | | 4,560 | | | | 3,289 | | | | 3,749 | |
| | | | | | | | | | | | | | | | | | | | |
Total non-performing loans | | $ | 40,567 | | | $ | 26,840 | | | $ | 26,469 | | | $ | 16,878 | | | $ | 7,258 | |
| | | | | | | | | | | | | | | | | | | | |
Foreclosed properties | | | 5,391 | | | | 3,891 | | | | 1,712 | | | | 84 | | | | 139 | |
| | | | | | | | | | | | | | | | | | | | |
Total non-performing assets | | $ | 45,958 | | | $ | 30,731 | | | $ | 28,181 | | | $ | 16,962 | | | $ | 7,397 | |
| | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructures still accruing and not included above | | $ | 8,470 | | | $ | 16,047 | | | $ | 674 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Ratios: | | | | | | | | | | | | | | | | | | | | |
Non-performing loans to total loans | | | 2.38 | % | | | 1.58 | % | | | 1.55 | % | | | 0.97 | % | | | 0.44 | % |
Non-performing assets to total assets | | | 1.46 | % | | | 1.02 | % | | | 0.93 | % | | | 0.57 | % | | | 0.26 | % |
For the year ended September 30, 2011, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to $1.8 million. Interest income actually recognized on such loans totaled $1.1 million.
Allowance for Loan Losses.We provide 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 incurred losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and other criticized or classified loans (if any), as well as allowances determined for each major loan category. After we establish a provision for loans that are known to be non-performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred losses inherent in that portion of the portfolio. When the loan portfolio increases, therefore, the percentage calculation results in a higher dollar amount of estimated probable incurred losses than would be the case without the increase, and when the loan portfolio decreases, the percentage calculation results in a lower dollar amount of estimated probable incurred losses than would be the case without the decrease. These percentages are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:
levels of, and trends in, delinquencies and non-accruals;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
experience, ability, and depth of lending management and staff;
national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
for commercial loans, trends in risk ratings.
Land acquisition, development and construction lending is considered higher risk and exposes us 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 we make 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 us 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. All of these factors are considered as part of the underwriting, structuring and pricing of the loan. We have deemphasized this type of loan.
Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or the borrower may use the cash flow for other purposes. In addition, the foreclosure process, if necessary, may be slow and properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.
Commercial
business& industrial lending
is also
higherexposes us to risk because repayment depends on the successful operation of the business which is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before foreclosing, which we cannot be assured of doing, and the value in a foreclosure sale or other means of liquidation
is subject to downward pressure.When we evaluate residential mortgage loans and equity loans we weigh both the credit capacity of the borrower and the collateral value of the home. As unemployment and underemployment increases, and liquidity reserves if any, diminish, the credit capacity of the borrower decreases, which increases our risk. Also, after a period of years of stable or increasing home values in our market, home prices have declined from a high in 2005 and 2006. We are exposed to risk in both our first mortgage and equity lending programs due to declines in values in recent years. We are also exposed to risk because the time to foreclose is significant and has become longer under current conditions.
The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. 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, as an integral partuncertain.
Allowance for Loan Losses by Year.Losses. The following table sets forth activity in our allowance for loan losses for the years indicated. | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
Balance at beginning of year | | $ | 30,843 | | | $ | 30,050 | | | $ | 23,101 | | | $ | 20,389 | | | $ | 20,373 | |
| | | | | | | | | | | | | | | | | | | | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | (2,140 | ) | | | (749 | ) | | | (461 | ) | | | (97 | ) | | | — | |
Real estate — Commercial mortgage | | | (819 | ) | | | (416 | ) | | | (669 | ) | | | (627 | ) | | | — | |
Real estate — Commercial mortgage (CBL) ¹ | | | (983 | ) | | | (571 | ) | | | (233 | ) | | | — | | | | — | |
Commercial business loans | | | (366 | ) | | | (1,666 | ) | | | (601 | ) | | | (3,596 | ) | | | (2,164 | ) |
Commercial business loans (CBL) ¹ | | | (5,034 | ) | | | (4,912 | ) | | | (6,670 | ) | | | — | | | | — | |
Acquisition Development & Construction loans | | | (8,939 | ) | | | (848 | ) | | | (1,515 | ) | | | — | | | | — | |
Consumer, including home equity loans | | | (1,989 | ) | | | (1,168 | ) | | | (1,140 | ) | | | (609 | ) | | | (329 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | (20,270 | ) | | | (10,330 | ) | | | (11,289 | ) | | | (4,929 | ) | | | (2,493 | ) |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 15 | | | | 3 | | | | 2 | | | | — | | | | — | |
Real estate — Commercial mortgage | | | 2 | | | | 8 | | | | — | | | | — | | | | — | |
Real estate — Commercial mortgage (CBL) ¹ | | | — | | | | 15 | | | | — | | | | — | | | | — | |
Commercial business loans | | | 232 | | | | 306 | | | | 80 | | | | 291 | | | | 581 | |
Commercial business loans (CBL) ¹ | | | 373 | | | | 364 | | | | 169 | | | | — | | | | — | |
Acquisition Development & Construction loans | | | 10 | | | | 261 | | | | 200 | | | | — | | | | — | |
Consumer, including home equity loans | | | 128 | | | | 166 | | | | 187 | | | | 150 | | | | 128 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 760 | | | | 1,123 | | | | 638 | | | | 441 | | | | 709 | |
| | | | | |
Net charge-offs | | | (19,510 | ) | | | (9,207 | ) | | | (10,651 | ) | | | (4,488 | ) | | | (1,784 | ) |
Provision for loan losses | | | 16,584 | | | | 10,000 | | | | 17,600 | | | | 7,200 | | | | 1,800 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at end of year | | $ | 27,917 | | | $ | 30,843 | | | $ | 30,050 | | | $ | 23,101 | | | $ | 20,389 | |
| | | | | | | | | | | | | | | | | | | | |
Ratios: | | | | | | | | | | | | | | | | | | | | |
Net charge-offs to average loans outstanding | | | 1.17 | % | | | 0.56 | % | | | 0.62 | % | | | 0.28 | % | | | 0.12 | % |
Allowance for loan losses to non-performing loans | | | 69 | % | | | 115 | % | | | 114 | % | | | 137 | % | | | 281 | % |
Allowance for loan losses to total loans | | | 1.64 | % | | | 1.81 | % | | | 1.76 | % | | | 1.33 | % | | | 1.24 | % |
¹ | Community Business Loan (CBL) information is not available for 2008 and 2007 |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | (Dollars in thousands) |
| Balance at beginning of period | $ | 28,877 |
| | $ | 28,282 |
| | $ | 27,917 |
| | $ | 30,843 |
| | $ | 30,050 |
|
| Charge-offs: | | | | | | | | | |
| Commercial & industrial | (2,901 | ) | | (1,354 | ) | | (1,526 | ) | | (5,400 | ) | | (6,578 | ) |
| Payroll finance | (758 | ) | | — |
| | — |
| | — |
| | — |
|
| Warehouse lending | — |
| | — |
| | — |
| | — |
| | — |
|
| Factored receivables | (211 | ) | | — |
| | — |
| | — |
| | — |
|
| Equipment finance | (1,074 | ) | | — |
| | — |
| | — |
| | — |
|
| Commercial real estate | (741 | ) | | (3,285 | ) | | (2,682 | ) | | (1,752 | ) | | (984 | ) |
| Multi-family | (418 | ) | | (440 | ) | | (25 | ) | | (50 | ) | | (3 | ) |
| Acquisition, development & construction | (1,479 | ) | | (3,422 | ) | | (4,124 | ) | | (8,939 | ) | | (848 | ) |
| Residential mortgage | (963 | ) | | (2,547 | ) | | (2,551 | ) | | (2,140 | ) | | (749 | ) |
| Consumer | (786 | ) | | (2,009 | ) | | (1,901 | ) | | (1,989 | ) | | (1,168 | ) |
| Total charge-offs | (9,331 | ) | | (13,057 | ) | | (12,809 | ) | | (20,270 | ) | | (10,330 | ) |
| Recoveries: | | | | | | | | | |
| Commercial & industrial | 1,073 |
| | 410 |
| | 1,116 |
| | 605 |
| | 670 |
|
| Payroll finance | — |
| | — |
| | — |
| | — |
| | — |
|
| Warehouse lending | — |
| | — |
| | — |
| | — |
| | — |
|
| Factored receivables | 9 |
| | — |
| | — |
| | — |
| | — |
|
| Equipment finance | 194 |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate | 161 |
| | 567 |
| | 528 |
| | 2 |
| | 23 |
|
| Multi-family | 92 |
| | 10 |
| | — |
| | — |
| | — |
|
| Acquisition, development & construction | — |
| | 182 |
| | 299 |
| | 10 |
| | 261 |
|
| Residential mortgage | 323 |
| | 101 |
| | 356 |
| | 15 |
| | 3 |
|
| Consumer | 114 |
| | 232 |
| | 263 |
| | 128 |
| | 166 |
|
| Total recoveries | 1,966 |
| | 1,502 |
| | 2,562 |
| | 760 |
| | 1,123 |
|
| Net charge-offs | (7,365 | ) | | (11,555 | ) | | (10,247 | ) | | (19,510 | ) | | (9,207 | ) |
| Provision for loan losses | 19,100 |
| | 12,150 |
| | 10,612 |
| | 16,584 |
| | 10,000 |
|
| Balance at end of period | $ | 40,612 |
| | $ | 28,877 |
| | $ | 28,282 |
| | $ | 27,917 |
| | $ | 30,843 |
|
| Ratios: | | | | | | | | | |
| Net charge-offs to average loans outstanding | 0.24 | % | | 0.52 | % | | 0.56 | % | | 1.17 | % | | 0.56 | % |
| Allowance for loan losses to non-performing loans | 80 |
| | 107 |
| | 71 |
| | 69 |
| | 115 |
|
| Allowance for loan losses to total loans | 0.85 |
| | 1.20 |
| | 1.33 |
| | 1.64 |
| | 1.81 |
|
The allowance for loan losses increased from $28.9 million to $40.6 million as the provision for loan losses exceeded net charge-offs by $11.7 million. The allowance for loan losses at September 30, 2014 represented 79.7% of non-performing loans and 0.85% of the total loan portfolio. Net charge-offs for the year ended September 30, 2014 were $7.4 million, or 0.24% of average loans, compared to net charge-offs of $11.6 million, or 0.52% of average loans for the prior year. The decrease in net charge-offs as a percentage of average loans was mostly due to improved collateral values and performance in our commercial real estate and ADC loans.
Provision for Loan Losses. We recorded $19.1 million in loan loss provisions for the year ended September 30, 2014 compared to $12.2 million in the prior year, an increase of approximately $7 million. Loans acquired in the Merger were initially recorded at fair value and in accordance with GAAP did not carry an allowance for loan losses at the acquisition date. In fiscal 2014, we recorded provision for loan losses as a result of organic growth and renewed loans from the Legacy Sterling acquired portfolio. Provision for loan losses was $12.2 million in fiscal 2013, an increase of approximately $1.5 million as compared to fiscal 2012. Net charge-offs in the loan portfolio were $11.6 million in fiscal 2013 compared to $10.2 million in the prior year.
Our loss experience indicates classified loans, those rated substandard or worse, require higher levels of provision for loan losses and allowance for loan losses than loans that are not classified. Classified loans increased from $61.1 million at September 30, 2013 to $73.1 million at September 30, 2014 primarily due to classified loans acquired in the Merger. Special mention loans increased from $13.5 million at September 30, 2013 to $39.6 million at September 30, 2014, also mainly due to the Merger.
Impaired Loans. A loan is impaired when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loan values are based on one of three measures (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) 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, the Bank’s practice is to write-down the loan against the allowance for loan losses so the recorded investment matches the impaired value of the loan. Impaired loans generally include a portion of non-performing loans and accruing and performing TDR loans. At September 30, 2014, we had $36.2 million in impaired loans compared to $36.8 million at September 30, 2013 and $53.3 million at September 30, 2012. The decline between 2012 and 2013 was mainly due to the resolution of several ADC relationships. In fiscal 2013, we modified the methodology we use to determine the allowance for loan losses required for residential mortgage loans and equity lines of credit. In prior periods, we evaluated these loans for impairment on an individual basis. In fiscal 2013, we began evaluating residential mortgage loans and equity lines of credit with an outstanding balance of $500 or less on a homogeneous pool basis. This modified approach to our methodology did not have a material impact on the allowance for loan losses.
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 (excluding loans held for sale), 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, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Allowance
for Loan
Losses | | | Loan
Balances by
Category | | | Percent
of Loans
in Each
Category
to Total
Loans | | | Allowance
for Loan
Losses | | | Loan
Balances by
Category | | | Percent
of Loans
in Each
Category
to Total
Loans | | | Allowance
for Loan
Losses | | | Loan
Balances by
Category | | | Percent
of Loans
in Each
Category
to Total
Loans | |
| | | (Dollars in thousands) | |
Real estate — residential mortgage | | $ | 3,498 | | | $ | 389,765 | | | | 22.88 | % | | $ | 2,641 | | | $ | 434,900 | | | | 25.55 | % | | $ | 3,106 | | | $ | 460,728 | | | | 27.04 | % |
Real estate — commercial mortgage | | | 4,533 | | | | 610,379 | | | | 35.82 | % | | | 5,060 | | | | 481,632 | | | | 28.31 | % | | | 4,824 | | | | 460,649 | | | | 27.05 | % |
Real estate — commercial mortgage (CBL) | | | 1,035 | | | | 92,977 | | | | 5.46 | % | | | 855 | | | | 97,599 | | | | 5.74 | % | | | 2,871 | | | | 86,118 | | | | 5.06 | % |
Commercial business loans | | | 1,331 | | | | 134,399 | | | | 7.89 | % | | | 3,262 | | | | 125,766 | | | | 7.39 | % | | | 3,917 | | | | 142,908 | | | | 8.39 | % |
Commercial business loans (CBL) | | | 4,614 | | | | 75,524 | | | | 4.43 | % | | | 5,708 | | | | 92,162 | | | | 5.42 | % | | | 5,011 | | | | 99,721 | | | | 5.85 | % |
Acquisition, development & construction | | | 9,895 | | | | 175,931 | | | | 10.33 | % | | | 9,752 | | | | 231,258 | | | | 13.59 | % | | | 7,680 | | | | 201,611 | | | | 11.84 | % |
Consumer, including home equity loans | | | 3,011 | | | | 224,824 | | | | 13.19 | % | | | 3,565 | | | | 238,224 | | | | 14.00 | % | | | 2,641 | | | | 251,522 | | | | 14.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 27,917 | | | $ | 1,703,799 | | | | 100.00 | % | | $ | 30,843 | | | $ | 1,701,541 | | | | 100.00 | % | | $ | 30,050 | | | $ | 1,703,257 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2008 | | | 2007 | |
| | | Allowance
for Loan
Losses | | | Loan
Balances by
Category | | | Percent
of Loans
in Each
Category
to Total
Loans | | | Allowance
for Loan
Losses | | | Loan
Balances by
Category | | | Percent
of Loans
in Each
Category
to Total
Loans | |
| | | (Dollars in thousands) | |
Real estate — residential mortgage | | $ | 1,494 | | | $ | 513,381 | | | | 29.60 | % | | $ | 668 | | | $ | 500,825 | | | | 30.60 | % |
Real estate — commercial mortgage | | | 5,793 | | | | 554,811 | | | | 32.00 | % | | | 8,157 | | | | 535,003 | | | | 32.70 | % |
Commercial business loans | | | 7,051 | | | | 243,642 | | | | 14.10 | % | | | 5,223 | | | | 207,156 | | | | 12.60 | % |
Acquisition, development & construction | | | 6,841 | | | | 170,979 | | | | 9.90 | % | | | 4,743 | | | | 153,074 | | | | 9.30 | % |
Consumer, including home equity loans | | | 1,922 | | | | 248,740 | | | | 14.40 | % | | | 1,598 | | | | 242,000 | | | | 14.80 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 23,101 | | | $ | 1,731,553 | | | | 100.00 | % | | $ | 20,389 | | | $ | 1,638,058 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Securities Investments
Our securities investment policy is established by our Board
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 |
| | Allowance for loan losses | | Loan balance | | % of total loans | | Allowance for loan losses | | Loan balance | | % of total loans | | Allowance for loan losses | | Loan balance | | % of total loans |
| | (Dollars in thousands) |
| Commercial & industrial | $ | 9,536 |
| | $ | 1,164,537 |
| | 24.5 | % | | $ | 5,302 |
| | $ | 434,932 |
| | 18.0 | % | | $ | 4,603 |
| | $ | 343,307 |
| | 16.2 | % |
| Payroll finance | 1,379 |
| | 145,474 |
| | 3.1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Warehouse lending | 630 |
| | 192,003 |
| | 4.0 |
| | — |
| | 4,855 |
| | 0.2 | % | | — |
| | — |
| | — |
|
| Factored receivables | 1,294 |
| | 181,433 |
| | 3.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equipment finance | 2,621 |
| | 393,027 |
| | 8.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate | 10,844 |
| | 1,449,052 |
| | 30.4 |
| | 7,567 |
| | 969,490 |
| | 40.2 |
| | 5,754 |
| | 896,746 |
| | 42.3 |
|
| Multi-family | 1,867 |
| | 368,524 |
| | 7.7 |
| | 2,400 |
| | 307,547 |
| | 12.7 |
| | 1,476 |
| | 175,758 |
| | 8.3 |
|
| Acquisition, development & construction | 2,120 |
| | 92,149 |
| | 1.9 |
| | 5,806 |
| | 102,494 |
| | 4.2 |
| | 8,526 |
| | 144,061 |
| | 6.8 |
|
| Residential mortgage | 5,837 |
| | 570,431 |
| | 12.0 |
| | 4,474 |
| | 400,009 |
| | 16.6 |
| | 4,359 |
| | 350,022 |
| | 16.5 |
|
| Consumer | 4,484 |
| | 203,808 |
| | 4.3 |
| | 3,328 |
| | 193,571 |
| | 8.1 |
| | 3,564 |
| | 209,578 |
| | 9.9 |
|
| Total | $ | 40,612 |
| | $ | 4,760,438 |
| | 100.0 | % | | $ | 28,877 |
| | $ | 2,412,898 |
| | 100.0 | % | | $ | 28,282 |
| | $ | 2,119,472 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2011 | | 2010 |
| | Allowance for loan losses | | Loan balance | | % of total loans | | Allowance for loan losses | | Loan balance | | % of total loans |
| | (Dollars in thousands) |
| Commercial & industrial | $ | 5,945 |
| | $ | 209,923 |
| | 12.3 | % | | $ | 8,970 |
| | $ | 217,927 |
| | 12.8 | % |
| Commercial real estate | 5,123 |
| | 592,201 |
| | 34.8 |
| | 5,739 |
| | 535,227 |
| | 31.5 |
|
| Multi-family | 445 |
| | 111,155 |
| | 6.6 |
| | 176 |
| | 44,005 |
| | 2.5 |
|
| Acquisition, development & construction | 9,895 |
| | 175,931 |
| | 10.3 |
| | 9,752 |
| | 231,258 |
| | 13.6 |
|
| Residential mortgage | 3,498 |
| | 389,765 |
| | 22.9 |
| | 2,641 |
| | 434,900 |
| | 25.5 |
|
| Consumer | 3,011 |
| | 224,824 |
| | 13.1 |
| | 3,565 |
| | 238,224 |
| | 14.1 |
|
| Total | $ | 27,917 |
| | $ | 1,703,799 |
| | 100.0 | % | | $ | 30,843 |
| | $ | 1,701,541 |
| | 100.0 | % |
The allowance allocated to commercial & industrial loans, payroll finance, warehouse lending, factored receivables and equipment financing mainly increased in fiscal 2014 as a result of higher loan balances due to the safetyMerger and organic loan growth. The loans acquired in the Merger were recorded at fair value with no allowance for loan losses at the acquisition date. The reserve allocated to commercial loans in total was $15.5 million, or 38.1% of the investment, liquidity requirements, potential returns, cash flow targets,allowance for loan losses at September 30, 2014 compared to $5.3 million or 18.4% of the allowance for loan losses at September 30, 2013. This increase reflects mainly the increase in commercial loans as a percentage of the total loan portfolio. Commercial real estate loans, including multi-family loans, represented 38.1% of the loan portfolio at September 30, 2014 and consistency with31.3% of the allowance for loan losses as compared to September 30, 2013, in which commercial real estate loans were 52.9% of the loan portfolio and 34.5% of the allowance for loan losses. The allowance allocated to acquisition, development and construction loans declined to $2.1 million at September 30, 2014 compared to $5.8 million at September 30, 2013. The decrease in the allowance allocated to acquisition, development and construction loans was mainly due to a reduction in the trailing loan loss allocation factor, which is the main component in determining the estimated allowance required for each class of loan, and also to a change in the composition of the non-performing ADC loans at September 30, 2014, which included several loans that management has determined are well-secured. In our interest rate risk management strategy. allowance for loan losses methodology the allocation of loss on commercial real estate loans increases as the loan ages during the initial two years of the life of the loan, which results in a higher allocation of the allowance for loan losses as the loan portfolio becomes more seasoned. The increase in the allowance for loan losses on residential mortgage loans and consumer loans is primarily related to the increase in non-performing residential mortgage and consumer loans.
Investment Securities
Available for Sale Portfolio. The following table sets forth the composition of our available for sale securities portfolio at the dates indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 |
| | Amortized cost | | Fair value | | Amortized cost | | Fair value | | Amortized cost | | Fair value |
| | (Dollars in thousands) |
| Residential MBS: | | | | | | | | | | | |
| Agency-backed | $ | 477,003 |
| | $ | 477,705 |
| | $ | 284,837 |
| | $ | 282,529 |
| | $ | 241,598 |
| | $ | 251,445 |
|
| CMO/Other MBS | 115,395 |
| | 114,145 |
| | 169,336 |
| | 166,654 |
| | 191,867 |
| | 193,064 |
|
| Total residential MBS | 592,398 |
| | 591,850 |
| | 454,173 |
| | 449,183 |
| | 433,465 |
| | 444,509 |
|
| Other securities: | | | | | | | | | | | |
| Federal agencies | 158,114 |
| | 152,814 |
| | 273,637 |
| | 261,547 |
| | 404,820 |
| | 408,823 |
|
| Corporate bonds | 195,547 |
| | 192,839 |
| | 118,575 |
| | 114,933 |
| | — |
| | — |
|
| State and municipal | 131,715 |
| | 134,898 |
| | 127,324 |
| | 128,730 |
| | 146,136 |
| | 156,481 |
|
| Trust Preferred | 37,684 |
| | 38,412 |
| | — |
| | — |
| | — |
| | — |
|
| Equities | — |
| | — |
| | — |
| | — |
| | 1,087 |
| | 1,059 |
|
| Total other securities | 523,060 |
| | 518,963 |
| | 519,536 |
| | 505,210 |
| | 552,043 |
| | 566,363 |
|
| Total available for sale securities | $ | 1,115,458 |
| | $ | 1,110,813 |
| | $ | 973,709 |
| | $ | 954,393 |
| | $ | 985,508 |
| | $ | 1,010,872 |
|
Held to Maturity Portfolio. The following table sets forth the composition of our held to maturity securities portfolio at the dates indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 |
| | Amortized cost | | Fair value | | Amortized cost | | Fair value | | Amortized cost | | Fair value |
| | (Dollars in thousands) |
| Residential MBS: | | | | | | | | | | | |
| Agency-backed | $ | 142,329 |
| | $ | 143,586 |
| | $ | 130,371 |
| | $ | 130,979 |
| | $ | 71,343 |
| | $ | 73,902 |
|
| CMO/Other MBS | 62,690 |
| | 61,495 |
| | 25,776 |
| | 25,494 |
| | 27,921 |
| | 28,119 |
|
| Total residential MBS | 205,019 |
| | 205,081 |
| | 156,147 |
| | 156,473 |
| | 99,264 |
| | 102,021 |
|
| Other securities: | | | | | | | | | | | |
| Federal agencies | 136,413 |
| | 138,085 |
| | 77,341 |
| | 73,883 |
| | 22,236 |
| | 22,342 |
|
| State and municipal | 232,643 |
| | 239,334 |
| | 19,011 |
| | 19,021 |
| | 19,376 |
| | 20,435 |
|
| Other | 5,000 |
| | 5,338 |
| | 1,500 |
| | 1,519 |
| | 1,500 |
| | 1,526 |
|
| Total other securities | 374,056 |
| | 382,757 |
| | 97,852 |
| | 94,423 |
| | 43,112 |
| | 44,303 |
|
| Total held to maturity securities | $ | 579,075 |
| | $ | 587,838 |
| | $ | 253,999 |
| | $ | 250,896 |
| | $ | 142,376 |
| | $ | 146,324 |
|
Overview. The Board’s Asset/LiabilityEnterprise Risk Committee oversees our investment program and evaluates on an ongoing basis our investment policy and objectives. Our chief financial officer, or our chief financial officer acting with our chief executive officer, is responsible for making securities portfolio decisions in accordance with established policies. Our chief financial officer, chief executive officerChief Financial Officer, Chief Executive Officer, Chief Investment Officer/Treasurer and certain other executivesenior officers have the authority to purchase and sell securities within specific guidelines established byin the investment policy. In addition, a summary of all transactions areis reviewed by the Board’s Asset/LiabilityEnterprise Risk Committee at least quarterly.Our current
The Company’s objectives for the investment policy generally permits securities investmentsis to maintain a high quality portfolio that consists primarily of liquid investment securities with a duration that is designed to limit the impact of fair value declines in debt securities issued by the U.S. government and U.S. agencies, municipal bonds and notes, and corporate debt obligations, as well as investments in preferred and common stocka rising interest rate environment. The primary use of government agencies and government sponsored enterprises such as Fannie Mae, Freddie Macfunds from deposit growth and the Federal Home Loan Bankprimary source of New York (federal agency securities) and,interest income is expected to a lesser extent, other equity securities. Securitiesbe from loan growth. The investment portfolio provides for flexibility 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, privately issued mortgage-backed securities and CMOs, and asset-backed securities collateralized by auto loans, credit card receivables, and home equity and home improvement loans. Our current investment strategy uses ainterest rate risk management approachand additional liquidity, in addition to contributing to our overall earnings. Investment securities are also utilized for pledging purposes as collateral for borrowings from FHLB, municipal deposits, and other
borrowings. The Company regularly evaluates the portfolio against its overall balance sheet optimization strategy of producing growth in
fixed-rate securities with short-earnings per share, and contributing to
intermediate-term maturities, as well as adjustable-rate securities, which may havereturn on assets. The Company evaluates the portfolio size, risk and duration on a
longer term to maturity. The emphasisdaily basis. At September 30, 2014, the portfolio represented 23.0% of
this approachtotal assets. Our goal is to
increase overallestablish and maintain the investment
securities yields while managing interest rate and credit risk.portfolio at 18.0% to 20.0% of total assets over time.
FASB ASC Topic #320,320, Investments - Debt and Equity securitiesSecurities, requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our intent and ability to hold and our intent.the security. Securities designated available for sale are reported at fair value, while securities designated held to maturity are reported at amortized cost. We do not have a trading portfolio. Excluding mortgage backed securities and CMO’s management sold $325.7 million at amortized cost inThe carrying value of investment securities and realized net gainsis comprised of $5.4 million the market yields associated with the securities sold were below levels management believed justifying retaining such securities.Government and Agency Securities.At September 30, 2011, we held government and agencyfair value of investment securities available for sale and the amortized cost of held to maturity securities.
Investment portfolio activity. At September 30, 2014, the carrying value of investment securities was $1.7 billion, an increase of $481.5 million compared to September 30, 2013. At September 30, 2013, the carrying value of the portfolio was $1.2 billion, an increase of $55.1 million as compared to September 30, 2012. In connection with the Merger, the Company acquired securities with a fair value of $204.6 million, consisting primarily of agency obligations$607.9 million.
In accordance with
maturities of more than one year through ten years. In addition, we held $30.0 millionFASB ASC Subtopic 320-10-25-6, in
government and agency securities asa significant business combination a company may transfer held to maturity
at amortized cost. While these securities
generally provide lower yields than other investments such as mortgage-backedto available for sale securities
our current investment strategy is to maintain
investments in such instruments to the
extent appropriate for liquidity purposes and as collateral for borrowings and municipal deposits.Corporate and Municipal Bonds and Notes.At September 30, 2011, we held $17.1 million in corporate debt securities. Corporate bonds have a highercompany’s existing interest rate risk of default due to adverse changes in the creditworthinessposition or credit risk policy. Based on management’s review of the issuer. In recognition of this risk, our policy limits investments in corporate bonds tocombined investment securities with maturities of ten years or lessportfolio and rated “A” or better by at least one nationally recognized rating agency at time of purchase,implications for asset and to a totalliability management, investment of no more than $2.0securities totaling $165.2 million per issuer and a total corporate bond portfolio limit of 5% of assets. The policy also limits investments in municipal bonds to securities with maturities of 20 years or less and rated as investment grade by at least one nationally recognized rating agency at the time of purchase, and favors issues that are insured, however we also purchase securities that are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy generally imposes an investment limitation of $5.0 million per municipal issuer
and a total municipal bond portfolio limit of 10% of assets. At September 30, 2011, we held $207.3 million in bonds issued by states and political subdivisions, $18.6 million of which were classified astransferred from held to maturity at amortized costto available for sale. Investment securities that were transferred included residential mortgage-backed securities, federal agency securities and arestate and municipal securities and was based mainly unratedon the premium amortization and $188.7extension risk inherent in these securities. Concurrent with this repositioning, a total of $221.9 million of whichinvestment securities were classified asalso transferred from available for sale at fair value. At September 30, 2011 we did not hold any obligations that were rated less than “A” as available for sale.
Equity Securities.At September 30, 2011, our equityto held to maturity. Substantially all of the securities transferred from available for sale had a fair value of $1.2 million. We also held $17.6 million (at cost) of Federal Home Loan Bank of New York (“FHLBNY”) common stock, 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 our borrowing under the Federal Home Loan Bank advance program. Dividends on FHLBNY stock recorded in the year ended September 30, 2011 amounted to $1.1 million. We held no preferred shares of Freddie Mac or Fannie Mae for the year ended September 30, 2011. We also held no “auction rate securities” or “pooled trust preferred securities” during the year ended September 30, 2011. We held approximately $837,000 in fair value of equity securities in a local bank. We recorded $278,000 in other than temporary impairment as the fair value of these securities has been less that original cost for a period of over two years
Mortgage-Backed Securities.We purchase 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 and Fannie Mae; (iii) increase liquidity, and (iv) maintain our status as a thrift for charter and income tax purposes. We invest primarily in mortgage-backed securities issued or sponsored by Freddie Mac, and Fannie Mae or private issuers for CMOs. To a lesser extent, we also invest in securities backed by agencies of the U.S. Government, such as Ginnie Mae. At September 30, 2011, our mortgage-backed securities portfolio totaled $381.2 million, consisting of $328.3 million available for sale at fair value and $60.0 million held to maturity at amortized cost.have a maturity date in 2020 or beyond. Management believes the transfers of investment securities highlighted above maintain the Company’s interest rate risk position and credit risk profile on a combined basis post-Merger.
Portfolio Maturities and Yields. The total mortgage-backedfollowing table summarizes the composition, maturities and weighted average yield of our investment securities portfolio includes CMOsat September 30, 2014. Maturities are based on the final contractual payment dates and do not reflect the impact of $108.2 million, consistingprepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax equivalent basis.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 1 Year or Less | | 1-5 years | | 5-10 years | | 10 years or more | | Total |
| | Amortized cost | | Yield | | Amortized
cost | | Yield | | Amortized
cost | | Yield | | Amortized
cost | | Yield | | Amortized
cost | | Fair Value | | Yield |
| | (Dollars in thousands) |
| Available for sale: | | | | | | | | | | | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | | | | | | | | | | |
| Agency-backed | $ | — |
| | — | % | | $ | 9,088 |
| | 1.93 | % | | $ | 111,629 |
| | 2.27 | % | | $ | 356,286 |
| | 2.49 | % | | $ | 477,003 |
| | $ | 477,705 |
| | 2.43 | % |
| CMO/Other MBS | — |
| | — |
| | 2,130 |
| | 3.22 |
| | 11,022 |
| | 1.92 |
| | 102,243 |
| | 2.21 |
| | 115,395 |
| | 114,145 |
| | 2.20 |
|
| Residential MBS | — |
| | — |
| | 11,218 |
| | 2.17 |
| | 122,651 |
| | 2.24 |
| | 458,529 |
| | 2.43 |
| | 592,398 |
| | 591,850 |
| | 2.39 |
|
| Federal agencies | — |
| | — |
| | 24,996 |
| | 1.35 |
| | 133,118 |
| | 1.52 |
| | — |
| | — |
| | 158,114 |
| | 152,814 |
| | 1.49 |
|
| Corporate | — |
| | — |
| | 66,473 |
| | 2.02 |
| | 129,074 |
| | 2.41 |
| | — |
| | — |
| | 195,547 |
| | 192,839 |
| | 2.28 |
|
| State and municipal | 2,100 |
| | 1.96 |
| | 50,039 |
| | 3.06 |
| | 72,103 |
| | 2.94 |
| | 7,473 |
| | 3.97 |
| | 131,715 |
| | 134,898 |
| | 3.03 |
|
| Trust Preferred | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37,684 |
| | 6.60 |
| | 37,684 |
| | 38,412 |
| | 6.60 |
|
| Total | $ | 2,100 |
| | 1.96 | % | | $ | 152,726 |
| | 2.26 | % | | $ | 456,946 |
| | 2.19 | % | | $ | 503,686 |
| | 2.87 | % | | $ | 1,115,458 |
| | $ | 1,110,813 |
| | 2.46 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Held to maturity: | | | | | | | | | | | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | | | | | | | | | | |
| Agency-backed | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 42,796 |
| | 2.77 | % | | $ | 99,533 |
| | 2.55 | % | | $ | 142,329 |
| | $ | 143,586 |
| | 2.62 | % |
| CMO/Other MBS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 62,690 |
| | 1.95 |
| | 62,690 |
| | 61,495 |
| | 1.95 |
|
| Residential MBS | — |
| | — |
| | — |
| | — |
| | 42,796 |
| | 2.77 |
| | 162,223 |
| | 2.32 |
| | 205,019 |
| | 205,081 |
| | 2.42 |
|
| Federal agencies | — |
| | — |
| | — |
| | — |
| | 108,317 |
| | 2.50 |
| | 28,096 |
| | 2.56 |
| | 136,413 |
| | 138,085 |
| | 2.51 |
|
| State and municipal | 8,846 |
| | 2.18 |
| | 4,388 |
| | 3.30 |
| | 80,928 |
| | 3.00 |
| | 138,481 |
| | 3.52 |
| | 232,643 |
| | 239,333 |
| | 3.03 |
|
| Other | — |
| | | | 4,750 |
| | 3.09 |
| | 250 |
| | 3.75 |
| | — |
| | — |
| | 5,000 |
| | 5,338 |
| | 3.12 |
|
| Total | $ | 8,846 |
| | 2.18 | % | | $ | 9,138 |
| | 3.20 | % | | $ | 232,291 |
| | 2.73 | % | | $ | 328,800 |
| | 2.85 | % | | $ | 579,075 |
| | $ | 587,837 |
| | 2.69 | % |
Mortgage-Backed 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 our 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 us, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk in addition to the guarantee of repayment of principal outstanding that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We review prepayment estimates for our 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. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. As a result of our reviews, we anticipated an acceleration of prepayments. Management sold $204.8 million in mortgage backed securities, including CMO’s, at amortized cost and realized $4.6 million in net gains on the sales. Such proceeds were reinvested in securities with yields which were lower than the recorded yields of the securities sold and a more diversified risk profile.
A portion of our mortgage-backed securities portfolio is invested in
CMOs,collateralized mortgage obligations (“CMOs”), including Real Estate Mortgage Investment Conduits (“REMICs”), backed by Fannie Mae and Freddie
Mac and certain private issuers.Mac. CMOs and REMICs are types of debt securities issued by
a special-purpose
entityentities that
aggregatesaggregate pools of mortgages and mortgage-backed securities and
createscreate 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. Our 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 an emphasis on the relative trade-offs between lifetime rate caps, prepayment risk, and interest rates.
AvailableGovernment and Agency Securities. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for Sale Portfolio.liquidity purposes and as collateral for borrowings and municipal deposits.
Corporate Bonds. Corporate bonds have a higher risk of default due to potential for adverse changes in the creditworthiness of the issuer. In recognition of this risk, our 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 at time of purchase, and to a total investment size of no more than $20.0 million per issuer. Our total corporate bond portfolio limit is the lesser of 5% of total assets or 75% of risk-based capital.
State and Municipal Bonds. The investment policy limits municipal bonds to securities with maturities of 20 years or less and rated as investment grade by at least one nationally recognized rating agency at the time of purchase. However, we also purchase securities that are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy generally imposes an investment size limit of $5.0 million per municipal issuer and a total municipal bond portfolio limit of 10% of assets. At September 30, 2014, we did not hold any obligations that were rated less than “A-” as available for sale.
Trust preferred securities. The Company owns securities of single-issuer bank trust preferred securities, all of which are paying in accordance with their terms and have no deferrals of interest or other deferrals. Management analyzes the credit risk and the probability of impairment on the contractual cash flows of applicable securities. Based upon our analysis, all of the issuers have maintained performance levels adequate to support the contractual cash flows of the securities.
Deposits
The following table sets forth the
compositiondistribution of
our available for sale portfolioaverage deposit accounts by account category and the average rates paid at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Amortized
Cost | | | Fair Value | | | Amortized
Cost | | | Fair Value | | | Amortized
Cost | | | Fair Value | |
| | | (Dollars in thousands) | |
Investment Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government securities | | $ | — | | | $ | — | | | $ | 71,071 | | | $ | 72,293 | | | $ | 20,893 | | | $ | 21,076 | |
Federal agency obligations | | | 199,741 | | | | 204,648 | | | | 344,154 | | | | 346,019 | | | | 186,301 | | | | 186,700 | |
Corporate Bonds | | | 16,984 | | | | 17,062 | | | | 29,406 | | | | 30,540 | | | | 25,245 | | | | 25,823 | |
State and municipal securities | | | 177,666 | | | | 188,684 | | | | 180,879 | | | | 191,657 | | | | 158,007 | | | | 167,584 | |
Equity securities | | | 1,192 | | | | 1,192 | | | | 1,146 | | | | 889 | | | | 1,145 | | | | 885 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investment securities available for sale | | | 395,583 | | | | 411,586 | | | | 626,656 | | | | 641,398 | | | | 391,591 | | | | 402,068 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-Backed Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Pass-through securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Fannie Mae | | | 136,699 | | | | 139,991 | | | | 149,084 | | | | 153,188 | | | | 238,723 | | | | 243,063 | |
Freddie Mac | | | 98,511 | | | | 100,675 | | | | 56,632 | | | | 58,452 | | | | 92,885 | | | | 94,506 | |
Ginnie Mae | | | 4,973 | | | | 5,180 | | | | 9,047 | | | | 9,315 | | | | 26,586 | | | | 26,929 | |
CMOs and REMICs | | | 81,170 | | | | 82,412 | | | | 38,338 | | | | 38,659 | | | | 66,784 | | | | 66,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities available for sale | | | 321,353 | | | | 328,258 | | | | 253,101 | | | | 259,614 | | | | 424,978 | | | | 430,515 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total securities available for sale | | $ | 716,936 | | | $ | 739,844 | | | $ | 879,757 | | | $ | 901,012 | | | $ | 816,569 | | | $ | 832,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 |
| | Average balance | | Rate | | Average balance | | Rate | | Average balance | | Rate |
| | (Dollars in thousands) |
| Non-interest bearing demand | $ | 1,580,108 |
| | — | % | | $ | 646,373 |
| | — | % | | $ | 520,265 |
| | — | % |
| Interest bearing demand | 706,160 |
| | 0.08 |
| | 466,110 |
| | 0.08 |
| | 399,819 |
| | 0.12 |
|
| Savings | 622,414 |
| | 0.14 |
| | 572,246 |
| | 0.17 |
| | 485,624 |
| | 0.08 |
|
| Money market | 1,458,852 |
| | 0.35 |
| | 819,442 |
| | 0.30 |
| | 671,325 |
| | 0.33 |
|
| Certificates of deposit | 554,396 |
| | 0.44 |
| | 352,469 |
| | 0.60 |
| | 289,230 |
| | 0.87 |
|
| Total interest bearing deposits | 3,341,822 |
| | 0.27 |
| | 2,210,267 |
| | 0.27 |
| | 1,845,998 |
| | 0.30 |
|
| Total deposits | $ | 4,921,930 |
| | 0.18 |
| | $ | 2,856,640 |
| | 0.21 |
| | $ | 2,366,263 |
| | 0.24 |
|
Average deposits increased $2.1 billion, or 72.3% in fiscal 2014 and were $4.9 billion compared to $2.9 billion in fiscal 2013 and $2.4 billion in fiscal 2012. The increase in the average balance of deposits from 2013 to 2014 was mainly due to the Merger. The ratio of average non-interest bearing deposits to total deposits was 32.1% in the fiscal year ended September 30,
2011, our available for sale federal agency securities portfolio, at fair value, totaled $204.6 million, or 6.5% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of one year or less,2014 compared to 22.6% in fiscal 2013 and
$199.7 million had maturities of between one and ten years and a weighted22.0% in fiscal 2012. The average
yield of 1.89%. The agency securities portfolio currently includes both callable debentures and non callable debentures.At September 30, 2011, our available for sale state and municipal notes securities portfolio, at fair value totaled $188.7 million or 6.0% of total assets. Of the state and municipal note securities portfolio, based on amortized cost, had $4.4 million in securities with a final maturity of one year or less and a weighted average yield of 2.01%; $10.9 million maturing in one to five years with a weighted average yield of 3.3%; $116.5 million maturing in five to ten years with a weighted average yield of 3.54% and $45.9 million maturing in greater than ten years with a weighted average yield of 4.14%. Equity securities available for sale at September 30, 2011 had a fair value of $1.2 million.
At September 30, 2011, $328.3 million of our available for sale mortgage-backed securities, at fair value, consisted of pass-through securities, which totaled 10.5% of total assets and $82.4 million of CMO securities, at fair value. The total amortized cost of these pass- through securitiesinterest bearing and total deposits was $240.2 million0.27% and consisted of $136.7 million, $98.5 million0.18% during fiscal 2014 compared to 0.27% and $5.0 million of Fannie Mae, Freddie Mac0.21% during fiscal 2013 and Ginnie Mae mortgage backed securities, respectively, with respective weighted averages yields of 2.76%, 2.82%0.30% and 2.89%. At the same date, the fair
value of our available for sale CMO portfolio totaled $82.4 million, or 2.6% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae, Freddie Mac and $5.4 million sold by private party issuers. The amortized cost of these CMOs result in a weighted average yield of 2.38%. We own both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our portfolio of CMOs available for sale at September 30, 2011 had contractual maturities of over five 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.
0.24% during fiscal 2012.
Held to Maturity Portfolio.The following table sets forth the composition of our held to maturity portfolio at the dates indicated. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Amortized
Cost | | | Fair Value | | | Amortized
Cost | | | Fair Value | | | Amortized
Cost | | | Fair Value | |
| | | (Dollars in thousands) | |
Investment Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | $ | 29,973 | | | $ | 29,857 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
State and municipal securities | | | 18,583 | | | | 19,691 | | | | 27,879 | | | | 28,815 | | | | 37,162 | | | | 38,055 | |
Other | | | 1,500 | | | | 1,539 | | | | 1,000 | | | | 1,038 | | | | 1,000 | | | | 1,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investment securities held to maturity | | | 50,056 | | | | 51,087 | | | | 28,879 | | | | 29,853 | | | | 38,162 | | | | 39,089 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-Backed Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Pass-through securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Fannie Mae | | | 1,298 | | | | 1,361 | | | | 1,835 | | | | 1,931 | | | | 2,713 | | | | 2,823 | |
Freddie Mac | | | 32,858 | | | | 32,841 | | | | 2,389 | | | | 2,513 | | | | 2,834 | | | | 2,916 | |
Ginnie Mae | | | — | | | | — | | | | 16 | | | | 17 | | | | 45 | | | | 45 | |
CMOs and REMICs | | | 25,828 | | | | 25,983 | | | | 729 | | | | 748 | | | | 860 | | | | 866 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities held to maturity | | | 59,984 | | | | 60,185 | | | | 4,969 | | | | 5,209 | | | | 6,452 | | | | 6,650 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total securities held to maturity | | $ | 110,040 | | | $ | 111,272 | | | $ | 33,848 | | | $ | 35,062 | | | $ | 44,614 | | | $ | 45,739 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2011, our held to maturity federal agency securities portfolio, at amortized cost, totaled $30.0 million, or 1.0% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of five years or less, and $30.0 million had maturities of between five and ten years and a weighted average yield of 2.019%. The agency securities portfolio currently includes only callable debentures.
State and municipal securities totaled $18.6 million at amortized cost (primarily unrated obligations) and consisted of $5.8 million, with a final maturity of one year or less and a weighted average yield of 2.51%; $6.2 million, maturing in one to five years, with a weighted average yield of 3.53%; $3.0 million maturing in five to ten years, with a weighted average yield of 4.39% and $3.6 million, maturing in greater than ten years, with a weighted average yield of 4.48%.
At September 30, 2011, our held to maturity mortgage-backed securities portfolio totaled $60.0 million at amortized cost, consisting of: none with contractual maturities of one year or less, $223,000 with a weighted average yield of 5.15% and contractual maturities within five years, and $306,000 with a weighted average yield of 5.96% and contractual maturities of five to ten years and $59.5 million with a weighted average yield of 2.39% with contractual maturities of greater than ten years; CMOs of $25.8 million are included in this portfolio. While the contractual maturity of the CMOs underlying collateral is greater than ten years, the actual period to maturity of the CMOs may be shorter due to prepayments on the underlying mortgages and the terms of the CMO tranche owned.
Portfolio Maturities and Yields. The following table summarizes the composition and maturities of the investment debt securities portfolio and the mortgage backed securities portfolio at September 30, 2011. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis. ($ in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | One Year or Less | | | More than One Year
through Five Years | | | More than Five Years
through Ten Years | | | More than Ten Years | | | Total Securities | |
| | | Amortized
Cost | | | Weighted
Average
Yield | | | Amortized
Cost | | | Weighted
Average
Yield | | | Amortized
Cost | | | Weighted
Average
Yield | | | Amortized
Cost | | | Weighted
Average
Yield | | | Amortized
Cost | | | Fair
Value | | | Weighted
Average
Yield | |
| | | (Dollars in thousands) | |
Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | — | | | | — | % | | $ | 6,889 | | | | 2.47 | % | | $ | 53,626 | | | | 2.49 | % | | $ | 76,184 | | | | 2.97 | % | | $ | 136,699 | | | $ | 139,991 | | | | 2.76 | % |
Freddie Mac | | | — | | | | — | | | | 1,566 | | | | 3.89 | | | | — | | | | — | | | | 96,945 | | | | 2.80 | | | | 98,511 | | | | 100,675 | | | | 2.82 | |
Ginnie Mae | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,973 | | | | 2.88 | | | | 4,973 | | | | 5,180 | | | | 2.89 | |
CMOs and REMICs | | | — | | | | — | | | | — | | | | — | | | | 411 | | | | 4.43 | | | | 80,759 | | | | 2.37 | | | | 81,170 | | | | 82,412 | | | | 2.38 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | — | | | | — | | | | 8,455 | | | | 2.73 | | | | 54,037 | | | | 2.51 | | | | 258,861 | | | | 2.72 | | | | 321,353 | | | | 328,258 | | | | 2.68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and agency securities | | | — | | | | — | | | | 169,766 | | | | 1.84 | | | | 29,975 | | | | 2.15 | | | | — | | | | — | | | | 199,741 | | | | 204,648 | | | | 1.89 | |
Corporate | | | — | | | | — | | | | 16,856 | | | | 2.43 | | | | 128 | | | | 6.88 | | | | — | | | | — | | | | 16,984 | | | | 17,062 | | | | 2.46 | |
State and municipal | | | 4,410 | | | | 2.01 | | | | 10,854 | | | | 3.33 | | | | 116,531 | | | | 3.54 | | | | 45,871 | | | | 4.14 | | | | 177,666 | | | | 188,684 | | | | 3.65 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 4,410 | | | | 2.01 | | | | 197,476 | | | | 1.97 | | | | 146,634 | | | | 3.26 | | | | 45,871 | | | | 4.14 | | | | 394,391 | | | | 410,394 | | | | 2.70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities available for sale | | $ | 4,410 | | | | 2.01 | % | | $ | 205,931 | | | | 2.00 | % | | $ | 200,671 | | | | 3.06 | % | | $ | 304,732 | | | | 2.93 | % | | $ | 715,744 | | | $ | 738,652 | | | | 2.69 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held to Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
Mortgage-Backed Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | — | | | | — | % | | $ | 223 | | | | 5.15 | % | | $ | — | | | | — | % | | $ | 1,075 | | | | 2.31 | % | | $ | 1,298 | | | $ | 1,361 | | | | 2.80 | % |
Freddie Mac | | | — | | | | — | | | | — | | | | — | | | | 306 | | | | 5.96 | | | | 32,552 | | | | 2.54 | | | | 32,858 | | | | 32,841 | | | | 2.57 | |
Ginnie Mae | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
CMOs and REMICs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,828 | | | | 2.21 | | | | 25,828 | | | | 25,983 | | | | 2.21 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | — | | | | — | | | | 223 | | | | 5.15 | | | | 306 | | | | 5.96 | | | | 59,455 | | | | 2.39 | | | | 59,984 | | | | 60,185 | | | | 2.42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and agency securities | | | | | | | | | | | | | | | | | | | 29,973 | | | | 2.01 | | | | — | | | | — | | | | 29,973 | | | | 29,857 | | | | 2.01 | |
State and municipal | | | 5,813 | | | | 2.51 | | | | 6,196 | | | | 3.53 | | | | 2,982 | | | | 4.39 | | | | 3,592 | | | | 4.48 | | | | 18,583 | | | | 19,691 | | | | 3.53 | |
Other | | | — | | | | — | | | | 1,500 | | | | 2.36 | | | | — | | | | — | | | | — | | | | — | | | | 1,500 | | | | 1,539 | | | | 2.36 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 5,813 | | | | 2.51 | | | | 7,696 | | | | 3.30 | | | | 32,955 | | | | 2.23 | | | | 3,592 | | | | 4.48 | | | | 50,056 | | | | 51,087 | | | | 2.59 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities held to maturity | | $ | 5,813 | | | | 2.51 | % | | $ | 7,919 | | | | 3.35 | % | | $ | 33,261 | | | | 2.26 | % | | $ | 63,047 | | | | 2.51 | % | | $ | 110,040 | | | $ | 111,272 | | | | 2.50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Funds
General.Deposits, borrowings, 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 our funds for use in lending, investing and for other general purposes.
Deposits.We offer a variety of deposit accounts with a range of interest rates and terms. Our 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. We provide a variety of commercial checking accounts and other products for businesses. In addition, we provide low-cost checking account services for low-income customers.
At September 30, 2011, our deposits totaled $2.3 billion. Interest-bearing deposits totaled $1.6 billion, and non-interest-bearing demand deposits totaled $651.2 million. NOW, savings and money market deposits totaled $1.3 billion at September 30, 2011. Also at that date, we had a total of $303.7 million in certificates of deposit, of which $250.8 million had maturities of one year or less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, our management monitors activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of such accounts upon maturity, although we may have to match competitive rates to retain many of these accounts.
Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our favorable locations, customer service and competitive pricing to attract and retain these deposits. While we accept certificates of deposit in excess of $100,000 for which we may provide preferential rates, we do not actively solicit such deposits as they are more difficult to retain than core deposits. Our limited purpose commercial bank subsidiary, Provident Municipal Bank, accepts municipal deposits. Municipal time accounts (certificates of deposit) are generally obtained through a bidding process, and tend to carry higher average interest rates than retail certificates of deposit of similar term.
Management utilizes brokered deposits on a limited basis as a diversification of wholesale funding on an unsecured basis. Management maintains limits for the use of wholesale deposit and other short term funding in general less than 10% of total assets. Most of the brokered deposit funding maintained by the bank has a maturity to coincide with the anticipated inflows of deposits through municipal tax collections.
Listed below are the Company’s brokered deposits (in thousands):
| | | | | | | | |
| | | September 30,
2011 | | | September 30,
2010 | |
Money market | | $ | 5,725 | | | $ | — | |
Reciprocal CDAR’s 1 | | | 2,746 | | | | 7,889 | |
CDAR’s one way | | | 3,366 | | | | 10,665 | |
| | | | | | | | |
Total brokered deposits | | $ | 11,837 | | | $ | 18,554 | |
| | | | | | | | |
1 | Certificate of deposit account registry service
|
Distribution of Deposit Accounts by Type. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| | | (Dollars in thousands) | |
Demand deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Retail | | $ | 194,299 | | | | 8.5 | % | | $ | 174,731 | | | | 8.2 | % | | $ | 169,122 | | | | 8.1 | % |
Commercial & municipal | | | 456,927 | | | | 19.8 | | | | 355,126 | | | | 16.6 | | | | 323,112 | | | | 15.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total demand deposits | | | 651,226 | | | | 28.3 | | | | 529,857 | | | | 24.8 | | | | 492,234 | | | | 23.6 | |
Business & municipal NOW deposits | | | 237,865 | | | | 10.4 | | | | 276,100 | | | | 12.9 | | | | 225,046 | | | | 10.8 | |
Personal NOW deposits | | | 164,637 | | | | 7.2 | | | | 139,517 | | | | 6.5 | | | | 127,595 | | | | 6.1 | |
Savings deposits | | | 429,825 | | | | 18.7 | | | | 392,321 | | | | 18.3 | | | | 357,814 | | | | 17.2 | |
Money market deposits | | | 509,483 | | | | 22.2 | | | | 427,334 | | | | 19.9 | | | | 384,632 | | | | 18.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | 1,993,036 | | | | 86.8 | | | | 1,765,129 | | | | 82.4 | | | | 1,587,321 | | | | 76.2 | |
Certificates of deposit | | | 303,659 | | | | 13.2 | | | | 377,573 | | | | 17.6 | | | | 494,961 | | | | 23.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total deposits | | $ | 2,296,695 | | | | 100.0 | % | | $ | 2,142,702 | | | | 100.0 | % | | $ | 2,082,282 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 |
| | Amount | | % | | Amount | | % | | Amount | | % |
| | (Dollars in thousands) |
| Non-interest bearing demand | $ | 1,799,685 |
| | 34.0 | % | | $ | 943,934 |
| | 31.9 | % | | $ | 947,304 |
| | 30.4 | % |
| Interest bearing demand | 766,852 |
| | 14.5 |
| | 434,398 |
| | 14.7 |
| | 448,123 |
| | 14.4 |
|
| Savings | 698,443 |
| | 13.2 |
| | 580,125 |
| | 19.6 |
| | 506,538 |
| | 16.3 |
|
| Money market | 1,595,803 |
| | 30.1 |
| | 735,709 |
| | 24.8 |
| | 821,704 |
| | 26.4 |
|
| Subtotal | 4,860,783 |
| | 91.8 |
| | 2,694,166 |
| | 91.0 |
| | 2,723,669 |
| | 87.5 |
|
| Certificates of deposit | 437,871 |
| | 8.2 |
| | 268,128 |
| | 9.0 |
| | 387,482 |
| | 12.5 |
|
| Total deposits | $ | 5,298,654 |
| | 100.0 | % | | $ | 2,962,294 |
| | 100.0 | % | | $ | 3,111,151 |
| | 100.0 | % |
The following table presents the proportion of each component of total deposits for the periods presented:
|
| | | | | | | | |
| | September 30, |
| | 2014 | | 2013 | | 2012 |
| Retail and business deposits | 77.1 | % | | 72.7 | % | | 69.0 | % |
| Municipal deposits | 18.7 |
| | 25.5 |
| | 29.0 |
|
| Wholesale deposits | 4.2 |
| | 1.8 |
| | 2.0 |
|
| | 100.0 | % | | 100.0 | % | | 100.0 | % |
As of September 30, 20112014, 2013 and September 30, 20102012, the Company had $614.8$992.8 million, $757.1 million and $513.8$901.7 million, respectively, in municipal deposits. Of these amounts, $284.0 million and $219.0 million wereA significant portion of the municipal deposits related toat September 30 are associated with school district tax deposits due on September 30, 2011collections and 2010, respectively, which we generally retain these deposits only for a short period. The following table sets forth the distributionperiod of average deposit accounts by account category with the average rates paidtime. Wholesale deposits were $220.7 million, $53.1 million and $62.0 million at the dates indicated. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Average
Balance | | | Interest | | | Average
Rate
Paid | | | Average
Balance | | | Interest | | | Average
Rate
Paid | | | Average
Balance | | | Interest | | | Average
Rate
Paid | |
| | | (Dollars in thousands) | |
Non interest bearing deposits | | $ | 472,388 | | | $ | — | | | | — | | | $ | 429,655 | | | $ | — | | | | — | | | $ | 380,571 | | | $ | — | | | | — | |
NOW deposits | | | 315,623 | | | | 595 | | | | 0.19 | % | | | 280,304 | | | | 579 | | | | 0.21 | % | | | 232,164 | | | | 670 | | | | 0.29 | % |
Savings deposits (1) | | | 432,227 | | | | 444 | | | | 0.10 | % | | | 397,760 | | | | 403 | | | | 0.10 | % | | | 366,355 | | | | 758 | | | | 0.21 | % |
Money market deposits | | | 489,347 | | | | 1,595 | | | | 0.33 | % | | | 419,152 | | | | 1,456 | | | | 0.35 | % | | | 374,507 | | | | 2,707 | | | | 0.72 | % |
Certificates of deposit | | | 373,142 | | | | 3,470 | | | | 0.93 | % | | | 451,509 | | | | 6,079 | | | | 1.35 | % | | | 577,723 | | | | 14,240 | | | | 2.46 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest bearing deposits | | | 1,610,339 | | | $ | 6,104 | | | | 0.38 | % | | | 1,548,725 | | | $ | 8,517 | | | | 0.55 | % | | | 1,550,749 | | | $ | 18,375 | | | | 1.18 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total deposits | | $ | 2,082,727 | | | | | | | | | | | $ | 1,978,380 | | | | | | | | | | | $ | 1,931,320 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2014, 2013 and 2012, respectively. Wholesale deposits consist of brokered deposits and deposits acquired through listing services.
(1)
| Includes club accounts and mortgage escrow balances
|
Certificates of Deposit by Interest Rate Range. The following table sets forth information concerning certificates of deposit by interest rate rangesrange at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At September 30, 2011 | | | | | | | |
| | | Period to Maturity | | | Total at September 30, | |
| | | Less than
One Year | | | One to
Two Years | | | Two to
Three Years | | | More than
Three Years | | | Total | | | Percent of
Total | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Interest Rate Range: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
1.00% and below | | $ | 233,780 | | | $ | 10,134 | | | $ | 978 | | | $ | 885 | | | $ | 245,777 | | | | 80.9 | % | | $ | 285,923 | | | $ | 150,138 | |
1.01% to 2.00% | | | 6,446 | | | | 3,383 | | | | 2,143 | | | | 3,052 | | | | 15,024 | | | | 4.9 | % | | | 35,527 | | | | 172,536 | |
2.01% to 3.00% | | | 4,783 | | | | 1,024 | | | | 4,450 | | | | 6,585 | | | | 16,842 | | | | 5.5 | % | | | 21,261 | | | | 72,483 | |
3.01% to 4.00% | | | 2,099 | | | | 2,469 | | | | 5,958 | | | | — | | | | 10,526 | | | | 3.5 | % | | | 17,092 | | | | 77,720 | |
4.01% to 5.00% | | | 3,465 | | | | 5,482 | | | | 6,055 | | | | — | | | | 15,002 | | | | 4.9 | % | | | 17,115 | | | | 21,439 | |
5.01% to 6.00% | | | 196 | | | | 292 | | | | — | | | | — | | | | 488 | | | | 0.2 | % | | | 655 | | | | 645 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 250,769 | | | $ | 22,784 | | | $ | 19,584 | | | $ | 10,522 | | | $ | 303,659 | | | | 100 | % | | $ | 377,573 | | | $ | 494,961 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2014 | | |
| | Period to maturity | | At September 30, |
| | 1 year or less | | 1-2 years | | 2-3 years | | 3 years or more | | Total | | % of
total | | 2013 | | 2012 |
| | (Dollars in thousands) |
| Interest rate range: | | | | | | | | | | | | | | | |
| 1.00% and below | $ | 299,149 |
| | $ | 41,600 |
| | $ | 3,702 |
| | $ | 7,642 |
| | $ | 352,093 |
| | 80.4 | % | | $ | 236,786 |
| | $ | 239,149 |
|
| 1.01% to 2.00% | 32,360 |
| | 11,172 |
| | 31,930 |
| | 465 |
| | 75,927 |
| | 17.3 |
| | 8,880 |
| | 114,836 |
|
| 2.01% to 3.00% | 6,068 |
| | 547 |
| | — |
| | — |
| | 6,615 |
| | 1.5 |
| | 10,257 |
| | 11,569 |
|
| 3.01% to 4.00% | 3,235 |
| | — |
| | — |
| | — |
| | 3,235 |
| | 0.8 |
| | 5,838 |
| | 9,101 |
|
| 4.01% to 5.00% | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 6,367 |
| | 12,524 |
|
| 5.01% to 6.00% | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 303 |
|
| Total | $ | 340,813 |
| | $ | 53,319 |
| | $ | 35,632 |
| | $ | 8,107 |
| | $ | 437,871 |
| | 100.0 | % | | $ | 268,128 |
| | $ | 387,482 |
|
Certificates of Deposit by Time to Maturity. The following table sets forth certificates of deposit by time remaining until maturity as of September 30, 2011.2014 | | | | | | | | | | | | | | | | | | | | |
| | | Maturity | |
| | | 3 months or
Less | | | Over 3 to 6
Months | | | Over 6 to 12
Months | | | Over 12
Months | | | Total | |
| | | (Dollars in thousands) | |
Certificates of deposit less than $100,000 | | $ | 75,255 | | | $ | 61,014 | | | $ | 49,199 | | | $ | 35,847 | | | $ | 221,315 | |
Certificates of deposit of $100,000 or more(¹) | | | 30,821 | | | | 17,336 | | | | 17,144 | | | | 17,043 | | | | 82,344 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 106,076 | | | $ | 78,350 | | | $ | 66,343 | | | $ | 52,890 | | | $ | 303,659 | |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Period to maturity | | | | |
| | 3 months or less | | 3-6 months | | 6-12 months | | Over 12 months | | Total | | Rate |
| | (Dollars in thousands) | | |
| Certificates of deposit less than $100,000 | $ | 58,505 |
| | $ | 35,719 |
| | $ | 35,391 |
| | $ | 17,773 |
| | $ | 147,388 |
| | 0.26 | % |
| Certificates of deposit $100,000 or more | 105,709 |
| | 52,649 |
| | 52,840 |
| | 79,285 |
| | 290,483 |
| | 0.70 |
|
| | $ | 164,214 |
| | $ | 88,368 |
| | $ | 88,231 |
| | $ | 97,058 |
| | $ | 437,871 |
| | 0.55 | % |
Brokered Deposits. We utilize brokered deposits on a limited basis and maintain limits for the use of wholesale deposits and other short-term funding in general to be less than 10% of total assets. Most of the brokered deposit funding maintained by the Bank has a maturity to coincide with the anticipated inflows of deposits through municipal tax collections.
Listed below are the Company’s brokered deposits:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| | (Dollars in thousands) |
| Money market | $ | 84,022 |
| | $ | 34,571 |
|
Reciprocal CDAR’s 1 | 34,017 |
| | 1,343 |
|
| CDAR’s one way | 3,028 |
| | 768 |
|
| Total brokered deposits | $ | 121,067 |
| | $ | 36,682 |
|
|
| |
(¹)1
| The weighted interest rates for these accounts, by maturity period, are 0.46% for 3 months or less; 0.61% for 3 to 6 months; 0.79% for 6 to 12 months; and 2.85% for over 12 months. The overall weighted average interest rate for accountsCertificate of $100,000 or more was 1.06%
deposit account registry service |
Short-term Borrowings. OurThe Company’s primary source of short-term borrowings (less(which include borrowings with a maturity less than one year) consist ofare advances and overnight borrowings, and in 2011 includes $51.5 million of debt guaranteed byfrom the FDIC maturing in February 2012. At September 30, 2011, we had access to additional Federal Home Loan Bank advances of up to an additional $200 million or more in overnight advances on a collateralized basis. New York. Short-term borrowings also include federal funds purchased and repurchase agreements.
The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates
and for the years indicated.
| | | | | | | | | | | | |
| | | At or For the Years Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Balance at end of year | | $ | 61,500 | | | $ | 44,873 | | | $ | 62,677 | |
Average balance during year | | | 55,098 | | | | 91,442 | | | | 91,985 | |
Maximum outstanding at any month end | | | 128,200 | | | | 184,040 | | | | 293,608 | |
Weighted average interest rate at end of year | | | 2.96 | % | | | 3.82 | % | | | 4.09 | % |
Weighted average interest rate during year | | | 1.67 | % | | | 2.33 | % | | | 3.38 | % |
Competition
We face significant competition in both originating loans and attracting deposits. The New York metropolitan area has a high concentration of financial institutions, many of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. We have emphasized personalized banking and the advantage of local decision-making in our banking business and this strategy appears to
|
| | | | | | | | | | | |
| | At or for the fiscal year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| | (Dollars in thousands) |
| Balance at end of year | $ | 370,365 |
| | $ | 158,897 |
| | $ | 10,136 |
|
| Average balance during year | 264,249 |
| | 88,779 |
| | 27,286 |
|
| Maximum amount outstanding at any month end | 563,085 |
| | 295,652 |
| | 103,500 |
|
| Weighted average interest rate at end of year | 0.69 | % | | 0.95 | % | | 1.88 | % |
| Weighted average interest rate during year | 0.68 |
| | 0.57 |
| | 0.78 |
|
Short-term borrowings balances have been
well received in our market area. We do not rely on any individual, group, or entity formainly used to fund continued loan growth. On a
material portion of our deposits. Although we have not done so in the past, net interest income could be adversely affected should competitive pressures cause us to increase our interest rates paid on deposits in order to maintain our market share.Employees
As of September 30, 2011, we had 465 full-time employeesdaily and 85 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.
Regulation
General
As a savings and loan holding company, Provident Bancorp is supervised and regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Its federal savings bank subsidiary, Provident Bank, is supervised and regulated by the Office of the Comptroller of the Currency (“OCC”). As a state-chartered, FDIC-insured bank, Provident Municipal Bank is regulated by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation (“FDIC”). Because it is an FDIC-insured institution, Provident Bank also is subject to regulation by the FDIC. Provident Bank’s relationship with its depositors and borrowers is governed to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of Provident Bank’s loan documents. As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the continuation and growth of our businesses. The Federal Reserve, OCC, FDIC, SEC, and other regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations.
Certain federal banking laws have been amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). See “Regulation — Financial Reform Legislation” below. Among the more significant changes made by the Dodd-Frank Act, effective July 21, 2011, the Office of Thrift Supervision (“OTS”) ceased to exist as a separate entity and was merged into the OCC. The OCC has assumed the OTS’ role as primary federal regulator and supervisor of Provident Bank. The Federal Reserve has become the primary supervisor and regulator with respect to Provident Bancorp.
Some of the numerous governmental regulations to which Provident Bancorp and its subsidiaries are subject are summarized below. These summaries are not complete and you should refer to these laws and regulations for more information. Failure to comply with applicable laws and regulations could result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal agreements and cease and desist orders. Applicable laws and regulations may change in the future and any such change could have a material adverse impact on Provident Bancorp, Provident Bank or Provident Municipal Bank.
In addition, Provident Bancorp and its subsidiaries are subject to examination by regulators, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine,
among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations.
Holding Company Regulation
Provident Bancorp is a unitary savings and loan holding company because it owns only one savings association. The Federal Reserve has supervisory and enforcement authority over Provident Bancorp and its non-bank subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a risk to Provident Bank.
Provident Bancorp must generally limit its activities to those permissible for (i) financial holding companies under section 4(k) of the Bank Holding Company Act, or (ii) multiple savings and loan holding companies under the Savings and Loan Holding Company Act. Activities in which a financial holding company may engage are those considered financial in nature or those incidentals or complementary to financial activities. These activities include lending, trust and investment advisory activities, insurance agency activities, and securities and insurance underwriting activities. Activities permitted to multiple savings and loan holding companies include certain real estate investment activities, and other activities permitted to bank holding companies under the Bank Holding Company Act.
Federal law prohibits Provident Bancorp, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings association or a savings and loan holding company, without prior written approval of the Federal Reserve Bank. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the voting shares of a savings association or savings and loan holding company that is not already a subsidiary, without prior written approval of the Federal Reserve Bank. In evaluating applications for acquisition, the Federal Reserve Bank must consider the financial and managerial resources and future prospects of the company and association involved the effect of the acquisition on the association, the risk to the Deposit Insurance Fund, the convenience and needs of the community to be served, and competitive factors.
As a public company with securities registered under the Securities Exchange Act of 1934, Provident Bancorp also is subject to that statute and to the Sarbanes-Oxley Act.
Dividends
Provident Bancorp is a legal entity separate and distinct from its savings association and other subsidiaries, and its principal sources of funds are cash dividends paid by these subsidiaries. OCC regulations limitaverage balance basis, the amount of capital distributions, including cash dividends, stock repurchases, and other transactions charged to the institution’s capital account, that can be made by Provident Bank. Furthermore, because Provident Bank is a subsidiary of a holding company, it must file a notice with the Federal Reserve at least 30 days before Provident Bank’s Board of Directors declares a dividend. This notice may be disapproved if the Federal Reserve finds that:
the savings association would be undercapitalized or worse following the dividend;
the proposed dividend raises safety and soundness concerns; or
the dividend would violate a prohibition contained in any statute, regulation, enforcement action, or agreement with or condition imposed by an appropriate federal banking agency.
Provident Bank must file an application (rather than a notice) with the OCC if, among other things, the total amount of all capital distributions, including the proposed distribution, for the calendar year exceeds the institution’s net income for that year, plus retained net income for the preceding two years.
As of October 1, 2011, the maximum amount of dividends that could be declared by Provident Bank for fiscal year 2011, without regulatory approval, is net retained income for calendar year 2011, plus $8.5 million.
Capital Requirements
As a federal savings association, Provident Bank is subject to OCC capital requirements. The OCC regulations require savings associations to meet three minimum capital standards: at least an 8% risk-based capital ratio, a 4% leverage ratio (3% for institutions receiving the highest supervisory rating), and at least a 1.5% tangible capital ratio.
The OCC’s risk-based capital standards require a savings association to maintain a Tier 1 (core) capital to risk-weighted assets ratio of at least 4%, and a total (core plus supplementary) capital to risk-weighted assets ratio of at least 8%. To determine these ratios, the regulations define core capital as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of fully consolidated subsidiaries, less intangible capital, other than certain mortgage servicing rights and credit card relationships. Supplementary capital is defined as including cumulative perpetual preferred stock, mandatory convertible securities, subordinated debt, intermediate preferred stock, allowance for loan and lease losses up to a maximum of 1.25%of risk-weighted assets, and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor ranging from 0% to 100%, assigned by the OCC capital regulationshort-term borrowings will fluctuate based on the risks inherent in the typeinflows and outflows of asset.
The OCC’s leverage ratio is defined as the ratio of core capital to adjusted total assets. The tangible capital ratio is defined as the ratio of tangible capital (the components of which are very similar to those of core capital) to adjusted total assets.
As an FDIC-insured bank, Provident Municipal Bank is subject to the risk-based capital and leverage capital requirements of the FDIC. These requirements are similar to the OCC risk-based capital and leverage capital requirements described above.
The Dodd-Frank Act contains a number of provisions that affect the capital requirements applicable to Provident Bank and to Provident Bancorp, including the requirement that thrift holding companies be subject to consolidated capital requirements. See “Regulation — Financial Reform Legislation,” below. In addition, on September 12, 2010, the Basel Committee adopted the Basel III capital rules. These rules, which will be phased in over a period of years, set new standards for common equity, Tier 1 and total capital, determined on a risk-weighted basis. The impact on Provident Bank and Provident Bancorp of the Dodd-Frank requirements and the Basel III rules cannot be determined at this time.
The OCC, the FDICmunicipal deposits and other federal banking agencies have broad powers under current federal law to take “prompt corrective action” in connection with depository institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories for insured depository institution: “well-capitalized”, “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” To be considered “well capitalized,” an institution must maintain a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage capital ratio of 5% or greater, and not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total risk- based capital ratio of at least 8%, and a leverage capital ratio of at least 4%.
If an institution fails to meet these capital requirements, progressively more severe restrictions are placed on the institution’s operations, management and capital distributions, depending on the capital category in which an institution is placed. Any institution that is “adequately capitalized” is, absent a waiver from the FDIC, prohibited from accepting or renewing brokered deposits. Any institution that is determined to be “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to raise additional capital and may not accept or renew brokered deposits. In addition, numerous mandatory supervisory
actions become immediately applicable to the insured depository institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The federal banking agencies also may take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the replacement of senior executive officers and directors. The agencies also may appoint a receiver or conservator for a savings association that is “critically undercapitalized”.
At September 30, 2011, the capital of Provident Bank and Provident Municipal Bank exceeded all applicable capital requirements, and each met the requirements to be treated as a “well-capitalized” institution.
Deposit Insurance
The FDIC insures deposit accounts in Provident Bank and Provident Municipal Bank generally up to a maximum of $250,000 per ownership category of each separately-insured depositor. As FDIC-insured depository institutions, Provident Bank and Provident Municipal Bank are required to pay deposit insurance premiums based on the risk each institution poses to the Deposit Insurance Fund. Currently, the annual FDIC assessment rate ranges from $0.025 to $0.45 (not including the depository institution debt adjustment) per $100 of the institution’s assessment base, based on the institution’s relative risk to the Deposit Insurance Fund, as measured by the institution’s regulatory capital position and other supervisory factors. The FDIC also has the authority to raise or lower assessment rates on insured deposits, subject to limits, and to impose special additional assessments.
The Dodd-Frank Act also temporarily increases the maximum amount of federal deposit insurance coverage for non-interest bearing transaction accounts to an unlimited amount from December 31, 2010 through December 31, 2012. The Dodd-Frank Act also broadens the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity of an insured depository institution. In addition, the Dodd-Frank Act raises the minimum designated reserve ratio, which the FDIC is required to set each year for the Deposit Insurance Fund, to 1.35% and requires that the Deposit Insurance Fund meets that minimum ratio by September 30, 2020. It eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The FDIC is required to offset the effect of the increased reserve ratio for depository institutions with assets of less than $10 billion. The FDIC has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. There is no implementation deadline for the 2% ratio.
In addition, the FDIC collects funds from insured institutions sufficient to pay interest on debt obligations of the Financing Corporation (FICO). FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. For the quarter ended September 30, 2011, the annualized FICO assessment was equal to $0.01 for each $100 of insured domestic deposits maintained at an institution.
Regulation of Provident Bank
Business Activities.As a federal savings association, Provident Bank derives its deposit, lending and investment powers from the Home Owners’ Loan Act (the “HOLA”) and the regulations of the OCC. Under these laws and regulations, Provident Bank may offer any type of deposit accounts, make or invest in mortgage loans secured by residential and commercial real estate, make and invest in commercial and consumer loans, certain types of debt securities and certain other loans and assets, subject in certain cases to certain limits. Provident Bank also may establish and operate subsidiaries that engage in activities permissible for Provident Bank, as well as service corporation subsidiaries that engage in activities not permissible for Provident Bank to engage in directly (such as real estate investment, and securities and insurance brokerage). Pursuant to this authority, Provident Bank operates certain subsidiaries, including Provest Services Corp. I, which holds an investment in a limited partnership that operates an assisted living facility; Provest Services Corp. II, a licensed insurance agency, which
contracts with LPL Financial Corp. in order to offer annuities and insurance products to customers of Provident Bank. Provident Bank also controls Provident REIT, Inc. and WSB Funding Corp. to hold residential and commercial real estate loans and the Bank maintains several corporations which hold foreclosed properties acquired by Provident Bank. Certain of Provident Bank’s subsidiaries are subject to separate regulatory requirements, such as those applicable to insurance agencies and investment advisors. Hardenburgh Abstract Company Inc., a title insurance agency; Provident Risk Management Inc., a captive insurance company insuring Provident affiliated risk; and Hudson Valley Investment Advisors, LLC, an investment advisory firm are subsidiaries of Provident Bancorp.
Qualified Thrift Lender Test.As a federal savings association, Provident Bank must meet the qualified thrift lender (“QTL”) test. Under the QTL test, Provident Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of certain specified liquid assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business. “Qualified thrift investments” are primarily mortgage loans and securities, and other investments related to housing, home equity loans, credit card loans, education loans and other consumer loans up to a certain percentage of assets. Provident Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986. If Provident Bank were to fail the QTL test, it would be immediately required to operate under specified restrictions.
At September 30, 2011, Provident Bank maintained approximately 72.3% of its portfolio assets in qualified thrift investments, and satisfied the QTL test.
Loans to One Borrower.Provident Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2011, Provident Bank was in compliance with the loans-to-one-borrower limitations.
Transactions with Affiliates.Provident Bank is subject to restrictions on transactions with affiliates that are the same as those applicable to commercial banks under Sections 23A and 23B of the Federal Reserve Act, as well as certain additional restrictions imposed on federal savings associations by the Home Owners’ Loan Act. The term “affiliate” under these laws means any company that controls or is under common control with a savings association and includes Provident Bancorp and its non-bank subsidiaries. Transactions between Provident Bank and certain affiliates are restricted to an aggregate percentage of Provident Bank’s capital, and certain transactions must be collateralized with certain specified assets. The HOLA further prohibits a savings association from lending to any affiliate that is engaged in activities not permissible for a bank holding company and from purchasing or investing in securities issued by any affiliate other than with respect to shares of a subsidiary. Permissible transactions with affiliates must be on terms that are at least as favorable to the savings association as comparable transactions with non-affiliates.
Provident Bank also is restricted in its ability to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, to the same extent as such restrictions apply to commercial banks. Extensions of credit to insiders must (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons; (ii) not involve more than the normal risk of repayment or present other unfavorable features; and (iii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate. In addition, extensions of credit in excess of certain limits must be approved by Provident Bank’s Board of Directors.
The Dodd-Frank Act imposes further restrictions on transactions with affiliates and extensions of credit to executive officers, director and principal shareholders, by, among other things, expanding the types of
transactions covered by the law to include securities lending, repurchase agreement and derivatives activities with affiliates. These changes will become effective on July 21, 2012. See “Regulation — Financial Reform Legislation”.
Safety and Soundness Regulations. Federal law requires each federal banking agency to prescribe certain safety and soundness standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems, and audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; compensation; and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Establishing Standards for Safety and Soundness to implement the safety and soundness requirements of federal law. 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. 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. If a deficiency persists, the agency must issue an order that requires the institution to correct the deficiency, in addition to taking other statutorily-mandated or discretionary actions.
Enforcement. The OCC has primary enforcement responsibility over federal savings associations such as Provident Bank, and has the authority to bring enforcement action against all “institution-affiliated parties,” including controlling stockholders and attorneys, appraisers, and accountants who knowingly or recklessly participate in wrongful action likely to have a significant 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 or directors of the institution, receivership, conservatorship, or the termination of deposit insurance. Civil money penalties may be imposed for a wide range of violations and actions. The FDIC also has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings association. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.
Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OCC to help meet the credit needs of their communities, including low-and moderate-income neighborhoods, consistent with safe and sound operations. The OCC is required to assess the savings association’s record of compliance with the CRA, and to assign one of four possible ratings to an institution’s CRA performance, including “outstanding,” “satisfactory,” “needs to improve,” and “substantial noncompliance.” The Equal Credit Opportunity Act and the Fair Housing Act also prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. Provident Bank received an “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Federal Home Loan Bank System. Provident Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Provident Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of New York 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 borrowings from the Federal Home Loan Bank, whichever is greater. As of September 30, 2011, Provident Bank was in compliance with this requirement.
Other Regulations. Provident Bank is subject to federal consumer protection statutes and regulations promulgated under these laws, including, but not limited to, the:
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act, requiring financial institutions to provide certain information about home mortgage and refinanced loans;
Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Provident Bank also is subject to federal laws protecting the confidentiality of consumer financial records and limiting the ability of the institution to share non-public personal information with third parties.
Finally, Provident Bank is subject to extensive anti-money laundering provisions and requirements, which require the institution to have in place a comprehensive customer identification program and an anti-money laundering program and procedures. These laws and regulations also prohibit financial institutions from engaging in business with foreign shell banks; require financial institutions to have due diligence procedures and, in some cases, enhanced due diligence procedures for foreign correspondent and private banking accounts; and improve information sharing between financial institutions and the U.S. government. Provident Bank has established policies and procedures intended to comply with these provisions.
Recent Regulatory Initiatives
Capital Purchase Program. Under the Capital Purchase Program (“CPP”) announced by the U.S. Department of the Treasury on October 14, 2008, as part of the Troubled Asset Relief Program (“TARP”), Treasury committed to invest up to $250 billion in eligible institutions in the form of non-voting senior preferred stock. Treasury approved the purchase up to $58.4 million of Provident Bancorp non-voting preferred stock, but the Company decided not to participate in the program.
TLGP. Provident Bancorp and Provident Bank decided to opt-out of the TLGP effective July 1, 2010. As a result, Provident Bank’s non-interest-bearing transaction deposits accounts (such as business checking accounts), interest bearing transaction accounts, and IOLTA accounts were insured up to $250,000 from July 1, 2010 through December 30, 2010. From December 31, 2010 through December 31, 2012, non-interest bearing transaction accounts and IOLTA accounts are fully insured beyond the $250,000 limit under the Dodd-Frank Act. Beginning January 1, 2013, insurance coverage for non-interest bearing transaction accounts and IOLTA accounts will revert to the standard FDIC limit of $250,000.
In addition, the FDIC guaranteed all newly issued senior unsecured debt (e.g., promissory notes, unsubordinated unsecured notes and commercial paper) up to prescribed limits issued by participating entities between October 14, 2008 and October 31, 2009. For eligible debt issued by that date, the FDIC provides the guarantee coverage until the earlier of the maturity date of the debt or December 31, 2012. Provident Bank issued $51.5 million senior unsecured debt in a pooled security in February 2009. This debt matures in February 2012. Provident prepaid $1.00 of insurance premiums for each $100 (on a per annum basis) of debt that was guaranteed. Additionally, the FDIC previously established an emergency debt guarantee facility through April 30, 2010, through which institutions that are unable to issue non-guaranteed debt to replace maturing senior unsecured debt because of market disruptions or other circumstances beyond their control may apply on a case-by-case basis to issue FDIC-guaranteed senior unsecured debt. The FDIC guarantee of any debt issued under this emergency facility would expire the earlier of the maturity date or December 31, 2012, and the guarantee would be subject to an annualized assessment rate equal to a minimum of 300 basis points.
Financial Reform Legislation
On July 21, 2010, the President signed the Dodd-Frank Act into law. This law is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including Provident Bancorp and Provident Bank. It requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Act may not be known for many months or years.
One change that has been particularly significant to Provident Bancorp and Provident Bank is the abolition of the OTS, their historical federal financial institution regulator, on July 21, 2011. Supervision and regulation of Provident Bancorp has moved to the Federal Reserve and supervision and regulation of Provident Bank has moved to the OCC. The HOLA remains the main statute applicable to Provident Bancorp and Provident Bank, but it has been amended by the Dodd-Frank Act, as described below and by the implementing regulations that are being amended and interpreted by the Federal Reserve and the OCC, respectively.
The Dodd-Frank Act contains a number of provisions intended to strengthen capital. For example, the federal banking agencies are directed to establish minimum leverage and risk-based capital requirements that are at least as stringent as those currently in effect. Provident Bancorp for the first time will be subject to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank.
The Dodd-Frank Act also expands the affiliate transaction rules in Sections 23A and 23B of the Federal Reserve Act to broaden the definition of affiliate and to apply to securities lending, repurchase agreement and derivatives activities that Provident Bank may have with an affiliate, as well as to strengthen collateral requirements and limit Federal Reserve exemptive authority. Also, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders is being expanded to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction. These expansions will be effective on July 21, 2012. At this time, we do not anticipate that being subject to any of these provisions will have a material effect on Provident Bancorp or Provident Bank.
The Dodd-Frank Act also contains provisions that expand the insurance assessment base and increase the scope of deposit insurance coverage. See “Regulation—Deposit Insurance”.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates for election as directors using a company’s proxy materials. The legislation also directs the federal financial institution regulatory agencies to promulgate rules prohibiting excessive compensation being paid to financial institution executives.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau, which took over responsibility over the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others, on July 21, 2011. Institutions that have assets of $10 billion or less, such as the Bank, will continue to be supervised in this area by their primary federal regulators (in the case of Provident Bank, the OCC). The Act also gives the CFPB expanded data collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. The Dodd-Frank Act also provides that the same standards for federal preemption of state laws apply to both national banks and federal savings banks. As a result it is likely the Bank would be subject to a wider array of State laws going forward. In addition, as required by the Dodd-Frank Act, the Federal Reserve has adopted a rule that places restrictions on interchange fees applicable to debit card transactions. Effective October 1, 2011, interchange fees on debit card transactions
are limited to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the Federal Reserve. Issuers that, together with their affiliates, have less than $10 billion in assets, such as Provident Bank, are exempt from the debt card interchange fee standards.
The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Act on Provident Bancorp or Provident Bank at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. Nor can we predict the impact or substance of other future legislation or regulation. However, it is expected that they at a minimum will increase our operating and compliance costs.
ITEM 1A. Risk Factors
Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business.
The Dodd-Frank Act is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
One change that has been particularly significant to us is the abolition of the OTS, our historical federal financial institution regulator, which was effective on July 21, 2011. Supervision and regulation of Provident Bancorp has moved to the Federal Reserve and supervision and regulation of Provident Bank has moved to the OCC. Except as described below, however, the laws and regulations applicable to us have not generally changed — the Home Owners Loan Act and the regulations issued under the Dodd-Frank Act generally still apply (although these laws and regulations are interpreted by the Federal Reserve and the OCC, respectively). However, the application of the laws and regulations may vary as administered by the Federal Reserve and the OCC. It is possible that the OCC may rate the activities of Provident Bank in ways that are more restrictive than the OTS has. This might cause us to incur increased costs or become more restrictive in certain activities than we have in the past.
In addition, Provident Bancorp for the first time will be subject to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank. It is possible such requirements may limit our capacity to pay dividends or repurchase shares. Provident Bank also will be subject to the same lending limits as national banks. In addition, the affiliate transaction rules in Section 23A of the Federal Reserve Act will apply to securities lending, repurchase agreement and derivatives activities that Provident Bank may have with an affiliate.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. The FDIC insures deposits at FDIC-insured financial institutions, including Provident Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. The Bank’s FDIC insurance premiums increased substantially beginning in 2009, and we expect to pay significantly higher premiums in the future. Current economic conditions have increased bank failures and additional failures are expected, all of which decrease the DIF. In order to restore the DIF to its statutorily mandated minimum of 1.15% over a period of several years, the FDIC increased deposit insurance premium rates at the beginning of 2009 and imposed a special assessment on June 30, 2009. The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The FDIC has issued regulations to implement these provisions of the Dodd Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. There is no implementation deadline for the 2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the statutory target level. Any increase in our FDIC premiums could have an adverse effect on Provident Bank’s profits and financial condition.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau which took over responsibility for the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Savings Act, among others, July 21, 2011. Institutions such as Provident Bank, which have assets of $10 billion or less, will continue to be supervised in this area by their primary federal regulators (in the case of Provident Bank, the OCC). In addition, as required by the Dodd-Frank Act, the Federal Reserve has adopted a rule that places restrictions on interchange fees applicable to debit card transactions and is thus expected to lower fee income generated from this source. Effective October 1, 2011, interchange fees on debit card transactions are limited to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the Federal Reserve. Although technically this rule only applies to institutions with assets in excess of $10 billion, it is expected that smaller institutions, such as Provident Bank, may also be impacted.
In addition, the Dodd-Frank Act significantly rolls back the federal preemption of state consumer protection laws that is currently enjoyed by federal savings associations and national banks by (1) requiring that a state consumer financial law prevent or significantly interfere with the exercise of a federal savings association’s or national bank’s powers before it can be preempted, (2) mandating that any preemption decision be made on a case by case basis rather than a blanket rule, and (3) ending the applicability of preemption to subsidiaries and affiliates of national banks and federal savings associations. As a result, we may now be subject to state consumer protection laws in each state where we do business, and those laws may be interpreted and enforced differently in different states.
The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. However, it is expected that at a minimum they will increase our operating and compliance costs.
Difficult market conditions have adversely affected our industry.
We are operating in a challenging economic environment, including generally uncertain national and local conditions. Additional concerns from some of the countries in the European Union and elsewhere have to strained the financial markets both abroad and domestically. Financial institutions continue to be affected by declines in the real estate market and the constrained financial markets. Declines in the housing market over the past two years, with falling home prices and increasing foreclosure, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This tightening of credit has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these market conditions on us and others in the financial services industry. In particular, we may face the following risks in connection with these events:
Loan delinquencies could increase further;
Problem assets and foreclosures could increase further;
Demand for our products and services could decline;
Collateral for loans made by us, especially real estate, could decline further in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans; and
Investments in mortgage-backed securities could decline in value as a result of performance of the underlying loans or the diminution of the value of the underlying real estate collateral pressing the government sponsored agencies to honor its guarantees to principal and interest.
An inadequate allowance for loan losses would negatively impact our results of operations.
We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent
in the lending business and could have a material adverse effect on our operating results. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and borrower defaults result in losses exceeding our allowance for loan losses, our results of operations could be significantly and adversely affected. We cannot assure you that our allowance will be adequate to cover probable loan losses inherent in our portfolio.
The need to account for assets at market prices may adversely affect our results of operations.
We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the asset in question presents minimal credit risk. We may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.
Acquisition, development, and construction (ADC) loans, commercial real estate and commercial and industrial loans expose us to increased risk.
We consider our commercial real estate loans, commercial and industrial loans and ADC loans to be the higher risk categories in our loan portfolio. These loans are particularly sensitive to economic conditions. At September 30, 2011, our portfolio of commercial real estate loans totaled $703.4 million, or 41.4% of total loans, our commercial and industrial business loan portfolio totaled $209.9 million, or 12.3% of total loans, and our portfolio of ADC loans totaled $175.9 million, or 10.3% of total loans. We plan to emphasize the origination of these types of loans other than ADC loans, which we now make only on an exception basis. In addition, many of our borrowers also have more than one commercial real estate, commercial business or ADC loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss. In particular, many of our ADC loans continue to pose higher risk levels than the levels expected at origination. Many projects are stalled or are selling at prices lower than expected. While we continue to seek pay downs on loans with or without sales activity, this portfolio may cause us to incur additional bad debt expense even if losses are not realized. Additionally, the balance on over half of our ADC loans is maturing within one year, which may expose us to greater risk of loss.
Changes in the value of goodwill and intangible assets could reduce our earnings.
The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2011 the net present value of Provident Bancorp shares exceed recorded book value by 2%. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.
Our continuing concentration of loans in our primary market area may increase our risk.
Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the New York metropolitan area in general. Unlike large banks that are more geographically diversified, we provide banking and financial services to customers primarily in Rockland and Orange Counties, New York. We also have a branch presence in Ulster, Sullivan, Westchester and Putnam Counties in New York and in Bergen County, New Jersey. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would affect the local economic conditions and could adversely affect our financial condition and results of operations.
Changes in market interest rates could adversely affect our financial condition and results of operations.
Our financial condition and result of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. In recent years, the structure of the balance sheet has become more asset sensitive in which assets either mature or re-price at a faster pace than liabilities and in particular borrowings. If general levels of interest rates were to continue at existing levels or decline further, net interest income would be adversely affected as asset yields would be expected to decline at faster rates than deposit or borrowing costs. A decline in net interest income may also occur offsetting a portion or all gains in net interest income from assets re-pricing and increases in volume, if competitive market pressures limit our ability to maintain or lag deposit costs. Wholesale funding costs may also increase at a faster pace than asset re-pricing and in this regard we have $220.0 million in structured/convertible advances with the FHLB at an average cost of 4.17%. If interest rates were to approach or exceed this level, it would be expected that the FHLB would call for conversion of those funds at then current market rates which potentially would be higher.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates often result in increased prepayments of loans and mortgage- related securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans.
Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At September 30, 2011, our investment and mortgage-backed securities available for sale totaled $739.8 million. Unrealized gains on securities available for sale, net of tax, amounted to $13.6 million and are reported as part of other comprehensive income, included as a separate component of stockholders’ equity. Further, decreases in the fair value of securities available for sale, therefore, could have an adverse effect on stockholders’ equity.
Our ability to pay dividends is subject to regulatory limitations and other limitations which may affect our ability to pay dividends to our stockholders or to repurchase our common stock.
Provident Bancorp is a separate legal entity from its subsidiary, Provident Bank, and does not have significant operations of its own. The availability of dividends from Provident Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Provident Bank and other factors that Provident Bank’s regulator could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, under the Dodd-Frank Act, Provident Bancorp will be subjected to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank. If Provident Bank is
unable to pay dividends to Provident Bancorp or Provident Bancorp is required to retain capital or contribute capital to Provident Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.
A breach of information security could negatively affect our earnings.
Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. We cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Disruptions to our vendors’ systems may arise from events that are wholly or partially beyond our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). If information security is breached, despite the controls we and our third party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings.
We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place are flawless. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Our failure to comply with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions, and legal proceedings.
Failure to comply with applicable laws and regulations also could result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal agreements and cease and desist orders. In addition, the OCC and the FDIC have specific authority to take “prompt corrective action,” depending on our capital level. Currently, we are considered “well-capitalized” for prompt corrective action purposes. If we were designated by the OCC as “adequately capitalized,” our ability to take brokered deposits would become limited. If we were to be designated by the OCC in one of the lower capital levels — “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized” — we would be required to raise additional capital and also would be subject to progressively more severe restrictions on our operations, management and capital distributions; replacement of senior executive officers and directors; and, if we became “critically undercapitalized,” to the appointment of a conservator or receiver.
In addition, recently enacted, proposed and future legislation and regulations (including the Dodd-Frank Act, which is discussed above), have had, will continue to have or may have significant impact on the financial services industry. Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, could cause us to change or limit some of our products and services or the way we operate our business, and could limit our ability to pursue business opportunities.
We are subject to competition from both banks and non-banking companies.
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks, other savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, real estate investment trusts (REITs), private issuers of debt obligations, venture capital firms, and suppliers of other
investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and have advantages over us in providing certain services. Many of our competitors are significantly larger than we are and have greater access to capital and other resources. Also, our ability to compete effectively is dependent on our ability to adapt successfully to technological changes within the banking and financial services industry.
Various factors may make takeover attempts more difficult to achieve.
Our Board of Directors has no current intention to sell control of Provident Bancorp. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of Provident Bancorp without the consent of our Board of Directors. One may want a take over attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:
(a) Certificate of Incorporation and statutory provisions.
Provisions of the certificate of incorporation and bylaws of Provident Bancorp and Delaware law may make it more difficult and expensive to pursue a takeover attempt that management opposes. These provisions also would make it more difficult to remove our current Board of Directors or management, or to elect new directors. These provisions also include limitations on voting rights of beneficial owners of more than 10% of our common stock, supermajority voting requirements for certain business combinations, the election of directors to staggered terms of three years and plurality voting. Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the Board of Directors.
(b) Required change in control payments and issuance of stock options and recognition and retention plan shares
We have entered into employment agreements with executive officers, which require payments to be made to them in the event their employment is terminated following a change in control of Provident Bancorp or Provident Bank. We have issued stock grants and stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan. In the event of a change in control, the vesting of stock and option grants accelerate. In 2006 we adopted the Provident Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of the Company. These payments and the acceleration of grants would increase the cost of acquiring Provident Bancorp, thereby discouraging future takeover attempts.
Our ability to make opportunistic acquisitions and participation in FDIC-assisted acquisitions or assumption of deposits from a troubled institution is subject to significant risks, including the risk that regulators will not provide the requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time to time that we expect may further business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, diversion of management’s attention from other business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even
pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into operations. Ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.
Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.
Announcements of deficiencies in foreclosure documentation by several large seller/servicer financial institutions have raised various concerns relating to mortgage foreclosure practices in the U.S. A group of state attorneys general and state bank and mortgage regulators in all 50 states and the District of Columbia is currently reviewing foreclosure practices and a number of mortgage sellers/servicers have temporarily suspended foreclosure proceedings in some or all states in which they do business in order to evaluate their foreclosure practices and underlying documentation. These foreclosure process issues and the potential legal and regulatory responses could impact the foreclosure process and timing to completion of foreclosures for residential mortgage lenders, including the Company. Over the past few years, foreclosure timelines have increased due to, among other reasons, delays associated with the significant increase in the number of foreclosure cases as a result of the economic downturn, additional consumer protection initiatives related to the foreclosure process and voluntary and, in some cases, mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure. Further increases in the foreclosure timeline may have an adverse effect on collateral values and our ability to minimize our losses.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
ITEM 2. Properties
We maintain our executive offices, commercial lending division and investment management and trust department at a leased facility located at 400 Rella Boulevard, Montebello, NY consisting of 48,973 square feet. At September 30, 2011, we conducted our business through 37 full-service banking offices consisting of 30 retail branches and 7 commercial banking centers. Of our 37 branches, 14 are located in Orange County, NY, 13 in Rockland County, NY, 2 in Ulster County, NY, 2 in Sullivan County, NY, 1 in Putnam County, NY, 3 in Westchester County and 2 in Bergen County, NJ. Additionally, 18 of our branches are owned and 18 are leased.We have announced plans to consolidate two offices and have recorded a charge of $2.1 million reflecting the costs to exit the existing leases and write off the unamortized leasehold improvements.
In addition to our branch network and corporate headquarters we lease 2 and own 1 additional properties which are held for general corporate purposes and 15 foreclosed properties located in Putnam, Orange, Rockland, Sullivan and Ulster counties. See Note 7 of the “Notes to Consolidated Financial Statements” for further detail on our premises and equipment.
ITEM 3. Legal Proceedings
Provident Bancorp is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts that are believed by management to be immaterial to Provident Bancorp’s financial condition and results of operations.
ITEM 4. [Removed and Reserved]
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(A)
The shares of common stock of Provident Bancorp are quoted on the NASDAQ Global Select (“NASDAQ”) under the symbol “PBNY.” As of September 30, 2011, Provident Bancorp had 41 registered market makers, 5,445 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 37,864,008 shares outstanding.
Market Price and Dividends. The following table sets forth market price and dividend information for the common stock for the past two fiscal years.
| | | | | | | | | | | | |
Quarter Ended | | High | | | Low | | | Cash Dividends
Declared | |
September 30, 2011 | | $ | 8.49 | | | $ | 5.82 | | | $ | 0.06 | |
June 30, 2011 | | | 10.15 | | | | 8.26 | | | | 0.06 | |
March 31, 2011 | | | 10.93 | | | | 9.11 | | | | 0.06 | |
December 31, 2010 | | | 10.64 | | | | 8.48 | | | | 0.06 | |
| | | |
September 30, 2010 | | $ | 10.03 | | | $ | 7.92 | | | $ | 0.06 | |
June 30, 2010 | | | 10.40 | | | | 8.42 | | | | 0.06 | |
March 31, 2010 | | | 9.57 | | | | 8.01 | | | | 0.06 | |
December 31, 2009 | | | 9.41 | | | | 8.00 | | | | 0.06 | |
Payment of dividends on Provident Bancorp’s common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, legal, and 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. Repurchases of the Company’s shares of common stock during the fourth quarter of the fiscal year ended September 30, 2011 are detailed in (C) below. There were no sales of unregistered securities during the quarter ended September 30, 2011.
Set forth below is a stock performance graph comparing the yearly total return on our shares of common stock, commencing with the closing price on September 30, 2006, with (a) the cumulative total return on stocks included in the NASDAQ Composite Index, and (b) the cumulative total return on stocks included in the SNL Mid-Atlantic Thrift Index.
There can be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance.
PROVIDENT NEW YORK BANCORP
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Period Ending | |
Index | | 09/30/06 | | | 09/30/07 | | | 09/30/08 | | | 09/30/09 | | | 09/30/10 | | | 09/30/11 | |
Provident New York Bancorp | | | 100.00 | | | | 97.21 | | | | 99.86 | | | | 73.98 | | | | 66.73 | | | | 47.57 | |
NASDAQ Composite | | | 100.00 | | | | 120.52 | | | | 94.10 | | | | 96.49 | | | | 108.79 | | | | 112.05 | |
SNL Mid-Atlantic Thrift Index | | | 100.00 | | | | 99.90 | | | | 85.82 | | | | 63.59 | | | | 71.87 | | | | 56.41 | |
This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that Provident New York Bancorp specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
(B)
Not Applicable
(C)
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | |
| | | Total Number
of Shares
(or Units)
Purchased (1) | | | Average
Price Paid
per share
(or Unit) | | | Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs(2) | | | Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that may yet be
Purchased Under the
Plans or Programs (2) | |
Period (2011) | | | | | | | | | | | | | | | | |
July 1 — July 31 | | | — | | | $ | — | | | | — | | | | 959,713 | |
August 1 — August 31 | | | 183,000 | | | | 6.68 | | | | 183,000 | | | | 776,713 | |
September 1 — September 30 | | | 3,728 | | | | 5.82 | | | | — | | | | 776,713 | |
| | | | | | | | | | | | | | | | |
Total | | | 186,728 | | | $ | 6.66 | | | | 183,000 | | | | | |
| | | | | | | | | | | | | | | | |
1 | The total number of shares purchased during the periods includes shares deemed to have been received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes ($22,697, or 3,728 shares), as is permitted under the Company’s stock benefit plans and shares repurchased as part of a previously authorized repurchase program.
|
2 | The Company announced its fifth repurchase program on December 17, 2009 authorizing the repurchase of 2,000,000 shares of which 776,713 remain available for repurchase.
|
ITEM 6. Selected Financial Data
The following financial condition data and operating data are derived from the audited consolidated financial statements of Provident Bancorp. 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.
| | | $3,137,402 | | | | $3,137,402 | | | | $3,137,402 | | | | $3,137,402 | | | | $3,137,402 | |
| | | At September 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
Selected Financial Condition Data: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Total assets | | $ | 3,137,402 | | | $ | 3,021,025 | | | $ | 3,021,893 | | | $ | 2,984,371 | | | $ | 2,802,099 | |
Loans, net (1) | | | 1,675,882 | | | | 1,670,698 | | | | 1,673,207 | | | | 1,708,452 | | | | 1,617,669 | |
Securities available for sale | | | 739,844 | | | | 901,012 | | | | 832,583 | | | | 791,688 | | | | 794,997 | |
Securities held to maturity | | | 110,040 | | | | 33,848 | | | | 44,614 | | | | 43,013 | | | | 37,446 | |
Deposits | | | 2,296,695 | | | | 2,142,702 | | | | 2,082,282 | | | | 1,989,197 | | | | 1,713,684 | |
Borrowings | | | 323,522 | | | | 363,751 | | | | 430,628 | | | | 566,008 | | | | 661,242 | |
Equity | | | 431,134 | | | | 430,955 | | | | 427,456 | | | | 399,158 | | | | 405,089 | |
| | | $3,137,402 | | | | $3,137,402 | | | | $3,137,402 | | | | $3,137,402 | | | | $3,137,402 | |
| | | Years Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
Selected Operating Data: | | | | | | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 112,614 | | | $ | 119,774 | | | $ | 131,590 | | | $ | 148,982 | | | $ | 151,626 | |
Interest expense | | | 21,324 | | | | 26,440 | | | | 37,720 | | | | 53,642 | | | | 66,888 | |
| | | | | | | | | | | | | | | | | | | | |
Net interest income | | | 91,290 | | | | 93,334 | | | | 93,870 | | | | 95,340 | | | | 84,738 | |
Provision for loan losses | | | 16,584 | | | | 10,000 | | | | 17,600 | | | | 7,200 | | | | 1,800 | |
| | | | | | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 74,706 | | | | 83,334 | | | | 76,270 | | | | 88,140 | | | | 82,938 | |
Non-interest income | | | 29,951 | | | | 27,201 | | | | 39,953 | | | | 21,042 | | | | 19,845 | |
Non-interest expense | | | 90,111 | | | | 83,170 | | | | 80,187 | | | | 75,500 | | | | 74,590 | |
| | | | | | | | | | | | | | | | | | | | |
Income before income tax expense | | | 14,546 | | | | 27,365 | | | | 36,036 | | | | 33,682 | | | | 28,193 | |
Income tax expense | | | 2,807 | | | | 6,873 | | | | 10,175 | | | | 9,904 | | | | 8,566 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | | | $ | 23,778 | | | $ | 19,627 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | At or For the Years Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
Selected Financial Ratios and Other Data: | | | | | | | | | | | | | | | | | | | | |
Performance Ratios: | | | | | | | | | | | | | | | | | | | | |
Return on assets (ratio of net income to average total assets) | | | 0.40 | % | | | 0.70 | % | | | 0.89 | % | | | 0.84 | % | | | 0.70 | % |
Return on equity (ratio of net income to average equity) | | | 2.75 | | | | 4.82 | | | | 6.22 | | | | 5.88 | | | | 4.82 | |
Average interest rate spread(2) | | | 3.42 | | | | 3.51 | | | | 3.46 | | | | 3.49 | | | | 2.97 | |
Net interest margin(3) | | | 3.65 | | | | 3.78 | | | | 3.81 | | | | 3.96 | | | | 3.57 | |
Efficiency ratio(4) | | | 71.00 | | | | 68.96 | | | | 65.11 | | | | 61.20 | | | | 66.40 | |
Non-interest expense to average total assets | | | 3.06 | | | | 2.85 | | | | 2.77 | | | | 2.68 | | | | 2.68 | |
Ratio of average interest-earning assets to average interest-bearing liabilities | | | 128.36 | | | | 126.66 | | | | 123.54 | | | | 122.26 | | | | 122.34 | |
| | | | | |
Per Share Related Data: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Basic earnings per share | | $ | 0.31 | | | | 0.54 | | | | 0.67 | | | $ | 0.61 | | | $ | 0.48 | |
Diluted earnings per share | | | 0.31 | | | | 0.54 | | | | 0.67 | | | | 0.61 | | | | 0.48 | |
Dividends per share | | | 0.24 | | | | 0.24 | | | | 0.24 | | | | 0.24 | | | | 0.20 | |
Book value per share(6) | | | 11.39 | | | | 11.26 | | | | 10.81 | | | | 10.03 | | | | 9.82 | |
Dividend payout ratio(5) | | | 77.42 | % | | | 44.44 | % | | | 35.82 | % | | | 39.34 | % | | | 41.67 | % |
| | | | | |
Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Non-performing assets to total assets(1) | | | 1.46 | % | | | 1.02 | % | | | 0.93 | % | | | 0.57 | % | | | 0.26 | % |
Non-performing loans to total loans(1) | | | 2.38 | | | | 1.58 | | | | 1.55 | | | | 0.97 | | | | 0.44 | |
Allowance for loan losses to non-performing loans | | | 69 | | | | 115 | | | | 114 | | | | 137 | | | | 281 | |
Allowance for loan losses to total loans | | | 1.64 | | | | 1.81 | | | | 1.76 | | | | 1.33 | | | | 1.24 | |
| | | | | |
Capital Ratios: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Equity to total assets at end of year | | | 13.74 | % | | | 14.27 | % | | | 14.15 | % | | | 13.37 | % | | | 14.46 | % |
Average equity to average assets | | | 14.49 | | | | 14.60 | | | | 14.36 | | | | 14.34 | | | | 14.61 | |
Tier 1 leverage ratio (bank only) | | | 8.1 | | | | 8.4 | | | | 8.6 | | | | 8.0 | | | | 8.1 | |
| | | | | |
Other Data: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Number of full service offices | | | 37 | | | | 35 | | | | 33 | | | | 33 | | | | 33 | |
(1) | Excludes loans held for sale.
|
(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. Net interest income is commonly presented on a tax-equivalent basis. This is to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g. was received as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices.
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(4) | The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. As in the case of net interest income, generally, net interest income as utilized in calculating the efficiency ratio is typically expressed on a tax-equivalent basis. Moreover, most financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under generally accepted accounting principles) certain component elements, such as non-recurring charges, other real estate expense and amortization of intangibles (deducted from noninterest expense) and securities transactions and other non-recurring items (excluded from noninterest income). We follow these practices.
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(5) | The dividend payout ratio represents dividends per share divided by basic earnings per share.
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(6) | Book value per share is based on total stockholders’ equity and 37,864,008, 38,262,288, 39,547,207, 39,815,213 and 41,230,618 outstanding common shares at September 30, 2011, 2010, 2009, 2008 and 2007, respectively. For this purpose, common shares include unallocated employee stock ownership plan shares but exclude treasury shares.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company provides financial services to individuals and businesses in New York and New Jersey. The Company’s business is primarily accepting deposits from customers through its banking offices and investing those deposits, together with funds generated from operations and borrowings into commercial real estate loans, commercial business loans, ADC loans, residential mortgages, consumer loans, and investment securities. Additionally, the Company offers investment management services. The financial condition and results of operations of Provident Bancorp are discussed herein on a consolidated basis with the Bank. Reference to Provident Bancorp or the Company may signify the Bank, depending on the context.
Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities. The Federal Reserve Board, through a series of reductions to the federal funds target rate to an unprecedented 0-25 basis points has acted to increase liquidity in the credit markets. This target rate has been in effect since December 2008. These rate reductions significantly lowered yields on the short end of the treasury yield curve more so than the long end of the curve, resulting in a steeper yield curve than existed at the prior fiscal year-end.
As described in greater detail below, the key factors that have affected our results over the last three years include:
the effects of the economic downturn on our asset quality, which has led to higher levels of provisions for loan losses than historically had been the case;
the current low interest rate environment, which has contributed to margin pressure on net interest income;
management’s decision to take advantage of the interest rate environment and realize securities gains to reduce future interest rate exposure; and
limited opportunities to make loans that meet our credit standards and pricing criteria
The last recession and slow recovery over the past two years have resulted in borrowers experiencing higher levels of stress, which resulted in our increased levels of charge-offs and provisions for loan losses. In particular, small businesses and borrowers involved in Acquisition, Development and Construction projects have been affected. During the year our net charge-offs exceeded our provisions by $2.9 million. Management of our loan portfolio continues to be a top priority. We were able to grow commercial real estate loans, which was substantially offset by declines in one-to-four family residential mortgages as we sold a substantial portion of our new production.
In addition, we continue to experience pressure on net interest income. Low rates continue to have the effect of causing many assets to prepay or to be called. In anticipation of this, we have also been selling certain investment securities based on market conditions. Reinvestment of cash is necessarily made at lower interest rates or in extended maturity. Many of our liabilities are at rates that are either fixed or already very low, so maintaining net interest margin is a function of loan growth, growth in non-interest bearing deposits, and continuation of our deposit pricing discipline. Transaction accounts grew 11.4% during the year, non-time deposits grew as well, while CDs declined. This helped support our net interest margin which was 3.65% this year compared to 3.78% last year.
On August 9, 2011, Provident Bank (the “Bank”) announced a workforce reduction to improve efficiency and reduce operating expenses to better position the Bank for enhanced revenue growth. The Bank expects the workforce reduction together with other expense reductions to yield annual savings by the end of 2012 of approximately $10.0 million, including approximately $4.2 million in personnel salary and benefits from eliminated positions. Of the $10.5 million expense reduction the company intends to redeploy approximately $5.0 million to revenue generating initiatives designed to improve efficiency and enhance customer experience. Costs associated with the restructuring are estimated to be approximately $3.3 million. The charges the Bank expects to incur in connection with the workforce reduction are subject to a number of assumptions, and actual results may differ. The Bank may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the workforce reduction.
Operating expenses increased 8.3% primarily due to restructuring charges and charges related to CEO transitioning including defined benefit settlements. Fee income excluding securities gains, declined slightly. Deposit fees declined primarily due to changed customer behavior partially offset in other categories.
Net income for the year ended September 30, 2011 decreased 43% to $11.7 million, or $0.31 per diluted share from $20.5 million, or $0.54 per diluted share for the year ended September 30, 2010. Net interest income on a tax equivalent basis decreased $2.2 million or 2.3% for the year ended September 30, 2011 as compared to the year ended 2010. Net interest margin decreased 13 basis points to 3.65% at September 30, 2011 from 3.78% at September 30, 2010. Average loans increased $9.3 million to $1.67 billion at September 30, 2011 from $1.66 billion at September 30, 2010. The net increase in average loans is due to increases in commercial lending activities virtually offsetting the refinancing of residential loans as well as the sale of residential loans to the secondary market and decline in ADC loans due to management deemphasizing this type of lending . The provision for loan losses increased $6.6 million from September 30, 2010 to $16.6 million for the year ended September 30, 2011 primarily related to one ADC borrower.
Non-interest income increased $2.8 million to $30 million for the year ended September 30, 2011 from $27.2 million for the year ended September 30, 2010, primarily resulting from an increase of $1.9 million in net securities gains, $909,000 decrease in the fair value loss on interest rate caps, and a decrease of $417,000 in deposit fees and service charges.
Non-interest expense increased $6.9 million to $90.1 million for the year ended September 30, 2011 from $83.2 million for the year ended September 30, 2010 primarily from restructuring charges and charges relating to the CEO transition including defined benefit settlements, staffing for new offices, occupancy expense associated with the new offices and professional fees.
Total assets increased $116.4 million to $3.1 billion for the year ended September 30, 2011. Net loans remained relatively unchanged increasing by 0.3% as commercial lending increases in outstanding balances were offset by decreases in all other categories. Residential loans decreased as a result of residential originations of $49.8 million being sold in the secondary market during fiscal year 2011 and ADC loans decreased by $55.3 million. Deposits increased $154.0 million in 2011 primarily in business and retail transaction accounts, municipal NOW accounts, savings, and money market deposit accounts partially offset by declines in certificate of deposit balances as customers are less willing to maintain term deposits in this relatively low interest rate environment.
The Company had significant fourth quarter items as new strategies designed to drive growth in revenues and earnings have been implemented. There was a $2.1 million charge associated with the consolidation of two branches; this consolidation will result in an annual pre-tax savings of $900,000. In addition there was $1.1 million of severance expense associated with the workforce realignment established to improve efficiency and reduce operating expense to better position the Bank for enhanced revenue growth. This workforce realignment will result in an annual savings of $4.2 million in salaries and benefits.
Additional fourth quarter items were net gains on sales of securities totaled $4.5 million offsetting the restructuring charges mentioned above. Most of the securities sold had low current market yields and were reinvested in securities through modest extension of duration at comparable book yields thereby not causing further declines in net interest margin. Credit costs also impacted the quarter as ADC loans included a charge of $6.7 million for two relationships and a $1.2 million loss was incurred on a sale of non-performing loans
The following is an analysis of the financial condition and results of the Company’s operations. This item should be read in conjunction with the consolidated financial statements and related notes filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of the Company’s business filed here within Part I, Item 1, “Business.”
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income.
Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, and review their risk components as a part of that evaluation. See Note 1, “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in our “Notes to Consolidated Financial Statements” for a discussion of the risk components. We consistently review the risk components to identify any changes in trends. At September 30, 2011 Provident has recorded $27.9 million in its allowance for loan losses.
Goodwill and Other Intangible Assets. The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2011 the estimated net present value of Provident Bancorp shares exceed recorded book value by 2%. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.
We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired. Other intangible assets have been recorded in connection with the acquisition of HVIA for non-competition and customer intangibles. At September 30, 2011 the bank had $2.4 million in naming rights net of amortization included in other intangibles related to Provident Bank Ball Park and $1.5 million in mortgage servicing rights included in other assets. At September 30, 2011, the Company had $4.6 million recorded in core deposit and other intangibles.
Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. At September 30, 2011, Provident Bancorp has net deferred tax assets of $1.9 million.
Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when management has determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful. At September 30, 2011, Provident has $36.5 million in loans in non-accrual status.
Comparison of Financial Condition at September 30, 2011 and September 30, 2010
Total assets as of September 30, 2011 were $3.1 billion, an increase of $116.4 million compared to September 30, 2010. Cash and due from banks increased $190.6 million to $281.5 million at September 30, 2011 due primarily to deposits received on September 30, 2011 and high levels of balances maintained at the Federal Reserve in 2011 due to municipal tax collection activity. Core deposit and other intangibles increased by $1.0 million resulting from naming rights acquired on Provident Ballpark stadium. Goodwill was unchanged. The Company had $4.2 million in loans held for sale as of September 30, 2011 and $5.9 million at September 30, 2010. Premises and equipment decreased $2.7 million primarily related to depreciation and amortization exceeding new investment in premises and equipment.
Net loans as of September 30, 2011 were $1.7 billion, an increase of $5.2 million, or 0.3%, over net loan balances of $1.7 billion at September 30, 2010. Commercial real estate loans increased $124.1 million, or 21.4%, and ADC loans decreased $55.3 million or 23.9% to $175.9 million compared to $231.3 million as of September, 2010. Consumer loans decreased by $13.4 million, or 5.6%, during the fiscal year ended September 30, 2011, residential loans decreased by $45.1 million, or 10.4%. Total loan originations, excluding loans originated for sale were $578.6 million for the fiscal year ended September 30, 2011, while repayments were $553.2 million for the fiscal year ended September 30, 2011. The allowance for loan loss decreased from $30.8 million to $27.9 million as a result of provisions to loan losses of $16.6 million and net charge offs of $19.5 million. There were increases in the reserves for ADC, commercial business loans and home equity lines of credit, with decreases in commercial real estate and residential mortgages. The variances were driven by modifications in reserve factors as well as changes in loan balances.
Total securities decreased by $85.0 million, to $849.9 million at September 30, 2011 from $934.9 million at September 30, 2010. Security purchases were $716.3 million, sales of securities were $540.5 million, and maturities, calls, and repayments were $269.0 million.
Goodwill and other intangibles totaled $165.5 million at September 30, 2011 an increase of $989,000. The increase is a result of Provident Bank entering into a naming rights contract for $2.4 million in May 2011 partially offset by amortization.
Deposits as of September 30, 2011 were $2.3 billion, an increase of $154.0 million, or 7.2%, from September 30, 2010. Included in deposits for September 30, 2011 were approximately $284.0 million in short-term seasonal municipal deposits compared to $212.0 million at September 30, 2010. As of September 30, 2011 transaction accounts were 45.9% of deposits, or $1.1 billion compared to $945.5 million or 44.1% at September 30, 2010. As of September 30, 2011, savings deposits were $429.8 million, an increase of $37.5 million or 9.56%. Money market accounts increased $82.1 million or 19.2% to $509.5 million at September 30, 2011. Offsetting the increases in savings and money market accounts was a decrease of $73.9 million, or 19.6% in certificates of deposits as the Company, while maintaining competitive rate structures, did not compete with the highest pricing in the market place. The Company attributes the change in mix and net increases to customers unwilling to place significant amounts of deposits in term maturities in the current rate environment as well as the success of its marketing efforts.
Borrowings decreased by $40.2 million, or 9.7%, from September 2010, to $375.0 million. The decrease is related to the borrowings being paid down by maturing investment securities and deposits.
Stockholders’ equity increased $179,000 from September 30, 2010 to $431.1 million at September 30, 2011. The increase was due to $2.8 million increase in the Company’s retained earnings and a $12,000 improvement in accumulated other comprehensive income, after realizing securities gains in the fiscal year of $10.0 million. During fiscal 2011, the Company repurchased 457,454 shares of its common stock at a cost of $3.8 million under the treasury repurchase program and issued a net 47,046 shares from its stock based compensation plans.
As of September 30, 2011 the Company had authorization to purchase up to additional 776, 713 shares of common stock. Bank Tier I capital to assets was 8.14% at September 30, 2011. Tangible capital as a percentage of tangible assets at the holding company level was 8.94%.
Credit Quality
The Allowance for Loan Losses decreased from $30.8 million to $27.9 million as net charge-offs exceeded provisions by $3.0 million . Net charge-offs for the year ended September 30, 2011 were $19.4 million, or 1.17% of average loans, compared to net charge-offs of $9.2 million, or .56% of average loans for the prior year. The increase in net charge-offs came about as we recorded $8.9 million of charges in our ADC portfolio, including $7.5 million in one relationship. Sales activity in a residential housing subdivision dropped sharply in the second half of the year, causing us to re-evaluate cash flow expectations and collateral values in the related projects. We also experienced net charge-offs of $4.6 million in the C&I portion of our Community Business Loan portfolio and $2.3 million in our Residential Mortgage Loan portfolio. During September 2011 we completed the sale of $1.2 million in NPL residential mortgages, which accounted for $1.1 million of the residential charge-off total.
Non-performing Loans (“NPLs”) increased from $26.8 million to $40.6 million primarily driven by an increase in the ADC portfolio of $11.3 million. As at September 30, 2011, NPLs consisted of ADC loans of $17.0 million, Commercial mortgages including CBL of $13.2 million, residential mortgages of $8.0 million, consumer of $2.2 million and $243,000 in commercial business loans. In addition, other real estate owned consisted of 17 properties totaling $5.4 million dollars. However, we were able to reduce classified (substandard/doubtful) loans during the year from $132.1 million at September 30, 2010 to $94.0 million at September 30 2011. Loans carried as criticized (special mention) similarly went from $37.9 million down to $23.0 million at September 30 2011.
Impaired loans increased from $42.1 million at September 30, 2010 to $55.0 million at September 30, 2011. At September 30, 2011 impaired loans with no related valuation allowance totaled $35.2 million and impaired loans with a valuation allowance were $19.8 million before specific reserves of $3.8 million. Included in impaired loans are $9.3 million of Troubled Debt Restructured Loans at September 30, 2011 that are in performing status compared to $16.0 million at prior fiscal year end. The decrease was caused by moving the ADC relationship referred to above to non-performing status offset in part by new troubled debt restructure.
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. Tax-exempt securities are reported on a tax-equivalent basis, using a 35% federal tax rate. All average balances are 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 or expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Average
Outstanding
Balance | | | Interest | | | Yield/Rate | | | Average
Outstanding
Balance | | | Interest | | | Yield/Rate | | | Average
Outstanding
Balance | | | Interest | | | Yield/Rate | |
| | | (Dollars in thousands) | |
Interest Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 1,665,360 | | | $ | 89,500 | | | | 5.37 | % | | $ | 1,656,016 | | | $ | 92,542 | | | | 5.59 | % | | $ | 1,700,383 | | | $ | 97,149 | | | | 5.71 | % |
Securities taxable | | | 695,961 | | | | 14,493 | | | | 2.08 | | | | 662,914 | | | | 18,208 | | | | 2.75 | | | | 592,071 | | | | 25,552 | | | | 4.32 | |
Securities-tax exempt | | | 213,450 | | | | 11,448 | | | | 5.36 | | | | 216,119 | | | | 11,959 | | | | 5.53 | | | | 194,028 | | | | 11,569 | | | | 5.96 | |
Federal Reserve Bank | | | 14,044 | | | | 32 | | | | 0.23 | | | | 20,009 | | | | 52 | | | | 0.26 | | | | 56,639 | | | | 144 | | | | 0.25 | |
Other | | | 20,933 | | | | 1,148 | | | | 5.48 | | | | 25,007 | | | | 1,198 | | | | 4.79 | | | | 27,061 | | | | 1,225 | | | | 4.53 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Interest-earnings assets | | | 2,609,748 | | | | 116,621 | | | | 4.47 | | | | 2,580,065 | | | | 123,959 | | | | 4.80 | | | | 2,570,182 | | | | 135,639 | | | | 5.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest earning assets | | | 339,503 | | | | | | | | | | | | 333,495 | | | | | | | | | | | | 325,322 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,949,251 | | | | | | | | | | | $ | 2,913,560 | | | | | | | | | | | $ | 2,895,504 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW deposits | | $ | 315,623 | | | | 595 | | | | 0.19 | | | $ | 280,304 | | | | 579 | | | | 0.21 | | | $ | 232,164 | | | | 670 | | | | 0.29 | |
Savings deposits (2) | | | 432,227 | | | | 444 | | | | 0.10 | | | | 397,760 | | | | 403 | | | | 0.10 | | | | 366,355 | | | | 758 | | | | 0.21 | |
Money market deposits | | | 489,347 | | | | 1,595 | | | | 0.33 | | | | 419,152 | | | | 1,456 | | | | 0.35 | | | | 374,507 | | | | 2,707 | | | | 0.72 | |
Certificates of deposit | | | 373,142 | | | | 3,470 | | | | 0.93 | | | | 451,509 | | | | 6,079 | | | | 1.35 | | | | 577,723 | | | | 14,240 | | | | 2.46 | |
Senior Debt | | | 51,498 | | | | 2,017 | | | | 3.92 | | | | 51,495 | | | | 2,029 | | | | 3.94 | | | | 32,730 | | | | 1,269 | | | | 3.88 | |
Borrowings | | | 371,318 | | | | 13,203 | | | | 3.56 | | | | 436,835 | | | | 15,894 | | | | 3.64 | | | | 496,884 | | | | 18,076 | | | | 3.64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 2,033,155 | | | | 21,324 | | | | 1.05 | | | | 2,037,055 | | | | 26,440 | | | | 1.30 | | | | 2,080,363 | | | | 37,720 | | | | 1.81 | |
Non-interest bearing deposits | | | 472,388 | | | | | | | | | | | | 429,655 | | | | | | | | | | | | 380,571 | | | | | | | | | |
Other non-interest bearing liabilities | | | 16,418 | | | | | | | | | | | | 21,442 | | | | | | | | | | | | 18,683 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 2,521,961 | | | | | | | | | | | | 2,488,152 | | | | | | | | | | | | 2,479,617 | | | | | | | | | |
Stockholders’ equity | | | 427,290 | | | | | | | | | | | | 425,408 | | | | | | | | | | | | 415,887 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and Stockholders’ equity | | $ | 2,949,251 | | | | | | | | | | | $ | 2,913,560 | | | | | | | | | | | $ | 2,895,504 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread (3) | | | | | | | | | | | 3.42 | % | | | | | | | | | | | 3.51 | % | | | | | | | | | | | 3.46 | % |
Net Interest-earning assets (4) | | $ | 576,593 | | | | | | | | | | | $ | 543,010 | | | | | | | | | | | $ | 489,819 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin (5) | | | | | | | 95,297 | | | | 3.65 | % | | | | | | | 97,519 | | | | 3.78 | % | | | | | | | 97,919 | | | | 3.81 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less tax equivalent adjustment | | | | | | | (4,007 | ) | | | | | | | | | | | (4,185 | ) | | | | | | | | | | | (4,049 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest income | | | | | | $ | 91,290 | | | | | | | | | | | $ | 93,334 | | | | | | | | | | | $ | 93,870 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of interest-earning assets to interest bearing liabilities | | | | | | | 128.36 | % | | | | | | | | | | | 126.66 | % | | | | | | | | | | | 123.54 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Balances include the effect of net deferred loan origination fees and costs, the allowance for the loan losses, and non accrual loans. Includes prepayment fees and late charges.
|
(2) | Includes club accounts and interest-bearing mortgage escrow balances.
|
(3) | Net interest rate spread represents the difference between the tax equivalent 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 (tax equivalent) divided by average total interest-earning assets.
|
The following table presents the dollar amount of changes in interest income (on a fully tax-equivalent basis) and interest expense for the major categories of our 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.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 vs. 2010 | | | 2010 vs. 2009 | |
| | | Increase (Decrease)
Due to | | | Total
Increase | | | Increase (Decrease)
Due to | | | Total
Increase | |
| | | Volume | | | Rate | | | (Decrease) | | | Volume | | | Rate | | | (Decrease) | |
| | | (Dollars in thousands) | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 670 | | | $ | (3,712 | ) | | $ | (3,042 | ) | | $ | (2,546 | ) | | $ | (2,061 | ) | | $ | (4,607 | ) |
Securities taxable | | | 878 | | | | (4,593 | ) | | | (3,715 | ) | | | 2,786 | | | | (10,130 | ) | | | (7,344 | ) |
Securities tax exempt | | | (147 | ) | | | (364 | ) | | | (511 | ) | | | 1,260 | | | | (870 | ) | | | 390 | |
Federal Reserve Bank | | | (15 | ) | | | (5 | ) | | | (20 | ) | | | (98 | ) | | | 6 | | | | (92 | ) |
Other earning assets | | | (191 | ) | | | 141 | | | | (50 | ) | | | (127 | ) | | | 100 | | | | (27 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | | 1,195 | | | | (8,533 | ) | | | (7,338 | ) | | | 1,275 | | | | (12,955 | ) | | | (11,680 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
NOW deposits | | | 73 | | | | (57 | ) | | | 16 | | | | 121 | | | | (212 | ) | | | (91 | ) |
Savings deposits | | | 41 | | | | — | | | | 41 | | | | 63 | | | | (418 | ) | | | (355 | ) |
Money market deposits | | | 229 | | | | (90 | ) | | | 139 | | | | 286 | | | | (1,537 | ) | | | (1,251 | ) |
Certificates of deposit | | | (934 | ) | | | (1,675 | ) | | | (2,609 | ) | | | (2,662 | ) | | | (5,499 | ) | | | (8,161 | ) |
Senior Debt | | | — | | | | (12 | ) | | | (12 | ) | | | 740 | | | | 20 | | | | 760 | |
Borrowings | | | (2,347 | ) | | | (344 | ) | | | (2,691 | ) | | | (2,182 | ) | | | — | | | | (2,182 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | (2,938 | ) | | | (2,178 | ) | | | (5,116 | ) | | | (3,634 | ) | | | (7,646 | ) | | | (11,280 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Less tax equivalent adjustment | | | (51 | ) | | | (127 | ) | | | (178 | ) | | | 441 | | | | (305 | ) | | | 136 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in net interest income | | $ | 4,184 | | | $ | (6,228 | ) | | $ | (2,044 | ) | | $ | 4,468 | | | $ | (5,004 | ) | | $ | (536 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
Comparison of Operating Results for the Years Ended September 30, 2011 and September 30, 2010
Net income for the year ended September 30, 2011 was $11.7 million or $0.31 per diluted share. This compares to net income of $20.5 million, or $0.54 per diluted share for the year ended September 30, 2010. Excluding net securities gains, the fair value adjustment of interest caps, CEO transition expenses and restructuring charges adjusted net income was $9.4 million or $0.25 per diluted share for the year ended September 30, 2011. Excluding net securities gains and the fair value adjustment of interest caps adjusted net income was $16.3 million or $0.43 per diluted share for the year ended September 30, 2010.
Earnings excluding securities gains, defined benefit settlement charge / CEO transition, restructuring charges and the fair value adjustment of interest rate caps are presented below. The Company presents earnings excluding these factors so that investors can better understand the results of the Company’s core banking operations and to better align with the views of the investment community.
| | | | | | | | |
| (In thousands, except share data) | | | | | | |
| | | Twelve months ended
September 30, | |
| | | 2011 | | | 2010 | |
Net Income | | | | | | | | |
Net Income | | $ | 11,739 | | | $ | 20,492 | |
Securities gains, net of OTTI 1 | | | (5,780 | ) | | | (4,844 | ) |
Defined benefit settlement charge/CEO transition 1 | | | 1,052 | | | | — | |
Restructuring charges 1 | | | 2,243 | | | | — | |
Fair value loss on interest rate caps 1 | | | 117 | | | | 657 | |
| | | | | | | | |
Net adjusted income | | $ | 9,371 | | | $ | 16,305 | |
| | | | | | | | |
Earnings per common share | | | | | | | | |
Diluted earnings per common share | | $ | 0.31 | | | $ | 0.54 | |
Securities gains, net of OTTI 1 | | | (0.15 | ) | | | (0.13 | ) |
Defined benefit settlement charge/CEO transition 1 | | | 0.03 | | | | — | |
Restructuring charges 1 | | | 0.06 | | | | — | |
Fair value loss on interest rate caps 1 | | | — | | | | 0.02 | |
| | | | | | | | |
Diluted adjusted earnings per common share | | $ | 0.25 | | | $ | 0.43 | |
| | | | | | | | |
Non-interest income | | | | | | | | |
Total non-interest income | | $ | 29,951 | | | $ | 27,201 | |
Securities gains, net of OTTI | | | (9,733 | ) | | | (8,157 | ) |
Fair value loss, net of OTTI on interest rate caps | | | 197 | | | | 1,106 | |
| | | | | | | | |
Adjusted non interest-income | | $ | 20,415 | | | $ | 20,150 | |
| | | | | | | | |
Non-interest expense | | | | | | | | |
Total non-interest expense | | $ | 90,111 | | | $ | 83,170 | |
Restructuring charges 1 | | | (3,201 | ) | | | — | |
Defined benefit settlement charge/CEO transition 1 | | | (1,772 | ) | | | — | |
| | | | | | | | |
Adjusted non interest-expense | | $ | 85,138 | | | $ | 83,170 | |
| | | | | | | | |
1 | After marginal tax effect 40.61%
|
Interest Income. Interest income on a tax equivalent basis for the year ended September 30, 2011 decreased to $116.6 million, a decrease of $7.3 million, or 5.9%, compared to the prior year. The decrease was primarily due to declines in general market interest rates on new lending activity, impact of loans being classified as non accrual, sales of taxable securities in which gains of $9.7 million were realized and the proceeds reinvested at lower rates. Average interest-earning assets for the year ended September 30, 2011 were $2.6 billion, an increase of $29.7 million, or 1.2%, over average interest-earning assets for the year ended September 30, 2010. Average loan balances increased by $9.3 million, average balances at the Federal Reserve Bank decreased $6.0 million and average balances of other earning assets decreased by $4.1 million, primarily FHLB stock. On a tax-equivalent basis, average yields on interest earning assets decreased by 33 basis points to 4.47% for the year ended September 30, 2011, from 4.80% for the year ended September 30, 2010. Loan activity, the sale of securities with subsequent reinvestment and lower loan balances were the primary reasons for the decrease in asset yields.
Interest income on loans for the year ended September 30, 2011 decreased $3.0 million to $89.5 million from $92.5 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2011 increased to $57.4 million, as compared to commercial loan interest income of $56.5 million for the prior fiscal year. Average balances of commercial loans grew $63.1 million to $1.0 billion, with a 26 basis point decrease in the average yield. There was no change in the prime rate during fiscal year 2011. Commercial loans adjustable with the prime rate totaled $290.0 million at September 30, 2011. Interest income on consumer loans decreased to $10.5 million, as compared to consumer loan interest income of $11.1 million for the prior fiscal year. Average balances of consumer loans decreased $13.3 million to $233.2 million, with no change in basis point in the average yield. Consumer loans adjustable with the prime rate totaled $169.6 million at September 30, 2011. Income earned on residential mortgage loans was $21.6 million for the year ended September 30, 2011, down $3.3 million, from the prior year as a result of refinancing activity and lower outstanding average balances.
Tax-equivalent interest income on securities, balances at Federal Reserve Bank and other earning assets decreased to $27.1 million for the year ended September 30, 2011, compared to $31.4 million for the prior year. This was due to a tax-equivalent decrease of 53 basis points in yields. The Company sold $540.5 million in securities and recorded $10.0 million in gains on the sales. Further during fiscal 2011, proceeds totaling $269.0 million in security maturities and repayments were reinvested at current market rates with a minor increase in duration.
Interest Expense. Interest expense for the year ended September 30, 2011 decreased by $5.1 million to $21.3 million, a decrease of 19.3% compared to interest expense of $26.4 million for the prior fiscal year. The decrease in interest expense was primarily due to the significant decrease in the average rates paid on interest-bearing deposits for the year ended September 30, 2011. Rates paid on interest bearing liabilities decreased to 1.05% from 1.30% in fiscal 2010. The average interest rate paid on certificates of deposit decreased by 42 basis points to .93% for the year ended September 30, 2011, from 1.35% for the prior year. The rates paid on NOW accounts and money market accounts each decreased 2 basis points for fiscal 2011 as compared to fiscal 2010. The average cost of borrowings decreased to 3.56% at September 30, 2011 from 3.64% in 2010, with average balances also decreased by $65.5 million. Further, during the year, the bank restructured $89.0 million in FHLB advances and paid $5.2 million in prepayment fees as part of the modification. This modification resulted in a decrease of 106 basis points in the average cost of the $89.1 million in restructured borrowings.
Net Interest Income for the fiscal year ended September 30, 2011 was $91.3 million, compared to $93.3 million for the year ended September 30, 2010. The tax equivalent net interest margin decreased by 13 basis points to 3.65%, while the net interest spread decreased by 9 basis points to 3.42%. The Bank’s average cost of interest-bearing liabilities has decreased, although the average asset yields decreased faster due to lending activity, impact of non accrual loan increases and sales of securities during 2011. Further, the greater increase of interest earning assets compared to interest bearing liabilities partially offset the decline in net interest income.
Provision for Loan Losses.We recorded $16.6 million in loan loss provisions for the year ended September 30, 2011 compared to $10.0 million in the prior year, an increase of $6.6 million. We increased the provision due to increased net charge-offs, which were $19.5 million at September 30, 2011 compared to $9.2 million in the previous year. Our charge-offs were centered in our ADC portfolio, which incurred $8.9 million on average outstandings of $224.1 million Of the $8.9 million in ADC charge-offs one relationship accounted for $7.5 million due to a dramatic reduction in sales activity in the second half of our fiscal year on a particular property which resulted in a reduction in collateral value. We incurred $5.6 million in net charge-offs in our CBL C&I portfolio on average outstanding of $84.3 million. The other significant component of net charge-offs was our residential mortgage portfolio, in which we recorded $2.1 million in net charge-offs as the foreclosure process has extended on average to three or more years, home prices have continued to be weak, and taxes continue to accrue. We sold a portion of these loans in foreclosure to reduce a portion of this exposure. We recorded a loss of $1.1 million included above, on the sale of $1.3 million in the book value of loans.
Net charge-offs exceeded our provision by $2.9 million for the year ended September 30, 2011. During the year, our special mention loans decreased from $37.9 million at September 30, 2010 to $23.0 million at September 30, 2011, while our substandard and doubtful loans decreased from $132.1 million to $94.0 million respectively. All significant loans classified substandard or special mention are reviewed for impairment. As a result of our review we may establish a specific reserve, which totaled $3.8 million at September 30, 2011. A specific reserve is established when current information indicates that the carrying value of a loan is probably not recoverable, but there is sufficient uncertainty about the actual occurrence of a loss, or the amount thereof.
Non-interest income consists primarily of income on securities sales, banking fees and service charges, net increases in the cash surrender value of bank-owned life insurance (“BOLI”) contracts, title insurance fees and investment management fees. Non-interest income was $30.0 million for the fiscal year ended September 30, 2011 compared to $27.2 million at September 30, 2010. During the year ended September 30, 2011, the Company recorded gains on sales of investment securities totaling $10.0 million compared to $8.2 million for the prior year. Deposit fees and service charges decreased by $417,000, or 3.71%. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $67,000 due to an increase in residential mortgage originations. Investment management fees increased $10,000 which is related to increased market values on assets under management. During fiscal 2011 the Company originated and sold $49.8 million in residential mortgage loans and recorded $1.0 million in gains compared to $52.8 million in loans sold with $867,000 in gains at September 30, 2010.
Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization, data processing expenses and FDIC/other regulatory assessments. Non-interest expense for the fiscal year ended September 30, 2011 increased by $6.9 million, or 8.3% to $90.1 million, compared to $83.2 million for the same period in 2010. The increase was primarily attributable to $3.2 million in restructuring charge and $1.8 million from charges relating to the CEO transition, including defined benefit settlements. The $3.2 million in restructuring charge consisted of $1.1 million in severances which are expected to result in a pretax savings in salaries and benefits of $4.2 million, and $2.1 million related to the consolidation of two branches, which will result in an annual pre-tax savings of $900,000. Occupancy and office operations increased $1.1 million, or 8.0%, a full year of operations in the Yonkers and Nyack offices during the fiscal year 2011. Professional fees increased $370,000 due to increased consulting fees as well as elevated external costs of collection for problem loans. Stock-based compensation decreased by $381,000 mainly due to the vesting of stock based compensation awards in addition to lower ESOP expense. FDIC insurance decreased by $765,000 or 20.8% due to declines in FDIC assessments.
Income Taxes. Income tax expense was $2.8 million for the fiscal year ended September 30, 2011 compared to $6.9 million for fiscal 2010, representing effective tax rates of 19.3% and 25.1%, respectively. The lower tax rate in 2011 was primarily due to the high proportion of tax-free income, BOLI and insurance relative to the total levels of pre-tax income and the full year of the captive insurance company.
Comparison of Operating Results for the Years Ended September 30, 2010 and September 30, 2009
Net income for the year ended September 30, 2010 was $20.5 million or $0.54 per diluted share. Excluding net securities gains and the fair value adjustment of interest caps adjusted net income was $16.3 million or $0.43 per diluted share for the year ended September 30, 2010. This compares to net income of $25.9 million, or $0.67 per diluted share for the year ended September 30, 2009. Excluding net securities gains adjusted net income was $15.1 million or $0.39 earnings per diluted share for the year ended September 30, 2009.
Earnings excluding securities gains and the fair value adjustment of interest rate caps are presented below. The Company presents earnings excluding these factors so that investors can better understand the results of the Company’s core banking operations and to better align with the views of the investment community.
| | | | | | | | |
| (In thousands, except share data) | | | | | | |
| | | Twelve months ended
September 30, | |
| | | 2010 | | | 2009 | |
Net Income | | | | | | | | |
Net Income | | $ | 20,492 | | | $ | 25,861 | |
Securities gains 1 | | | (4,844 | ) | | | (10,735 | ) |
Fair value loss on interest rate caps 1 | | | 657 | | | | — | |
| | | | | | | | |
Net adjusted income | | $ | 16,305 | | | $ | 15,126 | |
| | | | | | | | |
Earnings per common share | | | | | | | | |
Diluted Earnings per common share | | $ | 0.54 | | | $ | 0.67 | |
Securities gains 1 | | | (0.13 | ) | | | (0.28 | ) |
Fair value loss on interest rate caps 1 | | | 0.02 | | | | — | |
| | | | | | | | |
Diluted adjusted earnings per common share | | $ | 0.43 | | | $ | 0.39 | |
| | | | | | | | |
Non-interest income | | | | | | | | |
Total non-interest income | | $ | 27,201 | | | $ | 39,953 | |
Securities gains | | | (8,157 | ) | | | (18,076 | ) |
Fair value loss on interest rate caps | | | 1,106 | | | | — | |
| | | | | | | | |
Adjusted non interest-income | | $ | 20,150 | | | $ | 21,877 | |
| | | | | | | | |
1 | After marginal tax effect 40.61%
|
Interest Income. Interest income on a tax equivalent basis for the year ended September 30, 2010 decreased to $124.0 million, a decrease of $11.7 million, or 8.6%, compared to the prior year. The decrease was primarily due to declines in general market interest rates on variable rate loans, lower loan balances, sales of taxable securities in which gains of $8.2 million were realized and the proceeds reinvested at lower rates. Average interest-earning assets for the year ended September 30, 2010 were $2.6 billion, an increase of $9.9 million, or 0.4%, over average interest-earning assets for the year ended September 30, 2009. Average loan balances decreased by $44.4 million, balances at the Federal Reserve Bank decreased $36.6 million and average balances of other earning assets decreased by $2.1 million, primarily FHLB stock. On a tax-equivalent basis, average yields on interest earning assets decreased by 48 basis points to 4.80% for the year ended September 30, 2010, from 5.28% for the year ended September 30, 2009. The re-pricing of floating rate assets, the sale of securities with subsequent reinvestment and lower loan balances were the primary reasons for the decrease in asset yields.
Interest income on loans for the year ended September 30, 2010 decreased $4.6 million to $92.5 million from $97.1 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2010 decreased to $56.5 million, as compared to commercial loan interest income of $56.6 million for the prior fiscal year. Average balances of commercial loans grew $15.7 million to $976.9 million, with a 10 basis point decrease in the average yield. There was no change in the prime rate during fiscal year 2010. Commercial loans adjustable with the prime rate totaled $363.9 million at September 30, 2010. Interest income on consumer loans decreased to $11.1 million, as compared to consumer loan interest income of $11.9 million for the prior fiscal year. Average balances of consumer loans decreased $5.8 million to $246.6 million, with a 20 basis point decrease in the average yield. Consumer loans adjustable with the prime rate totaled $171.1 million at September 30, 2010. Income earned on residential mortgage loans was $24.9 million for the year ended September 30, 2010, down $3.8 million, from the prior year as a result of refinancing activity and lower outstanding average balances.
Tax-equivalent interest income on securities, balances at Federal Reserve Bank and other earning assets decreased to $31.4 million for the year ended September 30, 2010, compared to $38.5 million for the prior year. This was due to a tax-equivalent decrease of 103 basis points in yields. The Company sold $443.4 million in securities and recorded $8.2 million in gains on the sales. Further during fiscal 2010, $362.8 million in securities matured and the proceeds were reinvested at current market rates with a shorter duration.
Interest Expense. Interest expense for the year ended September 30, 2010 decreased by $11.3 million to $26.4 million, a decrease of 29.9% compared to interest expense of $37.7 million for the prior fiscal year. The decrease in interest expense was primarily due to the significant decrease in the average rates paid on interest-bearing deposits for the year ended September 30, 2010. Rates paid on interest bearing liabilities decreased to 1.30% from 1.81% in fiscal 2009. The average interest rate paid on certificates of deposit decreased by 111 basis points to 1.35% for the year ended September 30, 2010, from 2.46% for the prior year. The average interest rate paid on savings decreased to 0.1% or 11 basis points for the year ended September 30, 2010 from 0.21% paid during fiscal 2009. The average rate paid on money market rates also declined 37 basis points to 0.35% for the year ended September 30, 2010. The rates paid on NOW accounts decreased 8 basis points for fiscal 2010 as compared to fiscal 2009. The average cost of borrowings remained flat at 3.64% at September 30, 2010 and 2009, although average balances decreased $60.1 million.
Net Interest Income for the fiscal year ended September 30, 2010 was $93.3 million, compared to $93.9 million for the year ended September 30, 2009. The tax equivalent net interest margin decreased by 3 basis points to 3.78%, while the net interest spread increased by 5 basis points to 3.51%. The Bank’s average cost of interest-bearing liabilities has decreased, although the average asset yields decreased faster due to lower volume of loans and the lower rates earned on variable rate loans and sales of securities during 2010. Further, the greater increase of interest earning assets compared to interest bearing liabilities partially offset the decline in net interest income.
Provision for Loan Losses.We recorded $10.0 million and $17.6 million in loan loss provisions for the years ended September 30, 2010 and September 30, 2009, respectively. Provision for loan losses decreased $7.6 million to $10.0 million as the allowance is now at target levels. At September 30, 2010, the allowance for loan losses totaled $30.8 million, or 1.81% of the loan portfolio, compared to $30.1 million, or 1.76% of the loan portfolio at September 30, 2009. Net charge-offs for the years ended September 30, 2010 and 2009 were $9.2 million and $10.7 million, respectively (an annual rate of 0.56% and 0.62%, respectively, of the average loan portfolio). Our credit-scored small business loan portfolio continued to account for the single largest share of our net charge-offs. During the year we recorded net charge-offs of $4.5 million in this portfolio, on average outstanding balances of $97.1 million.
At September 30, 2010, substandard loans totaled $131.8 million, up from $89.4 million at September 30, 2009. Doubtful loans increased from $0 to $300,000 at September 30, 2010 compared to September 30, 2009. The bulk of the increase came from downgrades in the ADC portfolio, as home sales remain depressed and more borrowers are feeling stress in liquidity resources. The substandard classification for many of these loans is due to delayed progress in the projects and stress on liquidity reserves or expected outside (non-project related) cash flows. These loans, however, continue to pay interest on a current basis and do not otherwise warrant a non-accrual classification. All significant loans classified substandard or special mention are reviewed for impairment, under applicable accounting and regulatory standards. Specific reserves for impairment were $2.3 million at September 30, 2009 and $2.4 million September 30, 2010. Specific reserves are established when current information indicates that the carrying value of a loan is probably not recoverable, but there is sufficient uncertainty about the actual occurrence of a loss or the amount of any loss to be incurred. Our non-performing loans increased to $26.8 million at September 30, 2010 from $26.5 million at September 30, 2009, an increase of $300,000. Loans transferred from the non-performing category into other real estate owned during fiscal 2010 totaled $3.6 million.
Non-interest income consists primarily of income on securities sales, banking fees and service charges, net increases in the cash surrender value of bank-owned life insurance (“BOLI”) contracts, title insurance fees and
investment management fees. Non-interest income was $27.2 million for the fiscal year ended September 30, 2010 compared to $40.0 million at September 30, 2009. During the year ended September 30, 2010, the Company recorded gains on sales of investment securities totaling $8.2 million compared to $18.1 million for the prior year. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. As a result of our reviews, we anticipated an acceleration of prepayments, management sold $279.4 million in mortgage backed securities and realized $6.4 million in gains on the sales. The proceeds were reinvested in securities with yields lower than the recorded yields of the securities sold. This activity also provided greater diversification in the portfolio. Deposit fees and service charges decreased by $1.2 million, or 9.4%. Income derived from the Company’s BOLI investments decreased by $711,000, or 25.8%, due to $723 thousand in death benefit proceeds received in 2009. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $152,000 due to an increase in residential mortgage originations. Investment management fees increased $494,000 which is related to increased market values on assets under management. During fiscal 2010 the Company originated and sold $52.8 million in residential mortgage loans and recorded $867,000 in gains compared to $50.7 million in loans sold with $961,000 in gains at September 30, 2009.
Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization, data processing expenses and FDIC/other regulatory assessments. Non-interest expense for the fiscal year ended September 30, 2010 increased by $3.0 million, or 3.7% to $83.2 million, compared to $80.2 million for the same period in 2009. The increase was primarily attributable to compensation and employee benefits of $4.1 million resulting from annual merit raises and increases in incentive compensation. Further, the Company opened offices in Yonkers and Nyack during the fiscal year 2010, as well as, experiencing a full year of salary expense for the White Plains office. Occupancy and office operations increased $632,000, or 4.9%, as the Company invested in new branch locations and automation in 2010. Professional fees increased $929,000 due to increased consulting fees as well as elevated external costs of collection for problem loans. Stock-based compensation decreased by $1.4 million mainly due to the vesting of stock based compensation awards in addition to lower ESOP expense. FDIC insurance decreased by $582,000 or 13.7% due to declines in FDIC assessments and ATM debit card expense decreased $514,000 or 3.2%.
Income Taxes. Income tax expense was $6.9 million for the fiscal year ended September 30, 2010 compared to $10.2 million for fiscal 2009, representing effective tax rates of 25.1% and 28.2%, respectively. The lower tax rate in 2010 was primarily due to the high proportion of tax-free income, BOLI and insurance relative to the total levels of pre-tax income and the set up of a captive insurance company.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with
generally accepted accounting principles,GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs.
The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
The Company’s off-balance sheet arrangements, which principally include lending commitments, are described below.
At September 30, 2011 and 2010, the Company had no interests in non-consolidated special purpose entities.
Lending Commitments.Lending commitments include loan commitments, unused credit lines, and letters of credit and unused credit lines.credit. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the normal course of business.
For our non-real estate commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements, or for development and construction in the case ofrequirements. At September 30, 2014 these commitments totaled $225.8 million. For our real estatebusinesses. For retail customers, businesses, loan commitments are generally for residential construction, multi-family and commercial construction projects, which totaled $114.8 million at
September 30, 2014. Loan commitments for our retail customers are generally home equity lines of credit secured by residential property. At September 30, 2011, commercialproperty and retailtotaled $99.0 million. In addition loan commitments totaled $127.3 million. Approved closed undrawn lines of credit totaled $96.1 million, $129.0 million and $14.3 million for commercial, retail accounts, and overdraft protection lines, respectively. Letters of credit totaled $17.0overdrafts were $17.7 million. Letters of credit issued by the Company generally are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance
with the terms of the letter of credit. 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. Standby letters of credit are conditional commitments to support performance, typically of a contract or the financial integrity of a customer to a third party,third-party, and represent an independent undertaking by the Company to the third party.Provident Bank applies essentially the samethird-party. Letters of credit policies and standards as it does in the lending process when making these commitments. of
September 30, 2014 totaled $97.5 million.
See Note
1515. “Off-Balance-Sheet Financial Instruments” to
“Consolidated Financial Statements” in Item 8 hereofthe consolidated financial statements for additional information regarding lending commitments.
Contractual Obligations.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.
Payments Due by Period. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2011.2014. The payment amounts represent those amounts due to the recipient. | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period | |
Contractual Obligations | | Less than
One Year | | | One to Three
Years | | | Three to Five
Years | | | More Than
Five Years | | | Total | |
| | | (Dollars in thousands) | |
FHLB and other borrowings | | $ | 61,500 | | | $ | 5,066 | | | $ | 35,795 | | | $ | 272,660 | | | $ | 375,021 | |
Time deposits | | | 250,769 | | | | 22,784 | | | | 19,584 | | | | 10,522 | | | | 303,659 | |
Letters of credits | | | 6,786 | | | | 2,353 | | | | 387 | | | | 7,446 | | | | 16,972 | |
Undrawn lines of credit | | | 239,387 | | | | — | | | | — | | | | — | | | | 239,387 | |
Operating leases | | | 2,579 | | | | 2,411 | | | | 2,175 | | | | 18,997 | | | | 26,162 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 561,021 | | | $ | 32,614 | | | $ | 57,941 | | | $ | 309,625 | | | $ | 961,201 | |
Commitments to extend credit | | $ | 100,041 | | | | 26,653 | | | | 613 | | | | — | | | $ | 127,307 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | 1 year or less | | 1-3 years | | 3-5 years | | 5 years or more | | Total |
| | (Dollars in thousands) |
| Contractual obligations: | | | | | | | | | |
| FHLB borrowings | $ | 324,726 |
| | $ | 397,786 |
| | $ | 70,000 |
| | $ | 2,516 |
| | $ | 795,028 |
|
| Other borrowings | 45,639 |
| | — |
| | — |
| | — |
| | 45,639 |
|
| Senior notes | — |
| | — |
| | 98,402 |
| | — |
| | 98,402 |
|
| Time deposits | 340,812 |
| | 88,951 |
| | 8,108 |
| | — |
| | 437,871 |
|
| Operating leases | 8,984 |
| | 16,207 |
| | 14,089 |
| | 27,012 |
| | 66,292 |
|
| | 720,161 |
| | 502,944 |
| | 190,599 |
| | 29,528 |
| | 1,443,232 |
|
| Other commitments: | | | | | | | | | |
| Letters of credit | 81,599 |
| | 7,492 |
| | — |
| | 8,377 |
| | 97,468 |
|
| Undrawn lines of credit | 520,275 |
| | — |
| | — |
| | — |
| | 520,275 |
|
| Total | $ | 1,322,035 |
| | $ | 510,436 |
| | $ | 190,599 |
| | $ | 37,905 |
| | $ | 2,060,975 |
|
See Note 16. “Commitments and contingencies” to the consolidated financial statements for additional information regarding our contractual obligations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of
Provident Bancorpthe Company have been prepared in accordance with
U.S. GAAP. U.S. GAAP,
which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Liquidity and Capital Resources
Capital. At September 30, 3014, stockholders’ equity totaled $961.1 million compared to $482.9 million at September 30, 2013. In connection with the Merger, the Company issued 39,057,968 shares of its common stock with a value of $457.8 million on October 31, 2013. Other significant increases in stockholders’ equity included net income of $27.7 million, other comprehensive income, net of tax of $3.9 million, and stock-based compensation of $6.6 million which were partially offset by dividends declared of $17.7 million.
The overall objectiveaccumulated other comprehensive loss component of our liquidity management isstockholders’ equity totaled a net, after-tax, unrealized loss of $11.5 million compared to ensurea net, after-tax unrealized loss of $15.3 million at September 30, 2013. The increase was the availabilityresult of sufficient cash fundsa $9.2 million net after-tax increase in the value of securities available for sale, a $214 thousand after-tax decrease in the net actuarial loss on the defined benefit pension plan and a net after-tax decrease in the net unrealized loss on securities transferred to held maturity of $5.1 million.
Under current regulatory requirements, amounts reported as accumulated other comprehensive (loss) income related to securities available for sale, securities transferred to held to maturity, and defined benefit pension plans do not reduce or increase regulatory capital and are not included in the calculation of leverage and risk-based capital ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines to measure Tier 1 and total capital and to take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 14. “Stockholders’ Equity” in the consolidated financial statements included elsewhere in this Report.
The Company paid a $0.06 dividend per common share in the first fiscal quarter of 2014 and paid a dividend of $0.07 per common share in the second, third and fourth fiscal quarters of 2014. Dividends of $0.06 were paid in each fiscal quarter of 2013.
The Company’s board of directors has authorized the repurchase of the Company’s common stock. At September 30, 2014, there are 776,713 shares available for repurchase. No shares were repurchased under this plan during fiscal 2014 or 2013. See Part II, Item 5. “Market for Registrants Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities”, included elsewhere in this Report.
Basel III Capital Rules. In July 2013, the Company’s primary federal regulators published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules are discussed under “Supervision and Regulation - Capital Requirements - Basel III Capital Rules.”
Liquidity. Liquidity measures the ability to meet allcurrent and future cash flow needs as they become due. The liquidity of a financial commitmentsinstitution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of investmentinterest rate market opportunities. We manage liquidity in orderThe ability of a financial institution to meet deposit withdrawals on demand or at contractual maturity,its current financial obligations is a function of its balance sheet structure, its ability to repay borrowings as they mature,liquidate assets and its access to fund new loans and investments as opportunities arise.Our primary sources of funds are deposits, principal and interest payments on loans and securities, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortizations of loans and securities, as well as proceeds from borrowings, are predictablealternative sources of funds. OtherThe objective of the Company’s liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company’s operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. The Company seeks to achieve this objective and ensure that funding sources, however, suchneeds are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on the Company’s balance sheet. The Company’s liquidity position is enhanced by its ability to raise additional funds as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition.
Our cash flows are derived from operating activities, investing activities and financing activities as reportedneeded in the Consolidated Statements of Cash Flowswholesale markets.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in our consolidated financial statements. Our primary investing activities are the origination of commercial real estate and residential one- to four-family loans, and the purchase of investment securities and mortgage-backed securities. During the years ended September 30, 2011, 2010 and 2009, our loan originations totaled $578.6 million, $472.1 million and $450.6 million, respectively. Purchases ofnear future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale, totaled $622.6 million, $830.6 millionmaturities and $708.7 million for the years ended September 30, 2011, 2010 and 2009, respectively. Purchases ofcash flow from securities held to maturity totaled $93.8maturity.
Liability liquidity is provided by access to funding sources which include core deposits, federal funds purchased and repurchase agreements. The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in the Company’s asset/liability management process. The Company regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic activity, volatility in the financial markets, unexpected credit events or other significant occurrences. These scenarios are incorporated into the Company’s contingency funding plan, which provides the basis for the identification of the Company’s liquidity needs. As of September 30, 2014, management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, including the Basel III liquidity framework, which, if implemented, would have a material adverse effect on the Company.
At September 30, 2014 the Bank had $176.6 million $23.0in cash on hand and unused borrowing capacity at the FHLB of $785.1 million. In addition, the Bank may purchase additional federal funds from other institutions and enter into additional repurchase agreements.
The Company is a bank holding company and does not conduct operations. Its primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. At September 30, 2014, the Bank had capacity to pay up to $47.9 million of dividends to the Company. At September 30, 2014 the Company had cash of $23.4 million, and $25.1$15 million available under a revolving line of credit facility.
In September 2014, the Company entered into a $15 million revolving line of credit facility with a third-party financial institution that matures on September 5, 2015. The use of proceeds are for general corporate purposes. The facility has not been used and requires the years ended September 30, 2011, 2010Company and 2009, respectively. These activities were funded primarily by borrowings and by principal repayments onthe Bank to maintain certain ratios related to capital, nonperforming asset to capital, reserves to nonperforming loans and securities. Loan origination commitments totaled $127.3 milliondebt service coverage. The Company and the Bank were in compliance with all requirements at September 30, 2011,2014.
The Company has an effective shelf registration covering $29 million of debt and
consisted of $113.4 millionequity securities remaining available for use, subject to Board authorization and market conditions, to issue equity or debt securities at
adjustable or variable rates and $13.9 million at fixed rates. Unused lines of credit grantedour discretion. While we seek to
customers were $239.4 million at September 30, 2011. We anticipatepreserve flexibility with respect to cash requirements, there can be no assurance that
we will have sufficient funds available to meet current loan commitments and lines of credit.The Company’s investments in BOLI are considered illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. The recorded value of BOLI contracts totaled $57.0 million and $50.9 million at September 30, 2011 and September 30, 2010, respectively.
Deposit flows are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, and other factors. The net increase / (decrease) in total deposits was $154.0 million, $60.4 million, and $93.1 million for the years ended September 30, 2011, 2010 and 2009, respectively. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2011 totaled $250.8 million. Based upon prior experience and our current pricing strategy, management believes that a significant portion of such deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment.
Credit markets continued to improve in fiscal 2011 from the extreme conditions that existed for fiscal 2009. Credit spreads narrowed steadily during the past year and many are very near historical levels, as many financial institutions return to lending while loan demand remains at levels below that of a vibrant economy. This lack of fundamental economic vitality is causing an increase in liquidity as businesses and individuals remain uncommitted to investment. Furthermore, the extremely low interest rate environment has enhanced our deposit growth which has also strengthened our liquidity position. Many banks are experiencing a situation similar to ours resulting in the industry liquidity to be at significantly elevated levels. However, much of this liquidity is held in the form of very short-term securities and non-maturity deposit accounts. The preference of depositors to stay short could portend potential liquidity reductions in the future and possibly put pressure onwould permit us to raise rates in the future to retain these funds.
We generally remain fully invested and utilize additional sourcessell securities on acceptable terms at any given time or at all.
Table of funds through Federal Home Loan Bank of New York (“FHLB”) advances and other sources of which $375.0 million was outstanding at September 30, 2011. At September 30, 2011, we had the ability to borrow an additional $344.1 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow up to an additional $41.1 million by pledging securities not required to be pledged for other purposes as of September 30, 2011. Further, at September 30, 2011 we had only $11.8 million in Brokered Certificates of Deposit (including certificates of deposit accounts registry service (CDAR’s) reciprocal CD’s of $2.7 million and Money Market of $5.7 million) and have relationships with several brokers to utilize these sources of funding should conditions warrant further sources of funds. Provident Bank is subject to regulatory capital requirements that are discussed in “Capital Requirements” under “Regulation”.Cash and short-term borrowing capacity at September 30, 2011 is summarized below:
| | | | |
Cash and Due from Banks | | $ | 281,512 | |
Unpledged investment Securities | | | 41,096 | |
Unpledged mortgage collateral | | | 344,090 | |
| | | | |
Total immediate funding | | $ | 666,698 | |
| | | | |
The Company’s tangible capital to tangible asset ratio is a strong 8.94%. Further, the Company has a common stock repurchase program with 776,713 shares remaining under its current board authorization. The Bank’s regulatory capital ratios were as follows:
Contents
| | | | |
Tier I leverage
ITEM 7A. | | | 8.1 | % |
Tier I risk based capital
| | | 11.8 | % |
Total risk based capital
| | | 13.0 | % Quantitative and Qualitative Disclosures about Market Risk |
The levels are well above current regulatory capital requirements to be considered well capitalized. Management is currently studying the impact on capital resulting from the Basel III accords.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
We make statements in this Report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting Provident Bancorp that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions or future or conditional verbs such as “will,” “should,” “would” and “could.” These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared.
Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.
The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:
legislative and regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our business including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;
a further deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended declines in the real estate market and constrained financial markets;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
computer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs;
changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees;
our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with suchmatters;
our success at managing the risks involved in the foregoing and managing our business; and
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control.
Additional factors that may affect our results are discussed in this annual report on Form 10-K under “Item 1A, Risk Factors” and elsewhere in this Report or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. ProvidentThe Bank’s Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our 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 our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial
mortgagereal estate loans, commercial
business& industrial loans,
ADC loans, and residential fixed-rate mortgage loans that are repaid monthly and bi-weekly,
fixed-rate commercial mortgage loans,and adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell or securitize all, or a portion of such longer-term loans, generally on a
servicing-retainedservicing-released basis. We also invest in
shorter-termshorter term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.
Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NII”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the
CompanyCompany’s and the Bank’s
net portfolioeconomic value
of equity (“
NPV”EVE”) over a range of interest rate scenarios.
NPVEVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The model assumes estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem reasonable, based on historical experience during prior interest rate changes.
Estimated Changes in NPVEVE and NII.The table below sets forth, as of September 30, 2011,2014, the estimated changes in our (1) NPVEVE that would result from the designated instantaneous changes in the forward rates curve,rate curves, and (2) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. 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 uponon as indicative of actual results. | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rates
(basis points) | | Estimated NPV | | | in NPV | | | Estimated
NII | | | Estimated NII | |
| | | Amount | | | Percent | | | | Amount | | | Percent | |
| (Dollars in thousands) | |
+300 | | $ | 297,054 | | | $ | (45,133 | ) | | | -13.2 | % | | $ | 95,736 | | | $ | 8,359 | | | | 9.6 | % |
+200 | | | 314,826 | | | | (27,361 | ) | | | -8.0 | % | | | 93,619 | | | | 6,242 | | | | 7.1 | % |
+100 | | | 330,866 | | | | (11,321 | ) | | | -3.3 | % | | | 90,752 | | | | 3,375 | | | | 3.9 | % |
0 | | | 342,187 | | | | 0 | | | | 0.0 | % | | | 87,377 | | | | 0 | | | | 0.0 | % |
-100 | | | 338,189 | | | | (3,998 | ) | | | -1.2 | % | | | 80,831 | | | | (6,546 | ) | | | -7.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Interest rates | | Estimated | | Estimated change in EVE | | Estimated | | Estimated change in NII |
| (basis points) | | EVE | | Amount | | Percent | | NII | | Amount | | Percent |
| | | (Dollars in thousands) |
| +300 | | $ | 916,800 |
| | $ | (31,928 | ) | | (3.4 | )% | | $ | 278,113 |
| | $ | 30,308 |
| | 12.2 | % |
| +200 | | 936,800 |
| | (11,928 | ) | | (1.3 | ) | | 268,343 |
| | 20,538 |
| | 8.3 |
|
| +100 | | 955,109 |
| | 6,381 |
| | (0.7 | ) | | 257,610 |
| | 9,805 |
| | 4.0 |
|
| 0 | | 948,728 |
| | — |
| | — |
| | 247,805 |
| | — |
| | — |
|
| -100 | | 927,870 |
| | (20,858 | ) | | (2.2 | ) | | 229,429 |
| | (18,376 | ) | | (7.4 | ) |
The table
set forth above indicates that at September 30,
2011,2014, in the event of an immediate 200 basis point increase in interest rates, we would
be expectedexpect to experience
an 8.0%a 1.3% decrease in
NPVEVE and a
7.1%8.3% increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on
NPVEVE and NII beyond -100 basis points.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in
NPVEVE and NII 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
NPVEVE and NII table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the re-pricing characteristics of specific assets and liabilities. Accordingly, although the
NPVEVE and NII table provides an indication of our 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
may have on our net interest
income andincome. Actual results will
differ from actual results.Since December 2008,likely differ.
During the fiscal year 2014, the federal funds target rate remained in a range of 0.00
–- 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities
decreased by 17increased 25 basis points from
0.42%0.33% to
0.25% during0.58% in fiscal
year 20112014 while the yield on U.S. Treasury
10 year10-year notes decreased
6112 basis points from
2.53%2.64% to
1.92%2.52% over the same
timetwelve month period. The
disproportional greater rate of decrease
in rates on
longer termlonger-term maturities
hascoupled with the increase in rates on the short-term maturities resulted in
thea flatter 2-10 year treasury yield curve
being flatter at the end of
fiscal 2014 relative to the
pastbeginning of the fiscal
year than it was when the year began. The overall lower yield curve caused a significant reduction in rates paid on deposits and short-term borrowings as well as rates charged on loans and other assets. To fight the economic downturn the FOMC declared a willingness to keep the federal funds target low for an “extended period”. Furthermore, duringyear. During the fourth quarter,
of the current fiscal year the FOMC
statedreaffirmed its willingness to maintain an accommodative stance on monetary policy stating that it
anticipates thatintends to do so even after employment and inflation are near mandate consistent levels should economic conditions
are likely to warrant
exceptionally low levels forkeeping the
target federal funds rate
at least through mid-2013.below levels the committee views as normal in the longer run. However, should economic conditions improve, the FOMC could
reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise
disproportionably more thandisproportionately relative to the longer end, thereby resulting in
a short-term margin compression.
We hold $50 million in notional principal of interest rate caps to help mitigate this risk. Should rates not increase sufficiently to collect on such derivatives; the fair value of this derivative would decline and eventually mature. The derivative value at risk is $65,000.
ITEM 8. Financial Statements and Supplementary Data | |
| ITEM 8. | Financial Statements and Supplementary Data |
The following are included in this item:
(A) | Report of Management on Internal Control Over Financial Reporting |
(B)(A) | Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting |
(C) | Report of Independent Registered Public Accounting Firm on Financial Statements |
(D)(B) | Consolidated Statements of Financial ConditionBalance Sheets as of September 30, 20112014 and 20102013 |
(E) | |
| (C) | Consolidated Income Statements of Income for the fiscal years ended September 30, 2011, 20102014, 2013 and 20092012 |
(F) | |
| (D) | Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2011, 20102014, 2013 and 20092012 |
(G) | |
| (E) | Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2011, 20102014, 2013 and 20092012 |
(H) | |
| (F) | Notes to Consolidated Financial Statements |
The supplementary data required by this item (selected quarterly financial data) is provided in Note
2121. “Quarterly Results of
Operations (Unaudited)” to the
Notes to Consolidated Financial Statements.consolidated financial statements.
Report of
Management on Internal Control Over Financial ReportingIndependent Registered Public Accounting Firm
Board of Directors and Stockholders
Provident New York Bancorp:
The management
Sterling Bancorp
We have audited the accompanying consolidated balance sheets of
Provident New YorkSterling Bancorp
(“as of September 30, 2014 and 2013, and the
Company”) is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s systemrelated consolidated statements of
internal controls is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofincome, comprehensive income, changes in conditions, or thatstockholders' equity and cash flows for each of the degree of compliance withyears in the policies or procedures may deteriorate.
Management assessed the Company’sthree year period ended September 30, 2014. We also have audited Sterling Bancorp’s internal control over financial reporting as of September 30, 2011. This assessment was2014, based on criteria for effective internal control over financial reporting established in the 2013 Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September 30, 2011, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm has issued an audit report on the effective operation of the Company’s internal control over financial reporting as of September 30, 2011. This report appears on the following page.
| | |
By:
| | /s/ Jack Kopnisky
|
| | Jack Kopnisky |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | December 13, 2011 |
| | |
By:
| | /s/ Paul Maisch
|
| | Paul Maisch |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
| | December 13, 2011 |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Board of Directors and Stockholders
Provident New York Bancorp
We have audited Provident New York Bancorp’s (“the Company”) internal control over financial reporting as of September 30, 2011, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Provident New YorkSterling Bancorp’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying, Management’s Annual Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’scompany's internal control over financial reporting based on our audit.
audits.
We conducted our
auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
auditaudits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, andrisk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit providesaudits provide a reasonable basis for our
opinion.opinions.
A
company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A
company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’scompany's assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Provident New York Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Provident New York Bancorp and subsidiaries as of September 30, 2011 and 2010 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years ended September 30, 2011 and our report dated December 13, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ Crowe Horwath LLP
Livingston, New Jersey
December 13, 2011
Report of Independent Registered Public Accounting Firm on Financial Statements
Board of Directors and Stockholders
Provident New York Bancorp
We have audited the accompanying consolidated statements of financial condition of Provident New York Bancorp and subsidiaries (“the Company”) as of September 30, 2011 and 2010 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 New YorkSterling Bancorp
and subsidiaries as of September 30,
20112014 and
20102013, and the results of its operations and its cash flows for each of the
three years in the
three year period ended September 30,
20112014 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, Also in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Provident New York Bancorp’sour opinion, Sterling Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011,2014, based on criteria established in the 2013 Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 13, 2011 expressed an unqualified opinion thereon.
Commission.
/s/ Crowe Horwath LLP
Livingston,
New
JerseyDecember 13, 2011
PROVIDENT NEW YORKYork, New York
November 28, 2014
STERLING BANCORP AND SUBSIDIARIES
Consolidated
Statements of Financial ConditionBalance Sheets
(Dollars in thousands, except per share data)
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
| ASSETS | | | | | | | | |
Cash and due from banks | | $ | 281,512 | | | $ | 90,872 | |
Securities (including $644,910 and $719,172 pledged as collateral for borrowings and deposits in 2011 and 2010, respectively): | | | | | | | | |
Available for sale, at fair value (note 3) | | | 739,844 | | | | 901,012 | |
Held to maturity, at amortized cost (fair value of $111,272 and $35,062 in 2011 and 2010, respectively) (note 4) | | | 110,040 | | | | 33,848 | |
| | | | | | | | |
Total securities | | | 849,884 | | | | 934,860 | |
| | | | | | | | |
Loans held for sale | | | 4,176 | | | | 5,890 | |
Gross loans (note 5) | | | 1,703,799 | | | | 1,701,541 | |
Allowance for loan losses | | | (27,917 | ) | | | (30,843 | ) |
| | | | | | | | |
Total loans, net | | | 1,675,882 | | | | 1,670,698 | |
| | | | | | | | |
Federal Home Loan Bank (“FHLB”) stock, at cost | | | 17,584 | | | | 19,572 | |
Accrued interest receivable (note 6) | | | 9,904 | | | | 11,069 | |
Premises and equipment, net (note 7) | | | 40,886 | | | | 43,598 | |
Goodwill (note 2) | | | 160,861 | | | | 160,861 | |
Core deposit and other intangible assets (note 2) | | | 4,629 | | | | 3,640 | |
Bank owned life insurance | | | 56,967 | | | | 50,938 | |
Foreclosed properties (note 5) | | | 5,391 | | | | 3,891 | |
Other assets (notes 11 and 12) | | | 29,726 | | | | 25,136 | |
| | | | | | | | |
Total assets | | $ | 3,137,402 | | | $ | 3,021,025 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES | | | | | | | | |
Deposits (note 8) | | $ | 2,296,695 | | | $ | 2,142,702 | |
FHLB and other borrowings (including repurchase agreements of $211,694 and $222,500 in 2011 and 2010, respectively) (note 9) | | | 323,522 | | | | 363,751 | |
Borrowing senior unsecured note (FDIC insured) (note 9) | | | 51,499 | | | | 51,496 | |
Mortgage escrow funds (note 5) | | | 9,701 | | | | 8,198 | |
Other (note 11) | | | 24,851 | | | | 23,923 | |
| | | | | | | | |
Total liabilities | | | 2,706,268 | | | | 2,590,070 | |
| | | | | | | | |
Commitments and Contingent liabilities (note 16) | | | — | | | | — | |
STOCKHOLDERS’ EQUITY (note 14): | | | | | | | | |
Preferred stock, (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding) | | | — | | | | — | |
Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 issued; 37,864,008 and 38,262,288 shares outstanding in 2011 and 2010 respectively) | | | 459 | | | | 459 | |
Additional paid-in capital | | | 357,063 | | | | 356,912 | |
Unallocated common stock held by employee stock ownership plan (“ESOP”) (note 12) | | | (6,138 | ) | | | (6,637 | ) |
Treasury stock, at cost (8,065,544 shares in 2011 and 7,667,264 shares in 2010) | | | (90,585 | ) | | | (87,336 | ) |
Retained earnings | | | 165,199 | | | | 162,433 | |
Accumulated other comprehensive income, net of taxes of $3,522 in 2011 and $3,577 in 2010 (note 11) | | | 5,136 | | | | 5,124 | |
| | | | | | | | |
Total stockholders’ equity | | | 431,134 | | | | 430,955 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,137,402 | | | $ | 3,021,025 | |
| | | | | | | | |
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| ASSETS: | | | |
| Cash and due from banks | $ | 177,619 |
| | $ | 113,090 |
|
| Securities: | | | |
| Available for sale, at fair value | 1,110,813 |
| | 954,393 |
|
| Held to maturity, at amortized cost (fair value of $587,838 and $250,896 in 2014 and 2013, respectively) | 579,075 |
| | 253,999 |
|
| Total securities | 1,689,888 |
| | 1,208,392 |
|
| Loans held for sale | 17,846 |
| | 1,011 |
|
| Gross loans | 4,760,438 |
| | 2,412,898 |
|
| Allowance for loan losses | (40,612 | ) | | (28,877 | ) |
| Total loans, net | 4,719,826 |
| | 2,384,021 |
|
| Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost | 66,085 |
| | 24,312 |
|
| Accrued interest receivable | 19,667 |
| | 11,698 |
|
| Premises and equipment, net | 43,286 |
| | 36,520 |
|
| Goodwill | 388,926 |
| | 163,117 |
|
| Core deposit and other intangible assets | 45,278 |
| | 5,891 |
|
| Bank owned life insurance | 119,486 |
| | 60,914 |
|
| Other real estate owned | 7,580 |
| | 6,022 |
|
| Other assets | 41,900 |
| | 34,184 |
|
| Total assets | $ | 7,337,387 |
| | $ | 4,049,172 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| LIABILITIES: | | | |
| Deposits | $ | 5,298,654 |
| | $ | 2,962,294 |
|
| FHLB borrowings | 795,028 |
| | 462,953 |
|
| Other borrowings (federal funds purchased and repurchase agreements) | 45,639 |
| | — |
|
| Senior notes | 98,402 |
| | 98,033 |
|
| Mortgage escrow funds | 4,494 |
| | 12,646 |
|
| Other liabilities | 134,032 |
| | 30,380 |
|
| Total liabilities | 6,376,249 |
| | 3,566,306 |
|
| Commitments and Contingent liabilities (See Note 16.) |
|
| |
|
|
| STOCKHOLDERS’ EQUITY: | | | |
| Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding) | — |
| | — |
|
| Common stock (par value $0.01 per share; 190,000,000 shares authorized; 91,246,024 and 52,188,056 issued for 2014 and 2013, respectively; 83,628,267 and 44,351,046 shares outstanding in 2014 and 2013, respectively) | 912 |
| | 522 |
|
| Additional paid-in capital | 860,564 |
| | 403,816 |
|
| Unallocated common stock held by employee stock ownership plan (“ESOP”); 0 and 549,262 unallocated shares outstanding in 2014 and 2013, respectively | — |
| | (5,493 | ) |
| Treasury stock, at cost (7,617,757 shares in 2014 and 7,837,010 shares in 2013) | (86,339 | ) | | (88,538 | ) |
| Retained earnings | 197,460 |
| | 187,889 |
|
| Accumulated other comprehensive (loss), net of tax (benefit) of ($8,470) in 2014 and ($10,482) in 2013 | (11,459 | ) | | (15,330 | ) |
| Total stockholders’ equity | 961,138 |
| | 482,866 |
|
| Total liabilities and stockholders’ equity | $ | 7,337,387 |
| | $ | 4,049,172 |
|
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORK
STERLING BANCORP AND SUBSIDIARIES
Consolidated
Income Statements
of IncomeFor the
yearsyear ended September 30,
(Dollars in thousands, except per share data)
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Interest and dividend income: | | | | | | | | | | | | |
Loans, including fees | | $ | 89,500 | | | $ | 92,542 | | | $ | 97,149 | |
Taxable securities | | | 14,493 | | | | 18,208 | | | | 25,552 | |
Non-taxable securities | | | 7,441 | | | | 7,774 | | | | 7,520 | |
Other earning assets | | | 1,180 | | | | 1,250 | | | | 1,369 | |
| | | | | | | | | | | | |
Total interest and dividend income | | | 112,614 | | | | 119,774 | | | | 131,590 | |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
Deposits | | | 6,104 | | | | 8,517 | | | | 18,375 | |
Borrowings | | | 15,220 | | | | 17,923 | | | | 19,345 | |
| | | | | | | | | | | | |
Total interest expense | | | 21,324 | | | | 26,440 | | | | 37,720 | |
| | | | | | | | | | | | |
Net interest income | | | 91,290 | | | | 93,334 | | | | 93,870 | |
Provision for loan losses | | | 16,584 | | | | 10,000 | | | | 17,600 | |
| | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 74,706 | | | | 83,334 | | | | 76,270 | |
| | | | | | | | | | | | |
Non-interest income: | | | | | | | | | | | | |
Deposit fees and service charges | | | 10,811 | | | | 11,228 | | | | 12,393 | |
Net gain on sale of securities | | | 10,011 | | | | 8,157 | | | | 18,076 | |
Other than temporary impairment on securities | | | (278 | ) | | | — | | | | — | |
Title insurance fees | | | 1,224 | | | | 1,157 | | | | 1,005 | |
Bank owned life insurance | | | 2,049 | | | | 2,044 | | | | 2,755 | |
Gain (loss) on sale of premises and equipment | | | — | | | | (54 | ) | | | 517 | |
Net gain on sales of loans | | | 1,027 | | | | 867 | | | | 961 | |
Investment management fees | | | 3,080 | | | | 3,070 | | | | 2,576 | |
Fair value loss on interest rate caps | | | (197 | ) | | | (1,106 | ) | | | — | |
Other | | | 2,224 | | | | 1,838 | | | | 1,670 | |
| | | | | | | | | | | | |
Total non-interest income | | | 29,951 | | | | 27,201 | | | | 39,953 | |
| | | | | | | | | | | | |
Non-interest expense: | | | | | | | | | | | | |
Compensation and employee benefits | | | 43,662 | | | | 43,589 | | | | 39,520 | |
Defined benefit settlement charge / CEO transition | | | 1,772 | | | | — | | | | — | |
Restructuring charge (severance / branch relocation) | | | 3,201 | | | | — | | | | — | |
Stock-based compensation plans | | | 1,162 | | | | 1,543 | | | | 2,942 | |
Occupancy and office operations | | | 14,508 | | | | 13,434 | | | | 12,802 | |
Advertising and promotion | | | 3,328 | | | | 3,252 | | | | 3,093 | |
Professional fees | | | 4,389 | | | | 4,019 | | | | 3,090 | |
Data and check processing | | | 2,763 | | | | 2,285 | | | | 2,284 | |
Amortization of intangible assets | | | 1,426 | | | | 1,849 | | | | 2,185 | |
ATM/debit card expense | | | 1,584 | | | | 1,601 | | | | 2,115 | |
Foreclosed property expense | | | 1,171 | | | | 137 | | | | 207 | |
FDIC insurance and regulatory assessments | | | 2,910 | | | | 3,675 | | | | 4,257 | |
Other | | | 8,235 | | | | 7,786 | | | | 7,692 | |
| | | | | | | | | | | | |
Total non-interest expense | | | 90,111 | | | | 83,170 | | | | 80,187 | |
| | | | | | | | | | | | |
Income before income tax expense | | | 14,546 | | | | 27,365 | | | | 36,036 | |
Income tax expense | | | 2,807 | | | | 6,873 | | | | 10,175 | |
| | | | | | | | | | | | |
Net income | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | |
| | | | | | | | | | | | |
Weighted average common shares: | | | | | | | | | | | | |
Basic | | | 37,452,596 | | | | 38,161,180 | | | | 38,537,881 | |
Diluted | | | 37,453,542 | | | | 38,185,122 | | | | 38,705,837 | |
Earnings per common share (note 13) | | | | | | | | | | | | |
Basic | | $ | 0.31 | | | $ | 0.54 | | | $ | 0.67 | |
Diluted | | $ | 0.31 | | | $ | 0.54 | | | $ | 0.67 | |
|
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Interest and dividend income: | | | | | |
| Loans, including fees | $ | 202,982 |
| | $ | 107,810 |
| | $ | 91,010 |
|
| Taxable securities | 30,067 |
| | 17,509 |
| | 16,538 |
|
| Non-taxable securities | 10,453 |
| | 5,682 |
| | 6,497 |
|
| Other earning assets | 3,404 |
| | 1,060 |
| | 992 |
|
| Total interest and dividend income | 246,906 |
| | 132,061 |
| | 115,037 |
|
| Interest expense: |
| | | |
|
| Deposits | 8,964 |
| | 5,923 |
| | 5,581 |
|
| Borrowings | 19,954 |
| | 13,971 |
| | 12,992 |
|
| Total interest expense | 28,918 |
| | 19,894 |
| | 18,573 |
|
| Net interest income | 217,988 |
| | 112,167 |
| | 96,464 |
|
| Provision for loan losses | 19,100 |
| | 12,150 |
| | 10,612 |
|
| Net interest income after provision for loan losses | 198,888 |
| | 100,017 |
| | 85,852 |
|
| Non-interest income: |
| | | | |
| Accounts receivable management / factoring commissions and other related fees | 13,146 |
| | — |
| | — |
|
| Mortgage banking income | 8,086 |
| | 1,979 |
| | 1,897 |
|
| Deposit fees and service charges | 15,595 |
| | 10,964 |
| | 11,377 |
|
| Net gain on sale of securities | 641 |
| | 7,391 |
| | 10,452 |
|
| Bank owned life insurance | 3,080 |
| | 1,998 |
| | 2,050 |
|
| Investment management fees | 2,209 |
| | 2,413 |
| | 3,143 |
|
| Other | 4,613 |
| | 2,947 |
| | 3,233 |
|
| Total non-interest income | 47,370 |
| | 27,692 |
| | 32,152 |
|
| Non-interest expense: |
| | | |
|
| Compensation and employee benefits | 94,310 |
| | 47,833 |
| | 46,038 |
|
| Stock-based compensation plans | 3,703 |
| | 2,239 |
| | 1,187 |
|
| Occupancy and office operations | 27,726 |
| | 14,953 |
| | 14,457 |
|
| Amortization of intangible assets | 9,408 |
| | 1,296 |
| | 1,245 |
|
| FDIC insurance and regulatory assessments | 6,146 |
| | 3,010 |
| | 3,096 |
|
| Other real estate owned (income) expense, net | (237 | ) | | 1,562 |
| | 1,618 |
|
| Merger-related expense | 9,455 |
| | 2,772 |
| | 5,925 |
|
| Other | 57,917 |
| | 17,376 |
| | 18,391 |
|
| Total non-interest expense | 208,428 |
| | 91,041 |
| | 91,957 |
|
| Income before income taxes | 37,830 |
| | 36,668 |
| | 26,047 |
|
| Income taxes | 10,152 |
| | 11,414 |
| | 6,159 |
|
| Net income | $ | 27,678 |
| | $ | 25,254 |
| | $ | 19,888 |
|
| Weighted average common shares: |
| | | |
|
| Basic | 80,268,970 |
| | 43,734,425 |
| | 38,227,653 |
|
| Diluted | 80,534,043 |
| | 43,783,053 |
| | 38,248,046 |
|
| Earnings per common share: |
| | | |
|
| Basic | $ | 0.34 |
| | $ | 0.58 |
| | $ | 0.52 |
|
| Diluted | 0.34 |
| | 0.58 |
| | 0.52 |
|
PROVIDENT NEW YORK
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the year ended September 30,
(Dollars in thousands, except share data)
|
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Net income | $ | 27,678 |
| | $ | 25,254 |
| | $ | 19,888 |
|
| Other comprehensive income (“OCI”) (loss): | | | | | |
| Change in unrealized holding gains (losses) on securities available for sale | 15,948 |
| | (37,324 | ) | | 12,866 |
|
| Related income tax (expense) benefit | (6,778 | ) | | 15,157 |
| | (5,224 | ) |
| Change in net unrealized (loss) on securities transferred to held to maturity | (8,947 | ) | | — |
| | — |
|
| Related income tax benefit | 3,803 |
| | — |
| | — |
|
| Reclassification adjustment for net realized (gains) included in net income | (641 | ) | | (7,391 | ) | | (10,452 | ) |
| Related income tax expense | 272 |
| | 3,001 |
| | 4,245 |
|
| Reclassification adjustment for other than temporary impaired losses included in net income | — |
| | 32 |
| | 47 |
|
| Related income tax benefit | — |
| | (13 | ) | | (19 | ) |
| Total OCI securities component | 3,657 |
| | (26,538 | ) | | 1,463 |
|
| Acceleration of future amortization of accumulated other comprehensive loss on defined benefit pension plan and change in funded status of defined benefit plans | 372 |
| | 7,255 |
| | 505 |
|
| Related income tax (expense) | (158 | ) | | (2,946 | ) | | (205 | ) |
| Other comprehensive income (loss) | 3,871 |
| | (22,229 | ) | | 1,763 |
|
| Total comprehensive income | $ | 31,549 |
| | $ | 3,025 |
| | $ | 21,651 |
|
See accompanying notes to consolidated financial statements.
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended
For the year ended September 30,
2011, 2010 and 2009 (Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Shares | | | Common
Stock | | | Additional
Paid-in
Capital | | | Unallocated
ESOP
Shares | | | Treasury
Stock | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income (loss) | | | Total
Stockholders’
Equity | |
Balance at October 1, 2008 | | | 39,815,213 | | | $ | 459 | | | $ | 352,882 | | | $ | (7,635 | ) | | $ | (75,687 | ) | | $ | 138,720 | | | $ | (9,581 | ) | | $ | 399,158 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 25,861 | | | | | | | | 25,861 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 12,058 | | | | 12,058 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 37,919 | |
Deferred compensation transactions | | | — | | | | — | | | | 128 | | | | — | | | | — | | | | — | | | | — | | | | 128 | |
Stock option transactions, net | | | 181,969 | | | | — | | | | 1,066 | | | | — | | | | 2,182 | | | | (2,009 | ) | | | — | | | | 1,239 | |
ESOP shares allocated or committed to be released for allocation (49,932 shares) | | | — | | | | — | | | | (11 | ) | | | 499 | | | | — | | | | — | | | | — | | | | 488 | |
Vesting of RRP shares | | | — | | | | — | | | | 1,688 | | | | — | | | | — | | | | — | | | | — | | | | 1,688 | |
Other RRP transactions | | | (34,164 | ) | | | — | | | | — | | | | — | | | | (326 | ) | | | — | | | | — | | | | (326 | ) |
Purchase of treasury stock | | | (415,811 | ) | | | — | | | | — | | | | — | | | | (3,459 | ) | | | — | | | | — | | | | (3,459 | ) |
Cash dividends paid ($0.24 per common share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9,379 | ) | | | — | | | | (9,379 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2009 | | | 39,547,207 | | | | 459 | | | | 355,753 | | | | (7,136 | ) | | | (77,290 | ) | | | 153,193 | | | | 2,477 | | | | 427,456 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 20,492 | | | | | | | | 20,492 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,647 | | | | 2,647 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 23,139 | |
Deferred compensation transactions | | | — | | | | — | | | | 87 | | | | — | | | | — | | | | — | | | | — | | | | 87 | |
Stock option transactions, net | | | 249,953 | | | | — | | | | 247 | | | | — | | | | 3,016 | | | | (2,036 | ) | | | — | | | | 1,227 | |
ESOP shares allocated or committed to be released for allocation (49,932 shares) | | | — | | | | — | | | | (58 | ) | | | 499 | | | | — | | | | — | | | | — | | | | 441 | |
Vesting of RRP shares | | | — | | | | — | | | | 883 | | | | — | | | | | | | | — | | | | — | | | | 883 | |
Other RRP transactions | | | (18,949 | ) | | | — | | | | — | | | | — | | | | (177 | ) | | | — | | | | — | | | | (177 | ) |
Purchase of treasury stock | | | (1,515,923 | ) | | | — | | | | — | | | | — | | | | (12,885 | ) | | | — | | | | — | | | | (12,885 | ) |
Cash dividends paid ($0.24 per common share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9,216 | ) | | | — | | | | (9,216 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2010 | | | 38,262,288 | | | | 459 | | | | 356,912 | | | | (6,637 | ) | | | (87,336 | ) | | | 162,433 | | | | 5,124 | | | | 430,955 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 11,739 | | | | | | | | 11,739 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 12 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,751 | |
Deferred compensation transactions | | | — | | | | — | | | | 45 | | | | — | | | | — | | | | — | | | | — | | | | 45 | |
Stock option transactions, net | | | — | | | | — | | | | 558 | | | | — | | | | — | | | | — | | | | — | | | | 558 | |
ESOP shares allocated or committed to be released for allocation (49,932 shares) | | | — | | | | — | | | | (59 | ) | | | 499 | | | | — | | | | — | | | | — | | | | 440 | |
RRP awards | | | 63,870 | | | | — | | | | (561 | ) | | | — | | | | 561 | | | | — | | | | — | | | | — | |
Vesting of RRP shares | | | — | | | | — | | | | 168 | | | | — | | | | — | | | | — | | | | — | | | | 168 | |
Other RRP transactions | | | (4,696 | ) | | | — | | | | — | | | | — | | | | (30 | ) | | | — | | | | — | | | | (30 | ) |
Purchase of treasury stock | | | (457,454 | ) | | | — | | | | — | | | | — | | | | (3,780 | ) | | | — | | | | — | | | | (3,780 | ) |
Cash dividends paid ($0.24 per common share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (8,973 | ) | | | — | | | | (8,973 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2011 | | | 37,864,008 | | | $ | 459 | | | $ | 357,063 | | | $ | (6,138 | ) | | $ | (90,585 | ) | | $ | 165,199 | | | $ | 5,136 | | | $ | 431,134 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of shares | | Common stock | | Additional paid-in capital | | Unallocated ESOP shares | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total stockholders’ equity |
| Balance at October 1, 2011 | 37,864,008 |
| | $ | 459 |
| | $ | 357,063 |
| | $ | (6,138 | ) | | $ | (90,585 | ) | | $ | 165,199 |
| | $ | 5,136 |
| | $ | 431,134 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 19,888 |
| | — |
| | 19,888 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,763 |
| | 1,763 |
|
| Stock option & other stock transactions, net | — |
| | — |
| | 685 |
| | — |
| | — |
| | — |
| | — |
| | 685 |
|
| ESOP shares allocated or committed to be released for allocation (49,932 shares) | — |
| | — |
| | 43 |
| | 500 |
| | — |
| | — |
| | — |
| | 543 |
|
| Restricted stock awards, net | 50,958 |
| | — |
| | (187 | ) | | — |
| | 412 |
| | (16 | ) | | — |
| | 209 |
|
| Capital raise | 6,258,504 |
| | 63 |
| | 45,937 |
| | — |
| | — |
| | — |
| | — |
| | 46,000 |
|
| Cash dividends declared ($0.24 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (9,100 | ) | | — |
| | (9,100 | ) |
| Balance at September 30, 2012 | 44,173,470 |
| | 522 |
| | 403,541 |
| | (5,638 | ) | | (90,173 | ) | | 175,971 |
| | 6,899 |
| | 491,122 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 25,254 |
| | — |
| | 25,254 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,229 | ) | | (22,229 | ) |
| Stock option & other stock transactions, net | 8,250 |
| | — |
| | 730 |
| | — |
| | 95 |
| | (33 | ) | | — |
| | 792 |
|
| ESOP shares allocated or committed to be released for allocation (49,932 shares) | — |
| | — |
| | 119 |
| | 145 |
| | — |
| | — |
| | — |
| | 264 |
|
| Restricted stock awards, net | 169,326 |
| | — |
| | (574 | ) | | — |
| | 1,540 |
| | — |
| | — |
| | 966 |
|
| Cash dividends declared ($0.30 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (13,303 | ) | | — |
| | (13,303 | ) |
| Balance at September 30, 2013 | 44,351,046 |
| | 522 |
| | 403,816 |
| | (5,493 | ) | | (88,538 | ) | | 187,889 |
| | (15,330 | ) | | 482,866 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 27,678 |
| | — |
| | 27,678 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,871 |
| | 3,871 |
|
| Common stock issued in Legacy Sterling merger transaction | 39,057,968 |
| | 390 |
| | 457,362 |
| | — |
| | — |
| | — |
| | — |
| | 457,752 |
|
| Stock option & other stock transactions, net | 267,188 |
| | — |
| | 880 |
| | — |
| | 3,333 |
| | (430 | ) | | — |
| | 3,783 |
|
| ESOP shares allocated and ESOP termination | (488,403 | ) | | — |
| | 1,280 |
| | 5,493 |
| | (5,983 | ) | | — |
| | — |
| | 790 |
|
| Restricted stock awards, net | 440,468 |
| | — |
| | (2,774 | ) | | — |
| | 4,849 |
| | — |
| | — |
| | 2,075 |
|
| Cash dividends declared ($0.21 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (17,677 | ) | | — |
| | (17,677 | ) |
| Balance at September 30, 2014 | 83,628,267 |
| | $ | 912 |
| | $ | 860,564 |
| | $ | — |
| | $ | (86,339 | ) | | $ | 197,460 |
| | $ | (11,459 | ) | | $ | 961,138 |
|
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORK
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years
For the Year Ended September 30,
2011, 2010 and 2009 (Dollars in thousands)
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | |
Provisions for loan losses | | | 16,584 | | | | 10,000 | | | | 17,600 | |
(Gain) loss on other real estate owned | | | 869 | | | | (18 | ) | | | 186 | |
Depreciation of premises and equipment | | | 6,177 | | | | 5,144 | | | | 4,675 | |
Amortization of intangibles | | | 1,426 | | | | 1,849 | | | | 2,185 | |
Net gain on sale of securities | | | (10,011 | ) | | | (8,157 | ) | | | (18,076 | ) |
Other than temporary impairment (credit loss) | | | 278 | | | | — | | | | — | |
Fair value loss on interest rate cap | | | 197 | | | | 1,106 | | | | — | |
Net gains on loans held for sale | | | (1,027 | ) | | | (867 | ) | | | (961 | ) |
(Gain) loss on sale of premises and equipment | | | — | | | | 54 | | | | (517 | ) |
Net amortization of premium and discounts on securities | | | 3,181 | | | | 3,209 | | | | 1,715 | |
Accrued restructuring expense | | | 3,201 | | | | — | | | | — | |
Accretion of premiums on borrowings (includes calls on borrowings) | | | (30 | ) | | | (223 | ) | | | (440 | ) |
Amortization of payment fees on restructured borrowings | | | 1,033 | | | | — | | | | — | |
ESOP and RRP expense | | | 607 | | | | 1,325 | | | | 2,178 | |
ESOP forfeitures | | | (3 | ) | | | (29 | ) | | | (4 | ) |
Stock option compensation expense | | | 558 | | | | 247 | | | | 768 | |
Originations of loans held for sale | | | (49,807 | ) | | | (52,839 | ) | | | (50,677 | ) |
Proceeds from sales of loans held for sale | | | 52,548 | | | | 49,029 | | | | 49,653 | |
Increase in cash surrender value of bank owned life insurance | | | (2,049 | ) | | | (1,327 | ) | | | (1,961 | ) |
Deferred income tax (benefit) expense | | | 118 | | | | 26 | | | | (1,640 | ) |
Net changes in accrued interest receivable and payable | | | 674 | | | | (1,536 | ) | | | (585 | ) |
Other adjustments (principally net changes in other assets and other liabilities) | | | (9,785 | ) | | | (5,624 | ) | | | (9,273 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 26,478 | | | | 21,861 | | | | 20,687 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of securities: | | | | | | | | | | | | |
Available for sale | | | (622,551 | ) | | | (830,613 | ) | | | (708,727 | ) |
Held to maturity | | | (93,764 | ) | | | (23,023 | ) | | | (25,095 | ) |
Proceeds from maturities, calls and other principal payments on securities | | | | | | | | | | | | |
Available for sale | | | 251,774 | | | | 328,993 | | | | 153,585 | |
Held to maturity | | | 17,220 | | | | 33,780 | | | | 22,548 | |
Proceeds from sales of securities available for sale | | | 540,145 | | | | 443,389 | | | | 556,796 | |
Proceeds from sales of securities held to maturity | | | 357 | | | | — | | | | 625 | |
Loan originations | | | (578,631 | ) | | | (472,066 | ) | | | (450,551 | ) |
Loan principal payments | | | 553,235 | | | | 461,632 | | | | 469,157 | |
Purchase of interest rate cap derivatives | | | — | | | | (1,368 | ) | | | — | |
Proceeds from sale of FHLB stock, net | | | 1,988 | | | | 3,605 | | | | 5,498 | |
Proceeds from sales of other real estate owned | | | 301 | | | | | | | | | |
Purchases of premises and equipment | | | (3,465 | ) | | | (8,152 | ) | | | (8,852 | ) |
Proceeds from the sale of fixed assets | | | — | | | | 48 | | | | 718 | |
Purchases of bank owned life insurance | | | (3,980 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 62,629 | | | | (63,775 | ) | | | 15,702 | |
| | | | | | | | | | | | |
PROVIDENT NEW YORK
|
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 27,678 |
| | $ | 25,254 |
| | $ | 19,888 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Provisions for loan losses | 19,100 |
| | 12,150 |
| | 10,612 |
|
| (Gain) loss and write-downs on other real estate owned | (1,208 | ) | | 1,285 |
| | 694 |
|
| (Gain) on redemption of Subordinated Debentures | (712 | ) | | — |
| | — |
|
| Depreciation of premises and equipment | 6,507 |
| | 4,243 |
| | 4,746 |
|
| Impairment of premises and equipment | 11,043 |
| | — |
| | — |
|
| Amortization of intangibles | 9,408 |
| | 1,296 |
| | 1,245 |
|
| Amortization of low income housing tax credit | 520 |
| | — |
| | — |
|
| Net gain on sale of securities | (641 | ) | | (7,391 | ) | | (10,452 | ) |
| Net gains on loans held for sale | (8,086 | ) | | (1,979 | ) | | (1,897 | ) |
| (Gain) loss on sale of premises and equipment | (93 | ) | | 75 |
| | (75 | ) |
| Net amortization of premium and discount on securities | 3,176 |
| | 2,068 |
| | (1,006 | ) |
| Change in unamortized acquisition costs and premiums | 1,028 |
| | 1,050 |
| | — |
|
| Accretion of premium on borrowings (includes calls on borrowings), net | (446 | ) | | 87 |
| | (67 | ) |
| Amortization of pre-payment fees on restructured borrowings | 1,302 |
| | 1,466 |
| | 1,459 |
|
| ESOP and restricted stock expense | 2,803 |
| | 1,544 |
| | 667 |
|
| Stock option compensation expense | 901 |
| | 695 |
| | 521 |
|
| Originations of loans held for sale | (462,030 | ) | | (85,657 | ) | | (80,579 | ) |
| Proceeds from sales of loans held for sale | 483,622 |
| | 94,130 |
| | 79,147 |
|
| Increase in cash surrender value of bank owned life insurance | (3,198 | ) | | (1,998 | ) | | (2,050 | ) |
| Deferred income tax (benefit) expense | (3,507 | ) | | 719 |
| | (64 | ) |
| Other adjustments (principally net changes in other assets and other liabilities) | 40,497 |
| | (26,413 | ) | | 2,237 |
|
| Net cash provided by operating activities | 127,664 |
| | 22,624 |
| | 25,026 |
|
| Cash flows from investing activities: | | | | | |
| Purchases of securities: | | | | | |
| Available for sale | (407,438 | ) | | (490,160 | ) | | (679,553 | ) |
| Held to maturity | (172,899 | ) | | (169,320 | ) | | (95,157 | ) |
| Proceeds from maturities, calls and other principal payments on securities: | | | | | |
| Available for sale | 163,199 |
| | 168,771 |
| | 174,497 |
|
| Held to maturity | 31,227 |
| | 55,866 |
| | 63,037 |
|
| Proceeds from sales of securities available for sale | 529,107 |
| | 339,123 |
| | 344,431 |
|
| Proceeds from sales of securities held to maturity | — |
| | 1,187 |
| | — |
|
| Loan originations, net | (659,013 | ) | | (310,615 | ) | | (226,616 | ) |
| (Purchases) of FHLB and FRB stock, net | (34,093 | ) | | (5,063 | ) | | (620 | ) |
| Proceeds from sales of other real estate owned | 9,645 |
| | 4,730 |
| | 3,468 |
|
| Purchases of premises and equipment | (2,584 | ) | | (2,355 | ) | | (1,853 | ) |
| Proceeds from sale of Hudson Valley Investment Advisors | — |
| | 4,738 |
| | — |
|
| Proceeds from sale of fixed assets | 310 |
| | — |
| | 75 |
|
| Purchase low income housing tax credit | (1,966 | ) | | — |
| | — |
|
| Cash received from acquisitions | 277,798 |
| | — |
| | 126,818 |
|
| Net cash (used in) investing activities | (266,707 | ) | | (403,098 | ) | | (291,473 | ) |
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
ContinuedYears
For the Year Ended September 30,
2011, 2010 and 2009 (Dollars in thousands)
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Cash flows from financing activities | | | | | | | | | | | | |
Net increase in transaction, savings and money market deposits | | | 227,907 | | | | 177,808 | | | | 124,037 | |
Net decrease in time deposits | | | (73,914 | ) | | | (117,388 | ) | | | (30,952 | ) |
Net decrease in short-term borrowings | | | (34,840 | ) | | | (62,500 | ) | | | (153,791 | ) |
Gross repayments of long-term borrowings | | | (1,238 | ) | | | (4,152 | ) | | | (3,995 | ) |
Gross proceeds from long-term borrowings | | | — | | | | — | | | | 22,840 | |
Net increase in borrowings senior unsecured note | | | — | | | | — | | | | 51,500 | |
Payments of pre-payment fees on FHLBNY advances | | | (5,151 | ) | | | — | | | | — | |
Net (decrease) increase in mortgage escrow funds | | | 1,503 | | | | (207 | ) | | | 1,133 | |
Treasury shares purchased | | | (3,810 | ) | | | (13,062 | ) | | | (3,785 | ) |
Stock option transactions | | | 4 | | | | 1,008 | | | | 473 | |
Other stock-based compensation transactions | | | 45 | | | | 87 | | | | 128 | |
Cash dividends paid | | | (8,973 | ) | | | (9,216 | ) | | | (9,379 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 101,533 | | | | (27,622 | ) | | | (1,791 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 190,640 | | | | (69,536 | ) | | | 34,598 | |
Cash and cash equivalents at beginning of year | | | 90,872 | | | | 160,408 | | | | 125,810 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 281,512 | | | $ | 90,872 | | | $ | 160,408 | |
| | | | | | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | |
Interest payments | | $ | 21,815 | | | $ | 27,379 | | | $ | 38,714 | |
Income tax payments | | | 9,070 | | | | 7,993 | | | | 11,739 | |
Loans transferred to real estate owned | | | 1,932 | | | | 2,943 | | | | 1,815 | |
Net change in unrealized gains recorded on securities available for sale | | | 1,653 | | | | 5,241 | | | | 25,900 | |
Change in deferred taxes on unrealized gains on securities available for sale | | | (671 | ) | | | (2,122 | ) | | | (10,506 | ) |
Issuance of RRP shares | | | 561 | | | | — | | | | — | |
|
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Cash flows from financing activities: | | | | | |
| Net increase (decrease) in transaction, savings and money market deposits | 301,028 |
| | (29,503 | ) | | 499,340 |
|
| Net (decrease) in time deposits | (261,858 | ) | | (119,354 | ) | | (53,786 | ) |
| Net increase (decrease) in short-term FHLB borrowings | 103,000 |
| | 91,528 |
| | (5,000 | ) |
| Net increase (decrease) in long-term FHLB borrowings | 147,506 |
| | 24,783 |
| | (5,244 | ) |
| Net (decrease) in repurchase agreements and other short-term borrowings | (37,177 | ) | | — |
| | — |
|
| Redemption of Subordinated Debentures | (26,140 | ) | | — |
| | — |
|
| Payments of pre-payment fees on FHLB borrowings | — |
| | — |
| | (278 | ) |
| Repayment of senior unsecured note | — |
| | — |
| | (51,499 | ) |
| Net proceeds from Senior Notes | — |
| | 97,946 |
| | — |
|
| Net increase in mortgage escrow funds | (8,152 | ) | | 727 |
| | 2,218 |
|
| Stock option transactions | 2,980 |
| | 62 |
| | 102 |
|
| Other stock-based compensation transactions | 62 |
| | 35 |
| | 164 |
|
| Equity capital raise | — |
| | — |
| | 46,000 |
|
| Cash dividends paid | (17,677 | ) | | (10,642 | ) | | (9,100 | ) |
| Net cash provided by financing activities | 203,572 |
| | 55,582 |
| | 422,917 |
|
| Net increase (decrease) in cash and cash equivalents | 64,529 |
| | (324,892 | ) | | 156,470 |
|
| Cash and cash equivalents at beginning of year | 113,090 |
| | 437,982 |
| | 281,512 |
|
| Cash and cash equivalents at end of year | $ | 177,619 |
| | $ | 113,090 |
| | $ | 437,982 |
|
| Supplemental cash flow information: | | | | | |
| Interest payments | $ | 29,419 |
| | $ | 18,831 |
| | $ | 18,447 |
|
| Income tax payments | 12,473 |
| | 4,475 |
| | 1,873 |
|
| Real estate acquired in settlement of loans | 2,542 |
| | 5,634 |
| | 6,148 |
|
| Unsettled securities transactions | — |
| | — |
| | 41,758 |
|
| Dividends declared, not yet paid | — |
| | 2,661 |
| | — |
|
| | | | | | |
| Acquisitions: | | | | | |
| Non-cash assets acquired: | | | | | |
| Securities available for sale | $ | 233,190 |
| | $ | — |
| | $ | 54,994 |
|
| Securities held to maturity | 374,721 |
| | — |
|
| — |
|
| Loans held for sale | 30,341 |
| | — |
| | — |
|
| Total loans, net | 1,698,108 |
| | — |
| | 205,453 |
|
| FHLB stock | 7,680 |
| | — |
| | 1,045 |
|
| Accrued interest receivable | 6,590 |
| | — |
| | 417 |
|
| Goodwill | 225,809 |
| | — |
| | 5,535 |
|
| Trade name | 20,500 |
|
| — |
|
| — |
|
| Core deposit intangibles | 20,089 |
| | — |
| | 4,818 |
|
| Bank owned life insurance | 55,374 |
|
| — |
|
| — |
|
| Premises and equipment, net | 23,594 |
| | — |
| | 490 |
|
| Other real estate owned | 5,815 |
| | — |
| | — |
|
| Other assets | 20,933 |
| | — |
| | 1,793 |
|
| Total non-cash assets acquired | 2,722,744 |
| | — |
| | 274,545 |
|
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended September 30,
(Dollars in thousands)
|
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Liabilities assumed: | | | | | |
| Deposits | 2,297,190 |
| | — |
| | 368,902 |
|
| FHLB and other borrowings | 100,619 |
| | — |
| | 30,784 |
|
| Other borrowings | 62,465 |
| | — |
| | — |
|
| Subordinated debentures | 26,527 |
| | — |
| | — |
|
| Other liabilities | 55,960 |
| | — |
| | 1,677 |
|
| Total liabilities assumed | $ | 2,542,761 |
| | $ | — |
| | $ | 401,363 |
|
| | | | | | |
| Net non-cash (liabilities) acquired | $ | 179,983 |
| | $ | — |
| | $ | (126,818 | ) |
| Cash and cash equivalents acquired in acquisitions | 277,798 |
| | — |
| | 126,818 |
|
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESConsolidated Statements of Comprehensive Income
For the years ended September 30, 2011, 2010, and 2009
(in thousands, except share data)
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Net income: | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | |
Other comprehensive income: | | | | | | | | | | | | |
Net unrealized holding gains on securities available for sale net of related tax expense of $4,624, $5,435, and $17,834 | | | 6,762 | | | | 7,963 | | | | 26,142 | |
Less: | | | | | | | | | | | | |
Reclassification adjustment for net unrealized gains included in net income, net of related income tax expense of $4,065, $3,313 and $7,328 | | | 5,946 | | | | 4,844 | | | | 10,748 | |
Reclassification adjustment for other than temporary losses included in net income, net of related income tax benefit of $113, $0, and $0 | | | (165 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
| | | 981 | | | | 3,119 | | | | 15,394 | |
Change in funded status of defined benefit plans, net of related income tax expense of $665, $327, and $2,280 | | | (969 | ) | | | (472 | ) | | | (3,336 | ) |
| | | | | | | | | | | | |
| | | 12 | | | | 2,647 | | | | 12,058 | |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 11,751 | | | $ | 23,139 | | | $ | 37,919 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies
Merger with Sterling Bancorp
On October 31, 2013, Provident New York Bancorp (“Legacy Provident”) merged with Sterling Bancorp (“Legacy Sterling”). In connection with the merger, the following corporate actions occurred:
Legacy Sterling merged with and into Legacy Provident. Legacy Provident was the accounting acquirer and the surviving entity.
Legacy Provident changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended (“Sterling” or the “Company”).
Provident Bank converted to a national bank charter.
Sterling National Bank merged into Provident Bank.
Provident Bank changed its legal entity name to Sterling National Bank.
Provident Municipal Bank merged into Sterling National Bank.
We refer to the transactions detailed above collectively as the “Merger.”
The consolidated financial statements include the accounts of
Provident New York Bancorp (“Provident Bancorp” or “the Company”Sterling; STL Holdings, Inc. (formerly PBNY Holdings, Inc.) which has an investment in Sterling Silver Title Agency L.P. (formerly PB Madison Title Agency L.P.),
Hardenburgh Abstract Title Company, whicha company that provides title searches and
title insurance for residential and commercial real
estate, Hudson Valley Investment Advisors,estate; LandSave Development, LLC
(“HVIA”) a registered investment advisor,an inactive subsidiary, which was dissolved on September 30, 2014; Sterling Risk Management, Inc. (formerly Provident Risk Management,
(aInc., a captive insurance company)
, Provident; Sterling National Bank
(“the Bank”(the “Bank”) and the Bank’s
wholly ownedwholly-owned subsidiaries. These subsidiaries
areincluded at September 30, 2014: (i)
Provident Municipal Bank (“PMB”) which is a limited-purpose, New York State-chartered commercial bank formed to accept deposits from municipalities in the Company’s market area, (ii) ProvidentSterling REIT, Inc.
and WSB Funding, Inc. which area real estate investment
truststrust that
holdholds a portion of the Company’s real estate
loans, (iii)loans; (ii) Provest Services Corp. I, which has invested in a low-income housing
partnership, and (iv)partnership; (iii) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers and
(v) Limited Liability Companies,(iv) several limited liability companies which hold
foreclosed properties acquired by the bank.other real estate owned. 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. Certain amounts from prior years have been reclassified to conform to the current fiscal year presentation. Reclassifications had no affect on prior year net income or
shareholders’stockholders’ equity.
(a)Nature of BusinessProvident New York Bancorp (“Provident Bancorp” or
Since October 31, 2013, Sterling is a bank holding company and financial holding company under the
“Company”), a unitary savings and loan holding company,Bank Holding Company Act of 1956. Sterling is a Delaware corporation that owns all of the outstanding shares of
Provident Bank (the “Bank”). Provident Bancorp was formed in connection with the
second step offeringBank. Sterling is listed on
January 14, 2004.On June 29, 2005, Provident Bancorp, Inc. changed its name to Providentthe New York Bancorp in order to differentiate itself from the numerous bank holding companies with similar names. It began trading on the NASDAQStock Exchange (“NYSE”) under the stock symbol “PBNY” on that date. Prior to that date, from January 7, 1999 its common stock traded under the stock symbol “PBCP.”
STL.
The Bank, an independent, full-service bank founded in 1888, is a community bank offering financial services to individuals and businesses primarilyheadquartered in Rockland and Orange Counties,Montebello, New York and is the contiguousprincipal bank subsidiary of Sterling. The Bank accounts for substantially all of Sterling’s consolidated assets and net income. The Bank operates through commercial banking teams and financial centers which serve the greater New York metropolitan region. The Bank targets the following geographic markets: (i) the New York Metro Market, which includes Manhattan and Long Island; and (ii) the New York Suburban Market, which consists of Rockland, Orange, Sullivan, Ulster, Putnam and Westchester and Putnam Counties,counties in New York and Bergen County in New Jersey. In October 2011, the Company announced its plans to expand into the New York City market.
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.
TheIn connection with the Merger, the Bank
isbecame a
federally-chartered savings associationnational bank and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation
(FDIC)(“FDIC”). The Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve
Bank isBoard are the primary
regulatorregulators for
Provident Bancorp. Of the
Bank’s loans 87% are collateralized or dependent on real estate.Bank and the Company, respectively.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.GAAP. In preparing the consolidated financial statements,
managementthe Company 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. Also subject to change are estimates involving goodwill impairment evaluations, mortgage servicing rights, benefit plans, deferred income taxes and fair values of financial instruments.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
For purposes of reporting cash flows, cash equivalents include highly liquid, short-term investments such as overnight federal funds, as well as cash and deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with an original maturity of 90 days or less.
(d)Long Term Restrictions on Cash
The Bank was required to have $28.7 million and $14.6 million of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at September 30, 2014 and 2013.
Premises and equipment, core deposit and other intangible assets are reviewed annually for impairment or when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
(e)(f)Fair Values of Financial InstrumentsFair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. (See
note 18)Note 17. “Fair Value Measurements”)
(f)(g)Adoption of New Accounting StandardsAccounting Standards Update (ASU) 2009-16,Transfers2014-01 - Investments - Equity method and ServicingJoint Ventures (Topic 860)-323): Accounting for TransfersInvestments in Qualified Affordable Housing Projects was issued. This standard provides reporting guidance for entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in this ASU eliminate the effective yield election and permit the Company to make an accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the Company amortizes the initial cost of Financial Assetshas been issued. ASU 2009-16 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposurethe investment in proportion to the risks relatedtax credits and other tax benefits received and recognizes the net investment performance in the statement of operations as a component of income tax expense. The amendments in this ASU should be applied retrospectively to transferred financial assets. This standard was effectiveall periods presented. The Company adopted this ASU in the quarter ended March 31, 2014, which coincided with the Company’s initial recognition of low income housing tax credits. The adoption of this ASU resulted in a $508 income tax benefit and a $520 expense associated with the amortization of the Company’s investment for the Company October 1, 2010 and did not have a material effect on the Company’s consolidated financial statements.fiscal year ended September 30, 2014.
ASC 2009-17,Consolidations (Topic 810)-Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entitieshas been issued. ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This standard was effective for the Company October 1, 2010 did not have a material effect on the Company’s consolidated financial statements.(h)ASC 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements has been issued. ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The effect of adopting this new guidance was immaterial.Securities
ASU 2010-20,Receivables (Topic 310)-Disclosures abut the Credit Quality of Financing Receivables and the Allowance for Credit Lossesrequires significantly more information about credit quality in a financial institution’s portfolio. This statement addresses only disclosures and does not seek to change recognition or measurement. The effect of adopting this new guidance was immaterial.
Accounting Standards Update (ASU) 2011-02,Receivables (Topic 310)-A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuringhas been issued. The ASU clarifies which loan modifications constitute troubled debt restructurings and assists creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. This standard was effective for the Company July 1, 2011 and did not have a material effect on the Company’s consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(g)Securities
Securities include U.S. Treasury, U.S. Government Agency and Government Sponsored Agencies, municipal and corporate bonds,
mortgage backedmortgage-backed securities, collateralized mortgage obligations and
marketable equitytrust preferred securities.
The Company can classify its securities among three categories: held to maturity, trading, and available for sale.
ManagementThe Company determines the appropriate classification of the Company’s securities at the time of purchase.
Held-to-maturity
Held to maturity securities are limited to debt securities for which
management hasthere is 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 held principally for the purpose of selling them in the
near term.near-term. These securities are reported at fair value, with unrealized gains and losses included in earnings. The Company does not engage in securities trading activities.
All other debt and marketable 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-saleAvailable for sale securities include securities that
managementthe Company 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
to fund loan growth, 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. Amortization of premiums and accretion of discounts on mortgage backedmortgage-backed securities are based on the estimated cash flows of the mortgage backed
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
mortgage-backed securities, periodically adjusted for changes in estimated lives, on a level yield basis. The cost of securities sold is determined using the specific identification method.
The Company uses a discounted cash flow (“DCF”) analysis to provide an estimate of an other than temporary impairment (“OTTI”) loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over collateralization tests, interest coverage tests and other factors. Expected default and deferral rates are weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate is based upon the yield expected from the related securities. Unrealized losses are charged to earnings when management determines that the decline in fair value of a security is other than temporary.
Securities are evaluated
for impairment at least quarterly, and more frequently when economic and market conditions warrant such an evaluation. For securities in an unrealized loss position,
management considerswe consider the extent and duration of the unrealized loss, and the financial condition of the issuer.
ManagementThe Company also assesses whether it intends to sell, or is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either criteria regarding intent to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. If the Company does not expect to recover the entire amortized cost basis of the security, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary impairment is separated into a) the amount representing the credit loss and b) the amount related to all other factors. The amount of other than temporary impairment related to credit loss is recognized in earnings while the amount related to other factors is recognized in other comprehensive income, net of applicable taxes. The cost basis of individual equity securities is written down to estimated fair value through a charge to earnings when declines in value
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
below cost are considered to be other than temporary. As of September 30, 20112014, the Company does not intend to sell nor is it more likely than not that it would be required to sell any of its debt securities with unrealized losses prior to recovery of its amortized cost basis less any current-periodcurrent period credit loss.
(h)(i)Loans Held For SaleMortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. In the absence of commitments from investors, fair value is based on current investor yield requirements. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage
Historically mortgage loans held for sale
arewere generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the
value of the servicing
right.rights which is its fair value. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Under the
fair valueamortization measurement method, the Company
subsequently measures servicing rights at fair value at each reporting date and
reports changesrecords any impairment in
fair value of servicing assets in earnings in the period in which the
changes occur, and are included with other income on the income statement.impairment occurs. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal;principal or a fixed amount per loan, and are recorded as income when earned. Servicing fees totaled $623, $507$911, $778 and $13$695 for the years ended September 30, 2011, 20102014, 2013 and 2009,2012, respectively. Late fees and ancillary fees related to loan servicing are not material. Effective October 1, 2013, the Bank outsourced servicing of residential mortgage loans to a nationally recognized mortgage loan servicing company.
Loans where
managementSterling has the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Interest income on loans is accrued on the
level yield method.unpaid principal balance.
A loan is placed on non-accrual status upon the earlier of (i) when management has determinedSterling determines that the borrower may likely be unable to meet contractual principal or interest obligations, or (ii) when payments are 90 days or more past due, unless well secured and in the process of collection. Accrual of interest ceases and, in general, uncollected past due interest is reversed and charged against current interest income, related to the current year while interest recorded in the prior year is charged to the allowance for loan losses.income. Interest payments received on non-accrual loans, including impaired loans, are not recognized as income unless warranted based on the borrower’s financial condition and payment record. Furthermore, negative tax escrow will be included in the unpaid principal for loans individually evaluated for impairment, as this is part of the customer’s legal obligation to the Company.
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company defers nonrefundable loan origination and commitment fees, and certain direct loan origination costs, and amortizes the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid or sold, the net deferred amount is recognized in the statement of income at that time. Interest and fees on loans include prepayment fees and late charges collected.
PROVIDENT NEW YORK(l)Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable incurred credit losses inherent in the loan portfolio. The allowance for loan losses is a critical accounting estimate and requires substantial judgment of management. The allowance for loan losses includes allowance allocations calculated in accordance with ASC Subtopic 450-20, “Loss Contingencies” and ASC Subtopic 310-35-2, “Loan Impairment.” The level of the allowance reflects management’s continuing evaluation of loan loss experience, specific credit risks, current loan portfolio quality, industry and loan type concentrations, economic and regulatory conditions and unidentified losses inherent in the loan portfolios, as well as trends in the foregoing. The Company analyzes loans by two broad segments: real estate secured loans and loans that are either unsecured or secured by other collateral.
The classes considered real estate secured are: residential mortgage loans; commercial real estate (“CRE”) loans; business banking CRE; multi-family loans; acquisition, development and construction (“ADC”) loans; homeowner loans, and home equity lines of credit. The classes considered unsecured or secured by other than real estate collateral are: commercial & industrial (“C&I”) loans; payroll finance loans, warehouse lending; factored receivables; equipment finance loans; business banking C&I loans and consumer loans. In all segments or classes, significant loans are reviewed for impairment once they are past due 90 days or more or are classified substandard or doubtful. Generally the Company considers a homogeneous residential mortgage or home equity line of credit to be significant if the Company’s investment in the loan is greater than $500. If a loan is deemed to be impaired in one of the real estate secured segment, it is generally considered collateral dependent. If the value of the collateral securing a collateral dependent impaired loan is less than the loan’s carrying value, a charge-off is recognized equal to the difference between the appraised value and the book value of the loan. Additionally, impairment reserves are recognized for estimated costs to hold and liquidate and for a 10% discount on the appraisal value. The range for costs to hold and liquidate is 12-22% for CRE, business banking CRE and ADC loans and is 7-13% for homeowner loans, home equity lines of credit, and residential mortgage loans. Impaired loans in the real estate secured segments are re-appraised using a summary or drive-by appraisal report every six to nine months.
For loans in the business banking C&I classwe charge-off the full amount of the loan when it becomes 90 days or more past due, or earlier in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For other classes of C&I loans, we prepare a cash flow projection, and charge-off the difference between the net present value of the cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize a 10% impairment reserve to account for the potential imprecision of our estimates. However, on most of these cases receipt of future cash flows is too unreliable to be considered probable, resulting in the charge-off of the entire balance of the loan. For unsecured consumer loans, charg0- offs are recognized once the loan is 90 to 120 days or more past due or the borrower files for bankruptcy protection.
Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and other criticized or classified loans (if any), as well as allowances determined for the pass rated loans in each major loan category. After we establish an allowance for loan losses for loans that are known to be non-performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred losses inherent in that portion of the portfolio. These percentages are determined by management, based on historical loss experience for the applicable loan class, and are adjusted to reflect our evaluation of:
•levels of, and trends in, delinquencies and non-accruals;
•trends in volume and terms of loans;
•effects of any changes in lending policies and procedures;
•experience, ability, and depth of lending management and staff;
•national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and for commercial loans, trends in risk ratings.
Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or the borrower may use the cash flow for other purposes. In addition, if necessary, the foreclosure process may be slow and properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.
STERLING BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(k)Allowance
Commercial business lending presents a risk because repayment depends on the successful operation of the business which is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before foreclosing which we cannot be assured of doing, and the value in a foreclosure sale or other means of liquidation is uncertain.
Acquisition, development and construction (“ADC”) lending is considered higher risk and exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC 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 we make a land acquisition loan on property that is not yet approved for
Loan LossesThe allowance for loan lossesthe planned development, there is established through provisions for losses charged to earnings. Losses onthe 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 (including impaired loans) are chargedalso expose us to the allowance for loan losses when management believesrisk 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 is necessary to absorb probable incurred losses on existing loans that may become uncollectible. Management’s evaluations, which are subject to periodic review by the Company’s primary regulator, 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. The process of assessing the adequacy of the allowance for loan loss is subjective, particularly in times of economic downturns. It is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates. As such there can be no assurance that future charge-offsimprovements will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.
The Company considers a loan to be impaired when, basedcompleted on current information and events, it is probable that the borrower will be unable to comply with contractual principal and interest payments due. Certain loans are individually evaluated for collectabilitytime or in accordance with specifications and projected costs. In addition, the Company’s ongoing loan review procedures (principally commercial real estate, commercial businessultimate sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and construction loans). Smaller-balance homogeneous loans are collectively evaluated for impairment, such aspricing of the loan. We have deemphasized this type of lending.
When we evaluate residential mortgage loans and
consumer loans. Impairedhome equity loans
are based on onewe weigh both the credit capacity of
three measures — the
present value of expected future cash flows discounted atborrower and the
loan’s effective interest rate, the loan’s observable market price, or the faircollateral value of the
collateralhome. If unemployment or underemployment increase, the credit capacity of underlying borrowers will decrease, which increases our risk. Similarly, as we obtain a mortgage on the property, if
home prices decline, we are exposed to risk in both our first mortgage and equity lending programs due to declines in the
loanvalue of our collateral. We are also exposed to risk because the time to foreclose is
collateral dependent. If the measure of an impaired loan is less than its recorded investment, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at its measured value.significant and has become longer under current market conditions.
(l)(m) Troubled Debt RestructuringTroubled debt restructurings arerestructuring (“TDR”) is a formally renegotiated loansloan in which the Bank, for which concessionseconomic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not have been granted to the borrower otherwise. Not all loans that are restructured as a TDR are classified as non-accrual before the Company would not have otherwise granted and the borrower is experiencing financial difficulty.restructuring occurs. Restructured loans are recorded incan convert from non-accrual to accrual status when said loans have demonstrated performance, generally evidenced by six months of consistent payment performance in accordance with the restructured terms, or by the presence of other significant items.
(m)(n) Federal Reserve Bank of New York and Federal Home Loan Bank StockAs a member of the Federal
Reserve Bank of New York (“FRB”) and the Federal Home Loan Bank
(FHLB) of New York
(“FHLB”), the Bank is required to hold a certain amount of
FRB and FHLB
common stock. This stock is a non-marketable equity security and,
accordingly, is reported at cost.
(n)(o) Premises and EquipmentLand is reported at cost, while 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 ofPROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
the related assets, which range from
three years for equipment and 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases, including renewal options, 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. The Company recognizes an impairment charge based on the excess of the carrying amount of assets (generally assets associated with a financial center) over the fair value of the assets. Fair value is determined by third-party valuations and evaluations prepared by management. For the fiscal year ended September 30, 2014, the Company recognized premises and equipment impairment charges of $9.3 million related to financial center consolidations as a result of the Merger. These charges were included in other non-interest expense in the income statement.
(o) (p) Goodwill, Trade Names and Other Intangible AssetsGoodwill resulting from business combinations
prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill
resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and
separately recognized. Goodwill and intangible assetstrade names acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Goodwill
isand trade name are the only intangible
assetassets with an indefinite life on our balance sheet.
The Company accounts for goodwill,
trade names and other intangible assets in accordance with GAAP, which, in general, requires that goodwill
and trade names not be amortized, but rather that
itthey be tested for impairment at least annually at the reporting unit level.
There are two stepsThe Company has the option to
first perform a qualitative assessment to test goodwill for impairment on a reporting-unit-by-reporting-unit basis. If, after performing the
process:qualitative assessment, the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will perform the two-step process described below:
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| |
| 1. | Identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Goodwill is not considered impaired as long as the fair value of the reporting unit is greater than its carrying value. The second step is only required if a potential impairment to goodwill is identified in step one. |
| |
| 2. | Compare the implied fair value of goodwill to its carrying amount, where the implied fair value of goodwill is computed on a residual basis, that is, by subtracting the sum of the fair values of the individual asset categories (tangible and intangible) from the indicated fair value of the reporting unit as determined under step one. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair value, and it must be presented as a separate line item on financial statements. |
The Company estimated the fair value of the its primary reporting unit, Provident Bank, utilizing four valuation methodologies including, (1) the Comparable Transactions approach based on pricing ratios recently paid in the sale or merger of comparable banking franchises; (2) the Control Premium approach based on the Company’s trading price followed by the application of an industry based control premium; (3) the Public Market Peers approach based on the trading prices of similar publicly-traded companies as measured by standard valuation ratios followed by application of an industry based control premium; and, (4) the Discounted Cash Flow approach where value is estimated based on the present value of projected dividends and a terminal value. These approaches were weighted to determine if impairment existed and
At September 30, 2014, the Company
determined as of September 30, 2011assessed goodwill for impairment using qualitative factors and concluded the
aggregate fair value of the reporting unit exceeded the carrying value and therefore no impairmenttwo-step process was
recorded and the step two analysis for determining the impairment was not necessary. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.The coreunnecessary.
Core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives of approximately eight8 to 10 years. Intangibles related to HVIANon-compete agreements are amortized over 10PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
years on a straight-line basis. Intangiblesstraight line basis over their estimated life. Prior to March 31, 2014, intangibles related to the naming rights on Provident Bank Ball Park arewere amortized over
10 years on a straight-line basis. Impairment losses on intangible assets are charged to expense, if and when they occur.
(p)(q) Other Real Estate OwnedReal estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with any resulting write-down charged to the allowance for loan losses.
Other real estate owned also includes the fair value of the Bank’s financial centers that are held for sale. Any write-down associated with the transfer of a financial center from premises and equipment to other real state owned was included as a charge to other non-interest income in the income statement. Subsequent valuations
of other real estate owned 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
properties are recognized upon disposition.
Foreclosed properties totaled $5.4 million and $3.9 million at September 30, 2011 and 2010, respectively.
(q)(r) Securities Repurchase AgreementsIn 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
investment securities portfolio. Disclosure of the pledged securities is made in the consolidated
statements of financial conditionbalance sheets if the counterparty has the right by contract to sell or re-pledge such collateral.
Net 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 determineswe determine 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. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The Company evaluates uncertain tax positions in a two step process. The first step is recognition, which requires a determination of whether it is more likely than not that a tax position will be sustained upon examination. The second step is measurement. Under the measurement step, a tax position that meets the more likely than not recognition threshold is measured at the largest amount of
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meetPROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. PreviouslyA previously recognized tax position that no longer meetmeets the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company did not have any such position as of
September 30, 2011. See note 11 of the “Notes to Consolidated Financial Statements”2014. (See Note 10 “Income Taxes”).
(r) (Bank(t) Bank Owned Life Insurance (BOLI)The Company
has purchasedowns life insurance policies
(purchased and acquired) on certain
officers and key executives. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized).
(s)(u) Stock-Based Compensation PlansCompensation expense
for stock options, non-vested stock awards/stock units is
recognized for the Employee stock ownership plan (“ESOP”) equal tobased on the fair value of
shares that have been allocated or committed to be released for allocation to participants. Any difference betweenthe award on the measurement date, which is the date of grant. The expense is recognized ratably over the service period of the award. The fair value of stock options is estimated using a Black-Scholes valuation model. the fair value
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 for allocation is deducted from stockholders’ equity.The Company applies FASB ASC Topic 718 “Compensation- Stock Based” in accounting for its stock option plan. During 2011, 2010 and 2009, the Company issued 119,526, 321,976 and 88,861 new stock-based option awards and recognized total non-cash stock-based compensation cost of $558, $247 and $768. As of September 30, 2011, the total remaining unrecognized compensation cost related to non-vested stock options was $413. Options granted in 2011 have a four year vesting period.
The Company also has a restricted awards/stock plan in which shares awarded are transferred from treasuryunits is generally the market price of the Company’s common stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The expense is amortized over the vesting period of the awards. The Company issued 63,870 shares during 2011 and none during 2010 and 2009. The recognized total restricted stock compensation cost recognized during 2011, 2010 and 2009 was $168, $883, and $1,687, respectively. As of September 30, 2011, the total remaining unrecognized compensation cost related to restricted stock was $478. Options granted in 2011 have a two through four year vesting periods.
The Company’s stock-based compensation plans allow for accelerated vesting when employees retire under circumstances in accordance with the terms of the plans. Grants issued subsequent to adoption of FASB ASC Topic 718 (October 1, 2005), which are subject to such accelerated vesting, are expensed over the shorter of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be less than the vesting period expressed in the option agreement, depending upon the age of the grantee. As of September 30, 2011, 1,000 restricted shares and 34,300 stock options were potentially subject to accelerated vesting, and have been fully expensed. The Company did not recognize expense associated with the acceleration of restricted shares in 2011, 2010 and 2009. The Company recognized expense associated with the acceleration of 0, 27,000 and 0 stock option shares in 2011, 2010 and 2009, respectively.
(t)(v) Earnings Per ShareBasic earnings per share
(EPS)(“EPS”) is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 were exercised and unvested
RRP sharesrestricted stock became vested during the periods. For purposes of computing both basic and diluted EPS, outstanding shares
exclude unallocatedinclude earned ESOP shares.
(u)(w) Segment InformationPublic companies are required to report certain financial information about significant
revenue- producingrevenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker.
As a community-oriented financial institution, substantiallySubstantially all of the Company’s operations
occur through the Bank and involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of
the communityits banking operation, which constitutes the Company’s only operating segment for financial reporting purposes.
(2) Acquisitions(x)Summary Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of Acquisition Transactions. Belowbusiness, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Company does not believe there are such matters that will have a material effect on the summaryfinancial statements.
(y) Derivatives
At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the acquisition transactions for Warwick Community Bancorp (2005) “WSB”, Ellenville National Bank (2004) “ENB”, National Bank of Florida (2002) “NBF”, one purchase in 2005fair value of a branch officerecognized asset or liability or of HSBC Bank USA, National Association (“HSBC”an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and Hudson Valley Investment Advisors (“HVIA”).is reclassified into earnings in the same period during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | HVIA | | | HSBC | | | WSB | | | ENB | | | NBF | | | Total | |
At Acquisition Date | | | | | | | | | | | | | | | | | | | | | | | | |
Number of shares issued | | | 208,331 | | | | — | | | | 6,257,896 | | | | 3,969,676 | | | | — | | | | 10,435,903 | |
Loans acquired | | $ | — | | | $ | 2,045 | | | $ | 284,522 | | | $ | 213,730 | | | $ | 23,112 | | | $ | 523,409 | |
Deposits assumed | | | — | | | | 23,319 | | | | 475,150 | | | | 327,284 | | | | 88,182 | | | | 913,935 | |
Cash paid/(received) | | | 2,500 | | | | (18,938 | ) | | | 72,601 | | | | 36,773 | | | | 28,100 | | | | 121,036 | |
Goodwill | | | 2,531 | | | | — | | | | 91,576 | | | | 51,794 | | | | 13,063 | | | | 158,964 | |
Core deposit/other intangibles | | | 2,830 | | | | 1,690 | | | | 10,395 | | | | 6,624 | | | | 1,787 | | | | 23,326 | |
At September 30, 2011 | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 3,279 | | | $ | — | | | $ | 92,145 | | | $ | 52,101 | | | $ | 13,336 | | | $ | 160,861 | |
Accumulated core deposit/other amortization | | | 1,509 | | | | 1,651 | | | | 9,479 | | | | 6,624 | | | | 1,787 | | | | 21,050 | |
Net core deposit/other intangible | | | 1,321 | | | | 39 | | | | 916 | | | | — | | | | — | | | | 2,276 | |
The
changes to goodwill, reflected above, are due to tax relatedCompany formally documents the relationship between derivatives and hedged items,
in connection with acquisitionsas well as the risk-management objective and the
$750 settlementstrategy for undertaking hedge transactions at the inception of the
earn out provision for HVIA in 2007.hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Future Amortization
instruments that are used are highly effective in offsetting changes in fair values or cash flows of Core Depositthe hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and Other Intangible Assets.the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
(z) Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The following table sets forthface amount for these items represents the future amortizationexposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
(2) Acquisitions
On October 31, 2013, the Company completed the Merger. Under the terms of the Agreement and Plan of Merger, Legacy Sterling shareholders received 1.2625 shares of Legacy Provident’s common stock, par value $0.01 per share, for each share of Legacy Sterling common stock, which resulted in the issuance of 39,057,968 shares. Based on the closing stock price of $11.72 per share on October 31, 2013, the aggregate consideration paid to Legacy Sterling shareholders was $457,781, including $23 paid in cash for fractional shares, and $6 which represented outstanding vested stock options. Consistent with the Company’s strategy, the primary reason for the Merger was the expansion of the Company’s geographic footprint and diversification of its business in the greater New York metropolitan region and beyond.
The assets acquired and liabilities assumed were accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of October 31, 2013 based on management’s best estimate using the information available as of the Merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $225,809, a core deposit intangible of $20,089and othera trade name intangible of $20,500. As of October 31, 2013, Legacy Sterling had assets with a book value of approximately $2,759,628, loans including naming rightsloans held for sale with a book value of $2.3 millionapproximately $1,735,142, and deposits with a book value of approximately $2,296,713. The table below summarizes the amounts recognized as of the Merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the Company’s financial statements at September 30, 2011: | | | | | | | | |
Amoritization Schedule | | September 30,
2011 | | | September 30,
2010 | |
Less than one year | | $ | 1,183 | | | $ | 1,364 | |
One to two years | | | 821 | | | | 941 | |
Two to three years | | | 524 | | | | 580 | |
Three to four years | | | 524 | | | | 283 | |
Four to five years | | | 430 | | | | 283 | |
Beyond five years | | | 1,147 | | | | 189 | |
| | | | | | | | |
Total | | $ | 4,629 | | | $ | 3,640 | |
| | | | | | | | |
* | In addition to the above, the Company also carries $1,456 in mortgage servicing rights included in other assets at September 30, 2011 |
Goodwill is not amortized to expense and is reviewed for impairmentfair value at least annually, with impairment losses charged to expense, if and when they occur. The core deposit and other intangible assets are recognized apart from goodwill and they are amortized to expense over their estimated useful lives and evaluated at least annually for impairment.
the Merger date:
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(3) Securities Available for Sale
The following is a summary
|
| | | | | | |
| Consideration paid through Sterling Bancorp common stock issued to Legacy Sterling shareholders | $ | 457,781 |
|
|
| | | | | | | | | | | |
| | Legacy Sterling carrying value | | Fair value adjustments | | As recorded at acquisition |
| Cash and cash equivalents | $ | 277,798 |
| | $ | — |
| | $ | 277,798 |
|
| Investment securities | 613,154 |
| | (5,243 | ) | (a) | 607,911 |
|
| Loans held for sale | 30,341 |
| | — |
| | 30,341 |
|
| Loans | 1,704,801 |
| | (6,693 | ) | (b) | 1,698,108 |
|
| Federal Reserve Bank stock | 7,680 |
| | — |
| | 7,680 |
|
| Bank owned life insurance | 55,374 |
| | — |
| | 55,374 |
|
| Premises and equipment | 21,293 |
| | 2,301 |
| (c) | 23,594 |
|
| Accrued interest receivable | 6,590 |
| | — |
| | 6,590 |
|
| Core deposit and other intangibles | — |
| | 20,089 |
| (d) | 20,089 |
|
| Trade name intangible | — |
| | 20,500 |
| (e) | 20,500 |
|
| Other real estate owned | 1,720 |
| | 4,095 |
| (f) | 5,815 |
|
| Other assets | 40,877 |
| | (19,944 | ) | (g) | 20,933 |
|
| Deposits | (2,296,713 | ) | | (477 | ) | (h) | (2,297,190 | ) |
| FHLB borrowings | (100,346 | ) | | (273 | ) | (i) | (100,619 | ) |
| Other borrowings | (62,465 | ) | | — |
| | (62,465 | ) |
| Subordinated Debentures | (25,774 | ) | | (753 | ) | (j) | (26,527 | ) |
| Other liabilities | (60,462 | ) | | 4,502 |
| (k) | (55,960 | ) |
| Total identifiable net assets | $ | 213,868 |
| | $ | 18,104 |
| | $ | 231,972 |
|
| | | | | | |
| Goodwill recorded in the Merger | | | | | 225,809 |
|
| Goodwill at September 30, 2013 | | | | | 163,117 |
|
| Goodwill at September 30, 2014 | | | | | $ | 388,926 |
|
Explanation of
securities available for sale: | | | | | | | | | | | | | | | | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
September 30, 2011 | | | | | | | | | | | | | | | | |
Mortgage-backed securities-residential | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 136,699 | | | $ | 3,292 | | | $ | — | | | $ | 139,991 | |
Freddie Mac | | | 98,511 | | | | 2,205 | | | | (41 | ) | | | 100,675 | |
Ginnie Mae | | | 4,973 | | | | 207 | | | | — | | | | 5,180 | |
CMO/Other MBS | | | 81,170 | | | | 1,764 | | | | (522 | ) | | | 82,412 | |
| | | | | | | | | | | | | | | | |
| | | 321,353 | | | | 7,468 | | | | (563 | ) | | | 328,258 | |
| | | | | | | | | | | | | | | | |
Investment securities | | | | | | | | | | | | | | | | |
Federal agencies | | | 199,741 | | | | 4,986 | | | | (79 | ) | | | 204,648 | |
Corporate bonds | | | 16,984 | | | | 257 | | | | (179 | ) | | | 17,062 | |
State and municipal securities | | | 177,666 | | | | 11,018 | | | | — | | | | 188,684 | |
Equities | | | 1,192 | | | | — | | | | — | | | | 1,192 | |
| | | | | | | | | | | | | | | | |
| | | 395,583 | | | | 16,261 | | | | (258 | ) | | | 411,586 | |
| | | | | | | | | | | | | | | | |
Total available for sale | | $ | 716,936 | | | $ | 23,729 | | | $ | (821 | ) | | $ | 739,844 | |
| | | | | | | | | | | | | | | | |
| | | | |
September 30, 2010 | | | | | | | | | | | | | | | | |
Mortgage-backed securities-residential | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 149,084 | | | $ | 4,105 | | | $ | (1 | ) | | $ | 153,188 | |
Freddie Mac | | | 56,632 | | | | 1,820 | | | | — | | | | 58,452 | |
Ginnie Mae | | | 9,047 | | | | 268 | | | | — | | | | 9,315 | |
CMO/Other MBS | | | 38,338 | | | | 680 | | | | (359 | ) | | | 38,659 | |
| | | | | | | | | | | | | | | | |
| | | 253,101 | | | | 6,873 | | | | (360 | ) | | | 259,614 | |
| | | | | | | | | | | | | | | | |
Investment securities | | | | | | | | | | | | | | | | |
U.S. Government securities | | | 71,071 | | | | 1,222 | | | | — | | | | 72,293 | |
Federal agencies | | | 344,154 | | | | 1,919 | | | | (54 | ) | | | 346,019 | |
Corporate bonds | | | 29,406 | | | | 1,134 | | | | — | | | | 30,540 | |
State and municipal securities | | | 180,879 | | | | 10,798 | | | | (20 | ) | | | 191,657 | |
Equities | | | 1,146 | | | | — | | | | (257 | ) | | | 889 | |
| | | | | | | | | | | | | | | | |
| | | 626,656 | | | | 15,073 | | | | (331 | ) | | | 641,398 | |
| | | | | | | | | | | | | | | | |
Total available for sale | | $ | 879,757 | | | $ | 21,946 | | | $ | (691 | ) | | $ | 901,012 | |
| | | | | | | | | | | | | | | | |
certain fair value related adjustments:
| |
| (a) | Represents the fair value adjustment on investment securities held to maturity. |
| |
| (b) | Represents the elimination of Legacy Sterling’s allowance for loan losses and an adjustment of the amortized cost of loans to estimated fair value, which includes an interest rate mark and credit mark. Gross loans acquired were $1,723,447; of the acquired loans, $1,699,271 were not considered purchased credit impaired and we recorded a fair value adjustment of $14,440. |
| |
| (c) | Represents an adjustment to reflect the fair value of leasehold improvements. |
| |
| (d) | Represents intangible assets recorded to reflect the fair value of core deposits and below market rent on leased premises. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base. The below market rent intangible asset will be amortized on a straight-line basis over the remaining term of the leases. |
| |
| (e) | Represents the estimated fair value of Legacy Sterling’s trade name. This intangible asset will not be amortized and will be reviewed at least annually for impairment. |
| |
| (f) | Represents an adjustment to an acquired property which Legacy Sterling utilized as a financial center and recorded as premises and equipment. The Company included this asset in OREO as it was held for sale. This asset was sold during the fiscal year ended September 30, 2014. |
| |
| (g) | Consists primarily of adjustments in net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangibles recorded. |
| |
| (h) | Represents the fair value adjustment on deposits as the weighted average interest rate of deposits assumed exceeded the cost of similar funding available in the market at the time of the Merger. |
| |
| (i) | Represents the fair value adjustment on FHLB borrowings as the weighted average interest rate of FHLB borrowings assumed exceeded the cost of similar funding available in the market at the time of the Merger. |
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| |
| (j) | Represents the fair value adjustment on subordinated debentures as the weighted average interest rate of the debentures assumed exceeded the cost of similar debt funding available in the market at the time of the Merger. |
| |
| (k) | Represents the fair value of other liabilities assumed at the Merger date. |
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Legacy Sterling were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loans were derived from the eventual sale of the collateral. These values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Legacy Sterling’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on the date of the Merger.
The impaired loans acquired in the Merger as of October 31, 2013 were accounted for in accordance with ASC Topic 310-30 Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“ASC 310-30”) and were comprised of collateral dependent loans with deteriorated credit quality as follows:
|
| | | |
| | ASC 310-30 loans |
| Contractual principal balance at acquisition | $ | 24,176 |
|
| Principal not expected to be collected (non-accretable discount) | (10,927 | ) |
| Expected cash flows at acquisition | 13,249 |
|
| Interest component of expected cash flows (accretable discount) | — |
|
| Fair value of acquired loans | $ | 13,249 |
|
The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the accelerated method. Other intangibles consist of below market rents which are amortized over the remaining life of each lease using the straight-line method.
Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.
The fair value of premises and equipment and other real estate owned was estimated using appraisals of like kind properties and assets. Premises, equipment and leasehold improvements will be amortized or depreciated over their estimated useful lives ranging from one to five years for equipment or over the life of the lease for leasehold improvements. Other real estate owned is not amortized and is carried at estimated fair value determined by the appraised value less costs to sell.
The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.
Direct acquisition and integration costs of the Merger were expensed as incurred and totaled $9,455 and $2,772, for the fiscal years ended September 30, 2014 and 2013, respectively. These items were recorded as Merger-related expenses in the income statement. Other direct integration costs of the Merger for the fiscal year ended September 30, 2014, totaled $26,591 and included a charge for asset write-downs, banking systems conversion, employee retention and severance compensation. These items were recorded in non-interest expense in the income statement.
The following table presents selected unaudited pro forma financial information reflecting the Merger assuming it was completed as of October 1, 2012. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the Merger actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and diluted earnings per common share were calculated using the Company’s actual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the Merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the actual financial statements of the Company for the periods presented, and on the actual financial statements of Legacy Sterling for the
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
2012 period presented and in 2013 until the date of the Merger, at which time Legacy Sterling’s results of operations were included in the Company’s financial statements.
The unaudited pro forma information set forth below for the fiscal years ended September 30, 2014 and 2013, reflects adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to amortization of premiums and accretion of discounts. Direct Merger-related expenses and charges incurred in fiscal years ended September 30, 2014 and 2013 to write-down assets and accrue for retention and severance compensation are assumed to have occurred prior to October 1, 2012. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated potential cost savings.
|
| | | | | | | |
| | Pro forma for the |
| | fiscal year ended September 30, |
| | 2014 | | 2013 |
| Net interest income | $ | 198,776 |
| | $ | 180,030 |
|
| Non-interest income | 54,396 |
| | 65,749 |
|
| Non-interest expense | 187,306 |
| | 189,136 |
|
| Net income | 44,460 |
| | 39,190 |
|
| | | | |
| Pro forma earnings per share: | | | |
| Basic | $ | 0.53 |
| | $ | 0.47 |
|
| Diluted | 0.53 |
| | 0.47 |
|
On August 10, 2012, the Company acquired 100% of the outstanding common shares of Gotham Bank of New York (“Gotham”) in exchange for $40,510 in cash. Under the terms of the acquisition, common shareholders received cash equal to 125% of adjusted tangible net worth. The acquisition of Gotham provided a strategic expansion into the metropolitan New York City market, enabling the Company to grow its small-to-middle market commercial business. Gotham delivered a core asset and deposit base, long-term client relationships, an advantageous location in midtown Manhattan and an initial commercial banking team. Gotham’s results of operations are included in the Company’s results for all periods presented in these financial statements.
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(3) Securities
A summary of the amortized cost and estimated fair value of investmentour securities is presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | September 30, 2013 |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| Available for Sale | | | | | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | | | | | |
| Agency-backed | $ | 477,003 |
| | $ | 2,257 |
| | $ | (1,555 | ) | | $ | 477,705 |
| | $ | 284,837 |
| | $ | 1,849 |
| | $ | (4,157 | ) | | $ | 282,529 |
|
| CMO/Other MBS | 115,395 |
| | 242 |
| | (1,492 | ) | | 114,145 |
| | 169,336 |
| | 356 |
| | (3,038 | ) | | 166,654 |
|
| Total residential MBS | 592,398 |
| | 2,499 |
| | (3,047 | ) | | 591,850 |
| | 454,173 |
| | 2,205 |
| | (7,195 | ) | | 449,183 |
|
| Other securities: | | | | | | | | | | | | | | | |
| Federal agencies | 158,114 |
| | 3 |
| | (5,303 | ) | | 152,814 |
| | 273,637 |
| | — |
| | (12,090 | ) | | 261,547 |
|
| Corporate | 195,547 |
| | 149 |
| | (2,857 | ) | | 192,839 |
| | 118,575 |
| | 153 |
| | (3,795 | ) | | 114,933 |
|
| State and municipal | 131,715 |
| | 3,439 |
| | (256 | ) | | 134,898 |
| | 127,324 |
| | 3,447 |
| | (2,041 | ) | | 128,730 |
|
| Trust preferred | 37,684 |
| | 766 |
| | (38 | ) | | 38,412 |
| | — |
| | — |
| | — |
| | — |
|
| Total other securities | 523,060 |
| | 4,357 |
| | (8,454 | ) | | 518,963 |
| | 519,536 |
| | 3,600 |
| | (17,926 | ) | | 505,210 |
|
| Total available for sale | $ | 1,115,458 |
| | $ | 6,856 |
| | $ | (11,501 | ) | | $ | 1,110,813 |
| | $ | 973,709 |
| | $ | 5,805 |
| | $ | (25,121 | ) | | $ | 954,393 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | September 30, 2013 |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| Held to Maturity | | | | | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | | | | | |
| Agency-backed | $ | 142,329 |
| | $ | 1,360 |
| | $ | (103 | ) | | 143,586 |
| | 130,371 |
| | 716 |
| | (108 | ) | | 130,979 |
|
| CMO/Other MBS | 62,690 |
| | 9 |
| | (1,204 | ) | | 61,495 |
| | 25,776 |
| | 33 |
| | (315 | ) | | 25,494 |
|
| Total residential MBS | 205,019 |
| | 1,369 |
| | (1,307 | ) | | 205,081 |
| | 156,147 |
| | 749 |
| | (423 | ) | | 156,473 |
|
| Other securities: | | | | | | | | | | | | | | | |
| Federal agencies | 136,413 |
| | 2,634 |
| | (962 | ) | | 138,085 |
| | 77,341 |
| | — |
| | (3,458 | ) | | 73,883 |
|
| State and municipal | 232,643 |
| | 6,814 |
| | (123 | ) | | 239,334 |
| | 19,011 |
| | 556 |
| | (546 | ) | | 19,021 |
|
| Other | 5,000 |
| | 338 |
| | — |
| | 5,338 |
| | 1,500 |
| | 19 |
| | — |
| | 1,519 |
|
| Total other securities | 374,056 |
| | 9,786 |
| | (1,085 | ) | | 382,757 |
| | 97,852 |
| | 575 |
| | (4,004 | ) | | 94,423 |
|
| Total held to maturity | $ | 579,075 |
| | $ | 11,155 |
| | $ | (2,392 | ) | | $ | 587,838 |
| | $ | 253,999 |
| | $ | 1,324 |
| | $ | (4,427 | ) | | $ | 250,896 |
|
In accordance with ASC Subtopic 320-10-25-6, in a significant business combination a company may transfer held to maturity securities to available for sale (other than equity securities),securities to maintain the company’s existing interest rate risk position or credit risk policy. Based on management’s review of the combined investment securities portfolio and implications for asset and liability management, investment securities totaling $165,230 were transferred from held to maturity to available for sale in connection with the Merger. Investment securities that were transferred included residential mortgage-backed securities, federal agency securities and state and municipal securities and was based mainly on the premium amortization and extension risk inherent in these securities. Concurrent with this repositioning, a total of $221,904 of investment securities were also transferred from available for sale to held to maturity. Substantially all of the securities transferred from available for sale to held to maturity have a maturity date in 2020 or beyond. At the date of transfer, these securities were in an unrealized loss position of $9,657, which will be accreted into interest income using the level yield method over the life of the securities, which is estimated to be approximately 5.3 year. At September 30, 2014 the remaining unrealized loss was $8,947. The
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
unrealized loss amount is included in accumulated other comprehensive (loss) on an after-tax basis. Management believes the transfers of investment securities discussed above maintain the Company’s interest rate risk position and credit risk profile on a combined basis post-Merger.
The amortized cost and estimated fair value of securities at September 30, 2014 are presented below by remaining period to contractual maturity. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay their obligations. | | | | | | | | |
| | | September 30, 2011 | |
| | | Amortized | | | Fair | |
| | | Cost | | | Value | |
Remaining period to contractual maturity | | | | | | | | |
Less than one year | | $ | 4,410 | | | $ | 4,442 | |
One to five years | | | 197,476 | | | | 203,113 | |
Five to ten years | | | 146,634 | | | | 154,212 | |
Greater than ten years | | | 45,871 | | | | 48,627 | |
| | | | | | | | |
Total investment securities | | | 394,391 | | | | 410,394 | |
| | | | | | | | |
Mortgage backed securities-residential | | | 321,353 | | | | 328,258 | |
| | | | | | | | |
Total available for sale securities | | $ | 715,744 | | | $ | 738,652 | |
| | | | | | | | |
Proceeds from sales Residential mortgage-backed securities are shown separately since they are not due at a single maturity date.
|
| | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Available for sale | | Held to maturity |
| | Amortized cost | | Fair value | | Amortized cost | | Fair value |
| Other securities remaining period to contractual maturity: | | | | | | | |
| One year or less | $ | 2,100 |
| | $ | 2,112 |
| | $ | 8,847 |
| | $ | 8,897 |
|
| One to five years | 141,508 |
| | 141,748 |
| | 9,138 |
| | 9,624 |
|
| Five to ten years | 334,295 |
| | 328,902 |
| | 189,494 |
| | 192,109 |
|
| Greater than ten years | 45,157 |
| | 46,201 |
| | 166,577 |
| | 172,127 |
|
| Total other securities | 523,060 |
| | 518,963 |
| | 374,056 |
| | 382,757 |
|
| Residential MBS | 592,398 |
| | 591,850 |
| | 205,019 |
| | 205,081 |
|
| Total securities | $ | 1,115,458 |
| | $ | 1,110,813 |
| | $ | 579,075 |
| | $ | 587,838 |
|
Sales of securities available for sale during the yearsperiods indicated below were as follows:
|
| | | | | | | | | | | |
| | For the fiscal year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Available for sale: | | | | | |
| Proceeds from sales | $ | 529,107 |
| | $ | 339,123 |
| | $ | 344,431 |
|
| Gross realized gains | 1,964 |
| | 7,709 |
| | 10,468 |
|
| Gross realized losses | (1,323 | ) | | (377 | ) | | — |
|
| Income tax expense on realized net gains | 172 |
| | 2,282 |
| | 2,475 |
|
Held to maturity: (1) | | | | | |
| Proceeds from sales | $ | — |
| | $ | 1,187 |
| | $ | — |
|
| Gross realized gains | — |
| | 59 |
| | — |
|
| Income tax expense on realized gains | — |
| | 18 |
| | — |
|
(1) During the fiscal year ended September 30, 2011, 2010 and 2009 totaled $540,145, $443,389 and $556,796 respectively. These sales resulted in gross realized gains of $10,000, $8,518, and $18,043 for2013, the years ended September 30, 2011, 2010, and 2009 respectively, and gross realized losses of $7, $361 and $0, in fiscal years 2011, 2010, and 2009 respectively. The Company’s accumulated other income included in stockholders equity at September 30, 2011 and 2010 consist of net unrealized gain, on available for sale securities of $13,603 and $12,621, respectively, net of tax liabilities of $9,302 and $8,630 respectively.Securities, includingCompany sold held to maturity securities with carrying amountsafter the Company had already collected at least 85% of $206,829 and $228,442 were pledged as collateral for borrowingsthe principal balance outstanding at September 30, 2011 and 2010, respectively. Securities with carrying amountsacquisition.
Securities Available for Sale with Unrealized Losses.STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table summarizes
those securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Continuous Unrealized Loss Position | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or Longer | | | Total | |
As of September 30, 2011 | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
Freddie Mac | | $ | 10,262 | | | $ | (41 | ) | | $ | — | | | $ | — | | | $ | 10,262 | | | $ | (41 | ) |
CMO/Other MBS | | | 3,037 | | | | (257 | ) | | | 1,813 | | | | (265 | ) | | | 4,850 | | | | (522 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage backed securities — residential | | | 13,299 | | | | (298 | ) | | | 1,813 | | | | (265 | ) | | | 15,112 | | | | (563 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and agency securities | | | 9,914 | | | | (79 | ) | | | — | | | | — | | | | 9,914 | | | | (79 | ) |
Corporate bonds | | | 1,886 | | | | (179 | ) | | | — | | | | — | | | | 1,886 | | | | (179 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 25,099 | | | $ | (556 | ) | | $ | 1,813 | | | $ | (265 | ) | | $ | 26,912 | | | $ | (821 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Continuous unrealized loss position | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
| Available for sale | | | | | | | | | | | |
| September 30, 2014 | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | |
| Agency-backed | $ | 137,693 |
| | $ | (516 | ) | | $ | 41,516 |
| | $ | (1,039 | ) | | $ | 179,209 |
| | $ | (1,555 | ) |
| CMO/other MBS | 62,507 |
| | (446 | ) | | 29,499 |
| | (1,046 | ) | | 92,006 |
| | (1,492 | ) |
| Total residential MBS | 200,200 |
| | (962 | ) | | 71,015 |
| | (2,085 | ) | | 271,215 |
| | (3,047 | ) |
| Other securities: | | | | | | | | | | | |
| Federal agencies | 6,153 |
| | (144 | ) | | 146,416 |
| | (5,159 | ) | | 152,569 |
| | (5,303 | ) |
| Corporate | 97,833 |
| | (1,348 | ) | | 66,440 |
| | (1,509 | ) | | 164,273 |
| | (2,857 | ) |
| State and municipal | 8,170 |
| | (58 | ) | | 12,809 |
| | (198 | ) | | 20,979 |
| | (256 | ) |
| Trust preferred | 3,907 |
| | (38 | ) | | — |
| | — |
| | 3,907 |
| | (38 | ) |
| Total other securities | 116,063 |
| | (1,588 | ) | | 225,665 |
| | (6,866 | ) | | 341,728 |
| | (8,454 | ) |
| Total | $ | 316,263 |
| | $ | (2,550 | ) | | $ | 296,680 |
| | $ | (8,951 | ) | | $ | 612,943 |
| | $ | (11,501 | ) |
| September 30, 2013 | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | |
| Agency-backed | $ | 137,265 |
| | $ | (4,157 | ) | | $ | — |
| | $ | — |
| | $ | 137,265 |
| | $ | (4,157 | ) |
| CMO/Other MBS | 122,324 |
| | (2,742 | ) | | 7,820 |
| | (296 | ) | | 130,144 |
| | (3,038 | ) |
| Total residential MBS | 259,589 |
| | (6,899 | ) | | 7,820 |
| | (296 | ) | | 267,409 |
| | (7,195 | ) |
| Other securities: | | | | | | | | | | | |
| Federal agencies | 261,547 |
| | (12,090 | ) | | — |
| | — |
| | 261,547 |
| | (12,090 | ) |
| State and municipal | 43,585 |
| | (2,033 | ) | | 112 |
| | (8 | ) | | 43,697 |
| | (2,041 | ) |
| Corporate | 95,013 |
| | (3,795 | ) | | — |
| | — |
| | 95,013 |
| | (3,795 | ) |
| Total other securities | 400,145 |
| | (17,918 | ) | | 112 |
| | (8 | ) | | 400,257 |
| | (17,926 | ) |
| Total | $ | 659,734 |
| | $ | (24,817 | ) | | $ | 7,932 |
| | $ | (304 | ) | | $ | 667,666 |
| | $ | (25,121 | ) |
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Continuous Unrealized Loss Position | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or Longer | | | Total | |
As of September 30, 2010 | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
Fannie Mae | | $ | 124 | | | $ | (1 | ) | | $ | — | | | $ | — | | | $ | 124 | | | $ | (1 | ) |
CMO’s | | | 486 | | | | (7 | ) | | | 5,511 | | | | (352 | ) | | | 5,997 | | | | (359 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Mortgage-backed securities-residential | | | 610 | | | | (8 | ) | | | 5,511 | | | | (352 | ) | | | 6,121 | | | | (360 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and agency securities | | | 40,638 | | | | (54 | ) | | | — | | | | — | | | | 40,638 | | | | (54 | ) |
State and municipal securities | | | 1,541 | | | | (20 | ) | | | — | | | | — | | | | 1,541 | | | | (20 | ) |
Equity securities | | | 99 | | | | (6 | ) | | | 790 | | | | (251 | ) | | | 889 | | | | (257 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 42,888 | | | $ | (88 | ) | | $ | 6,301 | | | $ | (603 | ) | | $ | 49,189 | | | $ | (691 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The
Company, as of June 30, 2009 adopted the provisions under FASB ASC Topic 320 —Investments- Debt and Equity Securities which requires a forecast of recovery of cost basis through cash flow collection on all debtfollowing table summarizes securities
with a fair value less than its amortized cost less any current period credit loss with an assertion on the lack of intentheld to
sell (or requirement to sell prior to recovery of cost basis). Based on a review of each of the securities in the investment portfolio in accordance with FASB ASC 320 at September 30, 2011, the Company concluded that it expects to recover the amortized cost basis of its investments on all but one private label CMO security and one equity security for which incurred impairment charges of $75 and $203, respectively, were recognized. As of September 30, 2011, the Company does not intend to sell nor is it more than likely than not that it would be required to sell any of its securitiesmaturity with unrealized losses,
prior to recovery of its amortized cost basis less any current-period applicable credit losses.The losses related to privately issued residential CMOs were recognized in light of deterioration of housing values in the residential real estate market and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The Company uses a DCF analysis to provide an estimate of an OTTI loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over collateralization tests, interest coverage tests and other factors. Expected default and deferral rates were weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate was based upon the yield expected from the related securities. The loss related to the equity securities were recognized as a result ofsegregated by the length of time and the extent to which the market value has been less than cost. The decline in value on these securities is thought to be affected by general market conditions which reflect prospects for the economy as a whole.
continuous unrealized loss position:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Continuous unrealized loss position | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
| Held to maturity | | | | | | | | | | | |
| September 30, 2014 | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | |
| Agency-backed | $ | 20,616 |
| | $ | (103 | ) | | $ | — |
| | $ | — |
| | $ | 20,616 |
| | $ | (103 | ) |
| CMO/Other MBS | 14,928 |
| | (368 | ) | | 42,646 |
| | (836 | ) | | 57,574 |
| | (1,204 | ) |
| Total residential MBS | 35,544 |
| | (471 | ) | | 42,646 |
| | (836 | ) | | 78,190 |
| | (1,307 | ) |
| Other securities: | | | | | | | | | | | |
| Federal agencies | 23,756 |
| | (62 | ) | | 24,101 |
| | (900 | ) | | 47,857 |
| | (962 | ) |
| State and municipal | 13,943 |
| | (100 | ) | | 1,479 |
| | (23 | ) | | 15,422 |
| | (123 | ) |
| Total other securities | 37,699 |
| | (162 | ) | | 25,580 |
| | (923 | ) | | 63,279 |
| | (1,085 | ) |
| Total | $ | 73,243 |
| | $ | (633 | ) | | $ | 68,226 |
| | $ | (1,759 | ) | | $ | 141,469 |
| | $ | (2,392 | ) |
| September 30, 2013 | | | | | | | | | | | |
| Residential MBS: | | | | | | | | | | | |
| Agency-backed | $ | 10,963 |
| | $ | (86 | ) | | $ | — |
| | $ | — |
| | $ | 10,963 |
| | $ | (86 | ) |
| CMO/Other MBS | 31,412 |
| | (337 | ) | | — |
| | — |
| | 31,412 |
| | (337 | ) |
| Total residential MBS | 42,375 |
| | (423 | ) | | — |
| | — |
| | 42,375 |
| | (423 | ) |
| Other securities: | | | | | | | | | | | |
| Federal agencies | 73,883 |
| | (3,458 | ) | | — |
| | — |
| | 73,883 |
| | (3,458 | ) |
| State and municipal | 9,530 |
| | (546 | ) | | — |
| | — |
| | 9,530 |
| | (546 | ) |
| Total other securities | 83,413 |
| | (4,004 | ) | | — |
| | — |
| | 83,413 |
| | (4,004 | ) |
| Total | $ | 125,788 |
| | $ | (4,427 | ) | | $ | — |
| | $ | — |
| | $ | 125,788 |
| | $ | (4,427 | ) |
Substantially all of the unrealized losses at September 30, 20112014 relate to investment grade debt securities and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts atAt September 30, 2011. A2014, a total of 1199 available for sale securities were in a continuous unrealized loss position for less than 12 months and 4118 securities were in an unrealized loss position for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.Within
Declines in the collateralized mortgage-backed securities (CMO’s) categoryfair value of the available for sale portfolio thereand held to maturity securities below their cost that are four individual private label CMO’s that have an amortized costdeemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of $5,372the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses (“OTTI”), management considers, among other things, (i) the length of time and athe extent to which the fair value (carrying value) of $4,851 as of September 30, 2011. Onehas been less than cost, (ii) the financial condition and near-term prospects of the four securities is consideredissuer, and (iii) the intent and ability of the Company to be impaired as noted above and is belowretain the investment grade. The impaired private label CMO hasfor a period of time sufficient to allow for an amortized costanticipated recovery in cost.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In determining whether there existed
Securities pledged for borrowings at FHLB and other than temporary impairment on theseinstitutions, and securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit riskpledged for municipal deposits and liquidity risk, and determined that no losses are expected. other purposes were as follows: |
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Available for sale securities pledged for borrowings, at fair value | $ | 268,316 |
| | $ | 199,642 |
|
| Available for sale securities pledged for municipal deposits, at fair value | 532,770 |
| | 580,756 |
|
| Available for sale securities pledged for customer back-to-back swaps, at fair value | 1,934 |
| | 4,645 |
|
| Held to maturity securities pledged for borrowings, at amortized cost | 58,509 |
| | 55,497 |
|
| Held to maturity securities pledged for municipal deposits, at amortized cost | 430,611 |
| | 167,926 |
|
| Total securities pledged | $ | 1,292,140 |
| | $ | 1,008,466 |
|
(4) Loans
The
Company will continue to evaluate its portfolio in this manner on a quarterly basis.(4) Securities Held to Maturity
The following is a summary of securities held to maturity:
| | | | | | | | | | | | | | | | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
September 30, 2011 | | | | | | | | | | | | | | | | |
Mortgage-backed securities-residential | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 1,298 | | | $ | 63 | | | $ | — | | | $ | 1,361 | |
Freddie Mac | | | 32,858 | | | | 103 | | | | (120 | ) | | | 32,841 | |
CMO/Other MBS | | | 25,828 | | | | 155 | | | | — | | | | 25,983 | |
| | | | | | | | | | | | | | | | |
| | | 59,984 | | | | 321 | | | | (120 | ) | | | 60,185 | |
| | | | | | | | | | | | | | | | |
Investment securities | | | | | | | | | | | | | | | | |
Federal agencies | | | 29,973 | | | | 25 | | | | (141 | ) | | | 29,857 | |
State and municipal securities | | | 18,583 | | | | 1,108 | | | | — | | | | 19,691 | |
Other | | | 1,500 | | | | 39 | | | | — | | | | 1,539 | |
| | | | | | | | | | | | | | | | |
| | | 50,056 | | | | 1,172 | | | | (141 | ) | | | 51,087 | |
| | | | | | | | | | | | | | | | |
Total held to maturity | | $ | 110,040 | | | $ | 1,493 | | | $ | (261 | ) | | $ | 111,272 | |
| | | | | | | | | | | | | | | | |
September 30, 2010 | | | | | | | | | | | | | | | | |
Mortgage-backed securities-residential | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 1,835 | | | $ | 96 | | | $ | — | | | $ | 1,931 | |
Freddie Mac | | | 2,389 | | | | 124 | | | | — | | | | 2,513 | |
Ginnie Mae | | | 16 | | | | 1 | | | | — | | | | 17 | |
CMO/Other MBS | | | 729 | | | | 19 | | | | — | | | | 748 | |
| | | | | | | | | | | | | | | | |
| | | 4,969 | | | | 240 | | | | — | | | | 5,209 | |
| | | | | | | | | | | | | | | | |
Investment securities | | | | | | | | | | | | | | | | |
State and municipal securities | | | 27,879 | | | | 980 | | | | (44 | ) | | | 28,815 | |
Other | | | 1,000 | | | | 38 | | | | — | | | | 1,038 | |
| | | | | | | | | | | | | | | | |
| | | 28,879 | | | | 1,018 | | | | (44 | ) | | | 29,853 | |
| | | | | | | | | | | | | | | | |
Total held to maturity | | $ | 33,848 | | | $ | 1,258 | | | $ | (44 | ) | | $ | 35,062 | |
| | | | | | | | | | | | | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summarycomposition of the amortized cost and fair value of investment securities held to maturity, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or repay their obligations.
| | | | | | | | |
| | | September 30, 2011 | |
| | | Amortized
Cost | | | Fair
Value | |
Remaining period to contractual maturity | | | | | | | | |
Less than one year | | $ | 5,813 | | | $ | 5,840 | |
One to five years | | | 7,696 | | | | 8,022 | |
Five to ten years | | | 32,955 | | | | 33,226 | |
Greater than ten years | | | 3,592 | | | | 3,999 | |
| | | | | | | | |
Total investment securities | | | 50,056 | | | | 51,087 | |
| | | | | | | | |
Mortgage backed securities-residential | | | 59,984 | | | | 60,185 | |
| | | | | | | | |
Total held to maturity securities | | $ | 110,040 | | | $ | 111,272 | |
| | | | | | | | |
Proceeds from sales of securities held to maturity during the years ended September 30, 2011, 2010 and 2009 totaled $357, $0, and $625 respectively. These sales resulted in gross realized gains of $18, $0, and $33 for the years ended September 30, 2011, 2010, and 2009 respectively, and no gross realized losses in fiscal years 2011, 2010, and 2009. These securities can be considered maturities per FASB ASC Topic #320,Investments — Debt & Equity securities, as the sale of the securities occurred after at least 85% of the principal outstanding had been collected since acquisition.
The following table summarizes those securities held to maturity with unrealized losses, segregated by the length of time in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Continuous Unrealized Loss Position | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or Longer | | | Total | |
As of September 30, 2011 | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
Freddie Mac MBS-residential | | $ | 25,770 | | | $ | (120 | ) | | $ | — | | | $ | — | | | $ | 25,770 | | | $ | (120 | ) |
Federal Agencies | | | 24,831 | | | | (141 | ) | | | — | | | | — | | | | 24,831 | | | | (141 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 50,601 | | | $ | (261 | ) | | $ | — | | | $ | — | | | $ | 50,601 | | | $ | (261 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Continuous Unrealized Loss Position | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or Longer | | | Total | |
As of September 30, 2010 | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
State and municipal securities | | | — | | | | — | | | | 676 | | | | (44 | ) | | | 676 | | | | (44 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | 676 | | | $ | (44 | ) | | $ | 676 | | | $ | (44 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
All of the unrealized losses on held to maturity securities at September 30, 2011 are attributable to changes in market interest rates and credit risk spreads subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2011. There were 8 held-to-maturity securities in a continuous unrealized loss position for less than 12 months, and 0 securities for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
investment. Because the Company has the ability and intent to hold securities with unrealized losses until maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2011.
(5) Loans
The components of theCompany’s loan portfolio, excluding loans held for sale, were as follows:
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
One- to four-family residential mortgage loans: | | | | | | | | |
Fixed rate | | $ | 325,837 | | | $ | 374,251 | |
Adjustable rate | | | 63,928 | | | | 60,649 | |
| | | | | | | | |
| | | 389,765 | | | | 434,900 | |
| | | | | | | | |
Commercial real estate loans | | | 703,356 | | | | 579,232 | |
Commercial business loans | | | 209,923 | | | | 217,927 | |
Acquisition, development & construction loans | | | 175,931 | | | | 231,258 | |
| | | | | | | | |
| | | 1,089,210 | | | | 1,028,417 | |
| | | | | | | | |
Consumer loans: | | | | | | | | |
Home equity lines of credit | | | 174,521 | | | | 176,134 | |
Homeowner loans | | | 40,969 | | | | 48,941 | |
Other consumer loans, including overdrafts | | | 9,334 | | | | 13,149 | |
| | | | | | | | |
| | | 224,824 | | | | 238,224 | |
| | | | | | | | |
Total loans | | | 1,703,799 | | | | 1,701,541 | |
Allowance for loan losses | | | (27,917 | ) | | | (30,843 | ) |
| | | | | | | | |
Total loans, net | | $ | 1,675,882 | | | $ | 1,670,698 | |
| | | | | | | | |
was the following:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Commercial: | | | |
| Commercial & industrial | $ | 1,164,537 |
| | $ | 439,787 |
|
| Payroll finance | 145,474 |
| | — |
|
| Warehouse lending | 192,003 |
| | — |
|
| Factored receivables | 181,433 |
| | — |
|
| Equipment financing | 393,027 |
| | — |
|
| Total commercial | 2,076,474 |
| | 439,787 |
|
| Commercial mortgage: | | | |
| Commercial real estate | 1,449,052 |
| | 969,490 |
|
| Multi-family | 368,524 |
| | 307,547 |
|
| Acquisition, development & construction | 92,149 |
| | 102,494 |
|
| Total commercial mortgage | 1,909,725 |
| | 1,379,531 |
|
| Total commercial and commercial mortgage | 3,986,199 |
| | 1,819,318 |
|
| Residential mortgage | 570,431 |
| | 400,009 |
|
| Consumer: | | | |
| Home equity lines of credit | 159,944 |
| | 156,995 |
|
| Other consumer loans | 43,864 |
| | 36,576 |
|
| Total consumer | 203,808 |
| | 193,571 |
|
| Total loans | 4,760,438 |
| | 2,412,898 |
|
| Allowance for loan losses | (40,612 | ) | | (28,877 | ) |
| Total loans, net | $ | 4,719,826 |
| | $ | 2,384,021 |
|
Total loans include net deferred loan origination costs of $308$1,261 at September 30, 2014 and $720$1,201 at September 30, 20112013.
Loans acquired from Legacy Sterling were a total of $1,698,108, net of purchase accounting adjustments and
were comprised of $1,683,454 of loans that were not considered impaired at the acquisition date and $13,249 of loans that were determined to be impaired at the time of acquisition. The impaired loans were accounted for in accordance with ASC 310-30. At September 30,
2010, respectively.A substantial portion2014, the net recorded amount of the Company’s loan portfolio is secured by residential and commercial real estate located in Rockland and Orange Countiesloans accounted for under ASC 310-30 was $3,763.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loans acquired in the Merger that were determined to be purchased credit impaired were all considered collateral dependent loans. Therefore, estimated fair value calculations and projected cash flows included only return of principal and no interest income. There was no accretable yield associated with these loans during the twelve months ended September 30, 2014.
At September 30, 2014, the Company pledged loans totaling $1,246,315 to the FHLB as collateral for certain borrowing arrangements. See Note 8. “Borrowings and Senior Notes”.
The following tables set forth the amounts and status of the Company’s loans and TDRs at September 30, 2014 and September 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Current | | 30-59 days past due | | 60-89 days past due | | 90+ days past due | | Non- accrual | | Total |
| Commercial & industrial | $ | 1,150,854 |
| | $ | 2,316 |
| | $ | 7,043 |
| | $ | — |
| | $ | 4,324 |
| | $ | 1,164,537 |
|
| Payroll finance | 145,029 |
| | 99 |
| | — |
| | 346 |
| | — |
| | 145,474 |
|
| Warehouse lending | 192,003 |
| | — |
| | — |
| | — |
| | — |
| | 192,003 |
|
| Factored receivables | 181,063 |
| | — |
| | — |
| | — |
| | 370 |
| | 181,433 |
|
| Equipment financing | 391,914 |
| | 689 |
| | 162 |
| | — |
| | 262 |
| | 393,027 |
|
| Commercial real estate | 1,433,805 |
| | 93 |
| | 4,188 |
| | 521 |
| | 10,445 |
| | 1,449,052 |
|
| Multi-family | 368,393 |
| | — |
| | — |
| | — |
| | 131 |
| | 368,524 |
|
| Acquisition, development & construction | 79,732 |
| | — |
| | 56 |
| | — |
| | 12,361 |
| | 92,149 |
|
| Residential mortgage | 547,912 |
| | 4,023 |
| | 2,036 |
| | 534 |
| | 15,926 |
| | 570,431 |
|
| Consumer | 193,491 |
| | 3,087 |
| | 1,487 |
| | — |
| | 5,743 |
| | 203,808 |
|
| Total loans | $ | 4,684,196 |
| | $ | 10,307 |
| | $ | 14,972 |
| | $ | 1,401 |
| | $ | 49,562 |
| | $ | 4,760,438 |
|
| Total TDRs included above | $ | 17,138 |
| | $ | 346 |
| | $ | 169 |
| | $ | — |
| | $ | 11,944 |
| | $ | 29,597 |
|
| Non-performing loans: | | | | | | | | | | | |
| Loans 90+ days past due and still accruing | | | | | | | | | $ | 1,401 |
| | |
| Non-accrual loans | | | | | | | | | 49,562 |
| | |
| Total non-performing loans | | | | | | | | | $ | 50,963 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Current | | 30-59 days past due | | 60-89 days past due | | 90+ days past due | | Non- accrual | | Total |
| Commercial & industrial | $ | 438,818 |
| | $ | 178 |
| | $ | 2 |
| | $ | 289 |
| | $ | 500 |
| | 439,787 |
|
| Commercial real estate | 1,263,933 |
| | 1,978 |
| | 2,357 |
| | 1,574 |
| | 7,195 |
| | 1,277,037 |
|
| Acquisition, development & construction | 96,306 |
| | 768 |
| | — |
| | — |
| | 5,420 |
| | 102,494 |
|
| Residential mortgage | 390,072 |
| | 354 |
| | 267 |
| | 1,832 |
| | 7,484 |
| | 400,009 |
|
| Consumer | 190,393 |
| | 566 |
| | — |
| | 404 |
| | 2,208 |
| | 193,571 |
|
| Total loans | $ | 2,379,522 |
| | $ | 3,844 |
| | $ | 2,626 |
| | $ | 4,099 |
| | $ | 22,807 |
| | $ | 2,412,898 |
|
| Total TDRs included above | $ | 23,754 |
| | $ | — |
| | $ | — |
| | $ | 141 |
| | $ | 2,199 |
| | $ | 26,094 |
|
| Non-performing loans: | | | | | | | | | | | |
| Loans 90+ days past due and still accruing | | | | | | | | | $ | 4,099 |
| | |
| Non-accrual loans | | | | | | | | | 22,807 |
| | |
| Total non-performing loans | | | | | | | | | $ | 26,906 |
| | |
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Activity in the allowance for loan losses for the fiscal years ended September 30, 2014, 2013 and the recorded investments in loans by portfolio segment2012 is summarized below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Beginning balance | | Charge-offs | | Recoveries | | Net charge-offs | | Provision | | Ending balance |
| Commercial & industrial | $ | 5,302 |
| | $ | (2,901 | ) | | $ | 1,073 |
| | $ | (1,828 | ) | | $ | 6,062 |
| | $ | 9,536 |
|
| Payroll finance | — |
| | (758 | ) | | — |
| | (758 | ) | | 2,137 |
| | 1,379 |
|
| Warehouse lending | — |
| | — |
| | — |
| | — |
| | 630 |
| | 630 |
|
| Factored receivables | — |
| | (211 | ) | | 9 |
| | (202 | ) | | 1,496 |
| | 1,294 |
|
| Equipment financing | — |
| | (1,074 | ) | | 194 |
| | (880 | ) | | 3,501 |
| | 2,621 |
|
| Commercial real estate | 9,967 |
| | (741 | ) | | 161 |
| | (580 | ) | | 1,457 |
| | 10,844 |
|
| Multi-family | — |
| | (418 | ) | | 92 |
| | (326 | ) | | 2,193 |
| | 1,867 |
|
| Acquisition, development & construction | 5,806 |
| | (1,479 | ) | | — |
| | (1,479 | ) | | (2,207 | ) | | 2,120 |
|
| Residential mortgage | 4,474 |
| | (963 | ) | | 323 |
| | (640 | ) | | 2,003 |
| | 5,837 |
|
| Consumer | 3,328 |
| | (786 | ) | | 114 |
| | (672 | ) | | 1,828 |
| | 4,484 |
|
| Total loans | $ | 28,877 |
| | $ | (9,331 | ) | | $ | 1,966 |
| | $ | (7,365 | ) | | $ | 19,100 |
| | $ | 40,612 |
|
| Annualized net charge-offs to average loans outstanding | | | | | | | | 0.24 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Beginning
balance | | Charge-offs | | Recoveries | | Net
charge-offs | | Provision | | Ending balance |
| Commercial & industrial | $ | 4,603 |
| | $ | (1,354 | ) | | $ | 410 |
| | $ | (944 | ) | | $ | 1,643 |
| | $ | 5,302 |
|
| Commercial real estate | 7,230 |
| | (3,725 | ) | | 577 |
| | (3,148 | ) | | 5,885 |
| | 9,967 |
|
| Acquisition, development & construction | 8,526 |
| | (3,422 | ) | | 182 |
| | (3,240 | ) | | 520 |
| | 5,806 |
|
| Residential mortgage | 4,359 |
| | (2,547 | ) | | 101 |
| | (2,446 | ) | | 2,561 |
| | 4,474 |
|
| Consumer | 3,564 |
| | (2,009 | ) | | 232 |
| | (1,777 | ) | | 1,541 |
| | 3,328 |
|
| Total loans | $ | 28,282 |
| | $ | (13,057 | ) | | $ | 1,502 |
| | $ | (11,555 | ) | | $ | 12,150 |
| | $ | 28,877 |
|
| Annualized net charge-offs to average loans outstanding | | | | | | | | 0.52 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2012 |
| | Beginning
balance | | Charge-offs | | Recoveries | | Net
charge-offs | | Provision | | Ending balance |
| Commercial & industrial | $ | 5,945 |
| | $ | (1,526 | ) | | $ | 1,116 |
| | $ | (410 | ) | | $ | (932 | ) | | $ | 4,603 |
|
| Commercial real estate | 5,568 |
| | (2,707 | ) | | 528 |
| | (2,179 | ) | | 3,841 |
| | 7,230 |
|
| Acquisition, development & construction | 9,895 |
| | (4,124 | ) | | 299 |
| | (3,825 | ) | | 2,456 |
| | 8,526 |
|
| Residential mortgage | 3,498 |
| | (2,551 | ) | | 356 |
| | (2,195 | ) | | 3,056 |
| | 4,359 |
|
| Consumer | 3,011 |
| | (1,901 | ) | | 263 |
| | (1,638 | ) | | 2,191 |
| | 3,564 |
|
| Total loans | $ | 27,917 |
| | $ | (12,809 | ) | | $ | 2,562 |
| | $ | (10,247 | ) | | $ | 10,612 |
| | $ | 28,282 |
|
| | | | | | | | | | | | |
| Annualized net charge-offs to average loans outstanding | | | | | | | | 0.56 | % |
Management considers a loan to be impaired when, based on
impairment method for September 30, 2011 are summarized below: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended September 30, 2011 | |
| | | Beginning
Allowance for
loan losses | | | Charge-offs | | | Recoveries | | | Net
Charge-offs | | | Provision
for
losses | | | Ending
Allowance for
Loan Losses | |
Loans by segment: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 2,641 | | | $ | (2,140 | ) | | $ | 15 | | | $ | (2,125 | ) | | $ | 2,982 | | | $ | 3,498 | |
Real estate — commercial mortgage | | | 5,060 | | | | (819 | ) | | | 2 | | | | (817 | ) | | | 290 | | | | 4,533 | |
Real estate — commercial mortgage (CBL) | | | 855 | | | | (983 | ) | | | — | | | | (983 | ) | | | 1,163 | | | | 1,035 | |
Commercial business loans | | | 3,262 | | | | (366 | ) | | | 232 | | | | (134 | ) | | | (1,797 | ) | | | 1,331 | |
Commercial business loans (CBL) | | | 5,708 | | | | (5,034 | ) | | | 373 | | | | (4,661 | ) | | | 3,567 | | | | 4,614 | |
Acquisition Development & Construction | | | 9,752 | | | | (8,939 | ) | | | 10 | | | | (8,929 | ) | | | 9,072 | | | | 9,895 | |
Consumer, including home equity | | | 3,565 | | | | (1,989 | ) | | | 128 | | | | (1,861 | ) | | | 1,307 | | | | 3,011 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Loans | | $ | 30,843 | | | $ | (20,270 | ) | | $ | 760 | | | $ | (19,510 | ) | | $ | 16,584 | | | $ | 27,917 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net charge-offs to average loans outstanding | | | | | | | | | | | | | | | | | | | | | | | 1.17 | % |
| | | | | | | | | | | | |
| | | September 30, 2011 | |
| | | Individually
evaluated for
impairment | | | Collectivey
evaluated for
impairment | | | Total ending
loans balance | |
Loans by segment: | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 8,573 | | | $ | 381,192 | | | $ | 389,765 | |
Real estate — commercial mortgage | | | 10,653 | | | | 599,726 | | | | 610,379 | |
Real estate — commercial mortgage (CBL) | | | 4,477 | | | | 88,500 | | | | 92,977 | |
Commercial business loans | | | 531 | | | | 133,868 | | | | 134,399 | |
Commercial business loans (CBL) | | | — | | | | 75,524 | | | | 75,524 | |
Acquisition Development & Construction | | | 28,233 | | | | 147,708 | | | | 175,931 | |
Consumer, including home equity | | | 2,504 | | | | 222,320 | | | | 224,824 | |
| | | | | | | | | | | | |
Total Loans | | $ | 54,961 | | | $ | 1,648,838 | | | $ | 1,703,799 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | September 30, 2011 | |
| | | Individually
evaluated for
impairment | | | Collectivey
evaluated for
impairment | | | Total
allowance
balance | |
Ending allowance by segment: | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 1,069 | | | $ | 2,429 | | | $ | 3,498 | |
Real estate — commercial mortgage | | | 474 | | | | 4,059 | | | | 4,533 | |
Real estate — commercial mortgage (CBL) | | | 594 | | | | 441 | | | | 1,035 | |
Commercial business loans | | | — | | | | 1,331 | | | | 1,331 | |
Commercial business loans (CBL) | | | — | | | | 4,614 | | | | 4,614 | |
Acquisition Development & Construction | | | 1,409 | | | | 8,486 | | | | 9,895 | |
Consumer, including home equity | | | 260 | | | | 2,751 | | | | 3,011 | |
| | | | | | | | | | | | |
Total allowance | | $ | 3,806 | | | $ | 24,111 | | | $ | 27,917 | |
| | | | | | | | | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Activity in the allowance for loan lossescurrent information and the recorded investments in loans by portfolio segment based on impairment method for September 30, 2010 are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve months ended September 30, 2010 | |
| | | Beginning
Allowance for
loan losses | | | Charge-offs | | | Recoveries | | | Net
Charge-offs | | | Provision
for
losses | | | Ending
Allowance for
Loan Losses | |
Loans by segment: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 3,106 | | | $ | (749 | ) | | $ | 3 | | | $ | (746 | ) | | $ | 281 | | | $ | 2,641 | |
Real estate — commercial mortgage | | | 4,824 | | | | (416 | ) | | | 8 | | | | (408 | ) | | | 644 | | | | 5,060 | |
Real estate — commercial mortgage (CBL) | | | 2,871 | | | | (571 | ) | | | 15 | | | | (556 | ) | | | (1,460 | ) | | | 855 | |
Commercial business loans | | | 3,917 | | | | (1,666 | ) | | | 306 | | | | (1,360 | ) | | | 705 | | | | 3,262 | |
Commercial business loans (CBL) | | | 5,011 | | | | (4,912 | ) | | | 364 | | | | (4,548 | ) | | | 5,245 | | | | 5,708 | |
Acquisition Development & Construction | | | 7,680 | | | | (848 | ) | | | 261 | | | | (587 | ) | | | 2,659 | | | | 9,752 | |
Consumer, including home equity | | | 2,641 | | | | (1,168 | ) | | | 166 | | | | (1,002 | ) | | | 1,926 | | | | 3,565 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Loans | | $ | 30,050 | | | $ | (10,330 | ) | | $ | 1,123 | | | $ | (9,207 | ) | | $ | 10,000 | | | $ | 30,843 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net charge-offs to average loans outstanding | | | | | | | | | | | | | | | | | | | | | | | 0.56 | % |
| | | | |
Loans as of September 30, 2010: | | | | |
Individually evaluated for impairment | | $ | 42,082 | |
Collectively evaluated for impairment | | | 1,659,459 | |
| | | | |
Total ending loans balance | | $ | 1,701,541 | |
| | | | |
A loan is impaired whenevents, it is probabledetermined that a creditorthe Company will not be unableable to collect all amounts due according to the contractual termsloan contract, including scheduled interest payments. Determination of impairment is treated the loan agreement. Impairedsame across all classes of loans substantially consist of non-performingon a loan-by-loan basis, except residential mortgage loans and accruing and performing troubled debt restructured loans. The recorded investmenthome equity lines of credit with an outstanding balance of $500 or less, which are evaluated for impairment on a homogeneous pool basis. When management identifies a loan as impaired, loan includes the unpaid principal balance, negative escrow and any tax in arrears.
impairment is measured based on the present value of expected future cash flows, discounted at the
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
loan’s effective interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is generally recognized through a charge-off to the allowance for loan losses.
When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on non-accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectibility of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method.
The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans evaluated by segment | | Allowance evaluated by segment |
| | Individually evaluated for impairment | | Collectively evaluated for impairment | | Purchased credit impaired loans | | Total loans | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total allowance for loan losses |
| Commercial & industrial | $ | 4,177 |
| | $ | 1,158,837 |
| | $ | 1,523 |
| | $ | 1,164,537 |
| | $ | — |
| | $ | 9,536 |
| | $ | 9,536 |
|
| Payroll finance | — |
| | 145,474 |
| | — |
| | 145,474 |
| | — |
| | 1,379 |
| | 1,379 |
|
| Warehouse lending | — |
| | 192,003 |
| | — |
| | 192,003 |
| | — |
| | 630 |
| | 630 |
|
| Factored receivables | — |
| | 181,433 |
| | — |
| | 181,433 |
| | — |
| | 1,294 |
| | 1,294 |
|
| Equipment financing | — |
| | 393,027 |
| | — |
| | 393,027 |
| | — |
| | 2,621 |
| | 2,621 |
|
| Commercial real estate | 13,750 |
| | 1,435,163 |
| | 139 |
| | 1,449,052 |
| | — |
| | 10,844 |
| | 10,844 |
|
| Multi-family | — |
| | 368,524 |
| | — |
| | 368,524 |
| | — |
| | 1,867 |
| | 1,867 |
|
| Acquisition, development & construction | 17,766 |
| | 74,383 |
| | — |
| | 92,149 |
| | — |
| | 2,120 |
| | 2,120 |
|
| Residential mortgage | 515 |
| | 567,815 |
| | 2,101 |
| | 570,431 |
| | — |
| | 5,837 |
| | 5,837 |
|
| Consumer | — |
| | 203,808 |
| | — |
| | 203,808 |
| | — |
| | 4,484 |
| | 4,484 |
|
| Total loans | $ | 36,208 |
| | $ | 4,720,467 |
| | $ | 3,763 |
| | $ | 4,760,438 |
| | $ | — |
| | $ | 40,612 |
| | $ | 40,612 |
|
There was no amount included in the allowance for loan losses associated with purchased credit impaired loans at September 30, 2014, as there was no further deterioration in the credit quality of these loans since the Merger date.
The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Loans evaluated by segment | | Allowance evaluated by segment |
| | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total loans | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total allowance for loan losses |
| Commercial & industrial | $ | 2,631 |
| | $ | 437,156 |
| | $ | 439,787 |
| | $ | 249 |
| | $ | 5,053 |
| | $ | 5,302 |
|
| Commercial real estate | 14,091 |
| | 1,262,946 |
| | 1,277,037 |
| | 803 |
| | 9,164 |
| | 9,967 |
|
| Acquisition, development & construction | 19,582 |
| | 82,912 |
| | 102,494 |
| | 540 |
| | 5,266 |
| | 5,806 |
|
| Residential mortgage | 515 |
| | 399,494 |
| | 400,009 |
| | — |
| | 4,474 |
| | 4,474 |
|
| Consumer | 2 |
| | 193,569 |
| | 193,571 |
| | 1 |
| | 3,327 |
| | 3,328 |
|
| Total loans | $ | 36,821 |
| | $ | 2,376,077 |
| | $ | 2,412,898 |
| | $ | 1,593 |
| | $ | 27,284 |
| | $ | 28,877 |
|
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents loans individually evaluated for impairment by segment of loans as of at September 30, 2011: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Unpaid
Principal
Balance | | | Recorded
Investment | | | Allowance
for Loan
Losses
Allocated | | | YTD
Average
Impaired
Loans | | | Interest
Income
Recognized | | | Cash-basis
Interest
Income
Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 2,437 | | | $ | 2,577 | | | $ | — | | | $ | 2,702 | | | $ | 92 | | | $ | 51 | |
Real estate — commercial mortgage | | | 6,753 | | | | 6,823 | | | | — | | | | 6,769 | | | | 332 | | | | 146 | |
Real estate — commercial mortgage (CBL) | | | 2,012 | | | | 2,050 | | | | — | | | | 2,148 | | | | 165 | | | | 102 | |
Acquisition, development and construction | | | 20,914 | | | | 21,316 | | | | — | | | | 26,111 | | | | 1,892 | | | | 1,454 | |
Commercial business loans | | | 531 | | | | 531 | | | | — | | | | 862 | | | | 42 | | | | 42 | |
Commercial business loans (CBL) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Consumer loans, including home equity | | | 1,879 | | | | 1,885 | | | | — | | | | 1,860 | | | | 61 | | | | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | 34,526 | | | | 35,182 | | | | — | | | | 40,452 | | | | 2,584 | | | | 1,808 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | | 5,836 | | | | 5,996 | | | | 1,069 | | | | 6,319 | | | | 159 | | | | 159 | |
Real estate — commercial mortgage | | | 3,741 | | | | 3,830 | | | | 474 | | | | 3,843 | | | | 108 | | | | 108 | |
Real estate — commercial mortgage (CBL) | | | 2,283 | | | | 2,427 | | | | 594 | | | | 2,662 | | | | 91 | | | | 36 | |
Acquisition, development and construction | | | 6,900 | | | | 6,907 | | | | 1,409 | | | | 6,963 | | | | 114 | | | | 96 | |
Commercial business loans | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial business loans (CBL) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Consumer loans, including home equity | | | 619 | | | | 619 | | | | 260 | | | | 642 | | | | 33 | | | | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | 19,379 | | | | 19,779 | | | | 3,806 | | | | 20,429 | | | | 505 | | | | 421 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 53,905 | | | $ | 54,961 | | | $ | 3,806 | | | $ | 60,881 | | | $ | 3,089 | | | $ | 2,229 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
2014
and September 30, 2013: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | September 30, 2013 |
| | Unpaid principal balance | | Recorded investment | | Related allowance | | Unpaid principal balance | | Recorded investment | | Related allowance |
| With no related allowance recorded: | | | | | | | | | | | |
| Commercial & industrial | $ | 4,177 |
| | $ | 4,177 |
| | $ | — |
| | $ | 2,175 |
| | $ | 2,131 |
| | $ | — |
|
| Commercial real estate | 13,886 |
| | 13,750 |
| | — |
| | 12,451 |
| | 11,820 |
| | — |
|
| Acquisition, development & construction | 18,676 |
| | 17,766 |
| | — |
| | 17,971 |
| | 17,945 |
| | — |
|
| Residential mortgage | 515 |
| | 515 |
| | — |
| | 515 |
| | 515 |
| | — |
|
| Subtotal | 37,254 |
| | 36,208 |
| | — |
| | 33,112 |
| | 32,411 |
| | — |
|
| With an allowance recorded: | | | | | | | | | | | |
| Commercial & industrial | — |
| | — |
| | — |
| | 500 |
| | 500 |
| | 249 |
|
| Commercial real estate | — |
| | — |
| | — |
| | 3,150 |
| | 2,271 |
| | 803 |
|
| Acquisition, development & construction | — |
| | — |
| | — |
| | 2,753 |
| | 1,637 |
| | 540 |
|
| Consumer | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 1 |
|
| Subtotal | — |
| | — |
| | — |
| | 6,405 |
| | 4,410 |
| | 1,593 |
|
| Total | $ | 37,254 |
| | $ | 36,208 |
| | $ | — |
| | $ | 39,517 |
| | $ | 36,821 |
| | $ | 1,593 |
|
During the quarter ended March 31, 2014, the Company modified its allowance for loan loss policy to generally require a charge-off of the difference between the book balance of a collateral dependent impaired loan and the net value of the collateral securing the loan.
The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment of loans as of for the fiscal year September 30, 2010: | | | | | | | | | | | | |
| | | Unpaid
Principal
Balance | | | Recorded
Investment | | | Allowance
for Loan
Losses
Allocated | |
With no related allowance recorded: | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 2,896 | | | $ | 2,930 | | | $ | — | |
Real estate — commercial mortgage | | | 1,658 | | | | 1,793 | | | | — | |
Acquisition, development and construction | | | 4,732 | | | | 4,760 | | | | — | |
Commercial business loans | | | 458 | | | | 458 | | | | — | |
Consumer loans, including home equity | | | 378 | | | | 378 | | | | — | |
| | | | | | | | | | | | |
Subtotal | | | 10,122 | | | | 10,319 | | | | — | |
With an allowance recorded: | | | | | | | | | | | | |
Real estate — residential mortgage | | | 5,682 | | | | 5,879 | | | | 800 | |
Real estate — commercial mortgage | | | 6,974 | | | | 7,203 | | | | 399 | |
Acquisition, development and construction | | | 15,613 | | | | 15,652 | | | | 766 | |
Commercial business loans | | | 1,365 | | | | 1,365 | | | | 511 | |
Consumer loans, including home equity | | | 1,663 | | | | 1,664 | | | | 570 | |
| | | | | | | | | | | | |
Subtotal | | | 31,297 | | | | 31,763 | | | | 3,046 | |
| | | | | | | | | | | | |
Total | | $ | 41,419 | | | $ | 42,082 | | | $ | 3,046 | |
| | | | | | | | | | | | |
2014
PROVIDENT NEW YORK and 2013: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | September 30, 2013 |
| | YTD average recorded investment | | Interest income recognized | | Cash-basis interest income recognized | | YTD average recorded investment | | Interest income recognized | | Cash-basis interest income recognized |
| With no related allowance recorded: | | | | | | | | | | | |
| Commercial & industrial | $ | 4,180 |
| | $ | — |
| | $ | — |
| | $ | 1,821 |
| | $ | 91 |
| | $ | 86 |
|
| Commercial real estate | 14,016 |
| | 186 |
| | 180 |
| | 17,325 |
| | 286 |
| | 275 |
|
| Acquisition, development & construction | 20,525 |
| | 239 |
| | 239 |
| | 12,827 |
| | 631 |
| | 587 |
|
| Residential mortgage | 515 |
| | — |
| | — |
| | 309 |
| | — |
| | — |
|
| Consumer | — |
| | — |
| | — |
| | 61 |
| | — |
| | — |
|
| Subtotal | 39,236 |
| | 425 |
| | 419 |
| | 32,343 |
| | 1,008 |
| | 948 |
|
| With an allowance recorded: | | | | | | | | | | | |
| Commercial & industrial | — |
| | — |
| | — |
| | 705 |
| | — |
| | — |
|
| Commercial real estate | — |
| | — |
| | — |
| | 6,646 |
| | 7 |
| | 7 |
|
| Acquisition, development & construction | — |
| | — |
| | — |
| | 1,104 |
| | — |
| | — |
|
| Residential mortgage | — |
| | — |
| | — |
| | 1,602 |
| | 14 |
| | 10 |
|
| Consumer | — |
| | — |
| | — |
| | 228 |
| | — |
| | — |
|
| Subtotal | — |
| | — |
| | — |
| | 10,285 |
| | 21 |
| | 17 |
|
| Total | $ | 39,236 |
| | $ | 425 |
| | $ | 419 |
| | $ | 42,628 |
| | $ | 1,029 |
| | $ | 965 |
|
STERLING BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Average impaired loans for
In the
twelve months endingfiscal year ended September 30,
2011 were $60,881. Listed below are2012, the
Company recognized interest income of $1,878 including cash-basis interest income recognized
during impairment and cash received for interest during impairment for the twelve months ending September 30, 2011 and September 30, 2010, respectively. | | | | | | | | |
| | | September 30,
2011 | | | September 30,
2010 | |
Interest income recognized during impairment | | $ | 3,089 | | | $ | 1,975 | |
Cash-basis interest income recognized | | | 2,229 | | | | 1,157 | |
of $1,136 on $58,195 of average impaired loans.
Troubled Debt Restructuring:
The following tables set forth the amounts and past due status of the Company’s loans, troubled debt restructurings and other real estate ownedTDRs at September 30, 20112014 and September 30, 2010. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2011 | |
| | | Current
Loans | | | 30-59
Days
Past Due | | | 60-89
Days
Past Due | | | 90+
Days
Past Due | | | Non-
Accrual | | | Total
Loans | |
Non-performing loans: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 380,577 | | | $ | 868 | | | $ | 344 | | | $ | 491 | | | $ | 7,485 | | | $ | 389,765 | |
Real estate — commercial mortgage | | | 599,619 | | | | 768 | | | | 337 | | | | 1,639 | | | | 8,016 | | | | 610,379 | |
Real estate — commercial mortgage (CBL) | | | 89,418 | | | | — | | | | — | | | | 350 | | | | 3,209 | | | | 92,977 | |
Commercial business loans | | | 133,741 | | | | 490 | | | | — | | | | — | | | | 168 | | | | 134,399 | |
Commercial business loans (CBL) | | | 75,449 | | | | — | | | | — | | | | — | | | | 75 | | | | 75,524 | |
Acquisition, development and construction loans | | | 154,682 | | | | 3,859 | | | | 406 | | | | 446 | | | | 16,538 | | | | 175,931 | |
Consumer, including home equity loans | | | 221,880 | | | | 494 | | | | 300 | | | | 1,164 | | | | 986 | | | | 224,824 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,655,366 | | | $ | 6,479 | | | $ | 1,387 | | | $ | 4,090 | | | $ | 36,477 | | | $ | 1,703,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total troubled debt restructurings included above | | $ | 9,060 | | | $ | 266 | | | $ | — | | | $ | 446 | | | $ | 7,792 | | | $ | 17,564 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non Performing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans 90+ and still accruing | | | | | | | | | | | | | | | | | | $ | 4,090 | | | | | |
Nonaccrual loans | | | | | | | | | | | | | | | | | | | 36,477 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non performing loans | | | | | | | | | | | | | | | | | | | 40,567 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned: | | | | | | | | | | | | | | | | | | | | | | | | |
Land | | | | | | | | | | | | | | | | | | | 1,926 | | | | | |
Commercial real estate | | | | | | | | | | | | | | | | | | | 2,163 | | | | | |
Acquisition, development & construction loans | | | | | | | | | | | | | | | | | | | 745 | | | | | |
One- to four-family | | | | | | | | | | | | | | | | | | | 557 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other real estate owned | | | | | | | | | | | | | | | | | | | 5,391 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non-performing assets | | | | | | | | | | | | | | | | | | $ | 45,958 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ratios: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-performing loans to total loans | | | | | | | | | | | | | | | | | | | 2.38 | % | | | | |
Non-performing assets to total assets | | | | | | | | | | | | | | | | | | | 1.46 | % | | | | |
Allowance for loan losses to total non-performing loans | | | | | | | | | | | | | | | | | | | 69 | % | | | | |
Allowance for loan losses to average loans | | | | | | | | | | | | | | | | | | | 1.68 | % | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES2013:
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2010 | |
| | | Current
Loans | | | 30-59
Days
Past Due | | | 60-89
Days
Past Due | | | 90+
Days
Past Due | | | Non-
Accrual | | | Total
Loans | |
Non-performing loans: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate — residential mortgage | | $ | 426,754 | | | $ | 113 | | | $ | — | | | $ | 1,953 | | | $ | 6,080 | | | $ | 434,900 | |
Real estate — commercial mortgage | | | 475,532 | | | | 616 | | | | 853 | | | | 1,866 | | | | 5,061 | | | | 483,928 | |
Real estate — commercial mortgage (CBL) | | | 92,374 | | | | — | | | | — | | | | 1,105 | | | | 1,825 | | | | 95,304 | |
Commercial business loans | | | 121,301 | | | | 3,403 | | | | — | | | | — | | | | 1,061 | | | | 125,765 | |
Commercial business loans (CBL) | | | 91,847 | | | | — | | | | — | | | | — | | | | 315 | | | | 92,162 | |
Acquisition, development and construction loans | | | 218,847 | | | | 3,982 | | | | 2,699 | | | | — | | | | 5,730 | | | | 231,258 | |
Consumer, including home equity loans | | | 235,700 | | | | 375 | | | | 305 | | | | 503 | | | | 1,341 | | | | 238,224 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,662,355 | | | $ | 8,489 | | | $ | 3,857 | | | $ | 5,427 | | | $ | 21,413 | | | $ | 1,701,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total troubled debt restructurings included above | | $ | 16,047 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,457 | | | $ | 21,504 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non Performing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans 90+ and still accruing | | | | | | | | | | | | | | | | | | $ | 5,427 | | | | | |
Nonaccrual loans | | | | | | | | | | | | | | | | | | | 21,413 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non performing loans | | | | | | | | | | | | | | | | | | | 26,840 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned: | | | | | | | | | | | | | | | | | | | | | | | | |
Land | | | | | | | | | | | | | | | | | | | 2,029 | | | | | |
Commercial real estate | | | | | | | | | | | | | | | | | | | 1,507 | | | | | |
One- to four-family | | | | | | | | | | | | | | | | | | | 355 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other real estate owned | | | | | | | | | | | | | | | | | | | 3,891 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non-performing assets | | | | | | | | | | | | | | | | | | $ | 30,731 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ratios: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-performing loans to total loans | | | | | | | | | | | | | | | | | | | 1.58 | % | | | | |
Non-performing assets to total assets | | | | | | | | | | | | | | | | | | | 1.02 | % | | | | |
Allowance for loan losses to total non-performing loans | | | | | | | | | | | | | | | | | | | 115 | % | | | | |
Allowance for loan losses to average loans | | | | | | | | | | | | | | | | | | | 1.82 | % | | | | |
Troubled Debt Restructurings:
Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the company’s internal underwriting policy. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of the loan were for period ranging from 3 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 3months to 30 years. Restructured loans are recorded in accrual status when the loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items. Total troubled debt restructurings were $17,564 and $21,504 at September 30, 2011 and September 30, 2010,
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
respectively. There were $8,238 and $5,457 in troubled debt restructurings included in non-performing loans at September 30, 2011 and September 30, 2010, respectively. Troubled debt restructurings still accruing and considered to be performing were $9,326 and $16,047 at September 30, 2011 and September 30, 2010, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Current loans | | 30-59 days past due | | 60-89 days past due | | 90+ days past due | | Non- accrual | | Total |
| Commercial & industrial | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,618 |
| | $ | 1,893 |
|
| Equipment financing | 435 |
| | — |
| | — |
| | — |
| | — |
| | 435 |
|
| Commercial real estate | 4,838 |
| | — |
| | — |
| | — |
| | 447 |
| | 5,285 |
|
| Acquisition, development & construction | 5,732 |
| | — |
| | — |
| | — |
| | 6,817 |
| | 12,549 |
|
| Residential mortgage | 5,858 |
| | 346 |
| | 169 |
| | — |
| | 2,841 |
| | 9,214 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | 221 |
| | 221 |
|
| Total | $ | 17,138 |
| | $ | 346 |
| | $ | 169 |
| | $ | — |
| | $ | 11,944 |
| | $ | 29,597 |
|
| Allowance for loan losses | $ | 409 |
| | $ | — |
| | $ | 31 |
| | $ | — |
| | $ | 451 |
| | $ | 891 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Current loans | | 30-59
days
past due | | 60-89
days
past due | | 90+
days
past due | | Non-
accrual | | Total |
| Commercial & industrial | $ | 1,843 |
| | $ | — |
| | $ | — |
| | $ | 141 |
| | $ | — |
| | $ | 1,984 |
|
| Commercial real estate | 5,305 |
| | — |
| | — |
| | — |
| | — |
| | 5,305 |
|
| Acquisition, development & construction | 14,190 |
| | — |
| | — |
| | — |
| | 151 |
| | 14,341 |
|
| Residential mortgage | 2,416 |
| | — |
| | — |
| | — |
| | 1,792 |
| | 4,208 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | 256 |
| | 256 |
|
| Total loans | $ | 23,754 |
| | $ | — |
| | $ | — |
| | $ | 141 |
| | $ | 2,199 |
| | $ | 26,094 |
|
| Allowance for loan losses | $ | 438 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 439 |
| | $ | 877 |
|
The Company
has allocated $409had outstanding commitments to lend additional amounts of $0 and
$673 of specific reserves$4,101 to customers
whose loan terms have been modified in troubled debt restructuringswith loans classified as TDRs as of September 30,
20112014 and September 30,
20102013, respectively.
Troubled debt restructurings resulted in $7.5 million charge offs for the fiscal year ending September 30, 2011.The Company has committed to lend additional amountg1s totaling up to $4,225 and $3,957 as of September 30, 2011 and September 30, 2010 to customers with outstanding loans that are classified as troubled debt restructurings. The commitments to lend on the restructured debt is contingent on clear title and a third party inspection to verify completion of work and is associated with loans that are considered to be performing.
The following table presents loans by segment modified as troubled debt restructuringsTDRs that occurred during the twelve months ended September 30, 2011. | | | | | | | | | | | | |
| | | Number | | | Recorded Investment | |
| | | | Pre-
Modification | | | Post-
Modification | |
Restructured Loans: | | | | | | | | | | | | |
Real estate — residential mortgage | | | 6 | | | $ | 1,892 | | | $ | 1,892 | |
Real estate — commercial mortgage | | | 2 | | | | 1,439 | | | | 1,439 | |
Acquisition, development and construction loans | | | 26 | | | | 26,180 | | | | 26,180 | |
Consumer, including home equity loans | | | 1 | | | | 169 | | | | 169 | |
| | | | | | | | | | | | |
Total restructured loans | | | 35 | | | $ | 29,680 | | | $ | 29,680 | |
| | | | | | | | | | | | |
A loan is considered2014
and 2013: |
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | September 30, 2013 |
| | | | Recorded investment | | | | Recorded investment |
| | Number | Pre- modification | | Post- modification | | Number | Pre- modification | | Post- modification |
| Commercial & industrial | — |
| | $ | — |
| | $ | — |
| | 5 | | $ | 2,001 |
| | $ | 2,001 |
|
| Commercial real estate | — |
| | — |
| | — |
| | 2 | | 2,682 |
| | 2,682 |
|
| Acquisition, development & construction | 2 |
| | 1,060 |
| | 1,060 |
| | 7 | | 5,772 |
| | 5,772 |
|
| Residential mortgage | — |
| | — |
| | — |
| | 6 | | 1,436 |
| | 1,372 |
|
| Consumer | — |
| | — |
| | — |
| | 1 | | 302 |
| | 302 |
|
| Total restructured loans | 2 |
| | $ | 1,060 |
| | $ | 1,060 |
| | 21 | | $ | 12,193 |
| | $ | 12,129 |
|
| | | | | | | | | | | | |
STERLING BANCORP AND SUBSIDIARIES
Notes to beConsolidated Financial Statements
(Dollars in default once it is 90 days contractually past due under the modified terms. thousands, except per share data)
There were 5 troubled debt restructurings12 TDRs in the fiscal year ended September 30, 2012, with a pre-modification balance of $9,160 and a post-modification balance of $8,945.
The TDRs presented above increased the allowance for loan losses by $0, $300 and $134 and resulted in charge-offs of $0, $110 and $0 for the years ended September 30, 2014, 2013, and 2012, respectively.
There were no TDRs that were modified during the last twelve months that had subsequently defaulted totaling $6.6 millionduring the year.
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (residential mortgage and home equity lines of credit (“HELOC”)), (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the
ADC loan segment. Charge offs related to these loans totaled $2.3 million.Credit Quality Indicators:
greater New York metropolitan region. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The CompanyBank analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans.risk, except residential mortgage loans and consumer loans, which are evaluated on a homogeneous pool basis unless the loan balance is greater than $500. This analysis is performed on a monthly basisat least quarterly on all criticized/classified loans. The CompanyBank uses the following definitions of risk ratings:
1 and 2 - These grades include loans that are secured by cash, marketable securities or cash surrender value of life insurance policies.
3 - This grade includes loans to borrowers with strong earnings and cash flow and that have the ability to service debt. The borrower’s assets and liabilities are generally well matched and are above average quality. The borrower has ready access to multiple sources of funding including alternatives such as term loans, private equity placements or trade credit.
4 - This grade includes loans to borrowers with above average cash flow, adequate earnings and debt service coverage ratios. The borrower generates discretionary cash flow, assets and liabilities are reasonably matched, and the borrower has access to other sources of debt funding or additional trade credit at market rates.
5 - This grade includes loans to borrowers with adequate earnings and cash flow and reasonable debt service coverage ratios. Overall leverage is acceptable and there is average reliance upon trade debt. Management has a reasonable amount of experience and depth, and owners are willing to invest available outside capital as necessary.
6 - This grade includes loans to borrowers where there is evidence of some strain, earnings are inconsistent and volatile, and the borrowers’ outlook is uncertain. Generally such borrowers have higher leverage than those with a better risk rating. These borrowers typically have limited access to alternative sources of bank debt and may be dependent upon debt funding for working capital support.
7 - Special Mention. Loans classified as special mention (OCC definition) - Other Assets Especially Mentioned (OAEM) are loans that have a potential weakness that deserves management’s close attention. If left uncorrected these potential weaknesses which may, result inif not reviewed or corrected, weaken the deterioration ofasset or inadequately protect the repayment prospects for the loan or the institution’sBank’s credit position at some future date. Such assets constitute an undue and unwarranted credit risk but not to the point of justifying a classification of “Substandard.” The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset.
8 - Substandard. Loans classified as substandard (OCC definition) - These loans are inadequately protected by the current netsound worth and paying capacity of the obligor or of the collateral pledged, if any. LoansAssets so classified must have a well-defined weakness or weaknesses that jeopardizejeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the institutionBank will sustain some losslosses if the deficiencies are not corrected.Doubtful. Loans Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as doubtfulsubstandard.
9 - Doubtful (OCC definition)- These loans have all the weaknessesweakness inherent in thoseone classified as substandard,“Substandard” with the added characteristiccharacteristics that the weaknesses makeweakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidating procedures, capital injection, perfecting liens or additional collateral and refinancing plans.
PROVIDENT NEW YORK10 - Loss (OCC definition) - These loans are charged-off because they are determined to be uncollectible and unbankable assets. This classification does not reflect that the asset has no absolute recovery or salvage value, but rather it is not practical or desirable to defer writing-off this asset even though partial recovery may be effected in the future. Losses should be taken in the period in which they are determined to be uncollectible.
STERLING BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loans not meeting the criteria above that are analyzed individuallyrisk-rated 1 through 6 as part of thedefined above described process are considered to be pass ratedpass-rated loans. Based on the most recent analysis performed asAs of September 30, 20112014 and September 30, 2010,2013, the risk category of gross loans by segment of gross loans iswas as follows: | | | | | | | | | | | | |
| | | September 30, 2011 | |
| | | Special
Mention | | | Substandard | | | Doubtful | |
Real estate — residential mortgage | | $ | 3,701 | | | $ | 8,525 | | | $ | — | |
Real estate — commercial mortgage | | | 10,175 | | | | 25,952 | | | | — | |
Real estate — commercial mortgage (CBL) | | | 897 | | | | 4,044 | | | | — | |
Acquisition, development and construction | | | 5,170 | | | | 49,294 | | | | — | |
Commercial business loans | | | 1,915 | | | | 3,501 | | | | — | |
Commercial business loans (CBL) | | | 557 | | | | 150 | | | | — | |
Consumer loans, including home equity loans | | | 611 | | | | 2,523 | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 23,026 | | | $ | 93,989 | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | September 30, 2010 | |
| | | Special
Mention | | | Substandard | | | Doubtful | |
Real estate — residential mortgage | | $ | 243 | | | $ | 8,557 | | | $ | — | |
Real estate — commercial mortgage | | | 6,278 | | | | 21,648 | | | | — | |
Real estate — commercial mortgage (CBL) | | | — | | | | 3,171 | | | | — | |
Acquisition, development and construction | | | 27,985 | | | | 74,957 | | | | — | |
Commercial business loans | | | 3,044 | | | | 21,097 | | | | — | |
Commercial business loans (CBL) | | | 103 | | | | 498 | | | | 300 | |
Consumer loans, including home equity loans | | | 248 | | | | 1,825 | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 37,901 | | | $ | 131,753 | | | $ | 300 | |
| | | | | | | | | | | | |
(6) Accrued Interest Receivable
The components
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | September 30, 2013 |
| | Special mention | | Substandard | | Doubtful | | Special mention | | Substandard | | Doubtful |
| Commercial & industrial | $ | 24,980 |
| | $ | 5,749 |
| | $ | — |
| | $ | 3,545 |
| | $ | 3,855 |
| | $ | 365 |
|
| Payroll finance | — |
| | 346 |
| | — |
| | — |
| | — |
| | — |
|
| Factored receivables | 46 |
| | 370 |
| | — |
| | — |
| | — |
| | — |
|
| Equipment financing | — |
| | 262 |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate | 8,720 |
| | 26,826 |
| | — |
| | 7,279 |
| | 24,561 |
| | 227 |
|
| Multi-family | — |
| | 131 |
| | — |
| | — |
| | — |
| | — |
|
| Acquisition, development & construction | 1,040 |
| | 16,456 |
| | — |
| | 1,867 |
| | 19,410 |
| | — |
|
| Residential mortgage | 2,988 |
| | 16,981 |
| | — |
| | 824 |
| | 9,786 |
| | — |
|
| Consumer | 1,779 |
| | 5,972 |
| | — |
| | 15 |
| | 2,891 |
| | — |
|
| Total | $ | 39,553 |
| | $ | 73,093 |
| | $ | — |
| | $ | 13,530 |
| | $ | 60,503 |
| | $ | 592 |
|
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(7)
(5) Premises and Equipment, Net
Premises and equipment are summarized as follows:
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Land and land improvements | | $ | 7,331 | | | $ | 7,505 | |
Buildings | | | 31,511 | | | | 31,480 | |
Leasehold improvements | | | 7,858 | | | | 8,965 | |
Furniture, fixtures and equipment | | | 36,869 | | | | 34,857 | |
| | | | | | | | |
| | | 83,569 | | | | 82,807 | |
Accumulated depreciation and amortization | | | (42,683 | ) | | | (39,209 | ) |
| | | | | | | | |
Total premises and equipment, net | | $ | 40,886 | | | $ | 43,598 | |
| | | | | | | | |
(8) Deposits
Deposit balances
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Land and land improvements | $ | 6,048 |
| | $ | 7,282 |
|
| Buildings | 22,888 |
| | 30,558 |
|
| Leasehold improvements | 32,963 |
| | 8,136 |
|
| Furniture, fixtures and equipment | 50,343 |
| | 40,164 |
|
| Total premises and equipment, gross | 112,242 |
| | 86,140 |
|
| Accumulated depreciation and amortization | (68,956 | ) | | (49,620 | ) |
| Total premises and equipment, net | $ | 43,286 |
| | $ | 36,520 |
|
(6) Goodwill and weighted average interest ratesOther Intangible Assets
Goodwill and other intangible assets are presented in the tables below. The increase in goodwill and certain other intangible assets in fiscal 2014 was related to the acquisition of Legacy Sterling, which is described more fully in Note 2. “Acquisitions.”
Goodwill
The change in goodwill in the fiscal years ended September 30, 2014 and 2013 was as follows:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Beginning of year balance | $ | 163,117 |
| | $ | 163,247 |
|
| Acquisitions | 225,809 |
| | (130 | ) |
| Disposals | — |
| | — |
|
| End of year balance | $ | 388,926 |
| | $ | 163,117 |
|
During the fiscal year ended September 30, 2013, the Company decreased the goodwill recorded in connection with the Gotham Bank acquisition by $130 based on the completion of the analysis of fair value of the net assets acquired.
Other intangible assets
The balance of other intangible assets at September 30, 20112014 and 20102013 was as follows:
|
| | | | | | | | | | | |
| | Gross intangible assets | | Accumulated amortization | | Net intangible assets |
| September 30, 2014 | | | | | |
| Core deposits | $ | 24,182 |
| | $ | (4,694 | ) | | $ | 19,488 |
|
| Non-compete agreements | 10,308 |
| | (5,490 | ) | | 4,818 |
|
| Trade name | 20,500 |
| | — |
| | 20,500 |
|
| Fair value of below market leases | 725 |
| | (253 | ) | | 472 |
|
| Provident Bank Ball Park naming rights | 2,414 |
| | (2,414 | ) | | — |
|
| | $ | 58,129 |
| | $ | (12,851 | ) | | $ | 45,278 |
|
| September 30, 2013 | | | | | |
| Core deposits | $ | 4,818 |
| | $ | (798 | ) | | $ | 4,020 |
|
| Provident Bank Ball Park naming rights | 2,414 |
| | (543 | ) | | 1,871 |
|
| | $ | 7,232 |
| | $ | (1,341 | ) | | $ | 5,891 |
|
Included in other intangible assets was an intangible asset associated with the naming rights to Provident Bank Ball Park which is located in Rockland County, New York. At the time of the Merger, the Company wrote-off the remaining book value.
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Other intangible assets are amortized on a straight-line or accelerated bases over their estimated useful lives, which range from one to 10 years. Amortization expense related to core deposits, non-compete agreements and naming rights totaled $9,408, $1,296 and $1,245 for the fiscal years ended September 30, 2014, 2013, and 2012, respectively. The amortization of the fair value of below market leases was included in rent expense for the fiscal year ended September 30, 2014. The estimated aggregate future amortization expense for other intangible assets remaining as of September 30, 2014 was as follows:
|
| | | |
| | Amortization expense |
| 2015 | $ | 6,113 |
|
| 2016 | 5,042 |
|
| 2017 | 2,598 |
|
| 2018 | 2,178 |
|
| 2019 | 2,058 |
|
| Thereafter | 6,786 |
|
| | $ | 24,775 |
|
(7) Deposits
Deposit balances at September 30, 2014 and 2013 are summarized as follows: | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
| | | Amount | | | Rate | | | Amount | | | Rate | |
Demand Deposits | | | | | | | | | | | | | | | | |
Retail | | $ | 194,299 | | | | — | % | | $ | 174,731 | | | | — | % |
Commercial | | | 296,505 | | | | — | | | | 277,217 | | | | — | |
Municipal | | | 160,422 | | | | — | | | | 77,909 | | | | — | |
| | | | | | | | | | | | | | | | |
Total Non-interest bearing deposits | | | 651,226 | | | | | | | | 529,857 | | | | | |
NOW Deposits | | | | | | | | | | | | | | | | |
Retail | | | 164,637 | | | | 0.05 | | | | 139,517 | | | | 0.05 | |
Commercial | | | 37,092 | | | | 0.23 | | | | 34,105 | | | | 0.31 | |
Municipal | | | 200,773 | | | | 0.19 | | | | 241,995 | | | | 0.23 | |
| | | | | | | | | | | | | | | | |
Total Transaction deposits | | | 1,053,728 | | | | | | | | 945,474 | | | | | |
Savings deposits | | | 429,825 | | | | 0.07 | | | | 392,321 | | | | 0.11 | |
Money market deposits | | | 509,483 | | | | 0.30 | | | | 427,334 | | | | 0.29 | |
Certificates of deposit | | | 303,659 | | | | 0.94 | | | | 377,573 | | | | 1.12 | |
| | | | | | | | | | | | | | | | |
Total deposits | | $ | 2,296,695 | | | | 0.23 | % | | $ | 2,142,702 | | | | 0.31 | % |
| | | | | | | | | | | | | | | | |
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Non-interest bearing demand | $ | 1,799,685 |
| | $ | 943,934 |
|
| Interest bearing demand | 766,852 |
| | 434,398 |
|
| Savings | 698,443 |
| | 580,125 |
|
| Money market | 1,595,803 |
| | 735,709 |
|
| Certificates of deposit | 437,871 |
| | 268,128 |
|
| Total deposits | $ | 5,298,654 |
| | $ | 2,962,294 |
|
Municipal deposits held by PMB totaled$614,834 $992,761 and $513,760$757,065 at September 30, 20112014 and September 30, 2010,2013, respectively. See Note 3, “Securities Available for Sale,”3. “Securities” for the amount of securities that arewere pledged as collateral for municipal deposits and other purposes. Municipal deposits received for tax receipts were approximately $284,000 and $219,000 at September 30, 2011 and 2010, respectively.PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Certificates of deposit had remaining periods to contractual maturity as follows:
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Remaining period to contractual maturity: | | | | | | | | |
Less than one year | | $ | 250,769 | | | $ | 316,096 | |
One to two years | | | 22,784 | | | | 24,844 | |
Two to three years | | | 19,584 | | | | 13,273 | |
Three to four years | | | 7,203 | | | | 16,623 | |
Four to five years | | | 3,319 | | | | 6,737 | |
| | | | | | | | |
Total certificates of deposit | | $ | 303,659 | | | $ | 377,573 | |
| | | | | | | | |
Certificate
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Remaining period to contractual maturity: | | | |
| Less than one year | $ | 340,813 |
| | $ | 239,104 |
|
| One to two years | 53,319 |
| | 17,248 |
|
| Two to three years | 35,632 |
| | 5,185 |
|
| Three to four years | 4,000 |
| | 3,062 |
|
| Four to five years | 4,107 |
| | 3,529 |
|
| Total certificates of deposit | $ | 437,871 |
| | $ | 268,128 |
|
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Certificates of deposit accounts with a denomination of $100$100 or more totaled $82,345$290,483 and $105,717$104,225 at September 30, 20112014 and 2010,2013, respectively. Listed below are the Company’s brokered deposits: | | | | | | | | |
| | | September 30,
2011 | | | September 30,
2010 | |
Money market | | $ | 5,725 | | | $ | — | |
Reciprocal CDAR’s 1 | | | 2,746 | | | | 7,889 | |
CDAR’s one way | | | 3,366 | | | | 10,665 | |
| | | | | | | | |
Total brokered deposits | | $ | 11,837 | | | $ | 18,554 | |
| | | | | | | | |
1 | Certificate of deposit account registry service
|
Interest expense on deposits is summarized as follows:
| | | | | | | | | | | | |
| | | Years ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Savings deposits | | $ | 444 | | | $ | 403 | | | $ | 758 | |
Money market and NOW deposits | | | 2,190 | | | | 2,035 | | | | 3,377 | |
Certificates of deposit | | | 3,470 | | | | 6,079 | | | | 14,240 | |
| | | | | | | | | | | | |
Total interest expense | | $ | 6,104 | | | $ | 8,517 | | | $ | 18,375 | |
| | | | | | | | | | | | |
at
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIESSeptember 30, 2014Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(9) FHLB and Other2013:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Money market | $ | 84,022 |
| | $ | 34,571 |
|
Reciprocal CDAR’s 1 | 34,017 |
| | 1,343 |
|
| CDAR’s one way | 3,028 |
| | 768 |
|
| Total brokered deposits | $ | 121,067 |
| | $ | 36,682 |
|
1 Certificate of deposit account registry service
(8) Borrowings
and Senior Notes
The Company’s FHLB and other borrowings and weighted average interest rates are summarized as follows: | | | | | | | | | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
| | | Amount | | | Rate | | | Amount | | | Rate | |
By type of borrowing: | | | | | | | | | | | | | | | | |
Advances | | $ | 111,828 | | | | 3.83 | % | | $ | 141,251 | | | | 4.16 | % |
Repurchase agreements | | | 211,694 | | | | 3.61 | % | | | 222,500 | | | | 3.98 | % |
Senior unsecured debt (FDIC insured) | | | 51,499 | | | | 2.75 | % | | | 51,496 | | | | 2.75 | % |
| | | | | | | | | | | | | | | | |
Total borrowings | | $ | 375,021 | | | | 3.56 | % | | $ | 415,247 | | | | 3.88 | % |
| | | | | | | | | | | | | | | | |
By remaining period to maturity: | | | | | | | | | | | | | | | | |
Less than one year | | $ | 61,500 | | | | 2.96 | % | | $ | 44,873 | | | | 3.82 | % |
One to two years | | | 5,066 | | | | 4.04 | % | | | 73,996 | | | | 3.14 | % |
Two to three years | | | 35,795 | | | | 2.37 | % | | | 27,708 | | | | 4.00 | % |
Three to four years | | | 49,312 | | | | 2.28 | % | | | 25,125 | | | | 4.14 | % |
Four to five years | | | 211 | | | | 5.32 | % | | | 20,000 | | | | 2.96 | % |
Greater than five years | | | 223,137 | | | | 4.18 | % | | | 223,545 | | | | 4.19 | % |
| | | | | | | | | | | | | | | | |
Total borrowings | | $ | 375,021 | | | | 3.56 | % | | $ | 415,247 | | | | 3.88 | % |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| | Amount | | Rate | | Amount | | Rate |
| By type of borrowing: | | | | | | | |
| FHLB advances and overnight | $ | 795,028 |
| | 1.75 | % | | $ | 442,602 |
| | 2.77 | % |
| Repurchase agreements | 25,639 |
| | 0.39 |
| | 20,351 |
| | 0.88 |
|
| Fed funds purchased | 20,000 |
| | 0.31 |
| | — |
| | — |
|
| Senior notes | 98,402 |
| | 5.98 |
| | 98,033 |
| | 5.98 |
|
| Total borrowings | $ | 939,069 |
| | 2.12 | % | | $ | 560,986 |
| | 3.26 | % |
| By remaining period to maturity: | | | | | | | |
| Less than one year | $ | 370,365 |
| | 0.69 | % | | $ | 158,897 |
| | 0.95 | % |
| One to two years | 140,344 |
| | 0.59 |
| | 78,717 |
| | 1.97 |
|
| Two to three years | 257,442 |
| | 3.52 |
| | 191 |
| | 5.32 |
|
| Three to four years | 168,402 |
| | 4.38 |
| | 202,414 |
| | 4.21 |
|
| Four to five years | — |
| | — |
| | 118,033 |
| | 5.57 |
|
| Greater than five years | 2,516 |
| | 4.92 |
| | 2,734 |
| | 4.92 |
|
| Total borrowings | $ | 939,069 |
| | 2.12 | % | | $ | 560,986 |
| | 3.26 | % |
FHLB advances and overnight.As a member of the FHLB, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible residential mortgage loansmortgages and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 20112014 and 2010,2013, the Bank had pledged residential mortgage and commercial real estate loans totaling $464,900$1,246,315 and $313,587,$784,422, respectively. The Bank had also pledged securities with carrying amountsto secure borrowings, which are disclosed in Note 3. “Securities.” As of $206,829 and $228,442 as of September 30, 2011 and September 30, 2010, respectively, to secure repurchase agreements. As of September 30, 2011,2014, the Bank may increase its borrowing capacity by pledging securities and mortgagesmortgage loans not required to be pledged for other purposes with a marketcollateral value of $344,090. FHLB advances are subject to prepayment penalties if repaid prior to maturity.Securities repurchase agreements had weighted average remaining terms to maturity of approximately 4.77 years and 5.38 years at September 30, 2011 and 2010, respectively. Average borrowings under securities repurchase agreements were $216,875 and $224,375 during the years ended September 30, 2011 and 2010, respectively, and the maximum outstanding month-end balance was $222,500 and $230,000, respectively.
$703,486.
FHLB borrowings (includes advance and repurchase agreements) of $200,000 and $227,500 at September 30, 2011 and 2010 respectivelywhich are putable quarterly at the discretion of the FHLB.FHLB were $200,000 at September 30, 2014 and 2013. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 5.56 year2.56 years and 6.163.56 years and a weighted average interest rates of 4.23%4.23% at both September 30, 2014 and 4.24%2013, respectively.
Repurchase agreements. Securities sold under agreements to repurchase at September 30, 20112014 are secured short-term borrowings that mature in one to 17 days. Repurchase agreements are stated at the amount of cash received in connection with these transactions. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank had two $10,000 long-term repurchase agreements which were redeemed during the fiscal year ended September 30, 2014.
Fed funds purchased. Fed funds purchased are short-term borrowings that typically mature daily and 2010, respectively. An additional $20 million are putable on a one time basis after initial lockout period in February 2013 with a weighted average interest raterecorded at the amount of 3.57% and a weighted average remaining term to contractual maturityfunds received.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(10) DerivativesRevolving line of credit. On September 5, 2014, the Company entered into a $15,000 revolving line of credit facility with a financial institution that matures on September 5, 2015. The balance was zero at September 30, 2014. The use of proceeds are for general corporate purposes. The line and accrued interest is payable at maturity, and is required to maintain a zero balance for at least 30 days during its term. The line bears interest at one-month LIBOR plus 1.25%. Under the terms of the facility, the Company and the Bank must maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. The Company purchased and the Bank were in compliance with all requirements of the line at September 30, 2014.
Senior Notes. On July 2, 2013, the Company issued $100,000 principal amount of 5.50% fixed rate Senior Notes through a private placement at a discount of 1.75%. The cost of issuance was $303, and at September 30, 2014 and 2013 the unamortized discount was $1,597 and $1,967, respectively, which will be accreted to interest expense over the life of the Senior Notes, resulting in an effective yield of 5.98%. Interest is due semi-annually in arrears on January 2 and July 2 until maturity on July 2, 2018. The Senior Notes were issued under an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee.
The Senior Notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries.
The indenture includes provisions that, among other things, restrict the Company’s ability to dispose of or issue shares of voting stock of a principal subsidiary bank (as defined in the Indenture) or transfer the entirety of, or a substantial amount of, the Company’s assets or merge or consolidate with or into other entities, without satisfying certain conditions.
The Senior Notes will not be registered under the Securities Act and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements.
Trust preferred capital securities. In connection with the Merger, the Company assumed $25,000 of trust preferred capital securities (the “Subordinated Debentures”). The capital securities, which were due March 31, 2032 and bore interest at 8.375%, were issued by Sterling Bancorp Trust I, a wholly-owned, non-consolidated statutory business trust. The trust was formed with initial capitalization of common stock and for the exclusive purpose of issuing the capital securities. The trust used the proceeds from the issuance of the capital securities to acquire $25,774 junior subordinated debenture securities that paid interest at 8.375% issued by the Company. The Company was not considered the primary beneficiary of the trust (which is a VIE); therefore, the trust was not consolidated in the Company’s financial statements and the subordinated debentures were recorded as a liability. The debt securities were due concurrently with the capital securities.
On June 1, 2014, the Company redeemed all of the outstanding capital securities at a redemption price equal to 100% of the liquidation amount of the securities plus accumulated and unpaid interest, with such redemption payment made on June 2, 2014. In connection with the redemption, the Company eliminated the unamortized premium recorded to reflect the fair value of the Subordinated Debentures at the date of the Merger. The balance of the unamortized premium was $712 and this amount was recognized as a gain on extinguishment of debt and recorded as a reduction of other non-interest expense in the fiscal year ended September 30, 2014.
(9) Derivatives
The Company has two interest rate caps in the first quarter of fiscal 2010 to assist in offsettingoffset a portion of interest rate exposure should short termshort-term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.50%3.5% and 4.0%. These caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings. Losses recognized in earnings the amount for fiscal year 2011 is a loss of $197were $0 and a loss of $1,106$2 in fiscal 2010.2014 and 2013, respectively. The fair value of the interest rate caps at September 30, 2011,2014, is reflected in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.
The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customers to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an interest rate swap counterpartyintermediary for its customer, changes
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
The Company pledged collateral to another financial institution in the form of investment securities with certainan amortized cost of $5,034 and a fair value of $4,836 as of September 30, 2014. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is written into the International Swaps and manages this risk by entering into correspondingDerivatives Association agreement and offsetting interest rate risk agreements with third parties. The swaps are considered aloan documents where, in default situations, the Company is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative instrument and must be carried at fair value. As the swaps are not a designated qualifying hedge, the change in fair value is recognized in current earnings, with no offset from any other instrument. There was no net gain or loss recorded in earnings during fiscal year 2011. Interest rate swaps are recorded on our consolidated statements of financial condition as an other asset or other liability at estimated fair value.Atliability. The Company may need to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions.
Summary information as of September 30,
2011, summary information2014 and 2013 regarding these derivatives is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2011 | |
| | | Notional
Amount | | | Average
Maturity | | | Weighted
Average
Rate Fixed | | | Weighted
Average
Variable Rate | | | Fair
Value | |
Interest Rate Caps | | $ | 50,000 | | | | 3.18 | | | | 3.75 | % | | | NA | % | | $ | 65 | |
3rd party interest rate swap | | | 12,009 | | | | 10.23 | | | | 5.28 | | | | 1 m Libor + 2.15 | % | | | 1,114 | |
Customer interest rate swap | | | (12,009 | ) | | | 10.23 | | | | 5.28 | | | | 1 m Libor + 2.15 | % | | | (1,114 | ) |
At September 30, 2010, summary information regarding these derivatives is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2010 | |
| | | Notional
Amount | | | Average
Maturity | | | Weighted
Average
Rate Fixed | | | Weighted
Average
Variable Rate | | | Fair
Value | |
Interest Rate Caps | | $ | 50,000 | | | | 4.18 | | | | 3.75 | % | | | NA | % | | $ | 262 | |
3rd party interest rate swap | | | 1,182 | | | | 9.37 | | | | 6.25 | | | | 1 m Libor + 2.5 | % | | | 173 | |
Customer interest rate swap | | | (1,182 | ) | | | 9.37 | | | | 6.25 | | | | 1 m Libor + 2.5 | % | | | (173 | ) |
|
| | | | | | | | | | | | | | |
| | Notional amount | | Average maturity (in years) | | Weighted average fixed rate | | Weighted average variable rate | | Fair value |
| September 30, 2014 | | | | | | | | | |
| Interest rate caps | $ | 50,000 |
| | 0.18 | | 3.75 | % | | NA | | $ | — |
|
| 3rd party interest rate swap | 50,729 |
| | 4.86 | | 4.20 |
| | 1 m Libor + 2.44 | | 1,096 |
|
| Customer interest rate swap | (50,729 | ) | | 4.86 | | 4.20 |
| | 1 m Libor + 2.44 | | (1,096 | ) |
| September 30, 2013 | | | | | | | | | |
| Interest rate caps | $ | 50,000 |
| | 1.18 | | 3.75 | % | | NA | | $ | — |
|
| 3rd party interest rate swap | 54,180 |
| | 5.76 | | 4.22 |
| | 1 m Libor + 2.45 | | 997 |
|
| Customer interest rate swap | (54,180 | ) | | 5.76 | | 4.22 |
| | 1 m Libor + 2.45 | | (997 | ) |
The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial
instruments and, therefore are carried at estimatedinstruments; however, the fair value
on the consolidated balance sheets. The fair values of these commitments
areis not
considered material.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(11)
Income tax expense for the periods indicated consists of the following: | | | | | | | | | | | | |
| | | Years ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Current tax expense: | | | | | | | | | | | | |
Federal | | $ | 1,912 | | | $ | 5,410 | | | $ | 10,369 | |
State | | | 777 | | | | 1,437 | | | | 1,446 | |
| | | | | | | | | | | | |
| | | 2,689 | | | | 6,847 | | | | 11,815 | |
| | | | | | | | | | | | |
Deferred tax expense (benefit): | | | | | | | | | | | | |
Federal | | | 282 | | | | 375 | | | | (1,567 | ) |
State | | | (164 | ) | | | (349 | ) | | | (73 | ) |
| | | | | | | | | | | | |
| | | 118 | | | | 26 | | | | (1,640 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 2,807 | | | $ | 6,873 | | | $ | 10,175 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Current tax expense: | | | | | |
| Federal | $ | 11,613 |
| | $ | 9,146 |
| | $ | 5,538 |
|
| State | 1,598 |
| | 1,549 |
| | 685 |
|
| Total current tax expense | 13,211 |
| | 10,695 |
| | 6,223 |
|
| Deferred tax (benefit) expense: | | | | | |
| Federal | (2,745 | ) | | 522 |
| | (261 | ) |
| State | (314 | ) | | 197 |
| | 197 |
|
| Total deferred tax (benefit) expense | (3,059 | ) | | 719 |
| | (64 | ) |
| Total income tax expense | $ | 10,152 |
| | $ | 11,414 |
| | $ | 6,159 |
|
Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate for the following reasons:
| | | | | | | | | | | | |
| | | Years ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Tax at Federal statutory rate of 35% | | $ | 5,090 | | | $ | 9,578 | | | $ | 12,612 | |
| | | |
State income taxes, net of Federal tax benefit | | | 430 | | | | 652 | | | | 892 | |
Tax-exempt interest | | | (2,551 | ) | | | (2,645 | ) | | | (2,536 | ) |
BOLI income | | | (714 | ) | | | (715 | ) | | | (964 | ) |
Non deductible compensation expense | | | 594 | | | | — | | | | — | |
Other, net | | | (42 | ) | | | 3 | | | | 171 | |
| | | | | | | | | | | | |
Actual income tax expense | | $ | 2,807 | | | $ | 6,873 | | | $ | 10,175 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 19.3 | % | | | 25.1 | % | | | 28.2 | % |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Tax at Federal statutory rate of 35% | $ | 13,241 |
| | $ | 12,833 |
| | $ | 9,116 |
|
| State and local income taxes, net of Federal tax benefit | 834 |
| | 1,135 |
| | 573 |
|
| Tax-exempt interest, net of disallowed interest | (3,824 | ) | | (2,192 | ) | | (2,448 | ) |
| BOLI income | (1,110 | ) | | (699 | ) | | (718 | ) |
| Non-deductible acquisition related costs | 712 |
| | 416 |
| | 418 |
|
| Low income housing tax credits | (165 | ) | | — |
| | — |
|
| Other, net | 464 |
| | (79 | ) | | (782 | ) |
| Actual income tax expense | $ | 10,152 |
| | $ | 11,414 |
| | $ | 6,159 |
|
| Effective income tax rate | 26.8 | % | | 31.1 | % | | 23.6 | % |
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Deferred tax assets: | | | | | | | | |
Allowance for loan losses | | $ | 11,362 | | | $ | 12,525 | |
Deferred compensation | | | 3,011 | | | | 3,370 | |
Purchase accounting adjustments | | | — | | | | 13 | |
Accrued post retirement expense | | | 1,343 | | | | 1,121 | |
Core deposit intangibles | | | 198 | | | | (32 | ) |
Other comprehensive income (defined benefits) | | | 5,780 | | | | 5,053 | |
Goodwill | | | 117 | | | | (53 | ) |
Other | | | 1,497 | | | | 190 | |
| | | | | | | | |
Total deferred tax assets | | | 23,308 | | | | 22,187 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Undistributed earnings of subsidiary not consolidated for tax return purposes (REIT Income) | | | 5,801 | | | | 6,138 | |
Prepaid pension costs | | | 4,846 | | | | 3,592 | |
Purchase accounting fair value adjustments | | | 193 | | | | 165 | |
Depreciation of premises and equipment | | | 486 | | | | 743 | |
Other comprehensive income (securities) | | | 9,302 | | | | 8,630 | |
Other | | | 810 | | | | 876 | |
| | | | | | | | |
Total deferred tax liabilities | | | 21,438 | | | | 20,144 | |
| | | | | | | | |
Net deferred tax asset | | $ | 1,870 | | | $ | 2,043 | |
| | | | | | | | |
The
tax effects of temporary differences that give rise tofollowing table presents the Company’s deferred tax
assetsposition at September 30, 2014 and
liabilities are summarized below. The net amount is reported in other assets or other liabilities in the consolidated statements of financial condition.2013:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Deferred tax assets: | | | |
| Allowance for loan losses | $ | 17,272 |
| | $ | 11,809 |
|
| Deferred compensation | 649 |
| | 798 |
|
| Other accrued compensation and benefits | 5,418 |
| | 1,497 |
|
| Accrued post retirement expense | 2,705 |
| | 1,441 |
|
| Deferred rent | — |
| | 1,059 |
|
| Intangible assets | 2,439 |
| | — |
|
| Other comprehensive loss (securities) | 5,777 |
| | 7,844 |
|
| Other comprehensive loss (defined benefit plans) | 2,371 |
| | 2,638 |
|
| Depreciation of premises and equipment | 433 |
| | — |
|
| State NOL carryforward | 1,431 |
| | — |
|
| Other | 3,511 |
| | 2,172 |
|
| Total deferred tax assets | 42,006 |
| | 29,258 |
|
| Deferred tax liabilities: | | | |
| Undistributed earnings of subsidiary not consolidated for tax return purposes (income from REITs) | 9,303 |
| | 4,483 |
|
| Prepaid pension costs | 10,579 |
| | 3,758 |
|
| Purchase accounting adjustments | 16,056 |
| | 1,057 |
|
| Depreciation and lease adjustments | — |
| | 2,686 |
|
| Deferred rent | 163 |
| | — |
|
| Intangibles amortization | — |
| | 112 |
|
| Other | 2,557 |
| | 2,207 |
|
| Total deferred tax liabilities | 38,658 |
| | 14,303 |
|
| Net deferred tax asset | $ | 3,348 |
| | $ | 14,955 |
|
Based on management’sthe Company’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 either September 30, 20112014 or 2013.
Retained earnings at September 30, 2014 and 2010.The Bank is subject to special provisions in2013 included approximately $9,313 for which no provision for federal income taxes has been made. This amount represents the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related taxreserve at December 31, 1987, which is the end of the Bank
’s base year for purposes of calculating the bad debt reserves. Tax bad debt reserves consist of a defined “base-year” amount, plus additional amounts accumulated after the base year. Deferreddeduction for tax liabilities are recognized with respect to reserves accumulated after the base year, as well as anypurposes. If this portion of the base-year amount thatretained earnings is expected to become taxable (or recaptured)used in the foreseeable future.future for any purposes other than to absorb bad debts, the amount used will be added to future taxable income. The Bank’s base-yearunrecorded deferred tax bad debt reserves for Federal tax purposes were $9,313 and for NY State purposes were $44,340liability on the above amount at both September 30, 2010. Associated deferred2014 and 2013 was approximately $3,260.
At September 30, 2014 the Company has state and local NOL carryforwards that were acquired from Legacy Sterling as part of the Merger on October 31, 2013. The utilization of state and local NOLs are subject to an annual limitation. Based on our projections, we believe the state and local NOL carryforwards will be fully utilized before expiration.
At September 30, 2014and 2013, the Company had no unrecognized tax liabilities of $5,755 have not been recognized at those dates since thebenefits or accrued interest and penalties recorded. The Company does not expect that the Federal base-year reserves $(3,260) and New York State bad debt reserves $(3,839) nettotal amount of federal benefit at September 30, 2010, respectively will become taxable in the foreseeable future. Under the tax laws, events that would result in taxation of certain of these reserves include redemptions of the Bank’s stock or certain excess distributions by the Bank to Provident New York Bancorp.In 2010 the New York State law was modified to conform to the Federal treatment of the tax bad debt deduction. These changes in the law are effective for taxable years beginning on or after January 1, 2010. Therefore, there is no longer a separate New York State deduction for bad debts and the establishment and maintenance of a New York reserve is no longer necessary for thrift institutions. Taxpayers that cease to be a thrift institution will not be required to recapture any amounts of the New York reserve for losses.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Unrecognized Tax Benefits
The Company does not have unrecognized tax benefits as of September 2011 or September 2010.
to significantly increase within the next twelve months. The total amount ofCompany records interest and penalties recorded in the consolidated statementas a component of income in income tax expense (benefit) for the years ended September 30, 2011, 2010, and 2009 were $0, $0 and ($89) respective, respectively.
The Companyexpense.
Sterling and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of New York and various other
state income taxes.states. The
Company is no longer subject to examination by Federal and New York taxing authorities for tax years
that are currently open for audit are 2007 and later for federal and 2009 and later for New York State income tax.(12)prior to 2011.
(11) Employee Benefit Plans and Stock-Based Compensation Plans
STERLING BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
On May 31, 2014, the Company merged the Provident Bank Benefit Pension Plan (the “legacy Provident Plan”) and the Legacy Sterling/Sterling National Bank Employees’ Retirement Plan (the “Legacy Sterling Plan”) and formed the Sterling National Bank Defined Benefit Pension Plan. The Company has a noncontributory defined benefit pension plan coveringlegacy Provident Plan covers employees that were eligible as of September 30, 2006. In July, 2006 the. The Board of Directors of the Company approved a curtailment to the legacy Provident Bank Defined Benefit Pension Plan (“the Plan”) as of effective September 30, 2006.2006. At that time, all benefit accruals for future service ceased and no new participants maywere allowed to enter the plan.Plan. The purpose of the Plan curtailment was to afford flexibility in the retirement benefits the Company provides, while preserving all retirement plan participants’ earned and vested benefits, and to manage the increasing costs associated with the defined benefit pension plan. The Legacy Sterling Plan was a defined benefit plan that covered eligible employees of Legacy Sterling and Legacy Sterling National Bank and certain of its subsidiaries who were hired prior to January 3, 2006 and who attained age 21 prior to January 3, 2007. Effective October 31, 2013, the Legacy Sterling Plan was amended and the accrued benefit of each eligible actively employed participant that had not yet commenced benefits was increased by approximately 4.4% and the accrual of future service benefits ceased.
The following is a summary of changes in the projected benefit obligation and fair value of plan assets. The Company uses a September 30 measurement date for its pension plans.
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Changes in projected benefit obligation: | | | |
| Beginning of year balance | $ | 31,705 |
| | $ | 35,471 |
|
| Benefit obligation of the Legacy Sterling Plan at October 31, 2013 | 52,296 |
| | — |
|
| Service cost | — |
| | — |
|
| Interest cost | 2,779 |
| | 1,452 |
|
| Actuarial loss (gain) | 9,460 |
| | (3,672 | ) |
| Partial settlement | (44,774 | ) | | — |
|
| Benefits and distributions paid | (1,748 | ) | | (1,546 | ) |
| End of year balance | 49,718 |
| | 31,705 |
|
| Changes in fair value of plan assets: | | | |
| Beginning of year balance | 35,417 |
| | 32,657 |
|
| Fair value of the Legacy Sterling Plan assets at October 31, 2013 | 71,538 |
| | — |
|
| Actual gain on plan assets | 8,137 |
| | 4,306 |
|
| Employer contributions | — |
| | — |
|
| Partial settlement | (44,774 | ) | | — |
|
| Benefits and distributions paid | (1,748 | ) | | (1,546 | ) |
| End of year balance | 68,570 |
| | 35,417 |
|
| Funded status at end of year | $ | 18,852 |
| | $ | 3,712 |
|
During the year ended September 30, 2014 the Company settled a portion of the pension obligation associated with retired employees in the amount of $44,774 through the purchase of annuities.
The over-funded status of the Sterling National Bank Defined Benefit Pension Plan is included in other assets in the Consolidated Balance Sheets.
The components of net periodic pension expense were as follows:
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 2,779 |
| | 1,452 |
| | 1,501 |
|
| Expected return on plan assets | (3,380 | ) | | (2,462 | ) | | (2,125 | ) |
| Amortization of unrecognized actuarial loss | 236 |
| | 2,062 |
| | 2,316 |
|
| Partial settlement charge | 3,922 |
| | — |
| | — |
|
| Net periodic pension expense | $ | 3,557 |
| | $ | 1,052 |
| | $ | 1,692 |
|
Net periodic pension expense is included in compensation and benefits in the Consolidated Income Statements.
The amount of unrecognized actuarial loss and prior service cost that is expected to be amortized to net periodic pension expense during the fiscal year ending September 30, 2015 is $0.
Amounts recognized in accumulated other comprehensive (loss) at September 30, 2014 and 2013 consisted of:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Unrecognized actuarial loss | $ | (6,024 | ) | | $ | (5,479 | ) |
| Deferred tax asset | 2,556 |
| | 2,225 |
|
| Net amount recognized in accumulated other comprehensive (loss) | $ | (3,468 | ) | | $ | (3,254 | ) |
The principal actuarial assumptions used at September 30, 2014 and 2013 were as follows:
|
| | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Projected benefit obligation: | | | |
| Discount rate | 4.50 | % | | 5.20 | % |
| Net periodic pension cost: | | | |
| Discount rate | 4.50 | % | | 5.20 | % |
| Long-term rate of return on plan assets | 4.00 | % | | 7.75 | % |
The discount rate used in the measurement of the projected benefit obligation is determined by comparing the expected future retirement benefit payment cash flows of the Plan to the cash flows of a high-quality corporate bond portfolio as of the measurement date. The expected long-term rate of return on Plan assets reflect earnings expectations on existing Plan assets. In estimating this rate, appropriate consideration was given to historical returns earned by Plan assets in the funds and the rates of return expected to be available for reinvestment. The rate of return estimated at September 30, 2014 reflects the shift in the allocation of the Plan assets to a liability driven investment strategy which is more heavily weighted towards long-term fixed income assets with a similar duration profile to the Plan liabilities.
Estimated future benefit payments are the following for the years ending September 30:
|
| | | |
| 2015 | $ | 726 |
|
| 2016 | 902 |
|
| 2017 | 1,079 |
|
| 2018 | 1,625 |
|
| 2019 | 1,851 |
|
| 2020 - 2024 | 13,461 |
|
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company’s funding policy is to contribute annually an amount sufficient to meet statutory minimum funding requirements, but not in excess of the maximum amount deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future.
The following is a
summarydescription of
the valuation methodologies used for assets measured at fair value. There were no changes in the
projected benefit obligation and fair value of plan assets. The Company uses a September 30th measurement date for its pension plans. | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Changes in projected benefit obligation: | | | | | | | | |
Beginning of year | | $ | 31,109 | | | $ | 27,963 | |
Service cost | | | — | | | | — | |
Interest cost | | | 1,498 | | | | 1,555 | |
Actuarial loss | | | 647 | | | | 3,296 | |
Benefits and distributions paid | | | (2,642 | ) | | | (1,705 | ) |
| | | | | | | | |
End of year | | | 30,612 | | | | 31,109 | |
| | | | | | | | |
Changes in fair value of plan assets: | | | | | | | | |
Beginning of year | | | 26,796 | | | | 25,503 | |
Actual gain (loss) on plan assets | | | (242 | ) | | | 2,498 | |
Employer contributions | | | 4,400 | | | | 500 | |
Benefits and distributions paid | | | (2,642 | ) | | | (1,705 | ) |
| | | | | | | | |
End of year | | | 28,312 | | | | 26,796 | |
| | | | | | | | |
Funded status at end of year | | $ | (2,300 | ) | | $ | (4,313 | ) |
| | | | | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Included in the $2,642 benefit and distributions paid was $490 in settlement charges related the retirement of prior CEO of the Company.
Amounts recognized in accumulated other comprehensive income (loss)methodologies used at September 30, 20112014 and 2010 consisted of:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Unrecognized actuarial loss | | $ | (14,234 | ) | | $ | (13,159 | ) |
Deferred tax asset | | | 5,780 | | | | 5,344 | |
| | | | | | | | |
Net amount recognized in accumulated other comprehensive income (loss) | | $ | (8,454 | ) | | $ | (7,815 | ) |
| | | | | | | | |
Discount rates of 5.00%, 5.00% and 5.75% were used in determining the actuarial present value2013. See Note 17. “Fair Value Measurements” for a detailed discussion of the projected benefit obligation at September 30, 2011, 2010 and 2009, respectively. No compensation increases werethree levels of inputs that may be used as the plan is frozen. The weighted average long-term rate of return on plan assets was 7.75 % for fiscal years ended 2011 and 2010. The accumulated benefit obligation was $30,612 and $31,109 at year end September 30, 2011 and 2010 respectively. The discount rate used in the determination of net periodic pension expense were 5.00%, 5.75% and 7.00%, for the years ending September 30, 2011, 2010 and 2009, respectively.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| | | | |
2012 | | $ | 1,400 | |
2013 | | | 1,465 | |
2014 | | | 1,536 | |
2015 | | | 1,998 | |
2016 | | | 1,791 | |
2017 - 2019 | | | 9,593 | |
The components of the net periodic pension expense (benefit) were as follows:
| | | | | | | | | | | | |
| | | Years ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Service cost | | $ | — | | | $ | — | | | $ | — | |
Interest cost | | | 1,498 | | | | 1,555 | | | | 1,593 | |
Expected return on plan assets | | | (2,343 | ) | | | (1,890 | ) | | | (1,778 | ) |
Amortization of unrecognized loss | | | 1,667 | | | | 1,509 | | | | 826 | |
Settlement Charge | | | 490 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net periodic pension expense | | $ | 1,312 | | | $ | 1,174 | | | $ | 641 | |
| | | | | | | | | | | | |
Unrecognized actuarial loss and prior service cost totaling $2.3 million is expected to be amortized to pension expense during the next fiscal year ending September 30, 2012.
Equity, Debt, Invest Funds and Other Securities: Themeasure fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not readily available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
values.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The fair value of the planPlan assets consistingis based on the lowest level of various mutual funds andany input that is significant to the fair value measurement within the fair value hierarchy. Plan assets consisted of pooled investment fundsseparate accounts at September 30, 2011, by asset category, is as follows:
| | | | | | | | | | | | | | | | |
| | | Fair Value
Measurements
at
September 30,
2011 | | | Level 1 | | | Level 2 | | | Level 3 | |
Asset Category | | | | | | | | | | | | | | | | |
Large U.S. equity | | $ | 13,549 | | | $ | — | | | $ | 13,549 | | | $ | — | |
Small Mid U.S. equity | | | 3,238 | | | | — | | | | 3,238 | | | | — | |
International Equity | | | 2,607 | | | | — | | | | 2,607 | | | | — | |
| | | | | | | | | | | | | | | | |
Total Equity | | | 19,394 | | | | — | | | | 19,394 | | | | — | |
| | | | |
High yield bond | | | 914 | | | | — | | | | 914 | | | | — | |
Intermediate term bond | | | 6,447 | | | | — | | | | 6,447 | | | | — | |
Inflation protected bond | | | 1,557 | | | | — | | | | 1,557 | | | | — | |
| | | | | | | | | | | | | | | | |
Total Fixed Income | | | 8,918 | | | | — | | | | 8,918 | | | | — | |
| | | | |
Cash | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 28,312 | | | $ | — | | | $ | 28,312 | | | $ | — | |
| | | | | | | | | | | | | | | | |
2014. The fair value of shares of units of participation in pooled separate accounts are based on the plan assets consistingnet asset values of various mutualthe funds and pooled investment funds atreported by the fund managers as of September 30, 2010,2014 and recent transaction prices (Level 2 inputs). Assets allocated to these pooled separate accounts can include, but are not limited to stocks (both domestic and foreign), bonds and mutual funds. While some pooled separate accounts may have publicly quoted prices (Level 1 inputs), the units of separate accounts are not publicly quoted and are therefore classified as Level 2. The fair value of Plan assets by asset category is as follows:
| | | | | | | | | | | | | | | | |
| | | Fair Value
Measurements
at
September 30,
2010 | | | Level 1 | | | Level 2 | | | Level 3 | |
Asset Category | | | | | | | | | | | | | | | | |
Large U.S. equity | | $ | 14,355 | | | $ | — | | | $ | 14,355 | | | $ | — | |
Small Mid U.S. equity | | | 2,848 | | | | — | | | | 2,848 | | | | — | |
International Equity | | | 2,792 | | | | — | | | | 2,792 | | | | — | |
| | | | | | | | | | | | | | | | |
Total Equity | | | 19,995 | | | | — | | | | 19,995 | | | | — | |
| | | | |
High yield bond | | | 1,043 | | | | — | | | | 1,043 | | | | — | |
Intermediate term bond | | | 4,727 | | | | — | | | | 4,727 | | | | — | |
Inflation protected bond | | | 1,031 | | | | — | | | | 1,031 | | | | | |
| | | | | | | | | | | | | | | | |
Total Fixed Income | | | 6,801 | | | | — | | | | 6,801 | | | | — | |
| | | | |
Cash | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 26,796 | | | $ | — | | | $ | 26,796 | | | $ | — | |
| | | | | | | | | | | | | | | | |
of September 30, 2014 and 2013, was the following:
|
| | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
| Asset category: | | | | | | | |
| Intermediate term bond | $ | 8,629 |
| | $ | — |
| | $ | 8,629 |
| | $ | — |
|
| Long-term bond | 59,892 |
| | — |
| | 59,892 |
| | — |
|
| Total assets | $ | 68,521 |
| | $ | — |
| | $ | 68,521 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
| Asset category: | | | | | | | |
| Large cap U.S. equity | $ | 16,378 |
| | $ | — |
| | $ | 16,378 |
| | $ | — |
|
| Small and mid cap U.S. equity | 4,443 |
| | — |
| | 4,443 |
| | — |
|
| International equity | 3,654 |
| | — |
| | 3,654 |
| | — |
|
| Total equity | 24,475 |
| | — |
| | 24,475 |
| | — |
|
| Total balanced asset allocation | 1,691 |
| | — |
| | 1,691 |
| | — |
|
| High yield bond | 1,018 |
| | — |
| | 1,018 |
| | — |
|
| Intermediate term bond | 8,233 |
| | — |
| | 8,233 |
| | — |
|
| Total fixed income | 9,251 |
| | — |
| | 9,251 |
| | — |
|
| Total assets | $ | 35,417 |
| | $ | — |
| | $ | 35,417 |
| | $ | — |
|
The Company’s policy is to invest the pension planPlan assets in a prudent manner for the purpose of providing benefit payments to participants and mitigatingoffsetting reasonable expenses of administration. TheHistorically, the Company’s investment strategy iswas designed to provide a total return that, over the long-term, placesplaced a strong emphasis on the preservation of capital. The strategy attempts to maximize investment returns on assets at a level of risk deemed appropriate by the Company while complyingcapital and compliance with applicable regulations and laws. Management intends to terminate the Plan in fiscal 2015 subject to obtaining required approvals from the Internal Revenue Service and other regulators. Therefore, the investment allocation of Plan assets was shifted in fiscal 2014 to a liability driven investment strategy which is more heavily weighted towards long-term fixed income assets with a similar duration profile to the Plan liabilities. As of September 30, 2014, the majority of the Plan assets were invested in funds specifically designed for liability driven investment strategies and had a weighted average expected rate of return of 4.0%.
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Plan’s investment policy prohibits the direct investment in real estate but
does allowallows the Plan’s mutual funds to include a small percentage of real estate related investments. The investment strategy utilizes asset allocation as a principal determinant for establishing an appropriate risk profile.
Weighted-averageWeighted average pension
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
plan asset allocations based on the fair value of such assets at September 30, 2011,2014 and September 30, 20102013 and target allocationsallocation ranges for 2012,2014, by asset category, are as follows:
| | | | | | | | | | | | | | | | |
| | | September 30,
2010 | | | September 30,
2011 | | | Target Allocation
Range 2012 | | | Weighted
Average Expected
Rate of Return | |
Large U.S. equity securities | | | 54 | % | | | 48 | % | | | | | | | 7.00 | % |
Small mid U.S. equity securities | | | 11 | % | | | 11 | % | | | | | | | 15.00 | % |
International equity securities | | | 10 | % | | | 9 | % | | | | | | | 12.00 | % |
Total equity securities | | | 75 | % | | | 68 | % | | | 40 | % - 85% | | | 8.84 | % |
| | | | |
High yield bond | | | 4 | % | | | 3 | % | | | | | | | 8.00 | % |
Intermediate term bond | | | 17 | % | | | 23 | % | | | | | | | 6.00 | % |
Inflation protected bond | | | 4 | % | | | 6 | % | | | | | | | 3.00 | % |
Total fixed income | | | 25 | % | | | 32 | % | | | 20 | % - 40% | | | 5.85 | % |
| | | | |
Cash | | | 0 | % | | | 0 | % | | | 0 | % - 20% | | | 0 | % |
The expected long-term rate of return assumption as of each measurement date was determined by taking into consideration asset allocations as of each such date, historical returns on the types of assets held, and current economic factors. Under this method, historical investment returns for each major asset category are applied to the expected future investment allocation in that category as a percentage of total plan assets, and a weighted average is determined. The Company’s investment policy for determining the asset allocation targets was developed based on the desire to optimize total return while placing a strong emphasis on preservation of capital. In general, it is hoped that, in the aggregate, changes in the fair value of plan assets will be less volatile than similar changes in appropriate market indices. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns.
|
| | | | | | | | | | |
| | 2014 | | 2013 | | Target allocation range 2014 | | Weighted average expected rate of return |
| Large cap U.S. equity | — | % | | 44 | % | |
| | — | % |
| Small and mid cap U.S. equity | — |
| | 11 |
| |
| | — |
|
| International equity | — |
| | 10 |
| |
| | — |
|
| Total equity | — |
| | 65 |
| | 0% | | — |
|
| Total balanced asset allocation | — |
| | 5 |
| |
| | — |
|
| High yield bond | — |
| | 3 |
| |
| | — |
|
| Intermediate term bond | 13 |
| | 27 |
| |
| | — |
|
| Long-term bond | 87 |
| | — |
| |
| | — |
|
| Total fixed income | 100 |
| | 30 |
| | 95% - 100% | | 4.0 |
|
| Total assets | 100 | % | | 100 | % | | | | 4.0 | % |
| Cash | — |
| | — |
| | 0% to 5% | | — |
|
There were no pension plan assets consisting of ProvidentSterling Bancorp equity securities (common stock) at September 30, 20112014 or at September 30, 2010.2013.
The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. At this time, the Company has not determined whether contributions in
2012fiscal 2015 will be made.
(b) Other Post Retirement Benefit Plans
The Company
has also established a non-qualified Supplemental Executive Retirement Plan (“SERP”) to provide certain executives with supplementalprovides other post retirement
benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $44, $87 and $94 for the years ended September 30, 2011, 2010 and 2009, respectively. Additionally, a settlement charge of $278 in 2011 was recorded reflecting the partial settlement of the defined benefit
portion of the SERP relating to the former CEO benefit obligation. The actuarial present value of the projected benefit obligation was $912 and $1,763 at September 30, 2011 and 2010, respectively, and the vested benefit obligation was $912 and $1,763 for the same periods, respectively, all of which is unfunded. Discount rates of 4.75% and 4.50% were used in determining the actuarial projected benefit at September 30, 2011 and 5.00% for September 30, 2010.(b) Other Postretirement Benefit Plans
The Company’s postretirement plans, which are unfunded, provideunfunded. Included in the tables below is information regarding the Company’s optional medical, dental and life insurance benefits to retirees or death benefit paymentsplan, Supplemental Executive Retirement Plan to beneficiariescertain former directors and officers of employees covered by the
Company, life insurance benefits to certain directors, officers and former officers of Legacy Sterling.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Company and Bank Owned Life Insurance policies. The Company has elected to amortize the transition obligation for accumulated benefits to retirees as an expense over a 20-year period.
Data relating to
other post retirement benefit plans is the
postretirement benefit plan follows: | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Change in accumulated postretirement benefit obligation: | | | | | | | | |
Beginning of year | | $ | 2,261 | | | $ | 2,041 | |
Service cost | | | 38 | | | | 28 | |
Interest cost | | | 107 | | | | 107 | |
Actuarial loss | | | 209 | | | | 183 | |
Plan participants’ contributions | | | — | | | | — | |
Amendments | | | — | | | | — | |
Benefits paid | | | (106 | ) | | | (98 | ) |
| | | | | | | | |
End of year | | $ | 2,509 | | | $ | 2,261 | |
| | | | | | | | |
Changes in fair value of plan assets: | | | | | | | | |
Beginning of year | | $ | — | | | $ | — | |
Employer contributions | | | 106 | | | | 98 | |
Plan participants’ contributions | | | — | | | | — | |
Benefits paid | | | (106 | ) | | | (98 | ) |
| | | | | | | | |
End of year | | $ | — | | | $ | — | |
| | | | | | | | |
Funded status | | $ | (2,509 | ) | | $ | (2,261 | ) |
| | | | | | | | |
following:
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Changes in accumulated post retirement benefit obligation: | | | |
| Beginning of year | $ | 3,302 |
| | $ | 3,103 |
|
| Obligations assumed from Legacy Sterling | 9,644 |
| | — |
|
| Service cost | 51 |
| | 48 |
|
| Interest cost | 683 |
| | 134 |
|
| Actuarial loss | 79 |
| | 177 |
|
| Curtailment (gain) | (2,485 | ) | | — |
|
| Benefits paid | (284 | ) | | (160 | ) |
| End of year | 10,990 |
| | 3,302 |
|
| Changes in fair value of plan assets: | | | |
| Beginning of year | $ | — |
| | $ | — |
|
| Employer contributions | 284 |
| | 160 |
|
| Plan participants’ contributions | — |
| | — |
|
| Benefits paid | (284 | ) | | (160 | ) |
| End of year | — |
| | — |
|
| Funded status | $ | (10,990 | ) | | $ | (3,302 | ) |
Components of net periodic (benefit) expense for other post retirement benefit plans was the following:
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Service cost | $ | 51 |
| | $ | 48 |
| | $ | 46 |
|
| Interest cost | 683 |
| | 134 |
| | 125 |
|
| Amortization of transition obligation | 34 |
| | 24 |
| | 24 |
|
| Amortization of prior service cost | 270 |
| | 47 |
| | 47 |
|
| Amortization of net actuarial (gain) loss | (45 | ) | | 2 |
| | (25 | ) |
| Curtailment (gain) | (2,485 | ) | | — |
| | — |
|
| Total | $ | (1,492 | ) | | $ | 255 |
| | $ | 217 |
|
The Company terminated the optional medical and dental plan to retirees effective September 30, 2014 and all payments under the plan will cease on December 31, 2014. Net periodic benefit expense
(benefit): | | | | | | | | | | | | |
| | | For years ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Service Cost | | $ | 38 | | | $ | 28 | | | $ | 22 | |
Interest Cost | | | 107 | | | | 107 | | | | 118 | |
Amortization of transition obligation | | | 24 | | | | 24 | | | | 24 | |
Amortization of prior service cost | | | 48 | | | | 49 | | | | 49 | |
Amortization of net actuarial gain | | | (60 | ) | | | (95 | ) | | | (119 | ) |
| | | | | | | | | | | | |
Total | | $ | 157 | | | $ | 113 | | | $ | 94 | |
| | | | | | | | | | | | |
Therefor other post retirement benefit plans is $22 unrecognized actuarial gainincluded in non-interest expense - compensation and prior service cost expected to be amortized out of accumulatedemployee benefits for the fiscal years ended September 30, 2014, 2013 and 2012. The Company’s liability under its other comprehensive incomepost retirement benefit plans is included in 2012.
other liabilities in the balance sheet at September 30, 2014 and 2013.
Estimated
Future Benefit PaymentsThe followingfuture benefit payments are expected to be paid in future years:
| | | | |
2012 | | | 138 | |
2013 | | | 143 | |
2014 | | | 145 | |
2015 | | | 149 | |
2016 | | | 151 | |
2017 - 2019 | | | 838 | |
the following for the years ending September 30:
|
| | | |
| 2015 | $ | 660 |
|
| 2016 | 231 |
|
| 2017 | 271 |
|
| 2018 | 319 |
|
| 2019 | 373 |
|
| 2020 - 2024 | 2,370 |
|
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| | | | | | | | |
Assumptions used for plan | | 2011 | | | 2010 | |
Medical trend rate next year | | | 4.50 | % | | | 4.50 | % |
Ultimate trend rate | | | 4.50 | % | | | 4.50 | % |
Discount rate | | | 4.25 | % | | | 4.50 | % |
Discount rate used to value periodic cost | | | 4.50 | % | | | 5.50 | % |
Plan assumptions for the other post retirement medical, dental and vision plans include the following:
|
| | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 |
| Medical trend rate next year | 4.5 | % | | 4.5 | % |
| Ultimate trend rate | 4.5 |
| | 4.5 |
|
| Discount rate | 3.50% to 4.27% |
| | 4.2 |
|
| Discount rate used to value periodic cost | 3.50% to 4.20% |
| | 4.1 |
|
There is no impact of a 1% increase or decrease in health care trend rate due to the Company’s cap on cost.
Amounts recognized in accumulated other comprehensive income (loss) at September 30, 2011 and 2010 consisted of:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Post retirement plan unrecognized gain | | $ | 771 | | | $ | 1,047 | |
Post retirement plan unrecognized service cost | | | (364 | ) | | | (412 | ) |
Post retirement unrecognized transition obligation | | | (41 | ) | | | (51 | ) |
Post retirement SERP | | | (244 | ) | | | (306 | ) |
Post employment BOLI | | | (144 | ) | | | (152 | ) |
| | | | | | | | |
Subtotal | | | (22 | ) | | | 126 | |
Deferred tax asset (liability) | | | 9 | | | | (51 | ) |
| | | | | | | | |
Net amount recognized in accumulated other comprehensive income (loss) | | $ | (13 | ) | | $ | 75 | |
| | | | | | | | |
(c) Employee Savings Plan
The Company also sponsors a defined contribution plan established under Section 401(k) of the IRS Code. Eligible employees may elect to contribute up to 50%50.0% of their compensation to the plan. The Company currently makes matching contributions equal to 50%50.0% of a participant’s contributions up to a maximum matching contribution of 3%3.0% of eligible compensation. Effective after September 30, 2006, the Bank amended theThe plan to includealso provides for a discretionary profit sharing component, which was 3% of eligible compensation, in addition to the matching contributions for 2011.contributions. Fiscal year 2014 did not include a profit sharing component. Voluntary matching and profit sharing contributions are invested in accordance with the participant’s direction in one or a number of investment options. Savings plan expense was $1,875, $1,751$1,614, $935 and $1,594$1,029 for the years ended September 30, 2011, 20102014, 2013 and 2009,2012, respectively.
(d) Employee Stock Ownership Plan (“ESOP”)
In connection with the reorganizationSecond-Step Stock Conversion and initial common stock offeringOffering in 1999,January 2004, the Company established an ESOP for substantially all eligible employees who meet certain age and service requirements. The ESOP borrowed $3,760$9,987 from the BankSterling and used the funds to purchase 1,370,112 shares of common stock in the open market subsequent to the Offering. The Bank made periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan which matured December 31, 2007. The ESOP used these contributions, any dividends received by the ESOP on unallocated shares and forfeitures beginning in 2007, to make principal and interest payments on the loan.In connection with the Second-Step Stock Conversion and Offering in January 2004, the Company established an ESOP loan for eligible employees. The ESOP borrowed $9,987 from Provident Bancorp and used the funds to purchase
998,650 shares of common stock in the offering. The term of the secondthis ESOP loan is was twenty years.years
.
On October 30, 2013, the Company terminated the ESOP. In accordance with the provisions of the plan, all participants received contributions for calendar year 2013 and became 100% vested in their accounts. On February 4, 2014, the ESOP held 499,330 shares of the Company’s common stock. Of these shares, 488,403 were used to retire the ESOP trust outstanding loan obligation, which was $5,983 including accrued interest. In accordance with the provisions of the ESOP, the remaining 10,927 shares were allocated ratably to ESOP participants. ESOP expense was $295, $497, and $390 for the years ended September 30, 2014, 2013 and 2012, respectively.
(e) Stock Compensation Plans
The Company has active stock compensation plans as described below.
The Company’s stockholders approved the 2014 Stock Incentive Plan (the “2014 Plan”) on February 20, 2014. The 2014 Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, performance units, deferred stock, and other stock-based awards for up to 3,400,000 shares of common stock. At September 30, 2014 there were 3,350,761 shares available for future grant. The 2014 Plan replaced the Company’s 2012 Stock Incentive Plan (the “2012 Plan”) described below.
Under the 2014 Plan, any shares that are subject to stock options or stock appreciation rights are counted as one share deducted from the 2014 Plan for every one share delivered under those awards. Any shares granted under the 2014 Plan that are subject to awards other than stock options and stock appreciation rights are counted as 3.5 shares deducted from the 2014 Plan for every one share delivered under those awards.
The 2012 Plan was a shareholder-approved plan that permitted the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, performance units, deferred stock and other stock-based awards. Prior to the approval of the 2014 Plan, there were 566,554 shares remaining for issuance under the 2012 Plan. These shares are held byincluded in the aggregate 3,400,000 shares available under the 2014 Plan. The Company will no longer make awards under the 2012 Plan.
The Company’s 2004 Stock Incentive Plan (the “2004 Plan”), was a shareholder-approved plan trustee in a suspense account until allocatedthat permitted the grant of stock options to participant accounts. Shares released fromits employees for up to 2,796,220 shares of common stock. The Company will no longer make awards under the suspense account are allocated2004 Plan. As of September 30, 2014, 11,533 restricted shares awarded under the 2004 Plan were potentially subject to participants onaccelerated vesting as the basisemployees were eligible for retirement.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years. Any forfeited shares were allocated to other participants in the same proportion as contributions through 2006 and beginning in 2007
Stock option awards are
used by the plan to reduce debt service. A total of $4, $29 and $4 related to plan forfeitures were reversed against expense for the years ended September 30, 2011, 2010, and 2009 respectively.ESOP expense (net of forfeitures) was $436, $413, and $484 for the years ended September 30, 2011, 2010 and 2009, respectively. Through September 30, 2011 and 2010, a cumulative total of 1,755,010 and 1,705,078 shares, respectively, have been allocated to participants or committed to be released for allocation, respectively. 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; 613,758 sharesgranted with a cost of $6,138 and a fair value of approximately $3,572 at September 30, 2011 and 663,690 shares with a cost of $6,637 and a fair value of approximately $5,568 at September 30, 2010, respectively.
A supplemental savings plan has also been established for certain senior officersequal to compensate executives for benefits provided under the Bank’s tax qualified plans (employee’s savings plan and ESOP) that are limited by the IRS Code. Expense recognized for this plan including the defined benefit component was $340, $146, and $212, for the years ended September 30, 2011, 2010 and 2009, respectively. Amounts accrued and recorded in other liabilities at September 30, 2011 and 2010, including the defined benefit component were $1.6 million and $3.1 million respectively.
(e) Recognition and Retention Plan
In February 2000,market price of the Company’s stockholders approvedcommon stock at the Provident Bank 2000date of grant; the awards generally vest in equal installments annually on the anniversary date and have total vesting periods ranging from 2 to 5 years and stock options have 10 year contractual terms.
The Company’s 2004 Restricted Stock Plan, which historically has been referred to as the Recognition and Retention Plan (the RRP). The principal purpose(“RRP”), provides for the issuance of shares to directors and officers. RRP shares vest annually on the anniversary of the grant date over the vesting period. There were no shares remaining that are authorized and available for future grant under the RRP isat September 30, 2014.
In addition to
provide executive officers and directors a proprietary interest inthe above plans, the Company
in a manner designedprovided awards under its 2011 Employment Inducement Stock Program which included options to
encourage their continued performance and service. The awards vested at a rate of 20% on each of five annual vesting dates, the first of which was September 30, 2000. As of February 2010, 27,413 shares remaining from this plan were no longer eligible to be granted.In January 2005, the Company’s stockholders approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the terms of which the Company is authorized to issue up to 798,920purchase 107,256 shares of common stock asand restricted stock awards. Employees who retire under circumstancesawards covering 29,550 shares of common stock, both of which vest in accordancefour equal installments through July 2015, and performance-based restricted stock awards covering 11,820 shares which vest upon attainment of designated performance conditions in combination with continued service through December 31, 2014. These awards are governed by the terms of an award notice and the terms of the Plan may be entitled2004 Plan.
In connection with the Merger, the Company granted 104,152 options at an exercise price of $14.25 per share pursuant to
acceleratea Registration Statement on Form S-8 under which the
vestingCompany assumed all outstanding fully vested Legacy Sterling stock options. Substantially all of
individual awards. Such acceleration would require a charge to earnings forthese options expire March 15, 2017. During the
award shares that would then vest. As offiscal year ended September 30,
2011, 1,000 shares2014, 37,873 of these awards were
potentially subject to accelerated vesting.Under the 2004 restricted stock plan, 27,120 shares of authorized but un-issued shares remain available for future grant at September 30, 2011. Forfeited shares are available for re-issuance.canceled or forfeited. The Company also can fund the restricted stock plan with treasury stock. The fair market value of thegranted 95,991 shares awarded under the restricted stock plan is being amortizedSterling Bancorp 2013 Employment Inducement Award Plan to expense on a straight-line basis over the vesting periodcertain executive officers of the underlying shares.Legacy Sterling. In addition, 41,370the Company issued 255,973 shares of restricted stock were issued as inducementfrom shares which have threeavailable under the Company’s 2012 Plan to certain executives of Legacy Sterling. The weighted average grant date fair value was $11.72 per share and four year vesting periods. Compensation expense related to the restricted stock plan was $168, $883, and $1.7 millionawards vest in equal annual installments on the anniversary date over a three-year period.
The following table summarizes the activity in the Company’s active stock-based compensation plans for the years ended September 30, 2011, 2010 and 2009, respectively. The remaining unearned compensation cost2014:
|
| | | | | | | | | | | | | | | | |
| | | | Non-vested stock awards/stock units outstanding | | Stock options outstanding |
| | Shares available for grant | | Number of shares | | Weighted average grant date fair value | | Number of shares | | Weighted average exercise price |
| Balance at October 1, 2013 | 2,066,184 |
| | 209,697 |
| | $ | 8.73 |
| | 2,114,509 |
| | $ | 10.71 |
|
| 2014 Stock Incentive Plan | 3,400,000 |
| | | | | | | | |
| 2012 Stock Incentive Plan termination | (566,554 | ) | | | | | | | | |
Grants associated with the Merger(1) | (921,503 | ) | | 351,964 |
| | 11.72 |
| | 104,152 |
| | 14.25 |
|
Granted (1) | (719,674 | ) | | 115,145 |
| | 11.53 |
| | 324,862 |
| | 11.45 |
|
| Stock awards vested | — |
| | (69,211 | ) | | 9.51 |
| | — |
| | — |
|
| Exercised | — |
| | — |
| | — |
| | (507,955 | ) | | 11.29 |
|
| Forfeited | 439,594 |
| | (18,841 | ) | | (9.18 | ) | | (375,235 | ) | | 12.24 |
|
| Canceled/expired | (347,286 | ) | | — |
| | — |
| | — |
| |
|
|
| Balance at September 30, 2014 | 3,350,761 |
| | 588,754 |
| | $ | 10.99 |
| | 1,660,333 |
| | $ | 10.55 |
|
| Exercisable at September 30, 2014 | | | | | | | 951,492 |
| | $ | 11.11 |
|
(1) Reflects certain non-vested stock awards that count as 3.5 shares or 3.6 shares for each share granted.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of restricted stock award activity under the plan for the year ended
Other information regarding options outstanding at September 30, 2011, is presented below: | | | | | | | | |
| | | Number
of Shares | | | Weighted
Average
Grant-Date
Fair Value | |
Nonvested shares at September 30, 2010 | | | 6,250 | | | $ | 13.51 | |
| | | | | | | | |
Granted | | | 63,870 | | | | 8.79 | |
Vested | | | (12,600 | ) | | | 11.19 | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Nonvested shares at September 30, 2011 | | | 57,520 | | | $ | 8.77 | |
| | | | | | | | |
The total fair value of restricted stock vested for fiscal year ended September 30, 2011, 2010 and 2009 was $73, $575, and $1.3 million, respectively.
2014
(f) Stock Option Plan follows:The Company’s stockholders approved the Provident Bank 2000 Stock Option Plan (the Stock Option Plan) in February 2000. A total of 1,712,640 shares of authorized but unissued common stock was reserved for issuance under the Stock Option Plan, although the Company may also fund option exercises using treasury shares. The Company’s stockholders also approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, in February 2005. Under this plan 207,607 shares of authorized but unissued remain available for future grant at September 30, 2011. Under terms of the plan, a total of 1,997,300 shares of authorized but un-issued common stock were reserved for issuance under the Stock Option Plan. Under both plans, options have a ten-year term and may be either non-qualified stock options or incentive stock options. Reload options may be granted under the terms of the 2000 Stock Option Plan and provide for the automatic grant of a new option at the then-current market price in exchange for each previously owned share tendered by an employee in a stock-for-stock exercise. In February 2010, the 2000 Stock Option Plan expired with 338,594 options un-granted and no longer eligible for grant. The 2004 Plan options do not contain reload options. However, the 2004 plan allows for the grant of stock appreciation rights. 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. Employees who retire under circumstances, in accordance with the terms of the Plan, may be entitled to accelerate the vesting of individual awards. In addition, 107,526 shares of stock options were issued as inducement shares, which have a four year vesting period. As of September 30, 2011, 34,300 shares were potentially subject to accelerated vesting. Substantially, all stock options outstanding are expected to vest. Compensation expense related to stock option plans was $558, $247 and $768 for the years ended September 30, 2011, 2010 and 2009, respectively.
The following is a summary of activity in the Stock Option Plan:
| | | | | | | | |
| | | Shares subject
to option | | | Weighted
Average
exercise price | |
Outstanding at September 30, 2010 | | | 1,922,844 | | | $ | 12.47 | |
| | | | | | | | |
Granted | | | 119,526 | | | | 8.30 | |
Exercised | | | — | | | | — | |
Forfeited | | | (136,350 | ) | | | 12.55 | |
| | | | | | | | |
Outstanding shares at September 30, 2011 | | | 1,906,020 | | | $ | 12.20 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable |
| | | | Weighted average | | | | Weighted average |
| | Number of stock options | | Exercise price | | Life (in years) | | Number of stock options | | Exercise price | | Life (in years) |
| Range of exercise prices: | | | | | | | | | | | |
| $6.71 to $9.00 | 689,711 |
| | $ | 8.38 |
| | 7.57 | | 322,148 |
| | $ | 8.36 |
| | 7.57 |
| $9.28 to $12.64 | 787,243 |
| | 11.73 |
| | 5.02 | | 445,965 |
| | 12.05 |
| | 5.10 |
| $12.84 to $13.92 | 183,379 |
| | 13.68 |
| | 2.69 | | 183,379 |
| | 13.68 |
| | 2.69 |
| | 1,660,333 |
| | 10.55 |
| | 5.82 | | 951,492 |
| | 11.11 |
| | 5.82 |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The total intrinsic value of outstanding in-the-money stock options vested (exercisable) for fiscal years ended September 30, 2011, 2010 and 2009 was $0, $0 and $4.1 million, respectively. The unrecognized compensation cost associated withoutstanding in-the-money exercisable stock options was $413 as of $3.9 million and $1.8 million, at September 30, 2011 and is expected to be recognized in expense over a period of 4 years.
At September 30, 2011 and 2010, respectively, there were 207,607 and 93,257 shares available for future grant. The aggregate intrinsic value of options outstanding as of September 30, 2011 was $0. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing2014.
Proceeds from stock price on the last trading date of the year ended September 30, 2011 and the exercise price, multiplied by the number of in the money options). The cash received from option exercises was $0were $2,980, $62 and $984$102 for fiscal 20112014, 2013, and 2010,2012, respectively. There was no tax benefit recorded in the results of operations to the Company from the exercise of options for either fiscal 2011 or fiscal 2010.A summary of stock options at September 30, 2011 follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding | | | Exercisable | |
| | | | | | Weighted-Average | | | | | | Weighted-Average | |
| | | Number of
Stock Options | | | Exercise
Price | | | Life
(in Years) | | | Number of
Stock Options | | | Exercise
Price | | | Life
(in Years) | |
Range of Exercise Price | | | | | | | | | | | | | | | | | | | | | | | | |
$6.86 to $11.85 | | | 465,590 | | | $ | 9.99 | | | | 7.6 | | | | 228,314 | | | $ | 10.86 | | | | 7.6 | |
$11.85 to $12.84 | | | 1,222,600 | | | | 12.84 | | | | 3.3 | | | | 1,218,600 | | | | 12.84 | | | | 3.3 | |
$13.18 to $15.66 | | | 217,830 | | | | 13.35 | | | | 5.7 | | | | 160,430 | | | | 13.38 | | | | 5.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1,906,020 | | | $ | 12.20 | | | | 4.6 | | | | 1,607,344 | | | $ | 12.61 | | | | 4.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value of options currently exercisable as of September 30, 2010 was $0. All non vested shares are expected to vest.
The Company uses an option pricing model to estimate the grant date fair value of stock options granted. The weighted-averageweighted average estimated value per option granted was $2.27$2.51 in 2011, $2.692014, $2.74 in 2010,2013, and $1.97$2.31 in 2009. 2012.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Risk-free interest rate(1) | | | 2.2 | % | | | 2.2 | % | | | 1.9 | % |
Expected stock price volatility | | | 34.5 | % | | | 33.2 | % | | | 61.5 | % |
Dividend yield(2) | | | 2.8 | % | | | 1.9 | % | | | 3.3 | % |
Expected term in years | | | 5.9 | | | | 7.7 | | | | .91 | |
(1) | represents the yield on a risk free rate of return (either the US Treasury curve or the SWAP curve, in periods with high volatility in US Treasury securities) with a remaining term equal to the expected option term
|
(2) | represents | | | | | | | | | | | | For the year ended September 30, | | | 2014 | | 2013 | | 2012 | | Risk-free interest rate | 1.8 | % | | 1.0 | % | | 1.4 | % | | Expected stock price volatility | 26.4 |
| | 40.8 |
| | 40.0 |
| Dividend yield (1) | 2.0 |
| | 2.6 |
| | 3.0 |
| | Expected term in years | 5.67 |
| | 5.75 |
| | 5.82 |
|
(1) Represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date
|
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollarsa share of common stock at or near the grant date.
Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Stock-based compensation expense associated with stock options and non-vested stock awards and the related income tax benefit was as follows:
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Stock options | $ | 901 |
| | $ | 695 |
| | $ | 521 |
|
| Non-vested stock awards/performance units | 2,508 |
| | 1,047 |
| | 276 |
|
| Total | $ | 3,409 |
| | $ | 1,742 |
| | $ | 797 |
|
| Income tax benefit | 914 |
| | 542 |
| | 188 |
|
Unrecognized stock-based compensation expense at September 30, 2014 was as follows:
|
| | | |
| | September 30, 2014 |
| Stock options | $ | 962 |
|
| Non-vested stock awards/stock units | 4,013 |
|
| Total | $ | 4,975 |
|
The weighted average period over which unrecognized stock options was expected to be recognized was 1.66 years. The weighted average period over which unrecognized non-vested awards/performance units was expected to be recognized was 1.82 years.
(12) Other Non-interest Expense
Other non-interest expense items are presented in
thousands, except per share data)the following table. Components exceeding 1% of the aggregate of total net interest income and total non-interest income are presented separately.
|
| | | | | | | | | | | | |
| | | For the year ended September 30, |
| | | 2014 | | 2013 | | 2012 |
| Other non-interest expense: | | | | | | |
| Advertising and promotion | | $ | 2,358 |
| | $ | 1,502 |
| | $ | 1,849 |
|
| Professional fees | | 6,913 |
| | 3,393 |
| | 4,247 |
|
| Data and check processing | | 3,439 |
| | 2,520 |
| | 2,802 |
|
| ATM/debit card expense | | 1,249 |
| | 1,722 |
| | 1,711 |
|
| Insurance & surety bond premium | | 2,703 |
| | 1,199 |
| | 1,220 |
|
| Charge for asset write-downs, severance and retention | | 22,976 |
| | — |
| | — |
|
| Charge for banking systems conversion | | 3,249 |
| | — |
| | — |
|
| Other | | 15,030 |
| | 7,040 |
| | 6,562 |
|
| Total other non-interest expense | | $ | 57,917 |
| | $ | 17,376 |
| | $ | 18,391 |
|
| | | | | | | |
(13) Earnings Per Common Share
The following is a summary of the calculation of earnings per share
(EPS)(“EPS”):
| | | | | | | | | | | | |
| | | Years ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Net income | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | |
| | | | | | | | | | | | |
Weighted average common shares outstanding for computation of basic EPS(1) | | | 37,453 | | | | 38,161 | | | | 38,538 | |
Common-equivalent shares due to the dilutive effect of stock options(2) | | | 1 | | | | 24 | | | | 168 | |
| | | | | | | | | | | | |
Weighted average common shares for computation of diluted EPS | | | 37,454 | | | | 38,185 | | | | 38,706 | |
| | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | |
Basic | | $ | 0.31 | | | $ | 0.54 | | | $ | 0.67 | |
| | | | | | | | | | | | |
Diluted | | $ | 0.31 | | | $ | 0.54 | | | $ | 0.67 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Net income | $ | 27,678 |
| | $ | 25,254 |
| | $ | 19,888 |
|
Weighted average common shares outstanding for computation of basic EPS (1) | 80,268,970 |
| | 43,734,425 |
| | 38,227,653 |
|
Common-equivalent shares due to the dilutive effect of stock options (2) | 265,073 |
| | 48,628 |
| | 20,393 |
|
| Weighted average common shares for computation of diluted EPS | 80,534,043 |
| | 43,783,053 |
| | 38,248,046 |
|
| Earnings per common share: | | | | | |
| Basic | $ | 0.34 |
| | $ | 0.58 |
| | $ | 0.52 |
|
| Diluted | 0.34 |
| | 0.58 |
| | 0.52 |
|
(1) | Excludes unallocated
|
| (1) | Includes earned ESOP shares. |
(2) |
|
| (2) | Represents incremental shares computed using the treasury stock method. |
As of September 30, 2011, 20102014, 2013 and 20092012 there were 1,871,299, 1,826,519697,475; 1,786,608; and 1,934,6371,771,132 stock options, respectively, that were considered anti-dilutive for these periods and were not included in common-equivalent shares. (14) Stockholders’ Equity
(a) Regulatory Capital
OCC regulations require banks to maintain Requirements
In connection with the Merger, the Company became 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%,bank holding company and a minimumfinancial holding company as defined by the Bank Holding Company Act of 1956, as amended. Effective in the quarter ended December 31, 2013, Sterling Bancorp is subject to capital ratio of total (corerequirements as discussed below.
Banks and
supplementary)bank holding companies are subject to various regulatory capital
to risk-weighted assets of 8.0%.Under itsrequirements administered by the federal banking agencies. Capital adequacy guidelines, and additionally for banks, prompt corrective action regulations, the OCC 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 banks 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 to total adjusted assets 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 specificinvolve quantitative measures of assets,
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
liabilities, and certain off-balance-sheetoff-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OCCregulators about capital components, risk weightingsrisk-weighting, and other factors. TheseQuantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (as forth in the table below) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
The Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighed assets. Risk-weighted assets are calculated based on regulatory requirements apply onlyand include total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance sheet items (mainly loan commitments). Tier 1 capital to average assets is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.
Fiscal year end actual and required capital ratios for the Company and the Bank were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Regulatory requirements |
| | | The Bank and the Company | | Minimum capital adequacy | | Classification as well- capitalized |
| |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | September 30, 2014 | | | | | | | | | | | |
| | Tier 1 leverage capital (to average assets): | | | | | | | | | | |
| | Sterling National Bank | $ | 636,507 |
| | 9.34 | % | | $ | 272,542 |
| | 4.00 | % | | $ | 340,677 |
| | 5.00 | % |
| | Sterling Bancorp | 553,117 |
| | 8.12 |
| | 272,385 |
| | 4.00 |
| | 340,481 |
| | 5.00 |
|
| | | | | | | | | | | | | |
| | Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
| | Sterling National Bank | 636,507 |
| | 11.94 |
| | 213,176 |
| | 4.00 |
| | 319,763 |
| | 6.00 |
|
| | Sterling Bancorp | 553,117 |
| | 10.33 |
| | 214,102 |
| | 4.00 |
| | 321,153 |
| | 6.00 |
|
| | | | | | | | | | | | | |
| | Total capital (to risk-weighted assets): | | | | | | | | | | |
| | Sterling National Bank | 677,514 |
| | 12.71 |
| | 426,351 |
| | 8.00 |
| | 532,939 |
| | 10.00 |
|
| | Sterling Bancorp | 594,124 |
| | 11.10 |
| | 428,204 |
| | 8.00 |
| | 535,254 |
| | 10.00 |
|
| | | | | | | | | | | | | |
| | | Sterling National Bank only | | | | | | | | |
| | September 30, 2013 | | | | | | | | | | | |
| | Tier 1 leverage | $ | 363,274 |
| | 9.33 | % | | $ | 155,670 |
| | 4.00 | % | | $ | 194,587 |
| | 5.00 | % |
| | Risk-based capital: | | | | | | | | | | | |
| | Tier 1 | 363,274 |
| | 13.18 |
| | 110,235 |
| | 4.00 |
| | 165,352 |
| | 6.00 |
|
| | Total | 392,376 |
| | 14.24 |
| | 220,469 |
| | 8.00 |
| | 275,587 |
| | 10.00 |
|
Management believes that as of September 30, 2014, Sterling Bancorp and Sterling National Bank were “well-capitalized”.
A reconciliation of the Company’s stockholders’ equity to its regulatory capital at September 30, 2014 and the Bank’s total stockholder’s equity to the
Bank,Bank’s regulatory capital at September 30, 2014 and
do not consider additional capital retained by Provident Bancorp.2013 is as follows:
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Management believes that, as of September 30, 2011 and 2010 the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OCC 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, 2011 and 2010, compared to the OCC requirements for minimum capital adequacy and for classification as a well-capitalized institution. PMB is also subject to certain regulatory capital requirements, which it satisfied as of September 30, 2011 and 2010.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | OCC requirements | |
| | | Bank actual | | | Minimum capital
adequacy | | | Classification as well
capitalized | |
| | | |
| | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
September 30, 2011: | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible capital | | $ | 241,196 | | | | 8.1 | % | | $ | 44,460 | | | | 1.5 | % | | $ | — | | | | — | |
Tier 1 (core) capital | | | 241,196 | | | | 8.1 | | | | 118,559 | | | | 4.0 | | | | 148,199 | | | | 5.0 | % |
Risk-based capital: | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 | | | 241,196 | | | | 11.8 | | | | — | | | | — | | | | 122,126 | | | | 6.0 | |
Total | | | 265,307 | | | | 13.0 | | | | 162,835 | | | | 8.0 | | | | 203,544 | | | | 10.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2010: | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible capital | | $ | 240,230 | | | | 8.4 | % | | $ | 42,734 | | | | 1.5 | % | | $ | — | | | | — | |
Tier 1 (core) capital | | | 240,230 | | | | 8.4 | | | | 113,958 | | | | 4.0 | | | | 142,447 | | | | 5.0 | % |
Risk-based capital: | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 | | | 240,230 | | | | 12.1 | | | | — | | | | — | | | | 119,251 | | | | 6.0 | |
Total | | | 265,148 | | | | 13.3 | | | | 159,002 | | | | 8.0 | | | | 198,752 | | | | 10.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tangible and Tier 1 capital amounts represent the stockholder’s equity of the Bank, less intangible assets and after-tax net unrealized gains (losses) on securities available for sale and any other disallowed assets, such as deferred income taxes. Total capital represents Tier 1 capital plus the allowance for loan losses up to a maximum amount equal to 1.25% of risk-weighted assets.
The following is a reconciliation of the Bank’s total stockholder’s equity under accounting principles generally accepted in the United States of America (“GAAP”) and its regulatory capital:
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Total GAAP stockholder’s equity (Provident Bank) | | $ | 405,638 | | | $ | 403,630 | |
Goodwill and certain intangible assets | | | (159,306 | ) | | | (158,127 | ) |
Unrealized gains on securities available for sale included in other accumulated comprehensive income | | | (13,604 | ) | | | (12,770 | ) |
Other Comprehensive loss | | | 8,468 | | | | 7,497 | |
| | | | | | | | |
Tangible, tier 1 core and | | | | | | | | |
Tier 1 risk-based capital | | | 241,196 | | | | 240,230 | |
Allowance for loan losses | | | 24,111 | | | | 24,918 | |
| | | | | | | | |
Total risk-based capital | | $ | 265,307 | | | $ | 265,148 | |
| | | | | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | |
| | The Company | | The Bank |
| | September 30, | | September 30, |
| | 2014 | | 2014 | | 2013 |
| Total GAAP stockholders’ equity | $ | 961,138 |
| | $ | 1,011,973 |
| | $ | 516,281 |
|
| Disallowed goodwill and other intangible assets | (419,327 | ) | | (386,766 | ) | | (168,122 | ) |
| Net unrealized loss on available for sale securities | 7,815 |
| | 7,809 |
| | 11,455 |
|
| Disallowed servicing asset | (153 | ) | | (153 | ) | | (198 | ) |
| Net actuarial loss on defined benefit pension plans | 3,644 |
| | 3,644 |
| | 3,858 |
|
| Tier 1 risk-based capital | 553,117 |
| | 636,507 |
| | 363,274 |
|
| Allowance for loan losses and off-balance sheet commitments | 41,007 |
| | 41,007 |
| | 29,102 |
|
| Total risk-based capital | $ | 594,124 |
| | $ | 677,514 |
| | $ | 392,376 |
|
(b) Dividend
PaymentsOCC regulations limit the amount of cashRestrictions
The Company is mainly dependent upon dividends
that can be made byfrom the Bank to
the Company. Furthermore, because the Bank is a subsidiary of a holding company, it must file a notice with the Federal Reserve at least 30 days before the Bank’s Board of Directors declares a dividend. This notice may be disapproved if the Federal Reserve finds that:the savings association would be undercapitalized or worse following the dividend;
the proposed dividend raises safety and soundness concerns; or
the dividend would violate a prohibition contained in any statute, regulation, enforcement action, or agreement with or condition imposed by an appropriate federal banking agency.
Under OCC regulations, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to the sum of net incomeprovide funds for the current calendar year and net income retained for the two preceding calendar years. Dividend payments in excess of this amount require OCC approval. After September 30, 2011 the amount that can be paid to Provident Bancorp by Provident Bank is $8.5 million plus earnings for the remainder of calendar year 2011. The Bank paid $10.0 million in dividends to Provident Bancorp during the fiscal year ended September 30, 2011 ($29.4 million during the year ended 2010 and $10.5 million during the year ended September 30, 2009).
Unlike the Bank, Provident Bancorp is not subject to OCC regulatory limitations on the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that fiscal year combined with the retained net profits for the preceding two fiscal years. Under the foregoing dividend restrictions and while maintaining its stockholders.
“well-capitalized” status, at September 30, 2014, the Bank had capacity to pay aggregate dividends of up to $47,879 to the Company without prior regulatory approval.
(c) Stock Repurchase
ProgramsPlans
From time to time, the Company’s board of directors has authorized stock repurchase plans. The Company announced its fifth stock repurchase program on December 17, 2009, authorizing the repurchase of 2,000,000 shares, of whichhas 776,713 shares remainthat are available to be purchased at September 30, 2011.The total number ofunder an announced stock repurchase program. There were
no shares repurchased under the repurchase programs during the fiscal yearyears ended September 30, 2011, 2010, and 2009, was 457,454, 1,515,923 and 415,811, respectively at a total cost of $3.8 million, $12.9 million, and $3.5 million, respectively.2014
, 2013, or 2012.
Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with OCC regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s ownership interest in the retained earnings of Provident Federalthe Bank as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The liquidation account is reduced annually on September 30 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. At September 30, 20112014, the liquidation account had a balance of $16.0 million.$13,300. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount of the liquidation account.PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(15) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a partyenters into various transactions, which in accordance with generally accepted accounting principles are not included in its consolidated balance sheet. The Company enters into these transactions to off-balance-sheet financial instruments thatmeet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in addition toexcess of the amounts recognized in the consolidated financial statements. balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. Based on the Company’s credit risk
exposure assessment of standby letter of credit arrangements, the arrangements contain security and debt covenants similar to those contained in loan agreements. As of September 30, 2014, the Company had $97,468 in outstanding letters of credit, of which $21,756 were secured by cash collateral and $34,687 were secured by other collateral. The carrying value of these obligations are not considered material.
The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance-sheetoff-balance sheet financial instruments, are summarized as follows: | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Lending-related instruments: | | | | | | | | |
Loan origination commitments | | $ | 127,307 | | | $ | 114,822 | |
Unused lines of credit | | | 239,387 | | | | 282,428 | |
Letters of credit | | | 16,972 | | | | 23,104 | |
As of September 30, 2011 and 2010, 88%, and 86%, respectively of lending related off balance sheet instruments were at variable rates.
The contractual amounts of loan origination commitments, unused lines of credit and letters of credit represent the Company’s maximum potential exposure to credit loss, assuming (i) the instruments are fully funded at a later date, (ii) the borrowers do not meet the contractual payment obligations, and (iii) any collateral or other security proves to be worthless. The contractual amounts of these instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. Substantially all of these lending-related instruments have been entered into with customers located in the Company’s primary market area described in Note 5 (“Loans”).
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 loan origination commitments at September 30, 2011 provide for interest rates ranging principally from 2.06% to 8.00%.
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.
Letters of credit are commitments issued by the Company on behalf of its customer in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are nearly all standby letters of credit and 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.
As of September 30, 2011, the Company had $16,972 in outstanding letters of credit, of which $10,528 were secured by collateral.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Loan origination commitments | $ | 213,793 |
| | $ | 171,032 |
|
| Unused lines of credit | 306,482 |
| | 207,201 |
|
| Letters of credit | 97,468 |
| | 35,052 |
|
(16) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with terms expiring through 2033. The Company has the option to renew certain of these leases for additional terms. Future minimum rental payments due under non-cancelablenon-cancellable operating leases with initial or remaining terms of more than one year at September 30, 20112014 were as follows (for fiscal years ending September 30follows:
|
| | | |
| 2014 | $ | 8,984 |
|
| 2015 | 8,517 |
|
| 2016 | 7,690 |
|
| 2017 | 7,702 |
|
| 2018 | 6,386 |
|
| 2019 and thereafter | 27,012 |
|
| | $ | 66,291 |
|
th): | | | | |
2012 | | $ | 2,579 | |
2013 | | | 2,411 | |
2014 | | | 2,175 | |
2015 | | | 2,095 | |
2016 | | | 2,027 | |
2017 and thereafter | | | 14,875 | |
| | | | |
| | $ | 26,162 | |
| | | | |
Occupancy and office operations expense includeincludes net rent expense of $2,845, $2,802$7,893, $3,340 and $2,726$2,952 for the years ended September 30, 2011, 20102014, 2013 and 2009,2012, respectively.
Litigation
The
consolidation of two leased branches resultedCompany and the Bank are involved in a
restructuring chargenumber of
$2.1 million at September 30, 2011.The Company is a defendant in certain claims andjudicial proceedings concerning matters arising from conducting their business activities. These include routine legal actionsproceedings arising in the ordinary course of business. Management, after consultationThese proceedings also include actions brought against the Company and the Bank with respect to corporate matters and transactions in which the Company and the Bank were involved. In addition, the Company and the Bank may be requested to provide information or otherwise cooperate with government authorities in the conduct of investigations of other persons or industry groups. It is possible the Company will be named as a defendant in shareholder litigation arising out of the announcement of the HVB Merger. The Company believes that any such claims would be without merit.
There can be no assurance as to the ultimate outcome of a legal
counsel, does not anticipate losses on anyproceeding; however, the Company and the Bank have generally denied, or believe they have meritorious defenses and will deny, liability in all significant litigation pending against us, and we intend to defend vigorously each case, other than matters we determine are appropriate to be settled. We accrue a liability for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of
theseresolving legal claims
may be substantially higher or
actions that would have a material adverse effect onlower than the
consolidated financial statements.amounts accrued for those claims.
(17) Fair value measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values.
LEVEL
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Level 1
— Valuation is based onInputs – Unadjusted quoted prices in active markets for identical assets and
liabilities.LEVELliabilities that the reporting entity has the ability to access at the measurement date.
Level 2
— Valuation is determined fromInputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
instrumentsassets or liabilities in markets that are not active,
or by model-based techniques in which all significant inputs
other than quoted prices that are observable
infor the
market.LEVELasset or liability (such as interest rates, volatilities, prepayment speeds, credit risk, etc.) or inputs that are derived principally from, or corroborated by, market data by correlation or other means.
Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based onInputs – Unobservable inputs for determining the Company’sfair value of assets or liabilities that reflect an entity’s own estimatesassumptions about the assumptions that the market participants would use toin pricing the assets or liabilities.
In general, fair value
the asset or liability.When available, the Company attempts to useis based on quoted market prices, in active markets to determine fair value and classifies such items as Level 1 or Level 2.when available. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating variousbased on internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions including interest rates, prepayment speedsto determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending ontherefore, estimates of fair value after the lowest level classification of an input that is considered significant tobalance sheet date may differ significantly from the overall valuation.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is aamounts presented herein. A more detailed description of the valuation methodologies used for the Company’s assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that are measured on a recurring basis at estimated fair value.
caused the transfer, which generally coincide with the Company’s monthly and/or quarterly valuation process.
Investment
securities availableSecurities Available for
saleSale
The majority of the Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.
The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment securities that have been valueda complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are mortgage pass-through securities, state and municipal general obligation or revenue bonds, U.S. agency bullet and callable securities and corporate bonds. Pricing for such instruments is fairly generic and is easily obtained. From time to time, the Company validates, on a sample basis, prices supplied by referencethe independent pricing service by comparison to prices for similar securitiesobtained from third-party sources or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. U.S. Treasuries are actively traded and therefore have been classified as Level 1 valuations. As of October 1, 2010 the company determined that government sponsored agencies totaling $346,019 previously reported as Level 1 securities were not classified based on the lowest level withinderived using internal models.
The Company reports the fair value hierarchy and deemed it appropriate to transfer the securities to Level 2.The Company utilizes an outside vendor to obtain valuations for its traded securities as well as information receivedof private label collateralized mortgage obligations or “CMOs” with a rating from a third partynationally recognized bond rating agency of below investment advisor. The majority of the Company’s available for sale investment securities (mortgage backed securities issued by US government corporations and government sponsored entities) have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable (Level 2). The Company utilizes prices from a leading provider of financial market data and compares them to dealer indicative bids from the Company’s external investment advisor. The Company does not make adjustments to these prices unless it is determined there is limited trading activity. For securities where there is limited trading activity (private label CMO’s) and less observable valuation inputs, the Company has classified such valuations as Level 3.
The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there has been a decline in the volume and level of activity in the market for its private label mortgage backed securities. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of privately issued residential mortgage backed securities asgrade using Level 3 as of April 1, 2009 with a fair value of $9,534.inputs. As of
September 30, 2011,2014, these securities have an amortized cost of $5,372$2,866 and a fair value of $4,851. In determining the fair value$2,869, representing 17 basis points of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that market participants would use in pricing these securities in an orderly market. Present value estimated cash flow models were used discounted at a rate that was reflective of similarly structured securities in an orderly market. The resultant prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of our total investment portfolio. At September 30, 2011.2014, we do not anticipate further OTTI charges on these securities. These securities, havealong with all of the Company’s other securities, will be reviewed on at least a weighted average coupon rate of 2.92%, a weighted average life of 5.04 years, a weighted average 1 month prepayment history of 10.98 years and a weighted average twelve month default rate of 3.78 CDR. It was determined that one of these securities with a carrying amount of $1,683 and an amortized cost of $1,940 had an other than temporary loss which resulted in a $75 other than temporaryquarterly basis to assess whether the impairment, charge.The investment grades of these securities are as follows:
| | | | | | | | |
| | | Amortized
Cost | | | Fair
Value | |
Investment Rating: | | | | | | | | |
A1 | | $ | 352 | | | $ | 348 | |
Ba1 | | | 138 | | | | 130 | |
B | | | 4,882 | | | | 4,373 | |
| | | | | | | | |
Total private label CMOs | | $ | 5,372 | | | $ | 4,851 | |
| | | | | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIESif any, is OTTI.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the
counter partycounterparty as of the measurement date (Level 2). The Company’s derivatives consist of two interest rate caps and
threetwelve interest rate
swaps (see footnote 10).swaps. See Note 9. “Derivatives.”
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Commitments to
sell real estate loansSell Real Estate Loans
The Company enters into various commitments to sell real estate loans
intoin the secondary market. Such commitments are considered to be derivative financial instruments and therefore are carried at estimated fair value on the consolidated balance sheets. The estimated fair values of these commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell to certain government sponsored agencies. The fair values of these commitments generally result in a Level 2 classification. The fair
valuesvalue of these commitments
areis not
considered material.
A summary of assets and liabilities at September 30, 2014 measured at estimated fair value on a recurring basis is as follows:
|
| | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
| Asset: | | | | | | | |
| Investment securities available for sale: | | | | | | | |
| Residential MBS: | | | | | | | |
| Agency-backed | $ | 477,705 |
| | $ | — |
| | $ | 477,705 |
| | $ | — |
|
| CMO/Other MBS | 111,276 |
| | — |
| | 111,276 |
| | — |
|
| Privately issued CMOs | 2,869 |
| | — |
| | — |
| | 2,869 |
|
| Total residential MBS | 591,850 |
| | — |
| | 588,981 |
| | 2,869 |
|
| Federal agencies | 152,814 |
| | — |
| | 152,814 |
| | — |
|
| Corporate bonds | 192,839 |
| | — |
| | 192,839 |
| | — |
|
| State and municipal | 134,898 |
| | — |
| | 134,898 |
| | — |
|
| Trust preferred | 38,412 |
| | — |
| | 38,412 |
| | — |
|
| Total other securities | 518,963 |
| | — |
| | 518,963 |
| | — |
|
| Total investment securities available for sale | 1,110,813 |
| | — |
| | 1,107,944 |
| | 2,869 |
|
| Interest rate caps and swaps | 1,096 |
| | — |
| | 1,096 |
| | — |
|
| Total assets | $ | 1,111,909 |
| | $ | — |
| | $ | 1,109,040 |
| | $ | 2,869 |
|
| Swaps | $ | 1,096 |
| | $ | — |
| | $ | 1,096 |
| | $ | — |
|
| Total liabilities | $ | 1,096 |
| | $ | — |
| | $ | 1,096 |
| | $ | — |
|
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of assets and liabilities at September 30,
20112013 measured at estimated fair value on a recurring basis
were asis the follows:
| | | | | | | | | | | | | | | | |
| | | Fair Value
Measurements
at
September 30,
2011 | | | Level 1 | | | Level 2 | | | Level 3 | |
Investment securities available for sale: | | | | | | | | | | | | | | | | |
Mortgage-backed securities-residential | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 139,991 | | | $ | — | | | $ | 139,991 | | | $ | — | |
Freddie Mac | | | 100,675 | | | | — | | | | 100,675 | | | | — | |
Ginnie Mae | | | 5,180 | | | | — | | | | 5,180 | | | | — | |
CMO/Other MBS | | | 77,561 | | | | — | | | | 77,561 | | | | — | |
Privately issued collateralized mortgage obligations | | | 4,851 | | | | — | | | | — | | | | 4,851 | |
| | | | | | | | | | | | | | | | |
| | | 328,258 | | | | — | | | | 323,407 | | | | 4,851 | |
Investment securities | | | | | | | | | | | | | | | | |
Federal agencies | | | 204,648 | | | | — | | | | 204,648 | | | | — | |
Corporate debt securities | | | 17,062 | | | | — | | | | 17,062 | | | | — | |
Obligations of states and political subdivisions | | | 188,684 | | | | — | | | | 188,684 | | | | — | |
Equities | | | 1,192 | | | | — | | | | 1,192 | | | | — | |
| | | | | | | | | | | | | | | | |
Total investment securities available for sale | | | 411,586 | | | | — | | | | 411,586 | | | | — | |
| | | | | | | | | | | | | | | | |
Total available for sale securities | | | 739,844 | | | | — | | | | 734,993 | | | | 4,851 | |
| | | | | | | | | | | | | | | | |
Interest rate caps and swaps | | | 1,180 | | | | — | | | | 1,180 | | | | — | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 741,024 | | | $ | — | | | $ | 736,173 | | | $ | 4,851 | |
| | | | | | | | | | | | | | | | |
Swaps | | $ | 1,114 | | | $ | — | | | $ | 1,114 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | $ | 1,114 | | | $ | — | | | $ | 1,114 | | | $ | — | |
| | | | | | | | | | | | | | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of assets and liabilities at September 30, 2010 measured at estimated fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | | | |
| | | Fair Value
Measurements
at
September 30,
2010 | | | Level 1 | | | Level 2 | | | Level 3 | |
Investment securities available for sale: | | | | | | | | | | | | | | | | |
Mortgage-backed securities-residential | | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 153,188 | | | $ | — | | | $ | 153,188 | | | $ | — | |
Freddie Mac | | | 58,452 | | | | — | | | | 58,452 | | | | — | |
Ginnie Mae | | | 9,315 | | | | — | | | | 9,315 | | | | — | |
CMO/Other MBS | | | 32,663 | | | | — | | | | 32,663 | | | | — | |
Privately issued collateralized mortgage obligation | | | 5,996 | | | | — | | | | — | | | | 5,996 | |
| | | | | | | | | | | | | | | | |
| | | 259,614 | | | | — | | | | 253,618 | | | | 5,996 | |
Investment securities | | | | | | | | | | | | | | | | |
U.S. Government securities | | | 72,293 | | | | 72,293 | | | | — | | | | — | |
Federal agencies | | | 346,019 | | | | 346,019 | | | | — | | | | — | |
Corporate debt securities | | | 30,540 | | | | — | | | | 30,540 | | | | — | |
Obligations of states and political subdivisions | | | 191,657 | | | | — | | | | 191,657 | | | | — | |
Equities | | | 889 | | | | — | | | | 889 | | | | — | |
| | | | | | | | | | | | | | | | |
Total investment securities available for sale | | | 641,398 | | | | 418,312 | | | | 223,086 | | | | — | |
| | | | | | | | | | | | | | | | |
Total available for sale securities | | | 901,012 | | | | 418,312 | | | | 476,704 | | | | 5,996 | |
| | | | | | | | | | | | | | | | |
Interest rate caps and swaps | | | 435 | | | | — | | | | 435 | | | | — | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 901,447 | | | $ | 418,312 | | | $ | 477,139 | | | $ | 5,996 | |
| | | | | | | | | | | | | | | | |
Swaps | | $ | 173 | | | $ | — | | | $ | 173 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | $ | 173 | | | $ | — | | | $ | 173 | | | $ | — | |
| | | | | | | | | | | | | | | | |
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending September 30, 2011:
| | | | |
| | | Privately
issued
CMOS | |
Balance at September 30, 2009 | | $ | 10,411 | |
Pay downs | | | (1,946 | ) |
(Amortization) and accretion, net | | | 49 | |
Change in fair value | | | 380 | |
Loss recognized on sale | | | (186 | ) |
Sale | | | (2,712 | ) |
| | | | |
Balance at September 30, 2010 | | | 5,996 | |
Pay downs | | | (908 | ) |
(Amortization) and accretion, net | | | 1 | |
Credit loss write down (OTTI) | | | (75 | ) |
Change in fair value | | | (163 | ) |
| | | | |
Balance at September 30, 2011 | | $ | 4,851 | |
| | | | |
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
| Available for sale securities: | | | | | | | |
| Residential MBS: | | | | | | | |
| Agency-backed | $ | 282,529 |
| | $ | — |
| | $ | 282,529 |
| | $ | — |
|
| CMO/Other MBS | 163,041 |
| | — |
| | 163,041 |
| | — |
|
| Privately issued CMOs | 3,613 |
| | — |
| | — |
| | 3,613 |
|
| Total residential MBS | 449,183 |
| | — |
| | 445,570 |
| | 3,613 |
|
| Investment securities | | | | | | | |
| Federal agencies | 261,547 |
| | — |
| | 261,547 |
| | — |
|
| Corporate | 114,933 |
| | — |
| | 114,933 |
| | — |
|
| State and municipal | 128,730 |
| | — |
| | 128,730 |
| | — |
|
| Total investment securities available for sale | 505,210 |
| | — |
| | 505,210 |
| | — |
|
| Total available for sale securities | 954,393 |
| | — |
| | 950,780 |
| | 3,613 |
|
| Interest rate caps and swaps | 997 |
| | — |
| | 997 |
| | — |
|
| Total assets | $ | 955,390 |
| | $ | — |
| | $ | 951,777 |
| | $ | 3,613 |
|
| Swaps | $ | 997 |
| | $ | — |
| | $ | 997 |
| | $ | — |
|
| Total liabilities | $ | 997 |
| | $ | — |
| | $ | 997 |
| | $ | — |
|
The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain
circumstances:circumstances.
Loans Held for Sale and Impaired Loans
Loans
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value as determined by outstanding commitments from investors. Fair value of loans held for sale is determined using quoted prices for similar assets (Level 2 inputs).
When mortgage loans held for sale are
recorded atsold with servicing rights retained, the
lowercarrying value of
cost ormortgage loans sold is reduced by the amount allocated to the value of the servicing rights, which is equal to its fair
value. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value
in accordance with GAAP.of the related loan sold.
The Company may record nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. NonrecurringThese adjustments also include certain impairment amounts for collateral dependantdependent loans calculated in accordance with FASB ASC Topic 310 —– Receivables, when establishing the allowance for creditloan losses. SuchImpairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuationimpairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based uponon recent comparable sales of similar properties or assumptions generally observable by market participants. AnyHowever, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value adjustments for loans categorized here are classified asis based on Level 3.3 inputs. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classifiedare also based on Level 3 inputs. Impaired loans are evaluated on at least a quarterly basis for additional impairment and their carrying values are adjusted as Level 3.needed. Loans subject to nonrecurringnon-recurring fair value measurements were $51,155$36,208 and $28,717 which$35,228 (which equals the carrying value less the allowance for loan losses allocated to these loansloans) at September 30, 20112014 and 2010,2013, respectively. Loans subject to nonrecurring fair value measurements have been transferred from Level 2 to Level 3 as of September 30, 2010. Changes in fair value recognized onin provisions on loans held by the Company were $9,492$905 and $467$2,726 for the twelve months ended September 30, 20112014 and 2010,2013, respectively.
When valuing impaired loans that are collateral dependent, the Company charges-off the difference between the recorded investment in the loan and the appraised value, which is generally less than 12 months old. A discount for estimated costs to dispose of the asset is used when evaluating the impaired loans.
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of impaired loans at September 30, 2014 measured at estimated fair value on a non-recurring basis is the following:
|
| | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
| Commercial real estate | 1,463 |
| | — |
| | — |
| | 1,463 |
|
| Acquisition, development and construction | 2,173 |
| | — |
| | — |
| | 2,173 |
|
| Total impaired loans measured at fair value | $ | 3,636 |
| | $ | — |
| | $ | — |
| | $ | 3,636 |
|
A summary of impaired loans at September 30,
20112013 measured at estimated fair value on a
nonrecurringnon-recurring basis
were as follows: | | | | | | | | | | | | | | | | |
| | | Fair Value
Measurements
at
September 30,
2011 | | | Level 1 | | | Level 2 | | | Level 3 | |
Real estate — residential mortgage | | $ | 6,469 | | | $ | — | | | $ | — | | | $ | 6,469 | |
Real estate — commercial mortgage | | | 3,741 | | | | — | | | | — | | | | 3,741 | |
Commercial business loans (CBL) | | | 2,119 | | | | — | | | | — | | | | 2,119 | |
Acquisition, development and construction | | | 2,126 | | | | — | | | | — | | | | 2,126 | |
Consumer loans | | | 569 | | | | — | | | | — | | | | 569 | |
| | | | | | | | | | | | | | | | |
Total impaired loans with specific allowance allocations | | $ | 15,024 | | | $ | — | | | $ | — | | | $ | 15,024 | |
| | | | | | | | | | | | | | | | |
is the following:
|
| | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
| Commercial real estate | 3,672 |
| | — |
| | — |
| | 3,672 |
|
| Commercial & industrial | 500 |
| | — |
| | — |
| | 500 |
|
| Acquisition, development and construction | 1,839 |
| | — |
| | — |
| | 1,839 |
|
| Consumer | 2 |
| | — |
| | — |
| | 2 |
|
| Total impaired loans measured at fair value | $ | 6,013 |
| | $ | — |
| | $ | — |
| | $ | 6,013 |
|
Mortgage Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights
are initially recorded at fair value with the income statement effect recorded in net gain on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
The Company utilizes the amortization method to subsequently measure the carrying value of its servicing asset.rights. In accordance with FASB ASC Topic 860-860 - Transfers and Servicing, the Company must record impairment charges on a nonrecurringnon-recurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights, the Company utilizes a third party vendor,third-party, which on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights is considered arelies upon Level 3 valuation. Changes ininputs. The fairPROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
value of mortgage servicing rights recognized for the twelve months ended at September 30, 2011 was $53. There was no valuation allowance recorded at September 30, 2011. A valuation allowance2014 and 2013 were $1,526 and $1,978, respectively.
Assets Taken in Foreclosure of
$54 was recorded at September 30, 2010, reflecting fair market value.Defaulted Loans
Assets taken in foreclosure of defaulted loansAssets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less costs to sell and are primarily comprised of commercial and residential real estate property and upon initial recognition, wereare re-measured and reported at fair value through a charge-off to the allowance for loan losses based uponon the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place,place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and the related nonrecurringincome data available. The fair value measurements adjustments have generally been classified asis derived using Level 2.3 inputs. Appraisals are reviewed by our credit department, our external loan review consultant and verified by officers in our credit administration area. Assets taken in foreclosure of defaulted loans subject to nonrecurringnon-recurring fair value measurement were $5,391$7,580 and $3,891$6,022 at September 30, 20112014 and 2010,2013, respectively. There were $869write-downs of $224 and $19$1,978 related to changes in fair value recognized through income for those foreclosed assets held by the Company during the twelve months ending September 30, 20112014 and 2010,2013, respectively.
(18) STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Significant Unobservable Inputs to Level 3 Measurements
The following table presents quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets at September 30, 2014:
|
| | | | | | | | | | |
| Non-recurring fair value measurements | | Fair value | | Valuation technique | | Unobservable input / assumptions | | Range (1) (weighted average) |
| Impaired loans: | | | | | | | | |
| Commercial real estate | | $ | 1,463 |
| | Appraisal | | Adjustments for comparable properties | | 15.0% - 36.0% (22.0%) |
| Acquisition, development & construction | | 2,173 |
| | Appraisal | | Adjustments for comparable properties | | 10.0% - 30.0% (13.5%) |
| Assets taken in foreclosure: | | | | | | | | |
| Residential mortgage | | 1,301 |
| | Appraisal | | Adjustments by management to reflect current conditions/selling costs | | 16.0% - 59.0% (21.6%) |
Commercial real estate(2) | | 1,910 |
| | Appraisal | | Adjustments by management to reflect current conditions/selling costs | | 20.0% - 37.0% (24.8%) |
| Acquisition, development & construction | | 1,973 |
| | Appraisal | | Adjustments by management to reflect current conditions/selling costs | | 25.0% - 70.0% (30.2%) |
| Mortgage servicing rights | | 1,526 |
| | Third-party | | Discount rates | | 9.3% - 12.8% |
| | | | | Third-party | | Prepayment speeds | | 100 - 968 (224) |
(1) Represents range of discount factors applied to the appraisal to determine fair value. The amounts used for mortgage servicing rights are discounts applied by a third-party valuation provider which the Company believes are appropriate.
(2) Excludes $2,396 of commercial buildings that are former financial centers held for sale. These assets were not taken in foreclosure and their fair value is determined by appraisal, and our internal assessment of the market for this type of real estate in these locations.
Fair Values of Financial Instruments
FASB Codification Topic 825:825 - 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 for interim and annual periods. Fair value is the amount atfor 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 FASB Topic 825 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.
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the carrying amounts and estimated fair valuesvalue of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2014: | | | | | | | | | | | | | | | | |
| | | September 30, 2011 | | | September 30, 2010 | |
| | | Carrying
amount | | | Estimated
fair value | | | Carrying
amount | | | Estimated
fair value | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 281,512 | | | $ | 281,512 | | | $ | 90,872 | | | $ | 90,872 | |
Securities available for sale | | | 739,844 | | | | 739,844 | | | | 901,012 | | | | 901,012 | |
Securities held to maturity | | | 110,040 | | | | 111,272 | | | | 33,848 | | | | 35,062 | |
Loans | | | 1,675,882 | | | | 1,718,372 | | | | 1,670,698 | | | | 1,680,939 | |
Loans held for sale | | | 4,176 | | | | 4,176 | | | | 5,890 | | | | 5,934 | |
Accrued interest receivable | | | 9,904 | | | | 9,904 | | | | 11,069 | | | | 11,069 | |
FHLB of New York stock | | | 17,584 | | | | 17,584 | | | | 19,572 | | | | 19,572 | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Non-maturity deposits | | | (1,993,036 | ) | | | (1,993,036 | ) | | | (1,765,129 | ) | | | (1,765,129 | ) |
Certificates of Deposit | | | (303,659 | ) | | | (305,940 | ) | | | (377,573 | ) | | | (380,744 | ) |
FHLB and other borrowings | | | (375,021 | ) | | | (417,879 | ) | | | (415,247 | ) | | | (473,785 | ) |
Mortgage escrow funds | | | (9,701 | ) | | | (9,701 | ) | | | (8,198 | ) | | | (8,198 | ) |
Accrued interest payable | | | (1,816 | ) | | | (1,816 | ) | | | (2,307 | ) | | | (2,307 | ) |
|
| | | | | | | | | | | | | | | |
| | September 30, 2014 |
| | Carrying amount | |
Level 1 inputs | |
Level 2 inputs | |
Level 3 inputs |
| Financial assets: | | | | | | | |
| Cash and due from banks | $ | 177,619 |
| | $ | 177,619 |
| | $ | — |
| | $ | — |
|
| Securities available for sale | 1,110,813 |
| | — |
| | 1,110,813 |
| | — |
|
| Securities held to maturity | 579,075 |
| | — |
| | 587,838 |
| | — |
|
| Loans, net | 4,719,826 |
| | — |
| | — |
| | 4,758,366 |
|
| Loans held for sale | 17,846 |
| | — |
| | 17,846 |
| | — |
|
| Accrued interest receivable on securities | 8,876 |
| | — |
| | 8,876 |
| | — |
|
| Accrued interest receivable on loans | 10,791 |
| | — |
| | — |
| | 10,791 |
|
| FHLB stock and Federal Reserve Bank stock | 66,085 |
| | — |
| | — |
| | — |
|
| Interest rate caps and swaps | 1,096 |
| | — |
| | 1,096 |
| | — |
|
| Financial liabilities: | | | | | | | |
| Non-maturity deposits | (4,860,783 | ) | | (4,860,783 | ) | | — |
| | — |
|
| Certificates of deposit | (437,871 | ) | | — |
| | (438,088 | ) | | — |
|
| FHLB borrowings | (795,028 | ) | | — |
| | (813,490 | ) | | — |
|
| Other borrowings | (45,639 | ) | | — |
| | (45,640 | ) | | — |
|
| Senior notes | (98,402 | ) | | — |
| | (100,482 | ) | | — |
|
| Mortgage escrow funds | (4,494 | ) | | — |
| | (4,494 | ) | | — |
|
| Accrued interest payable on deposits | (320 | ) | | — |
| | (320 | ) | | — |
|
| Accrued interest payable on borrowings | (2,942 | ) | | — |
| | (2,942 | ) | | — |
|
| Interest rate caps and swaps | (1,096 | ) | | — |
| | (1,096 | ) | | — |
|
The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2013:
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | Carrying amount | |
Level 1 inputs | |
Level 2 inputs | |
Level 3 inputs |
| Financial assets: | | | | | | | |
| Cash and due from banks | $ | 113,090 |
| | $ | 113,090 |
| | $ | — |
| | $ | — |
|
| Securities available for sale | 954,393 |
| | — |
| | 950,780 |
| | 3,613 |
|
| Securities held to maturity | 253,999 |
| | — |
| | 250,896 |
| | — |
|
| Loans, net | 2,384,021 |
| | — |
| | — |
| | 2,422,824 |
|
| Loans held for sale | 1,011 |
| | — |
| | 1,011 |
| | — |
|
| Accrued interest receivable on securities | 4,892 |
| | — |
| | 4,892 |
| | — |
|
| Accrued interest receivable on loans | 6,805 |
| | — |
| | — |
| | 6,805 |
|
| FHLB stock | 24,312 |
| | — |
| | — |
| | — |
|
| Interest rate caps and swaps | 997 |
| | — |
| | 997 |
| | — |
|
| Financial liabilities: | | | | | | | |
| Non-maturity deposits | (2,694,166 | ) | | (2,694,166 | ) | | — |
| | — |
|
| Certificates of deposit | (268,128 | ) | | — |
| | (268,088 | ) | | — |
|
| FHLB and other borrowings | (345,176 | ) | | — |
| | (488,369 | ) | | — |
|
| Mortgage escrow funds | (12,646 | ) | | — |
| | (12,644 | ) | | — |
|
| Accrued interest payable on deposits | (1,480 | ) | | — |
| | (1,480 | ) | | — |
|
| Accrued interest payable on borrowings | (1,525 | ) | | — |
| | (1,525 | ) | | — |
|
| Interest rate caps and swaps | (997 | ) | | — |
| | (997 | ) | | — |
|
The following paragraphs summarize the principal methods and assumptions used by
managementthe Company to estimate the fair value of the Company’s financial
instruments.(a) Securities
instruments:
Loans
The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value
measurements consider observable data that may include dealer quotes, market spreads,of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows
live trading levels, market consensus prepayment speeds, credit information andusing the
bond’s terms and conditions among other items. For certain securities, forcurrent interest rates at which
the inputs used by independent pricing services were derived from unobservable market information, the Company evaluated the appropriateness of each price. In accordance with adoption of FASB Codification Topic 820, the Company reviewed the volume and level of activity for its different classes of securities to determine whether transactions were not considered orderly. For these securities, the quoted prices received from independent pricing services may be adjusted, as necessary, to estimate fair value in accordance with FASB Codification Topic 820. If applicable, adjustments to fair value were based on averaging present value cash flow model projections with prices obtained from independent pricing services.(b) Loans
Fair values were estimated for portfolios ofsimilar loans with similar financial characteristics. Forterms would be made to borrowers of similar credit quality. An overall 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. Loans were also segmented by maturity dates. 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 aadjustment is made for specific credit risk adjustment based on loan categories. Based on the current composition of the Company’s loan portfolio,risks as well as past experience and current
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
(c) general portfolio credit risk.
FHLB of New York Stock
and Federal Reserve Bank Stock
The redeemable carrying amount of these securities with limited marketability approximates their fair value.
(d)
Deposits and Mortgage Escrow Funds
In accordance with FASB Codification Topic 825, deposits with no stated maturity (such as savings, demand and money market deposits)
wereare assigned fair values equal to the carrying amounts payable on demand. Certificates of deposit and mortgage escrow funds
wereare segregated by account type and original term, and fair values
wereare estimated by discounting the contractual cash flows. The discount rate for each account grouping
wasis 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 believesdeposits. We believe that the Company’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial value separate from the deposit balances.
(e)
FHLB Borrowings,
Fair values of FHLB and other borrowings wereand Senior notes
The estimated
fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting
the contractualfuture cash
flows. A discount rate was utilizedflows using current interest rates for
each outstanding borrowing equivalent to the then-current rate offered on borrowings of similar
type and maturity.(f) financial instruments.
Other Financial Instruments
The other
Other financial assets and liabilities listed in the
preceding table
above 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.
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The fair values of the Company’s off-balance-sheet financial instruments described in Note
15 (“Off Balance15. “Off-Balance Sheet Financial Instruments”
) were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At September 30,
20112014 and
September 30, 2010,2013, the estimated fair
valuesvalue of these instruments approximated the related carrying amounts, which were
insignificant.(19)not material.
Accrued interest receivable/payable
The carrying amounts of accrued interest approximate fair value and are classified as Level 2.
(18) Recently Issued Accounting Standards Not Yet Adopted
Accounting Standards Update (ASU) 2011-03,Transfers(“ASU”) 2014-14 Classification of Certain Government-Guaranteed Residential Mortgage Loans Upon Foreclosure. This standard provides guidance on how holders of certain government-guaranteed loans (e.g., mortgage loans guaranteed by the FHA or VA) should present such loans upon foreclosure. Specifically, the ASU provides that, upon foreclosure, government-guaranteed loans within the scope of the standard should be derecognized and Servicing (Topic 860) — Reconsideration of Effective Control for Repurchase Agreementshas been issued, which is to improvere-recognized as a separate other receivable (i.e., a receivable from the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. Thisgovernment entity guaranteeing the loan). The standard does not require any new disclosures about such loans. ASU 2014-14 is effective for the Company January 1, 2012for annual and interim periods beginning after December 15, 2014, and is not expected to have a material effectimpact on our balance sheet or results of operations.
ASU 2014-11 Transfers and Servicing (topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This standard amends the Company’s consolidated financial statements.Accounting Standards Update (ASU) 2011-04,Fair Value Measurement (Topic 820)-Amendmentsguidance in ASC 860 on accounting for certain repurchase agreements (“repos”). The standard (1) requires entities to Achieve Common Fair Value Measurementaccount for repurchase-to-maturity transactions as secured borrowings, (2) eliminates accounting guidance on linked repurchase financing transactions, and Disclosure Requirements in U.S. GAAP and IFRShas been issued, which will conform the meaning and(3) expands disclosure requirements related to certain transfers of fair value measurement between U.S. GAAPfinancial assets that are accounted for as sales and in IFRS.certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) that are accounted for as secured borrowings. This standard is effective for the Company January 1, 2012annual periods beginning after December 15, 2014 and is not expected to have a material effectimpact on the Company’s consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Accounting Standards Update (ASU) 2011-05-Presentationour balance sheet or results of Comprehensive Income (Topic 220) has been issued. operations.
ASU 2014-09 Revenue From Contracts With Customers. This standard was issuedoutlines a single comprehensive model for entities to conform U.S. GAAPuse in accounting for revenue arising from contracts with customers and IFRS as well assupersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to increasedepict the prominencetransfer of items reportedpromised goods or services to customers in other comprehensive income. Thisan amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this standard will have on its balance sheet and results of operations.
ASU 2014-04 Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage loans upon Foreclosure was issued. This standard provides clarification when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be removed from the balance sheet and other real estate owned recognized. These amendments clarify that when an in-substance foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower is conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This standard was effective for the Company Januaryon October 1, 20122014 and is not expected to have a material effectimpact on the Company’s consolidated financial statements.our balance sheet or results of operations.
See Note
11. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policy” for a discussion of
the adoption of new accounting standards.
(19) Accumulated Other Comprehensive (Loss) Income
Components of accumulated other comprehensive income (loss) (“AOCI”) were as follows at September 30:
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Net unrealized holding loss on available for sale securities | $ | (4,645 | ) | | $ | (19,316 | ) |
| Related income tax benefit | 1,974 |
| | 7,844 |
|
| Available for sale securities AOCI, net of tax | (2,671 | ) | | (11,472 | ) |
| Net unrealized holding loss on securities transferred to held to maturity | (8,947 | ) | | — |
|
| Related income tax benefit | 3,803 |
| | — |
|
| Securities transferred to held to maturity AOCI, net of tax | (5,144 | ) | | — |
|
| Net unrealized holding loss on retirement plans | (6,336 | ) | | (6,496 | ) |
| Related income tax benefit | 2,692 |
| | 2,638 |
|
| Retirement plan AOCI, net of tax | (3,644 | ) | | (3,858 | ) |
| Accumulated other comprehensive loss | $ | (11,459 | ) | | $ | (15,330 | ) |
The following table presents the changes in each component of accumulated other comprehensive income for the fiscal years ended September 30, 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| | Net unrealized holding gain (loss) on AFS securities | | Net unrealized holding (loss) on securities transferred to held to maturity | | Net unrealized holding gain (loss) on retirement plans | | Total |
| Fiscal year ended September 30, 2014 | | | | | | | |
| Balance beginning of the year | $ | (11,472 | ) | | $ | — |
| | $ | (3,858 | ) | | $ | (15,330 | ) |
| Other comprehensive gain (loss) before reclassification | 9,170 |
| | (5,144 | ) | | — |
| | 4,026 |
|
| Amounts reclassified from AOCI | (369 | ) | | — |
| | 214 |
| | (155 | ) |
| Total other comprehensive income (loss) | 8,801 |
| | (5,144 | ) | | 214 |
| | 3,871 |
|
| Balance at end of period | $ | (2,671 | ) | | $ | (5,144 | ) | | $ | (3,644 | ) | | $ | (11,459 | ) |
| Fiscal year ended September 30, 2013 | | | | | | | |
| Balance beginning of the year | $ | 15,066 |
| | $ | — |
| | $ | (8,167 | ) | | $ | 6,899 |
|
| Other comprehensive (loss) gain before reclassification | (22,167 | ) | | — |
| | 3,041 |
| | (19,126 | ) |
| Amounts reclassified from AOCI | (4,371 | ) | | — |
| | 1,268 |
| | (3,103 | ) |
| Total other comprehensive (loss) income | (26,538 | ) | | — |
| | 4,309 |
| | (22,229 | ) |
| Balance at end of period | $ | (11,472 | ) | | $ | — |
| | $ | (3,858 | ) | | $ | (15,330 | ) |
| Fiscal year ended September 30, 2012 | | | | | | | |
| Balance beginning of the year | $ | 13,604 |
| | $ | — |
| | $ | (8,468 | ) | | $ | 5,136 |
|
| Other comprehensive gain before reclassification | 7,640 |
| | — |
| | — |
| | 7,640 |
|
| Amounts reclassified from AOCI | (6,178 | ) | | — |
| | 301 |
| | (5,877 | ) |
| Total other comprehensive income | 1,462 |
| | $ | — |
| | 301 |
| | 1,763 |
|
| Balance at end of period | $ | 15,066 |
| | $ | — |
| | $ | (8,167 | ) | | $ | 6,899 |
|
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed
statementsbalance sheets of
financial condition of Provident BancorpSterling and the related condensed statements of income and cash flows:
| | | | | | | | |
| Condensed Statements of Financial Condition | | September 30, | |
| | | 2011 | | | 2010 | |
Assets: | | | | | | | | |
Cash | | $ | 6,692 | | | $ | 10,020 | |
Loan receivable from ESOP | | | 7,338 | | | | 7,762 | |
Securities available for sale at fair value | | | 837 | | | | 790 | |
Investment in Provident Bank | | | 406,838 | | | | 404,755 | |
Non-bank subsidiaries | | | 9,082 | | | | 8,104 | |
Other assets | | | 1,680 | | | | 963 | |
| | | | | | | | |
Total assets | | $ | 432,467 | | | $ | 432,394 | |
| | | | | | | | |
Liabilities | | $ | 1,333 | | | $ | 1,439 | |
Stockholders’ equity | | | 431,134 | | | | 430,955 | |
| | | | | | | | |
Total liabilities & stockholders’ equity | | $ | 432,467 | | | $ | 432,394 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | | Year ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Condensed Statements of Income | | | | | | | | | | | | |
Interest income | | $ | 304 | | | $ | 326 | | | $ | 358 | |
Dividend income on equity securities | | | 31 | | | | 28 | | | | 28 | |
Dividends from Provident Bank | | | 10,000 | | | | 29,400 | | | | 10,500 | |
Dividends from non-bank subsidiaries | | | 500 | | | | 400 | | | | 607 | |
Bank owned life insurance income | | | 91 | | | | — | | | | — | |
Non-interest expense | | | (1,819 | ) | | | (2,262 | ) | | | (3,372 | ) |
Income tax benefit | | | 157 | | | | 321 | | | | 797 | |
| | | | | | | | | | | | |
Income before equity in undistributed earnings of subsidiaries | | | 9,264 | | | | 28,213 | | | | 8,918 | |
Equity in undistributed (excess distributed) earnings of: | | | | | | | | | | | | |
Provident Bank | | | 1,498 | | | | (8,257 | ) | | | 17,076 | |
Non-bank subsidiaries | | | 977 | | | | 536 | | | | (133 | ) |
| | | | | | | | | | | | |
Net income | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | |
| | | | | | | | | | | | |
|
| | | | | | | |
| | September 30, |
| | 2014 | | 2013 |
| Assets: | | | |
| Cash | $ | 23,369 |
| | $ | 56,230 |
|
| Loan receivable from ESOP | — |
| | 6,437 |
|
| Investment in Sterling National Bank | 1,011,973 |
| | 517,907 |
|
| Investment in non-bank subsidiaries | 3,587 |
| | 3,271 |
|
| Goodwill | 18,970 |
| | — |
|
| Trade name | 20,500 |
| | — |
|
| Other intangible assets, net | 917 |
| | — |
|
| Other assets | 528 |
| | 1,184 |
|
| Total assets | $ | 1,079,844 |
| | $ | 585,029 |
|
| | | | |
| Liabilities: | | | |
| Senior Notes | $ | 98,402 |
| | $ | 98,033 |
|
| Other liabilities | 20,304 |
| | 4,130 |
|
| Total liabilities | 118,706 |
| | 102,163 |
|
| Stockholders’ equity | 961,138 |
| | 482,866 |
|
| Total liabilities & stockholders’ equity | $ | 1,079,844 |
| | $ | 585,029 |
|
| | | | |
The table below presents the condensed statement of income:
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Interest income | $ | 139 |
| | $ | 262 |
| | $ | 282 |
|
| Dividend income on equity securities | — |
| | 22 |
| | 30 |
|
| Dividends from Sterling National Bank | 22,500 |
| | — |
| | 6,000 |
|
| Dividends from non-bank subsidiaries | 750 |
| | 1,600 |
| | 500 |
|
| Other | 18 |
| | — |
| | 10 |
|
| Interest expense | (6,265 | ) | | (1,431 | ) | | — |
|
| Non-interest expense | (5,841 | ) | | (2,700 | ) | | (1,838 | ) |
| Income tax benefit | 3,431 |
| | 898 |
| | 87 |
|
| Income (loss) before equity in undistributed earnings of subsidiaries | 14,732 |
| | (1,349 | ) | | 5,071 |
|
| Equity in undistributed (excess distributed) earnings of: | | | | | |
| Sterling National Bank | 12,590 |
| | 27,174 |
| | 13,739 |
|
| Non-bank subsidiaries | 355 |
| | (571 | ) | | 1,078 |
|
| Net income | $ | 27,677 |
| | $ | 25,254 |
| | $ | 19,888 |
|
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
| | | | | | | | | | | | |
| | | Year ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Condensed Statements of Cash Flows | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 11,739 | | | $ | 20,492 | | | $ | 25,861 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Equity in (undistributed) excess distributed earnings of | | | | | | | | | | | | |
Provident Bank | | | (1,498 | ) | | | 8,257 | | | | (17,076 | ) |
Non-bank subsidiaries | | | (977 | ) | | | (536 | ) | | | 133 | |
Other adjustments, net | | | (1,444 | ) | | | (1,077 | ) | | | (475 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 7,820 | | | | 27,136 | | | | 8,443 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
ESOP loan principal repayments | | | 424 | | | | 408 | | | | 392 | |
| | | | | | | | | | | | |
Net cash provided by investing activities | | | 424 | | | | 408 | | | | 392 | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Capital contribution to subsidiaries | | | — | | | | (350 | ) | | | — | |
Treasury shares purchased | | | (3,810 | ) | | | (13,062 | ) | | | (3,785 | ) |
Cash dividends paid | | | (8,973 | ) | | | (9,216 | ) | | | (9,379 | ) |
Stock option transactions including RRP | | | 770 | | | | 2,196 | | | | 3,055 | |
Other equity transactions | | | 441 | | | | 442 | | | | 488 | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (11,572 | ) | | | (19,990 | ) | | | (9,621 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash | | | (3,328 | ) | | | 7,554 | | | | (786 | ) |
Cash at beginning of year | | | 10,020 | | | | 2,466 | | | | 3,252 | |
| | | | | | | | | | | | |
Cash at end of year | | $ | 6,692 | | | $ | 10,020 | | | $ | 2,466 | |
| | | | | | | | | | | | |
The table below presents the condensed statement of cash flows:
|
| | | | | | | | | | | |
| | For the year ended September 30, |
| | 2014 | | 2013 | | 2012 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 27,677 |
| | $ | 25,254 |
| | $ | 19,888 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Equity in (undistributed) excess distributed earnings of: | | | | | |
| Sterling National Bank | (12,590 | ) | | (27,174 | ) | | (13,739 | ) |
| Non-bank subsidiaries | (355 | ) | | 571 |
| | (1,078 | ) |
| (Gain) on redemption of Subordinated Debentures | (712 | ) | | — |
| | — |
|
| Other adjustments, net | 22,066 |
| | 5,259 |
| | 380 |
|
| Net cash provided by operating activities | 36,086 |
| | 3,910 |
| | 5,451 |
|
| Cash flows from investing activities: | | | | | |
| Purchase of securities | — |
| | — |
| | (105 | ) |
| Sales of securities | 1,112 |
| | 818 |
| | 103 |
|
| Investment in subsidiaries | (15,000 | ) | | (45,000 | ) | | (44,203 | ) |
| ESOP loan principal repayments | 6,437 |
| | 459 |
| | 441 |
|
| Net cash (used for) investing activities | (7,451 | ) | | (43,723 | ) | | (43,764 | ) |
| Cash flows from financing activities: | | | | | |
| Net change in other short-term borrowings | (20,659 | ) | | — |
| | — |
|
| Redemption of Subordinated Debentures | (26,140 | ) | | — |
| | — |
|
| Senior Notes offering | — |
| | 97,946 |
| | — |
|
| Equity capital raise | — |
| | — |
| | 46,000 |
|
| Cash dividends paid | (17,677 | ) | | (10,642 | ) | | (9,100 | ) |
| Stock option transactions including RRP | 2,980 |
| | 1,758 |
| | 910 |
|
| Other equity transactions | — |
| | 265 |
| | 527 |
|
| Net cash (used for) provided by financing activities | (61,496 | ) | | 89,327 |
| | 38,337 |
|
| Net (decrease) increase in cash | (32,861 | ) | | 49,514 |
| | 24 |
|
| Cash at beginning of year | 56,230 |
| | 6,716 |
| | 6,692 |
|
| Cash at end of year | $ | 23,369 |
| | $ | 56,230 |
| | $ | 6,716 |
|
PROVIDENT NEW YORKSTERLING BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the
fiscal years ended September 30,
20112014 and
2010: | | | | | | | | | | | | | | | | |
| | | First
quarter | | | Second
quarter | | | Third
quarter | | | Fourth
quarter | |
Year ended September 30, 2011 | | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 29,060 | | | $ | 27,803 | | | $ | 27,934 | | | $ | 27,817 | |
Interest expense | | | 5,876 | | | | 5,292 | | | | 5,130 | | | | 5,026 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 23,184 | | | | 22,511 | | | | 22,804 | | | | 22,791 | |
Provision for loan losses | | | 2,100 | | | | 2,100 | | | | 3,600 | | | | 8,784 | |
Non-interest income | | | 9,883 | | | | 5,795 | | | | 5,217 | | | | 9,056 | |
Non-interest expense | | | 21,269 | | | | 21,791 | | | | 22,669 | | | | 24,382 | |
| | | | | | | | | | | | | | | | |
Income before income tax expense | | | 9,698 | | | | 4,415 | | | | 1,752 | | | | (1,319 | ) |
Income tax expense | | | 2,978 | | | | 842 | | | | (187 | ) | | | (826 | ) |
| | | | | | | | | | | | | | | | |
Net income | | $ | 6,720 | | | $ | 3,573 | | | $ | 1,939 | | | $ | (493 | ) |
| | | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.18 | | | $ | 0.10 | | | $ | 0.05 | | | $ | (0.01 | ) |
Diluted | | $ | 0.18 | | | $ | 0.10 | | | $ | 0.05 | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Year ended September 30, 2010 | | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 30,418 | | | $ | 29,627 | | | $ | 30,408 | | | $ | 29,321 | |
Interest expense | | | 7,532 | | | | 6,693 | | | | 6,210 | | | | 6,005 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 22,886 | | | | 22,934 | | | | 24,198 | | | | 23,316 | |
Provision for loan losses | | | 2,500 | | | | 2,500 | | | | 2,750 | | | | 2,250 | |
Non-interest income | | | 8,093 | | | | 6,113 | | | | 5,281 | | | | 7,714 | |
Non-interest expense | | | 19,894 | | | | 21,173 | | | | 20,741 | | | | 21,362 | |
| | | | | | | | | | | | | | | | |
Income before income tax expense | | | 8,585 | | | | 5,374 | | | | 5,988 | | | | 7,418 | |
Income tax expense | | | 2,419 | | | | 1,207 | | | | 1,232 | | | | 2,015 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 6,166 | | | $ | 4,167 | | | $ | 4,756 | | | $ | 5,403 | |
| | | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.16 | | | $ | 0.11 | | | $ | 0.12 | | | $ | 0.14 | |
Diluted | | $ | 0.16 | | | $ | 0.11 | | | $ | 0.12 | | | $ | 0.14 | |
| | | | | | | | | | | | | | | | |
2013:
|
| | | | | | | | | | | | | | | |
| | First quarter | | Second quarter | | Third quarter | | Fourth quarter |
| Year ended September 30, 2014 | | | | | | | |
| Interest and dividend income | $ | 52,711 |
| | $ | 61,325 |
| | $ | 65,761 |
| | $ | 67,109 |
|
| Interest expense | 6,835 |
| | 7,297 |
| | 7,310 |
| | 7,476 |
|
| Net interest income | 45,876 |
| | 54,028 |
| | 58,451 |
| | 59,633 |
|
| Provision for loan losses | 3,000 |
| | 4,800 |
| | 5,950 |
| | 5,350 |
|
| Non-interest income | 9,148 |
| | 12,415 |
| | 13,471 |
| | 12,286 |
|
| Non-interest expense | 72,974 |
| | 46,723 |
| | 44,904 |
| | 43,780 |
|
| (Loss) income before income tax | (20,950 | ) | | 14,920 |
| | 21,068 |
| | 22,789 |
|
| Income tax (benefit) expense | (6,948 | ) | | 4,588 |
| | 6,057 |
| | 6,452 |
|
| Net (loss) income | $ | (14,002 | ) | | $ | 10,332 |
| | $ | 15,011 |
| | $ | 16,337 |
|
| Earnings per common share: | | | | | | | |
| Basic | $ | (0.20 | ) | | $ | 0.12 |
| | $ | 0.18 |
| | $ | 0.20 |
|
| Diluted | (0.20 | ) | | 0.12 |
| | 0.18 |
| | 0.19 |
|
| Year ended September 30, 2013 | | | | | | | |
| Interest and dividend income | $ | 33,145 |
| | $ | 32,420 |
| | $ | 32,593 |
| | $ | 33,903 |
|
| Interest expense | 5,222 |
| | 4,601 |
| | 4,276 |
| | 5,795 |
|
| Net interest income | 27,923 |
| | 27,819 |
| | 28,317 |
| | 28,108 |
|
| Provision for loan losses | 2,950 |
| | 2,600 |
| | 3,900 |
| | 2,700 |
|
| Non-interest income | 7,659 |
| | 6,852 |
| | 6,581 |
| | 6,600 |
|
| Non-interest expense | 22,546 |
| | 23,339 |
| | 21,789 |
| | 23,367 |
|
| Income before income tax | 10,086 |
| | 8,732 |
| | 9,209 |
| | 8,641 |
|
| Income tax expense | 3,066 |
| | 2,203 |
| | 2,833 |
| | 3,312 |
|
| Net income | $ | 7,020 |
| | $ | 6,529 |
| | $ | 6,376 |
| | $ | 5,329 |
|
| Earnings per common share: | | | | | | | |
| Basic | $ | 0.16 |
| | $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.12 |
|
| Diluted | 0.16 |
| | 0.15 |
| | 0.15 |
| | 0.12 |
|
The Company incurred a net loss in the first fiscal quarter of 2014 due mainly to charges and asset write-downs associated with the Merger. The Company recognized charges of $22.2 million for asset write-downs, retention and severance compensation, a write-off of the naming rights to remaining book value of the Provident Bank Ballpark, all of which are included in other non-interest income on the income statement. The charge for asset write-downs was based on the Company’s intent to consolidate several office locations and financial centers. The Company recognized $9.1 million of Merger-related expenses, which included professional advisory fees, legal fees, a portion of change-in-control payments to Legacy Sterling executive officers, costs associated with changing signage at various office and financial center locations and other Merger-related items. In addition, the Company incurred a $2.7 million charge for the settlement of a portion of the Legacy Provident pension plan in December 2013.
ITEM 9. Changes(22) Subsequent Events (Unaudited)
On November 5, 2014, the Company announced it had entered into a definitive merger agreement with Hudson Valley Holding Corp. (NYSE: HVB). In the merger, which is a stock-for-stock transaction valued at approximately $539,234 based on the closing price of Sterling common stock on November 4, 2014, Hudson Valley Holding Corp. shareholders will receive a fixed ratio of 1.92 shares of Sterling common stock for each share of Hudson Valley Holding Corp. common stock. Upon closing, Sterling shareholders will own approximately 69% of stock in the combined company and DisagreementsHudson Valley Holding Corp. shareholders will own approximately 31%. On a pro forma combined basis, for the twelve months ended September 30, 2014, the companies had revenue of $363,217 and $21,962 in
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
net income. Upon completion of the merger the combined company is expected to have $10,703,764 in assets, $6,551,482 in gross loans, and deposits of $8,071,799. The transaction, which has been approved by the boards of directors of both companies, is expected to close in the second calendar quarter of 2015. The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions.
The Company has engaged an independent third-party to assist management in estimating the fair value of the majority of the assets acquired and liabilities to be assumed. The Company will file a Current Report on Form 8-K (or an amendment to a prior report) no later than January 15, 2015 that will include historical and pro forma information regarding Hudson Valley Holding Corp. and the Company which is required in connection with
Accountants on Accounting and Financial Disclosurethe Merger.
| |
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
ITEM 9A. Controls and Procedures. | |
| ITEM 9A. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2011,2014, under the supervision and with the participation of ProvidentSterling Bancorp’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on thethat evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be includedrecorded, processed, summarized and reported in ProvidentSterling Bancorp’s periodic SEC reports.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal
controlscontrol over financial reporting during the
fourth fiscal quarter of 2011year ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(b) Management’s Annual Report on Internal Control over Financial Reporting (see “Report of Management on Internal Control Over Financial Reporting”Reporting
The management of Sterling Bancorp (the “Company”)Provident Bancorp’s management is responsible for establishing and maintaining adequateeffective internal control over financial reporting, as such termreporting. The Company’s system of internal controls is defineddesigned to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in Exchange Act Rules 13a-15(f)accordance with U.S. generally accepted accounting principles. All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and 15d-15(f). Underpresentation. Also, projections of any evaluation of effectiveness to future periods are subject to the supervision andrisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the participation of the management of Provident Bancorp’s, including Provident Bancorp’s CEO and CFO, Provident Bancorp conducted an evaluation of the effectiveness ofpolicies or procedures may deteriorate. Management assessed the Company’s internal control over financial reporting as of September 30, 20112014. This assessment was based on criteria established in the framework in2013 Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission which is also referred to as COSO.(COSO). Based on that evaluation, management of Provident Bancorpthis assessment, we have concluded that, as of September 30, 2014, the Company’s internal control over financial reporting was effective as of September 30, 2011. Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.
effective.
The effectiveness of the Company’s internal control over financial reporting as of September 30,
20112014 has been audited by Crowe Horwath LLP, as stated in their report which is included elsewhere herein.
ITEM 9B. Other Information
| |
| ITEM 9B. | Other Information |
ITEM 10. Directors, Executive Officers, and Corporate Governance“
| |
| ITEM 10. | Directors, Executive Officers, and Corporate Governance |
The Proposal I — Election“Election of Directors” and “Section 169(a)16(a) Beneficial Ownership Reporting Compliance” sections of ProvidentSterling Bancorp’s Proxy Statement for the Annual Meeting of Stockholders to be held in February 20122015 (the “Proxy Statement”) is incorporated herein by reference.
ITEM 11. Executive Compensation“
| |
| ITEM 11. | Executive Compensation |
The Proposal I —
Election“Election of Directors” section of the Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersProvident
| |
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Sterling Bancorp does not have any equity compensation programs that were not approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2011,2014, regarding equity compensation that has been approved by stockholders. | | | | | | | | | | | | |
Equity compensation plans
approved by stockholders | | Number of securities
to be issued upon
exercise of outstanding
options and rights | | | Weighted average
Exercise price | | | Number of securities
remaining available
for issuance under plan | |
Stock Option Plans | | | 1,906,020 | | | $ | 12.20 | | | | 207,607 | |
Recognition and Retention Plan(1) | | | 57,520 | | | | N/A | | | | 27,120 | |
Total(2) | | | 1,963,540 | | | | 12.20 | | | | 234,727 | |
|
| | | | | | | | | |
Equity compensation plans approved by stockholders | Number of securities to be issued upon exercise of outstanding options and rights | | Weighted average Exercise price (1) | | Number of securities remaining available for issuance under plan |
| Stock Option Plans | 1,660,333 |
| | $ | 10.55 |
| | 3,350,761 |
|
(1) | Represents shares that have been granted but have not yet vested.
|
(2)(1) | Weighted average exercise price represents Stock Option PlanPlans only, since RRPrestricted shares have no exercise price. |
The
“ProposalProposal I —
Election“Election of Directors” section of the Proxy Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions and Director Independence | |
| ITEM 13. | Certain Relationships and Related Transactions and Director Independence |
The “Transactions with Certain Related Persons” section of the Proxy Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services | |
| ITEM 14. | Principal Accountant Fees and Services |
The
“IndependentProposal III - “Ratification of Appointment of Independent Registered Public Accounting Firm” section of the
proxy statementProxy Statement is incorporated herein by reference.
ITEM 15. Exhibits and Financial Statement Schedules
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A) | Report of Independent Registered Public Accounting Firm on Financial Statements |
(B) | Consolidated Statements of Financial Condition as of September 30, 2011 and 2010 |
(C) | Consolidated Statements of Income for the years ended September 30, 2011, 2010 and 2009 |
(D) | Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2011, 2010 and 2009 |
(E) | Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009 |
(F) | Notes to Consolidated Financial Statements |
(2) | Financial Statement Schedules |
(A)Report of Independent Registered Public Accounting Firm on Financial Statements
(B)Consolidated Balance Sheets as of September 30, 2014 and 2013
(C)Consolidated Statements of Income for the years ended September 30, 2014, 2013 and 2012
(D)Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2014, 2013 and 2012
(E)Consolidated Statements of Cash Flows for the years ended September 30, 2014, 2013 and 2012
(F)Notes to Consolidated Financial Statements
(G)Financial Statement Schedules
(2) All financial statement schedules have been omitted as the required information is inapplicable or has been included in
the Notes to Consolidated Financial Statements.
(3) Exhibits
| | |
| |
| 2.1 | Agreement and Plan of Merger, dated as of November 4, 2014, by and between Sterling Bancorp and Hudson Valley Holding Corp. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on November 7, 2014). |
| 3.1 | | Certificate of Incorporation of Provident Bancorpthe Company, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 1, 2013). |
| 3.2 | Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on November 1, 2013). |
3.24.1 | | BylawsForm of Provident Bancorp, as amended 2Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on November 1, 2013). |
| 4.2 | Form of Corporate Governance Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on August 7, 2012). |
| 4.3 | Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, no instrument which defines the holders of long-term debt of the Company or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the Company hereby agrees to furnish a copy of any such instrument to the Commission upon request. |
| 10.1 | Employment Agreement, dated as of June 20, 2011, with Jack L. Kopnisky (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 21, 2011).* |
| 10.2 | | Form of Amendment to Employment Agreement, dated as of November 26, 2012, with George Strayton 3* |
| Jack L. Kopnisky (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on November 26, 2012).* |
| 10.3 | | Amendment No. 2 to Employment Agreement, dated as of April 3, 2013, with Daniel Rothstein 4* |
| Jack L. Kopnisky (incorporated by reference to Exhibit 10.1 of the Company’s Amendment No. 1 to Current Report on Form 8-K filed on April 9, 2013).* |
| 10.4 | | Deferred CompensationEmployment Agreement, dated as amended and restated 5* |
| of November 1, 2013, with Luis Massiani (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 4, 2013).* |
| 10.5 | | Provident Amended and Restated 1995 Supplemental Executive
Retirement Plan 6*
|
| |
10.5.1 | | Provident 2005 Supplemental Executive Retirement Plan 7* |
| Form of Employment Agreement, dated as of November 22, 2011, with Rodney Whitwell (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K filed on December 14, 2012).* |
| 10.6 | Form of Reinstated Employment Agreement, dated as of November 26, 2012, with Rodney Whitwell (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on November 27, 2012).* |
Executive Officer Incentive Program 8* |
| |
| 10.7 | | 1996 Long-Term Incentive Plan for Officers and Directors,Employment Agreement, dated as amended 9* |
| of November 1, 2013, with David S. Bagatelle (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 4, 2013).* |
| 10.8 | Amendment No. 1 to Employment Agreement, dated as of September 23, 2014, with David S. Bagatelle (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 25, 2014).* |
| 10.9 | Employment Agreement, dated as of November 1, 2013, with James R. Peoples (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on November 4, 2013).* |
| 10.10 | Employment Agreement dated as of April 3, 2013, with Michael Bizenov* (filed herewith) |
| 10.11 | Employment Agreement dated as of April 3, 2013, with Howard M. Applebaum* (filed herewith) |
| 10.12 | Services and Covenant Agreement, dated as of April 3, 2013, by and between the Company and Louis J. Cappelli (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2013).* |
| 10.13 | Services and Covenant Agreement, dated as of April 3, 2013, by and between the Company and John C. Millman (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 1, 2013).* |
| 10.14 | Retention Award Letter, dated as of May 13, 2013, with Daniel G. Rothstein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 14, 2013).* |
| 10.15 | Provident Bank Amended and Restated 1995 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 0-25233)).* |
| 10.16 | Provident Bank 2005 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 0-25233)).* |
| 10.17 | Provident Bank 2000 Stock Option Plan 10* (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on January 18, 2000 (File No. 0-25233)).* |
| 10.18 | |
10.9 | | Provident Bank 2000 Recognition and Retention Plan 11* |
| |
10.10 | | Employment Agreement with Paul A. Maisch 12* |
| |
10.11 | | Provident Bancorp, Inc. 2004 Stock Incentive Plan 13* (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on January 19, 2005 (File No. 0-25233)).* |
| 10.19 | |
10.12 | | Provident Bank Executive Officer Incentive Plan 14* |
| |
10.13 | | Employment Agreement with Stephen Dormer 15* |
| |
10.14 | | Employment Agreement with Richard Jones 16* |
| |
10.15 | | Employment Agreement with Jack L. Kopnisky 17* |
| |
10.16 | | Letter Agreement with George L. Strayton 18* |
| | |
10.17 | | Form of Stock Option Agreement, dated as of July 6, 2011, between Provident New York Bancorpthe Company and Jack L. Kopnisky (grant date July 6,2011) 19*(incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2011).* |
| 10.20 | |
10.18 | | Form of Restricted Stock Award Notice, dated as of July 6, 2011, between the Company and Jack L. Kopnisky (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2011)).* |
| 10.21 | Form of Performance-Based Restricted Stock Award Notice, dated as of July 6, 2011, between the Company and Jack L. Kopnisky (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2011).* |
| 10.22 | Provident Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 1, 2011).* |
| 10.23 | Sterling Bancorp 2014 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2014 Annual Meeting of Stockholders, filed on January 10, 2014).* |
| 10.24 | Sterling Bancorp Stock Incentive Plan (incorporated by reference to Exhibit 10 to Legacy Sterling’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-05273)).* |
| 10.25 | Form of Sterling Bancorp 2013 Employment Inducement Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Post Effective Amendment on Form S-8 to Form S-4 filed on November 1, 2013).* |
| 10.26 | Form of Restricted Stock Unit Award Agreement Pursuant to the Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011) 20*2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 1, 2013).* |
| 10.27 | |
10.19 | | Form of Performance-based Restricted Stock Award Notice betweenAgreement Pursuant to the Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011) 21*2012 Stock Incentive Plan* (filed herewith) |
| 10.28 | Form of Stock Option Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock Incentive Plan* (filed herewith) |
10.2010.29 | | SeparationForm of Performance-Based Stock Award Agreement with Stephen G. Dormer 22*Pursuant to the Provident New York Bancorp 2012 Stock Incentive Plan* (filed herewith) |
| 10.30 | Form of Restricted Stock Award Agreement Pursuant to the 2014 Stock Incentive Plan* (filed herewith) |
10.2110.31 | | Provident Short-termForm of Stock Option Award Agreement Pursuant to the 2014 Stock Incentive Plan 23*Plan* (filed herewith) |
| 10.32 | |
10.22 | | Form of Non-Renewal Notice(filedPerformance-Based Stock Award Agreement Pursuant to the 2014 Stock Incentive Plan* (filed herewith) |
| |
| 21 | | Subsidiaries of Registrant(filed (filed herewith) |
|
| |
| 23 | | Consent of Crowe Horwath LLP(filed (filed herewith) |
| |
| 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002(filed (filed herewith) |
| |
| 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002(filed (filed herewith) |
| |
| 32 | | Certification Pursuant to 18 U.S.C. Section 1350, as amended by Section 906 of the Sarbanes-Oxley Act of 2002(filed (filed herewith) |
| |
| 101.INS | | XBRL Instance Document24 (filed herewith) |
| |
| 101.SCH | | XBRL Taxonomy Extension Schema document24Document (filed herewith) |
| |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document24 (filed herewith) |
| |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document24 (filed herewith) |
| |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document24 (filed herewith) |
| |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document24 (filed herewith) |
1 | Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (File No. 333-108795), originally filed with the Commission on September 15,2003.
|
2 | Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on November 3, 2010.
|
3 | Incorporated by reference to Exhibit 10.2 of the 2008 10-K (File No, 0-25233), files with the Commission on December 15, 2008.
|
4 | Incorporated by reference to Exhibit 10.3 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.
|
5 | Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No 333-63593) filed with the Commission on September 17, 1998.
|
6 | Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008
|
7 | Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008
|
8 | Incorporated by reference to Exhibit 10.6 of the 2007 10-K (File No. 0-25233), filed with the Commission on December 13, 2007.
|
9 | Incorporated by reference to Exhibit 10.7 of Amendment No. 1 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No. 333-63593), filed with the Commission on September 17, 1998.
|
10 | Incorporated by reference to Appendix A of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.
|
11 | Incorporated by reference to Appendix B of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.
|
12 | Incorporated by reference to Exhibit 10.10 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.
|
13 | Incorporated by reference to Appendix A to the Proxy Statement for the 2005 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 19, 2005.
|
14 | Incorporated by reference to Exhibit 10 to the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on December 5, 2005.
|
15 | Incorporated by reference to Exhibit 10.13 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.
|
16 | Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on February 6, 2009.
|
17 | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on June 21, 2011.
|
18 | Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on June 21, 2011.
|
19 | Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 9, 2011.
|
20 | Incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 9, 2011.
|
21 | Incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 9, 2011.
|
22 | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on October 13, 2011.
|
23 | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on November 1, 2011.
|
24 | In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed “not filed” for purposes of section 18 of the exchange Act, and otherwise are not subject to liability under that section.
|
* | Indicates management contract or compensatory plan or arrangement. |
* Indicates management contract or compensatory plan or arrangement.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934,
Provident New YorkSterling Bancorp has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Provident New York
| |
| | | | |
Date: December 13, 2011 | | | November 28, 2014 | By: | | /s/ Jack L. Kopnisky |
| | | | | | Jack L. Kopnisky |
| | | | | | President, Chief Executive Officer and Director (Principal Executive Officer) |
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/ Jack L. Kopnisky | | | | By: | | /s/ Paul A. Maisch Luis Massiani |
| | Jack L. Kopnisky | | | | | | Paul A. MaischLuis Massiani |
| | President, Chief Executive Officer and | | | | | | Executive Vice President |
| | Director | | | | | | Chief Financial Officer |
| | Principal Executive Officer | | | Principal Financial Officer |
| Date: | November 28, 2014 | | | | Principal Accounting Officer |
Date:
| | December 13, 2011 | | | | | | Principal Financial Officer |
| | | | | | Date: | | December 13, 2011November 28, 2014 |
| | | | |
By:
| | /s/ William F. Helmer
| | |
| By: | /s/ Louis J. Cappelli | | By: | |
| Louis J. Cappelli | | /s/ Dennis L. Coyle
|
| | William F. Helmer | | | | | | Dennis L. Coyle |
| | Chairman of the Board of Directors | | | |
| Date: | November 28, 2014 | | | | Vice Chairman |
Date:
| | December 13, 2011 | | | | Date: | | December 13, 2011 |
| | | | |
| | | | | | | | | |
By:
| | /s/ Navy Djonovic
| | | | | | | |
| By: | /s/ Robert Abrams | | By: | | /s/ Judith Hershaft | | James F. Deutsch | | By: | | /s/ Thomas F. Jauntig, Jr. Navy E. Djonovic |
| Robert Abrams | | | | James F. Deutsch | | | | Navy E. Djonovic |
| Director | | | | | | Judith Hershaft | | | | | | Thomas F. Jauntig, Jr. |
| | Director | | | | | | Director | | | | | | Director |
Date: | | December 13, 2011 | | November 28, 2014 | | Date: | | December 13, 2011 | | November 28, 2014 | | Date: | | December 13, 2011November 28, 2014 |
| | | | | | | |
By:
| | /s/ Thomas G. Kahn
| | | | | | | |
| By: | /s/ Fernando Ferrer | | By: | | /s/ R. Michael Kennedy | | William F. Helmer | | By: | | /s/ Victoria Kossover Thomas G. Kahn |
| Fernando Ferrer | | | | William F. Helmer | | | | Thomas G. Kahn |
| | Director | | | | R. Michael Kennedy | | | | | | Victoria Kossover |
| | Director | | | | Director |
| Date: | November 28, 2014 | | Date: | | November 28, 2014 | | Date: | | November 28, 2014 |
| | | | | | | | | |
| By: | /s/ James B. Klein | | By: | | /s/ Robert W. Lazar | | By: | | /s/ John C. Millman |
| James B. Klein | | | | Robert W. Lazar | | | | John C. Millman |
| Director | | | | Director | | | | | | Director |
Date: | | December 13, 2011 | | November 28, 2014 | | Date: | | December 13, 2011 | | November 28, 2014 | | Date: | | December 13, 2011November 28, 2014 |
| | | | | | | |
By:
| | /s/ Donald T. McNelis
| | | | | | | |
| By: | /s/ Richard O’Toole | | By: | | /s/ Carl Rosenstock
| | | | By: | | /s/ George Strayton
|
| | Donald T. McNelis | | | | | | Carl Rosenstock | | | | | | George Strayton |
| | Director | | | | | | Director | | | | | | Director |
Date:
| | December 13, 2011 | | | | Date: | | December 13, 2011 | | | | Date: | | December 13, 2011 |
| | | | | | | |
By:
| | /s/ Burt Steinberg | | | | |
| Richard O’Toole | | | | | | | | |
| | Burt Steinberg | | | | |
| Director | | | | | | | | |
| | Director | | | | |
| Date: | November 28, 2014 | | Date: | | November 28, 2014 | | | | |
Date
| | December 13, 2011 | | | | | | | | | | | | |
133
