SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
------------------------------
Commission File Number: 0-25233
PROVIDENT NEW YORK BANCORP
--------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 80-0091851
------------------------------- ----------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ----------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
--------------
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
$0.01 per share 43,850,552
as of August 2, 2005
1
PROVIDENT NEW YORK BANCORP
QUARTERLY PERIOD ENDED JUNE 30, 2005
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at June 30, 2005 and September 30, 2004 3
Consolidated Statements of Income for the Three Months and
Nine Months Ended June 30, 2005 and 2004 5
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 2005 6
Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 2005 and 2004 7
Consolidated Statements of Comprehensive Income/ (Loss) for the
Three Months and Nine Months Ended June 30, 2005 and 2004 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 37
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 3. Defaults upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits 40
Signatures 41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets June 30, 2005 September 30, 2004
- ------ ------------- ------------------
Cash and due from banks $ 51,578 $ 107,571
Securities (Note 7):
Available for sale, at fair value (amortized cost of
$851,822 at June 30, 2005 and $534,512 at
September 30, 2004) 845,451 534,297
Held to maturity, at amortized cost (fair value of $71,927
at June 30, 2005 and $70,230 at September 30, 2004) 71,194 69,078
----------- -----------
Total securities 916,645 603,375
----------- -----------
Loans held for sale 3,684 855
Gross loans (Note 5) 1,314,716 997,634
Allowance for loan losses (Note 6) (22,252) (17,353)
----------- -----------
Total loans, net 1,292,464 980,281
----------- -----------
FHLB stock, at cost 18,076 10,247
Accrued interest receivable, net 9,657 6,815
Premises and equipment, net 29,810 16,846
Goodwill (Notes 2 and 3) 157,927 65,260
Core deposit intangible (Notes 2 and 3) 14,953 5,624
Bank owned life insurance 37,256 13,245
Other assets 27,328 16,032
----------- -----------
Total assets $ 2,559,378 $ 1,826,151
=========== ===========
(Continued)
3
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity June 30, 2005 September 30, 2004
- ------------------------------------ ------------- ------------------
Liabilities:
Deposits (Note 8):
Non-interest bearing $ 382,394 $ 289,360
Interest bearing 1,365,876 950,172
----------- -----------
Total deposits 1,748,270 1,239,532
Borrowings 377,626 214,909
Mortgage escrow funds 13,559 2,526
Other 20,229 19,672
----------- -----------
Total liabilities 2,159,684 1,476,639
----------- -----------
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; 75,000,000 shares
authorized; 45,929,552 shares and 39,655,167 shares issued;
43,848,778 shares and 39,618,373 shares outstanding at
June 30, 2005 and September 30, 2004, respectively) 459 397
Additional paid-in capital 345,301 269,325
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (1,321,967 shares at June 30, 2005
and 1,445,045 shares at September 30, 2004) (10,240) (10,854)
Common stock awards under recognition and retention plan
("RRP," 762,400 shares at June 30, 2005) (9,247) --
Treasury stock, at cost (2,080,774 shares at June 30, 2005 and
36,794 shares at September 30, 2004) (24,134) (432)
Retained earnings 101,303 91,373
Accumulated other comprehensive loss (3,748) (297)
----------- -----------
Total stockholders' equity 399,694 349,512
----------- -----------
Total liabilities and stockholders' equity $ 2,559,378 $ 1,826,151
=========== ===========
Book value per common share at period end $ 9.11 $ 8.82
See accompanying notes to unaudited consolidated financial statements
4
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share and share data)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest and dividend income:
Loans $ 20,302 $ 14,300 $ 59,220 $ 38,651
Securities 8,365 5,646 25,852 14,633
Other earning assets 244 38 136 103
----------- ----------- ----------- -----------
Total interest and dividend income 28,911 19,984 85,208 53,387
----------- ----------- ----------- -----------
Interest expense:
Deposits 4,362 2,137 11,207 5,682
Borrowings 3,281 1,350 9,609 3,719
----------- ----------- ----------- -----------
Total interest expense 7,643 3,487 20,816 9,401
----------- ----------- ----------- -----------
Net interest income 21,268 16,497 64,392 43,986
Provision for loan losses (Note 6) 225 225 525 575
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 21,043 16,272 63,867 43,411
----------- ----------- ----------- -----------
Non-interest income:
Deposit fees and service charges 2,673 1,797 7,613 4,761
Loan fees and late charges 381 186 1,011 591
Gains on sales of securities available for sale 57 446 369 1,894
Gains on sales of loans 105 61 185 231
Title insurance fees 361 -- 1,019 --
Bank owned life insurance 768 130 1,378 422
Previously unrecognized low income housing
partnership investment 681 -- 681 --
Other 407 255 1,042 563
----------- ----------- ----------- -----------
Total non-interest income 5,433 2,875 13,298 8,462
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 8,277 6,070 24,063 16,523
Stock-based compensation plans 854 558 2,142 2,083
Occupancy and office operations 2,421 1,844 7,028 4,834
Advertising and promotion 808 509 2,620 1,544
Professional fees 523 656 1,801 1,660
Data and check processing 1,184 1,076 3,590 2,585
Stationery and office supplies 305 346 815 785
Merger integration costs 249 56 965 773
Amortization of intangible assets 929 681 3,046 1,468
ATM/debit card expense 322 206 948 565
Other 2,269 1,503 5,899 3,905
----------- ----------- ----------- -----------
Subtotal 18,141 13,505 52,917 36,725
Establishment of Charitable Foundation -- -- -- 5,000
----------- ----------- ----------- -----------
Total non-interest expense 18,141 13,505 52,917 41,725
----------- ----------- ----------- -----------
Income before income tax expense 8,335 5,642 24,248 10,148
Income tax expense 2,676 1,988 8,394 3,377
----------- ----------- ----------- -----------
Net income $ 5,659 $ 3,654 $ 15,854 $ 6,771
=========== =========== =========== ===========
Weighted average common shares:
Basic 42,440,624 37,806,911 43,545,750 36,450,748
Diluted 43,073,358 38,426,183 44,292,686 37,068,663
Per common share: (Note 10)
Basic $ 0.13 $ 0.10 $ 0.36 $ 0.19
Diluted $ 0.13 $ 0.10 $ 0.36 $ 0.18
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except share and per share data)
Common
Additional Unallocated Stock
Number of Common Paid-In ESOP Awards
Shares Stock Capital Shares Under RRP
---------- --------- ---------- ----------- ---------
Balance at September 30, 2004 39,618,373 $ 397 $ 269,325 $ (10,854) $ 0
Net income
Other comprehensive loss
Total comprehensive income
Purchase of Warwick Community
Bancorp, Inc. 6,257,896 62 74,531
Tax benefits- stock-based compensation 465
Stock option transactions 54,509 58
ESOP shares allocated or committed to be
released for allocation (123,078 shares) 922 614
RRP awards 762,400
Vesting of RRP shares (9,789)
Purchase of treasury stock (2,844,400) 542
Cash dividends paid ($0.125 per common
share)
---------- --------- --------- --------- ---------
Balance at June 30, 2005 43,848,778 $ 459 $ 345,301 $ (10,240) $ (9,247)
========== ========= ========= ========= =========
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Loss Equity
--------- --------- ------------- -------------
Balance at September 30, 2004 $ (432) $ 91,373 $ (297) $ 349,512
Net income 15,854 15,854
Other comprehensive loss (3,451) (3,451)
---------
Total comprehensive income 12,403
Purchase of Warwick Community
Bancorp, Inc. 74,593
Tax benefits- stock-based compensation 465
Stock option transactions 449 (416) 91
ESOP shares allocated or committed to be
released for allocation (123,078 shares) 1,536
RRP awards 9,803 (14) 0
Vesting of RRP shares 542
Purchase of treasury stock (33,954) (33,954)
Cash dividends paid ($0.125 per common
share) (5,494) (5,494)
--------- --------- --------- ---------
Balance at June 30, 2005 $ (24,134) $ 101,303 $ (3,748) $ 399,694
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except share amounts)
For the Nine Months
Ended June 30
------------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 15,854 $ 6,771
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 525 575
Depreciation and amortization of premises and equipment 2,285 1,708
Amortization of core deposit intangible 3,046 1,468
Gain on sales of securities available for sale (369) (1,894)
Gain on sales of loans held for sale (185) (231)
Gain on sales of fixed assets sold -- (50)
Gain on sales of real estate owned -- (55)
Net amortization of premiums and discounts on securities 3,378 1,967
ESOP and RRP expense 2,543 1,753
Originations of loans held for sale (15,446) (10,101)
Proceeds from sales of loans held for sale 12,802 11,311
Deferred income tax benefit (440) (3,154)
Net changes in accrued interest receivable and payable 435 353
Other adjustments (principally net changes in other assets and other
liabilities) (14,137) (2,808)
--------- ---------
Net cash provided by operating activities 10,291 7,613
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (356,683) (443,267)
Held to maturity (18,728) (9,349)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale 93,847 72,389
Held to maturity 18,724 15,804
Proceeds from sales of securities available for sale 71,653 113,536
Loan originations (330,102) (251,328)
Loan principal payments 303,988 197,136
Proceeds from sales of fixed assets -- 411
Proceeds from sales of other real estate owned -- 135
Purchase of FHLB stock (224) (1,535)
Purchase of Warwick Community Bancorp, Inc. 164,486 --
Purchase of ENB Holding Company, Inc. -- 60,144
Purchase of HSBC South Fallsburg Branch 18,938
Increase in bank owned life insurance (10,691) (423)
Purchases of premises and equipment (2,863) (2,371)
--------- ---------
Net cash used in investing activities (47,655) (248,718)
--------- ---------
See accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(Dollars in thousands, except share amounts)
For the Nine Months
Ended June 30
------------------------
2005 2004
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in transaction and savings deposits (53,663) 50,378
Net increase (decrease) in time deposits 63,805 (6,049)
Receipt of stock subscription funds -- 192,363
Net increase in borrowings 4,059 4,795
Net increase in mortgage escrow funds 6,527 8,416
Establishment of ESOP Plan -- (9,987)
Common stock issued for formation of Charitable Foundation -- 4,000
Tax benefit: contribution of 400,000 shares to Charitable Foundation -- 115
Tax benefit: MHC contribution carry forward -- 512
Recapitalization -- 95
Treasury shares purchased (33,954) --
Stock option transactions 91 75
Cash dividends paid (5,494) (3,422)
--------- ---------
Net cash (used in) provided by financing activities (18,629) 241,291
--------- ---------
Net (decrease) increase in cash and cash equivalents (55,993) 186
Cash and cash equivalents at beginning of period 107,571 33,500
--------- ---------
Cash and cash equivalents at end of period $ 51,578 $ 33,686
========= =========
Supplemental information:
Interest payments $ 19,495 $ 8,952
Income tax payments 9,320 3,135
Fair value of assets acquired (incl. intangibles) 806,114 406,267
Fair value of liabilities assumed 658,919 329,797
--------- ---------
Net fair value $ 147,195 $ 76,470
========= =========
Cash portion of ENB Holding Co. purchase transaction -- $ 36,773
Stock portion of ENB Holding Co. purchase transaction -- 39,697
---------
Total paid for ENB Holding Co. -- $ 76,470
=========
Cash portion of Warwick Community Bancorp Inc. purchase
transaction $ 72,601 --
Stock portion of Warwick Community Bancorp Inc. purchase transaction 74,594 --
---------
Total paid for Warwick Community Bancorp Inc. $ 147,195 --
=========
Cash received from HSBC branch purchase $ 18,938
=========
Transfer of loans to real estate owned -- 112
Net change in unrealized losses recorded on securities available for sale (6,004) (11,988)
Change in deferred taxes on unrealized losses on securities available for sale 2,553 4,791
Issuance of RRP shares 762,400 --
See accompanying notes to unaudited consolidated financial statements.
8
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Nine Months
Ended June 30 Ended June 30
---------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net Income: $ 5,659 $ 3,654 $ 15,854 $ 6,771
Other Comprehensive Income (loss):
Net unrealized holding gains (losses) 4,943 (7,817) (3,230) (6,049)
arising during the year, net of taxes of
$(3,293), $5,211, $2,153 and $4,033
Less reclassification adjustment for net
realized gains included in net income,
net of taxes of $23, $178, $148 and (34) (268) (221) (1,136)
$758 -------- -------- -------- --------
Other comprehensive income (loss) 4,909 (8,085) (3,451) (7,185)
-------- -------- -------- --------
Total comprehensive income (loss) $ 10,568 $ (4,431) $ 12,403 $ (414)
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
On June 29, 2005, the Company changed its name from Provident Bancorp,
Inc., to Provident New York Bancorp in order to differentiate itself from the
numerous bank holding companies with similar names.
The consolidated financial statements and other financial information
presented in this document as of June 30, 2005, include the accounts of
Provident New York Bancorp, a Delaware corporation (the "Company"), Provident
Bank (the "Bank") and Hardenburgh Abstract Company of Orange County, Inc.
("Hardenburgh"), and each subsidiary of Provident Bank [Provest Services Corp.,
(an inactive subsidiary), Provest Services Corp. I, Provest Services Corp. II,
Provident REIT, Inc., WSB Funding, Inc., Warsave Development Corp., Provident
Municipal Bank and WSB Financial Services, Inc. (an inactive subsidiary)].
Collectively, these entities are referred to herein as the "Company". Provident
New York Bancorp is a publicly-held company and the parent of the Bank. Provest
Services Corp. I holds a limited partnership interest in a low-income housing
partnership that provides certain favorable tax consequences. Warsave holds an
investment in a rental property that generates rental income. Hardenburgh is a
title insurance agency that generates title insurance fees and commissions.
Provest Services Corp. II has engaged a third-party provider to sell annuities
to the customers of the Bank. Through June 30, 2005, the activities of these
wholly-owned subsidiaries have had a minor impact on the Company's consolidated
financial condition and results of operations. Provident REIT, Inc. and WSB
Funding, Inc. hold a portion of the Company's real estate loans and are real
estate investment trusts for federal income tax purposes. Provident Municipal
Bank ("PMB") is a limited purpose New York State-chartered commercial bank and
is authorized to accept deposits from municipalities in the Bank's New York
business area.
The Company's off-balance sheet activities are limited to loan origination
commitments, lines of credit and letters of credit extended to customers or, in
the case of letters of credit, on behalf of customers in the ordinary course of
its lending activities. The Company does not engage in off-balance sheet
financing transactions or other activities involving the use of special-purpose
or variable-interest entities.
The consolidated financial statements have been prepared by management
without audit, but, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company's financial position and results of operations as of the dates and
for the periods presented. Although certain information and footnote disclosures
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q,
the Company believes that the disclosures are adequate to make the information
presented clear. The results of operations for the nine months ended June 30,
2005 are not necessarily indicative of results to be expected for other interim
periods or the entire fiscal year ending September 30, 2005. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the annual audited financial statements included in the Company's Form 10-K
for the fiscal year ended September 30, 2004.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses (see Note 6), which is a
critical accounting policy.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
10
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Stock-Based Compensation
------------------------
The Company applies Accounting Pronouncement Bulletin ("APB") Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plan. No stock-based employee compensation cost
is reflected in net income pertaining to stock options, as all options granted
under this plan had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
outstanding awards in each period.
Three Months Ended Nine Months Ended
June 30, June 30,
2005 2004 2005 2004
------- ------- ------- -------
Net income, as reported $ 5,659 $ 3,654 $15,854 $ 6,771
Add RRP expense included in reported net
income, net of related tax effects 263 75 325 $ 227
Deduct RRP and stock option expense
determined under the fair-value-based
method, net of related tax effects (500) (165) (1,496) (388)
------- ------- ------- -------
Pro forma net income $ 5,422 $ 3,564 $14,683 $ 6,610
======= ======= ======= =======
Earnings per share:
Basic, as reported $ 0.13 $ 0.10 $ 0.36 $ 0.19
Basic, pro forma 0.13 0.09 0.34 0.18
Diluted, as reported 0.13 0.10 0.36 0.18
Diluted, pro forma 0.13 0.09 0.33 0.18
In December 2004, the Financial Accounting Standards Board ("FASB") Issued
Statement of Financial Accounting Standards No. 123R (Statement 123R),
Share-Based Payments, the provisions of which become effective for the company
as of October, 2005. This Statement eliminates the alternative to use APB No.
25's intrinsic value method of accounting that was provided in Statement 123 as
originally issued. Statement 123R requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards. While the fair-value-based method
prescribed by Statement 123R is similar to the fair-value-based method disclosed
under the provisions of Statement 123 in most respects, there are some
differences. The Company estimates that annual expense using the Black-Scholes
method beginning in fiscal 2006 will be approximately $1.2 million, or $939
after tax, and the diluted earnings per share impact will be $0.02. This impact
does not include the effect of reload options or forfeitures or options
accelerations due to termination or retirement of personnel, the effect of which
cannot be measured with any degree of certainty.
11
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
2. Mutual Holding Company Conversion
---------------------------------
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Bancorp., Inc., a federal corporation ("Provident Federal") were
sold to investors. In addition, the Company simultaneously completed its
acquisition of E.N.B. Holding Company, Inc. ("ENB"), located in Ellenville, New
York (detailed in footnote 3).
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the Bank as of June 30, 2002 and September 30, 2003. The new
holding company also issued 400,000 shares of common stock and contributed $1.0
million in cash to the Provident Bank Charitable Foundation. In addition, each
outstanding share of common stock of Provident Federal as of January 14, 2004
was converted into 4.4323 new shares of the Company's common stock.
3. Acquisitions
------------
The Company has been active in acquisitions over the past several years.
All acquisitions were accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed were recorded by the
Company at their fair values at the acquisition date.
On October 1, 2004 the Company completed its acquisition of Warwick
Community Bancorp, Inc. ("WSB" or "Warwick"), located in Warwick, New York. WSB
was the holding company for The Warwick Savings Bank, headquartered in Warwick,
New York, The Towne Center Bank, headquartered in Lodi, New Jersey and
Hardenburgh Abstract Company of Orange County, Inc. headquartered in Goshen, New
York.
On January 14, 2004, the Company completed its acquisition of ENB, located
in Ellenville, New York. ENB was the holding company for Ellenville National
Bank.
On April 23, 2002, the Company completed its acquisition of The National
Bank of Florida ("NBF"), located in Florida, New York.
12
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Below is a summary of the financial transactions, including the most
recent branch purchase on May 19, 2005 of an HSBC Bank USA, National Association
("HSBC") branch office in South Fallsburg New York, which will be consolidated
with the Bank's existing branch in South Fallsburg.
-------------------------------------------------------------------
HSBC WSB ENB NBF Total
-------- ---------- ---------- ------- -----------
At Acquisition Date
- -------------------
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) (18,938) 72,601 36,773 28,100 118,536
Number of shares issued -- 6,257,896 3,969,676 -- 10,227,572
At June 30, 2005
- ----------------
Goodwill $ -- $ 92,694 $ 51,767 $13,466 $ 157,927
Core deposit intangible 1,933 8,815 3,614 591 14,953
Goodwill is not amortized to expense, but is reviewed for impairment at
least annually, with impairment losses charged to expense, if and when they
occur. The core deposit intangible asset is recognized apart from goodwill and
amortized to expense over its estimated useful life and evaluated, at least
annually, for impairment.
The following table presents unaudited pro forma information as if WSB had
been consummated on September 30, 2003. This pro forma information gives effect
to certain adjustments, including accounting adjustments related to fair value
adjustments, amortization of core deposit intangibles and related income tax
effects. The pro forma information does not include merger integration costs and
does not necessarily reflect the results of operations that would have occurred
had the Company acquired WSB on September 30, 2003.
Pro forma (unaudited)
Nine Months Ended
June 30,
2005 2004
------- -------
Net interest income $64,964 $54,357
Non interest income 13,298 13,272
Non interest expense 51,581 58,701
Net income 17,423 5,957
======= =======
Basic earnings per share $ 0.40 $ 0.16
======= =======
Diluted earnings per share $ 0.39 $ 0.16
======= =======
13
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
4. Critical Accounting Policies
----------------------------
The accounting and reporting policies of the Company are prepared in
accordance with accounting principles generally accepted within the United
States of America and conform to general practices within the banking industry.
Accounting policies considered critical to the Company's financial results
include the allowance for loan losses, accounting for goodwill and the
recognition of interest income. 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. Accounting for goodwill is considered to be a critical policy because
goodwill must be tested for impairment at least annually using a "two-step"
approach that 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 utilized. 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 nonaccrual 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. At such time, unpaid interest is
reversed by charging interest income. Interest payments received on nonaccrual
loans (including impaired loans) are recognized as income unless future
collections are doubtful. Loans are returned to accrual status when
collectibility is no longer considered doubtful (generally, when all payments
have been brought current). Application of assumptions different than those used
by management could result in material changes in the Company's financial
position or results of operations. Footnote 2 (Summary of Significant Accounting
Policies) of the Annual Report on Form 10-K for the year ending September 30,
2004 provides detail with regard to the Company's accounting for the allowance
for loan losses. There have been no significant changes in the application of
accounting policies since September 30, 2004.
5. Loans
-----
Major classifications of loans, excluding loans held for sale, are
summarized below:
June 30, 2005 September 30, 2004
------------- ------------------
Real estate - residential mortgage $ 439,097 $380,749
Real estate - commercial mortgage 487,160 327,414
Real estate - construction 68,866 54,294
Commercial and industrial 142,892 105,196
Consumer loans 176,701 129,981
---------- --------
Total $1,314,716 $997,634
========== ========
6. Allowance for Loan Losses and Non-Performing Assets
---------------------------------------------------
The allowance for loan losses is established through provisions for losses
charged to earnings. Loan losses are charged against the allowance when
management believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when realized. The
allowance for loan losses is the amount that management has determined to be
necessary to absorb probable loan losses inherent in the existing portfolio.
Management's evaluations, which are subject to periodic review by the Company's
regulators, are made using a consistently-applied methodology that takes into
consideration such factors as the Company's past loan loss experience, changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans and
14
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
collateral values, and current economic conditions that may affect the
borrowers' ability to pay. Changes in the allowance for loan losses may be
necessary in the future based on changes in economic and real estate market
conditions, new information obtained regarding known problem loans, regulatory
examinations, the identification of additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Nine Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2005 2004 2005 2004
-------- -------- -------- --------
Balance at beginning of period $ 22,249 $ 17,093 $ 17,353 $ 11,069
Allowance acquired through acquisition -- -- 4,880 5,750
Provision for loan losses 225 225 525 575
Charge-offs (255) (101) (641) (249)
Recoveries 33 114 135 186
-------- -------- -------- --------
Net (charge-offs)/recoveries (222) 13 (506) (63)
-------- -------- -------- --------
Balance at end of period $ 22,252 $ 17,331 $ 22,252 $ 17,331
======== ======== ======== ========
Net charge-offs to average loans outstanding (annualized) 0.02% 0.001% 0.04% 0.01%
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).
June 30, 2005 September 30, 2004
------------- ------------------
Non-accrual loans:
One- to four-family residential mortgage loans $ 1,668 $ 1,597
Commercial real estate, commercial business and
construction loans 1,521 962
Consumer loans 60 178
------- -------
Total non-performing loans 3,249 2,737
Real estate owned:
One to four family residence 93 --
------- -------
Total non-performing assets $ 3,342 $ 2,737
======= =======
Ratios:
Non-performing loans to total loans, net 0.25% 0.27%
Non-performing assets to total assets 0.13% 0.15%
Allowance for loan losses to total non-performing loans 684.89% 634.02%
Allowance for loan losses to total loans 1.69% 1.74%
15
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
7. Securities
----------
The following is a summary of securities available for sale at June 30, 2005 and
September 30, 2004:
Available for Sale Portfolio
June 30, 2005
=======================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=======================================================
Mortgage-backed and SBA securities
Mortgage-backed securities $516,811 $ 440 $ (3,168) $514,083
Collateralized mortgage obligations 24,525 -- (116) 24,409
SBAs and other 124 -- (2) 122
-------- -------- -------- --------
Total mortgage-backed and SBA securities 541,460 440 (3,286) 538,614
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency securities 268,036 -- (3,539) 264,497
State and municipal securities 41,379 236 (160) 41,455
Equity securities 947 7 (69) 885
-------- -------- -------- --------
Total investment securities 310,362 243 (3,768) 306,837
-------- -------- -------- --------
Total available for sale $851,822 $ 683 $ (7,054) $845,451
======== ======== ======== ========
Available for Sale Portfolio
September 30, 2004
=======================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=======================================================
Mortgage-backed and SBA securities
Mortgage-backed securities $304,578 $ 1,155 $ (1,452) $304,281
Collateralized mortgage obligations 9,711 -- (95) 9,616
SBAs and other 5,948 377 -- 6,325
-------- -------- -------- --------
Total mortgage-backed and SBA securities 320,237 1,532 (1,547) 320,222
-------- -------- -------- --------
Investment securities
U.S. Government and federal agency securities 192,788 522 (1,008) 192,302
State and municipal securities 20,482 172 (95) 20,559
Equity securities 1,005 337 (128) 1,214
-------- -------- -------- --------
Total investment securities 214,275 1,031 (1,231) 214,075
-------- -------- -------- --------
Total available for sale $534,512 $ 2,563 $ (2,778) $534,297
======== ======== ======== ========
16
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
The following is a summary of securities held to maturity at June 30, 2005 and
September 30, 2004:
Held to Maturity Portfolio
June 30, 2005
=======================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=======================================================
Mortgage-backed securities
Mortgage-backed securities $ 27,021 $ 417 $ (164) $ 27,274
Collateralized mortgage obligations 2,130 47 -- 2,177
-------- -------- -------- --------
Total mortgage-backed securities 29,151 464 (164) 29,451
-------- -------- -------- --------
Investment securities
State and municipal securities 41,735 733 (302) 42,166
Other investments 308 7 (5) 310
-------- -------- -------- --------
Total investment securities 42,043 740 (307) 42,476
-------- -------- -------- --------
Total held to maturity $ 71,194 $ 1,204 $ (471) $ 71,927
======== ======== ======== ========
Held to Maturity Portfolio
September 30, 2004
=======================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=======================================================
Mortgage-backed securities
Mortgage-backed securities $ 35,402 $ 741 $ (266) $ 35,877
Collateralized mortgage obligations 2,788 55 -- 2,843
Other 685 37 -- 722
-------- -------- -------- --------
Total mortgage-backed securities 38,875 833 (266) 39,442
-------- -------- -------- --------
Investment securities
State and municipal securities 29,894 922 (293) 30,523
Other 309 -- (44) 265
-------- -------- -------- --------
Total investments 30,203 922 (337) 30,788
-------- -------- -------- --------
Total held to maturity $ 69,078 $ 1,755 $ (603) $ 70,230
======== ======== ======== ========
17
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
At June 30, 2005 and September 30, 2004, the accumulated unrealized net
loss on securities available for sale (net of tax of $2,684 and $86,
respectively) that was included in accumulated other comprehensive income, a
separate component of stockholders' equity, was ($3,637) and $(186)
respectively. Gross realized gains were $57 and $446 respectively and gross
realized losses were $0 and $0, respectively, for the three months ended June
30, 2005 and 2004. Gross realized gains were $914 and $1,894 respectively, and
gross realized losses were $545 and $0, respectively, for the nine months ended
June 30, 2005 and 2004.
Securities with a carrying amount of $320,497 and $168,310 were pledged as
collateral for municipal deposits, borrowings and other purposes at June 30,
2005 and September 30, 2004, respectively.
The following table summarizes, for all securities in an unrealized loss
position at June 30, 2005, the aggregate fair value and gross unrealized loss by
length of time those securities have continuously been in an unrealized loss
position:
Less than 12 Months 12 months or longer Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Losses Fair Value Losses Fair Value Losses Fair Value
------------------------------------------------------------------------------
Available For Sale:
Mortgage-backed securities $ (1,624) $120,246 $ (1,663) $300,000 $ (3,287) $420,246
U.S. government & federal securities (1,666) 75,326 (1,870) 189,172 (3,536) 264,498
Municipal securities (66) 5,240 (96) 13,199 (162) 18,439
Equity securities (69) 772 -- 105 (69) 877
----------------------------------------------------------------------------
Total available-for-sale: (3,425) 201,584 (3,629) 502,476 (7,054) 704,060
----------------------------------------------------------------------------
Held to Maturity:
Mortgage-backed securities (163) 11,638 -- -- (163) 11,638
State and municipal securities (225) 3,042 (79) 18,248 (304) 21,290
Other securities (4) 100 -- -- (4) 100
----------------------------------------------------------------------------
Total held to maturity: (392) 14,780 (79) 18,248 (471) 33,028
----------------------------------------------------------------------------
Total securities: $ (3,817) $216,364 $ (3,708) $520,724 $ (7,525) $737,088
============================================================================
18
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
Substantially all of the unrealized losses at June 30, 2005 relate to
investment grade 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 at June 30, 2005. A total of
263 securities were in a continuous unrealized loss position for less than 12
months, and 77 securities for 12 months or longer. For 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. Because the Company has the ability and
intent to hold securities with unrealized losses until a market price recovery
(which, for fixed maturities, may be until maturity) the Company did not
consider these investments to be other-than-temporarily impaired at June 30,
2005, except for an investment in Freddie Mac perpetual preferred stock which
had been determined that an impairment loss of $93 existed on a recorded basis
of $905. (See Recent Accounting Standards for discussion of a new accounting
pronouncement that will provide additional guidance with respect to impairment
evaluations).
8. Deposits
--------
Major classifications of deposits are summarized below:
June 30, 2005 September 30, 2004
------------- ------------------
Demand deposits:
Retail $ 169,582 $ 122,276
Commercial and municipal 212,812 167,084
NOW 138,573 83,439
---------- ----------
Total transaction accounts 520,967 372,799
Money market 218,689 173,272
Savings 515,593 360,138
Time under $100 349,229 239,411
Time over $100 143,792 93,912
---------- ----------
Total $1,748,270 $1,239,532
========== ==========
19
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
9. FHLB and Other Borrowings
-------------------------
The Company's FHLB and other borrowings and weighted average interest
rates are summarized as follows:
----------------- ------------------
June 30, 2005 September 30, 2004
----------------- ------------------
Amount Rate Amount Rate
-------- ---- -------- ----
By type of borrowing:
Advances $206,637 3.55% $164,947 2.81%
Repurchase agreements 170,989 4.60 49,962 3.49
-------- --------
Total borrowings $377,626 3.37% $214,909 2.97%
======== ========
By remaining period to maturity:
One year or less $169,390 3.27% $ 94,961 2.11%
One to two years 19,751 3.60 28,000 3.18
Two to three years 52,837 3.63 18,651 3.65
Three to four years 47,924 3.71 29,443 3.78
Four to five years 21,827 3.77 40,017 3.76
Five years or greater 65,897 3.57 3,837 4.89
-------- --------
Total borrowings $377,626 3.37% $214,909 2.97%
======== ========
As a member of the FHLB of New York, the Bank may borrow in the form of
term and overnight borrowings up to the amount of eligible mortgages that have
been pledged as collateral under a blanket security agreement. As of June 30,
2005 and September 30, 2004, the Bank had pledged mortgages totaling $462,181
and $267,457, respectively. Based on outstanding borrowings under the line
totaling $204,478 and $164,969 as of June 30, 2005 and September 30, 2004, the
Bank had unused borrowing capacity under the FHLB of New York Line of Credit of
$257,703 and $102,489, respectively. The Bank may borrow additional amounts by
pledging securities not required to be pledged for other purposes with a market
value of $596,881 as of June 30, 2005.
20
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
10. Earnings Per Common Share
-------------------------
The number of shares used in the computation of both basic and diluted
earnings per share includes all shares issued to Provident Bancorp, MHC for all
periods through January 14, 2004, but excludes unallocated ESOP shares that have
not been released or committed to be released to participants.
Common stock equivalent shares are incremental shares (computed using the
treasury stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became vested
during the periods.
Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the second-step conversion
completed January 14, 2004.
Basic earnings per common share is computed as follows:
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Weighted average common shares
outstanding (basic) 42,440,624 37,806,911 43,545,750 36,450,748
----------- ----------- ----------- -----------
Net income $ 5,659 $ 3,654 $ 15,854 $ 6,771
Basic earnings per common share $ 0.13 $ 0.10 $ 0.36 $ 0.19
Diluted earnings per common share is computed as follows:
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Weighted average common shares
outstanding (basic) 42,440,624 37,806,911 43,545,750 36,450,748
Effect of common stock equivalents 632,734 619,272 746,936 617,915
----------- ----------- ----------- -----------
Total diluted shares 43,073,358 38,426,183 44,292,686 37,068,663
Net income $ 5,659 $ 3,654 $ 15,854 $ 6,771
Diluted earnings per common share $ 0.13 $ 0.10 $ 0.36 $ 0.18
21
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(Dollars in thousands, except per share amounts)
11. Pension and Other Post Retirement Plans
---------------------------------------
Net post retirement cost, which is recorded within salaries and employee
benefits expense in the consolidated statements of income, is comprised of the
following:
Pension Plans Other Post Retirement Plans
-------------------- ---------------------------
Nine Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
----------------------------------------------
Service cost $ 968 $ 590 $ 77 $ 6
Interest cost 1,210 506 112 17
Expected return on plan assets (1,342) (592) -- --
Unrecognized net transition obligation 8 19 8 7
Amortization of prior service cost (8) (10) 4 4
Amortization of gain or loss 252 130 (1) (2)
-------------------- --------------------
Net periodic cost $ 1,088 $ 643 $ 200 $ 32
-------------------- --------------------
The Company previously disclosed in its consolidated financial statements
for the year ended September 30, 2004, that it expected to contribute $692 to
its pension plan in fiscal 2005. As of June 30, 2005, the Company has
contributed $149. As part of the acquisition of WSB, the Company assumed the WSB
Pension Plan, a defined benefit plan. The WSB plan was frozen on April 30, 2002.
As part of the acquisition of ENB, the Company assumed the ENB Pension Plan, a
defined benefit plan. The ENB plan was frozen in connection with the merger of
ENB into the Company.
12. Guarantor's Obligations Under Guarantees
----------------------------------------
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.
As of June 30, 2005, the Company had $15.5 million in outstanding letters
of credit, of which $4.2 million were secured by cash collateral.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
--------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 2005 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; pricing
pressures on loan and deposit products; changes in local and national economic
conditions; the extent and timing of actions of the Company's regulators;
customer deposit disintermediation; changes in customers' acceptance of the
Company's products and services; general actions of competitors, other normal
business risks such as credit losses, litigation, increases in the levels of
non-performing assets, revenues following acquisitions if such revenues are
lower than expected, and costs or difficulties related to the integration of
acquired and existing businesses that are greater than expected. The Company's
forward-looking statements speak only as of the date on which such statements
are made. The Company assumes no duty to update forward-looking statements to
reflect new, changing or unanticipated events or circumstances.
The Company's significant accounting policies are summarized in Note 2 to
the consolidated financial statements included in its September 30, 2004 Annual
Report on Form 10-K. An accounting policy considered particularly critical to
the Company's financial results is the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance for loan losses
and non-performing loans is considered a critical accounting policy by
management 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 in the necessary allowance.
As of January 14, 2004, the Company completed its stock offering and
acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock
conversion. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to ENB have been included in the Company's consolidated
financial statements from the date of acquisition. See Note 3 to the
accompanying consolidated financial statements included in Item 1 of this
quarterly report.
As discussed in Note 3 to the consolidated financial statements included
in Item 1 of this quarterly report, the Company completed its acquisition of WSB
on October 1, 2004. The acquisition was accounted for as a purchase and,
accordingly, amounts attributable to Warwick have been included in the Company's
consolidated financial statements from the date of acquisition.
23
Comparison of Financial Condition at June 30, 2005 and September 30, 2004
-------------------------------------------------------------------------
Total assets as of June 30, 2005 were $2.6 billion, an increase of $733.2
million, or 40.2%, over assets of $1.8 billion at September 30, 2004, and an
increase of $776.7 million, or 43.6%, over assets of $1.8 billion at June 30,
2004. The increase from September 30, 2004 was primarily due to the October 2004
acquisition of Warwick, whose assets totaled $703.7 million on the merger date,
and the purchase of an HSBC Bank USA, National Association ("HSBC") branch
office in South Fallsburg New York, which added $23.3 million of assets in the
third quarter of 2005. The increase over June 30, 2004, was due to (i) the
October 2004 acquisition of Warwick, (ii) internal growth of the Company, and
(iii) the purchase of the South Fallsburg branch. Goodwill increased by $92.7
million from September 30, 2004 as a result of the completion of the Warwick
acquisition, and core deposit intangibles increased by $9.3 million, net of $3.0
million in amortization, from September 30, 2004 as a result of the Warwick and
the South Fallsburg HSBC branch acquisitions.
Net loans as of June 30, 2005 were $1.3 billion, an increase of $312.2
million, or 31.8%, over net loan balances of $980.3 million at September 30,
2004, and an increase of $322.0 million, or 33.2 %, over balances at June 30,
2004. Loans acquired from WSB totaled $288.2 million, while allowances for loan
losses acquired in connection with WSB were $4.9 million, or 1.7% of WSB's
outstanding loan balances. Inclusive of Warwick loans acquired, commercial loans
increased by $212.0 million, or 43.5%, over balances at September 30, 2004.
Consumer loans increased by $46.7 million, or 35.9%, during the nine-month
period ended June 30, 2005, while residential loans increased by $58.3 million,
or 15.3%. Total loan originations have increased from $261.4 million for the
nine months ended June 30, 2004 to $346.5 million for the nine months ended June
30, 2005. However, repayments and sales of loans have also increased from $208.4
million from the 2004 period to $316.7 million for the nine months ended June
30, 2005. Loan quality continues to be strong. At $3.2 million, non-performing
loans as a percentage of total loans is 0.25%, as opposed to 0.27% at September
30, 2004 and 0.55% at June 30, 2004.
Total securities increased by $313.3 million, or 51.9 %, to $916.6 million
at June 30, 2005 from $603.4 million at September 30, 2004. Securities acquired
from Warwick totaled $298.2 million. Investments were made primarily in
mortgage-backed securities, which increased by $208.2 million, or 57.7%, and in
U.S. Government and Federal Agency Securities, which increased by $105.1
million, or 43.3%.
Deposits as of June 30, 2005 were $1.7 billion, up $508.7 million, or
41.0%, from September 30, 2004, and $507.4 million, or 40.9%, from June 30,
2004. Deposits acquired from Warwick and HSBC totaled $475.1 million and $23.3
million, respectively. As of June 30, 2005 retail and commercial transaction
accounts were 29.8% of deposits compared to 30.1% at September 30, 2004 and
29.4% at June 30,2004.
Borrowings increased by $162.7 million from September 2004, or 75.7%, to
$377.6 million. Almost all of the increase is related to the borrowings assumed
from Warwick.
24
Stockholders' equity increased by $50.2 million to $399.7 million at June
30, 2005 compared to $349.5 million at September 30, 2004. Shares of common
stock with a value of $74.6 million were issued for the purchase of Warwick. Net
income of $15.9 million and ESOP allocations of $1.5 million for the nine-month
period also increased equity. Partially offsetting the increases were the
payments of cash dividends totaling $5.5 million and a decrease of $3.5 million
in other comprehensive income due to unrealized losses on available for sale
securities. Since September 2004, we have purchased a total of 2.8 million
treasury shares which further decreased stockholders' equity by $34.0 million.
During the third quarter the Company completed its first stock repurchase
program and announced a second repurchase plan for up to 2.2 million shares.
Repurchases for the quarter were 1,656,600 shares for a total purchase price of
$18.7 million, of which 549,000 shares were purchased as part of the second
repurchase plan. Also during 2005, 762,400 shares of restricted stock have been
granted from treasury shares. Bank Tier I capital to assets stands at 8.3% at
June 30, 2005. Tangible capital at the holding company level is 9.6%.
Comparison of Operating Results for the Three Months Ended
June 30, 2005 and June 30, 2004
Net Income. For the three months ended June 30, 2005 net income was $5.7
million, an increase of $2.0 million, compared to $3.7 million for the same
period in fiscal 2004. Net interest income after provision for loan losses for
the three months ended June 30, 2005 increased by $4.7 million, or 29.3%, to
$21.0 million compared to $16.3 million for the same period in the prior year.
Non-interest income increased $2.5 million or 89.0% to $5.4 million for the
three months ended June 30, 2005 compared to $2.9 million for the three months
ended June 30, 2004. Non-interest expense increased $4.6 million, or 34.3%, to
$18.1 million for the three months ended June 30, 2005 compared to $13.5 million
for the same prior-year period.
The relevant performance measures follow:
Three Months Ended
June 30,
-------------------
2005 2004
------ ------
Per common share:
Basic earnings $ 0.13 $ 0.10
Diluted earnings 0.13 0.10
Dividends declared 0.045 0.04
Return on average (annualized):
Assets 0.90% 0.82%
Equity 5.75% 4.24%
25
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
Three Months Ended June 30,
---------------------------
2005 2004
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ---------- ---------- ----------- ---------- ----------
Interest earning assets:
Commercial and commercial
mortgage loans(1) $ 688,978 $ 11,779 6.86% $ 447,784 $ 7,324 6.58%
Consumer loans(1) 167,711 2,210 5.28 119,603 1,386 4.66
Residential mortgage loans(1) 429,400 6,313 5.90 378,454 5,590 5.94
---------- ---------- ---------- ----------
Total loans 1,286,089 20,302 6.33 945,841 14300 6.08
---------- ---------- ---------- ----------
Securities-taxable 833,718 7,769 3.74 557,661 5,233 3.77
Securities-tax exempt(2) 65,239 918 5.65 44,562 636 5.74
Other earning assets 19,147 244 5.12 10,473 8 1.46
---------- ---------- ---------- ----------
Total securities and other
earning assets 918,104 8,931 3.90 612,696 5,907 3.88
---------- ---------- ---------- ----------
Total interest-earning assets 2,204,193 29,233 5.32 1,558,537 20,207 5.21
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-earning assets 320,732 236,410
---------- ----------
Total assets $2,524,925 $1,794,947
========== ==========
Interest bearing liabilities:
NOW checking $ 160,234 126 0.32% $ 98,611 $ 53 0.22%
Savings, clubs and escrow 540,937 761 0.56 377,845 409 0.44
Money market accounts 223,134 687 1.23 176,544 225 0.51
Certificate accounts 458,023 2,788 2.44 349,126 1,450 1.67
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,382,328 4,362 1.27 1,002,126 2,137 0.86
Borrowings 384,073 3,281 3.43 180,154 1,350 3.01
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,766,401 7,643 1.74 1,182,280 3,487 1.19
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-bearing liabilities 363,592 265,904
---------- ----------
Total liabilities 2,129,993 1,448,184
Stockholders' equity 394,932 346,763
---------- ----------
Total liabilities and equity $2,524,925 $1,794,947
========== ==========
Net interest rate spread 3.58% 4.04%
========== ==========
Net earning assets $ 437,792 $ 376,257
========== ==========
Net interest margin 21,590 3.93% 16,270 4.31%
========== ========== ========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 124.78% 131.82%
========== ==========
Less tax equivalent adjustment (322) (223)
---------- ----------
Net interest income $ 21,268 $ 16,497
========== ==========
- ----------
(1) Includes non-accrual loans.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
26
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended June 30,
2005 vs. 2004
Increase/(Decrease) Due to
--------------------------
Volume(1) Rate(1) Total
--------- ------- -------
Interest-earning assets
Commercial and commercial mortgage loans $ 4,107 $ 348 $ 4,455
Consumer loans 615 209 824
Residential mortgage loans 751 (28) 723
Securities-taxable 2,564 (28) 2,536
Securities-tax exempt(2) 291 (9) 282
Other earning assets 52 154 206
------- ------- -------
Total interest income 8,380 646 9,026
------- ------- -------
Interest-bearing liabilities
Savings 209 143 352
Money market 72 390 462
NOW checking 42 31 73
Certificates of deposit 536 803 1,339
Borrowings 1,713 217 1,930
------- ------- -------
Total interest expense 2,572 1,584 4,156
------- ------- -------
Net interest margin 5,808 (938) 4,870
------- ------- -------
Less tax equivalent adjustment(2) (273) 174 (99)
------- ------- -------
Net interest income $ 5,535 $ (764) $ 4,771
======= ======= =======
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
Net interest income for the three months ended June 30, 2005 increased by
$4.8 million, or 28.9%, to $21.3 million for the quarter ended June 30, 2005,
compared to $16.5 million for the quarter ended June 30, 2004. Gross interest
income increased by $8.9 million, or 44.7%, to $28.9 million for the quarter
ended June 30, 2005, compared to $20.0 million for the same three months in
2004. The increase in interest income was largely due to a $645.7 million
increase in average earning assets to $2.2 billion during the quarter ended June
30, 2005, as compared to $1.6 billion for the same quarter in the prior year.
The increase is primarily due to the Warwick acquisition and continued internal
growth. The increase in average earning assets was enhanced by an increase in
average yield of 11 basis points from 5.21% to 5.32%, on a fully taxable
equivalent basis. The average yields on the loan and investment portfolios
increased 25 basis points and two basis points, respectively. Interest expense
increased by $4.2 million for the quarter compared to the same quarter in 2004,
as average interest-bearing liabilities increased by $584.0 million and the
average cost of interest-bearing liabilities increased by 55 basis points. The
tax equivalent net interest margin declined by 38 basis points to 3.93%, while
net interest spread declined by 46 basis points to 3.58%. This was primarily the
result of assets acquired from Warwick being recorded at then current market
interest rates, coupled with the impact of the increase in the cost of
interest-bearing liabilities resulting from the 225 basis point increase in the
target federal funds rate since May of 2004.
27
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $225 in loan loss provisions in both the three
months ended June 30, 2005 and 2004. Net charge-offs for the three months ended
June 30, 2005 were $222, compared to a net recovery of $13 for the same period
in 2004. (See Note 6 for further discussion).
Non-interest income was $5.4 million for the three months ended June 30,
2005 compared to $2.9 million for the three months ended June 30, 2004, an
increase of $2.6 million, or 89.0%. Deposit fees and service charges increased
by $876,000 or 48.7%, of which $442,000 was generated from the acquired Warwick
branches, while $418,000 was primarily due to volume-driven increases in
overdraft, non-sufficient funds, and ATM and debit card fees. Income derived
from the Company's bank owned life insurance ("BOLI") investments increased by
$638,000 or 490.7% due to additional BOLI investments of $24.1 million ($13.3
million of which were added from the Warwick acquisition) and the receipt of
death benefit proceeds. Title insurance fee income derived from the Company's
new wholly-owned title subsidiary, Hardenburgh Abstract Company, Inc. (acquired
as part of the Warwick acquisition), was $361,000 for the quarter. Gains on the
sale of securities were $57,000 for the current three-month period, compared to
$446,000 for the same period last year. During the three-month period ended June
30, 2005, the Company also recorded gains on sales of loans totaling $105,000
compared to $61,000 for the same period last year. For the quarter ending June
30, 2005, there was a recognition of $681,000 in income pertaining to our
investment as a limited partner in a low-income housing partnership. The
investment had been amortized quarterly since 1996 in excess of our interest in
the partnership. There was no material impact on any quarter in the affected
periods.
Non-interest expenses for the three months ended June 30, 2005 increased
by $4.6 million, or 34.3%, due largely to the increase in branch locations and
office facilities, as well as staff acquired in the Warwick acquisition.
Compensation and employee benefits increased by $2.2 million, or 36.4%, to $8.3
million for the three months ended June 30, 2005. In addition, there was an
increase in the cost of stock-based compensation benefits of $296,000. Occupancy
and office operations increased by $577,000 or 31.2%, for the three months ended
June 30, 2005, of which $367,000 was attributable to the acquired Warwick
properties. Advertising and promotion increased $299,000 or 58.7%, primarily as
a result of the Company's new brand identity. Merger and integration costs
increased $193,000, or 344.6% primarily due to the acquisition of the HSBC South
Fallsburg branch. Other non-interest expense increased $766,000, or 51.0%, due
to increased overhead relating to the increase in branch locations and
administration costs associated with being a larger bank. These increases were
partially offset by a $133,000 decrease in professional fees due to consulting
fees incurred in 2004 in connection with the Warwick merger.
The efficiency ratio, which excludes securities gains, merger costs,
amortization of intangible assets, the $5.0 million charitable contribution, and
the income from the low income housing investment, and includes the tax
equivalent adjustment for interest income, has improved to 64.5% for the current
quarter from 66.7% for the quarter ending June 30, 2004, reflecting the strides
we have made in combining Warwick and Ellenville into Provident and the
operating leverage derived from those efforts [see below table].
28
Efficiency Ratio
3 Months Ended June 30, 9 Months Ended June 30,
----------------------- -----------------------
2005 2004 2005 2004
-------- -------- -------- --------
Non-interest expense $ 18,141 $ 13,505 $ 52,917 $ 41,725
-----------------------------------------------------
Interest & Non-interest income $ 26,701 $ 19,372 $ 77,690 $ 52,448
GAAP efficiency ratio 67.9% 69.7% 68.1% 79.6%
Non-interest expense less: $ 18,141 $ 13,505 $ 52,917 $ 41,725
merger integration costs (249) (56) (965) (773)
amortization of intangible assets (929) (681) (3,046) (1,468)
Charitable foundation -- -- -- (5,000)
-----------------------------------------------------
Adjusted non-interest expense $ 16,963 $ 12,768 $ 48,906 $ 34,484
Interest & Non-interest income $ 26,701 $ 19,372 $ 77,690 $ 52,448
add: Tax equivalent adjustment less: 322 223 824 507
gains on sales of securities (57) (446) (369) (1,894)
gain on low income housing LLP (681) -- (681) --
-----------------------------------------------------
Adjusted income $ 26,285 $ 19,149 $ 77,464 $ 51,061
Adjusted (Non-GAAP) efficiency ratio 64.5% 66.7% 63.1% 67.5%
Income Taxes. Income tax expense was $2.7 million for the three months
ended June 30, 2005, compared to a tax benefit of $2.0 million for the same
period in 2004. The effective tax rates were 32.1% and 35.2%, respectively. The
reduction in the effective rate is primarily due to increased investment in tax
exempt securities and the increase in income realized from bank owned life
insurance.
Comparison of Operating Results for the Nine Months Ended June 30, 2005 and June
30, 2004
Net Income. For the nine months ended June 30, 2005 net income was $15.9
million, an increase of $9.1 million compared to $6.8 million for the same
period in fiscal 2004. Net interest income after provision for loan losses for
the nine months ended June 30, 2005 increased by $20.5 million, or 47.1%, to
$63.9 million compared to $43.4 million for the same period in fiscal 2004.
Non-interest income increased $4.8 million or 57.1% to $13.3 million for the
nine months ended June 30, 2005 compared to $8.5 million for the nine months
ended June 30, 2004. Non-interest expense increased $11.2 million, or 26.8%, to
$52.9 million for the nine months ended June 30, 2005 compared to $41.7 million
for the same period in fiscal 2004.
The relevant performance measures follow:
Nine Months Ended
June 30,
2005 2004
------ ------
Per common share:
Basic earnings $ 0.36 $ 0.19
Diluted earnings 0.36 0.18
Dividends declared 0.125 0.11
Return on average (annualized):
Assets 0.84% 0.59%
Equity 5.13% 3.51%
29
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
Nine Months Ended June 30,
--------------------------
2005 2004
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ---------- ---------- ----------- ---------- ----------
Interest earning assets:
Commercial and commercial mortgage loans(3) $ 676,340 $ 34,101 6.74% $ 358,255 $ 17,427 6.50%
Consumer loans(1) 163,712 6,139 5.01 101,027 3,720 4.92
Residential mortgage loans(1) 431,565 18,980 5.88 393,407 17,504 5.94
---------- ---------- ---------- ----------
Total loans 1,271,617 59,220 6.23 852,689 38,651 6.05
---------- ---------- ---------- ----------
Securities-taxable 839,212 23,863 3.80 494,032 13,693 3.70
Securities-tax exempt(4) 55,303 2,355 5.69 35,143 1,447 5.50
Other earning assets 27,036 594 2.94 11,192 103 1.23
---------- ---------- ---------- ----------
Total securities and other
earning assets 921,551 26,812 3.89 540,367 15,243 3.77
---------- ---------- ---------- ----------
Total interest-earning assets 2,193,168 86,032 5.24 1,393,056 53,894 5.17
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-earning assets 331,516 147,247
---------- ----------
Total assets $2,524,684 $1,540,303
========== ==========
Interest bearing liabilities:
NOW checking $ 153,192 386 0.34% $ 82,548 134 0.22%
Savings, clubs and escrow 551,403 2,351 0.57 346,499 1,141 0.44
Money market accounts 227,810 1,883 1.11 144,264 601 0.56
Certificate accounts 418,572 6,587 2.10 302,918 3,805 1.68
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,350,977 11,207 1.11 876,229 5,681 0.87
Borrowings 385,610 9,609 3.33 157,207 3,720 3.16
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,736,587 20,816 1.60 1,033,436 9,401 1.22
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-bearing liabilities 375,013 248,963
---------- ----------
Total liabilities 2,111,600 1,282,399
Stockholders' equity 413,084 257,904
---------- ----------
Total liabilities and equity 2,524,684 1,540,303
========== ==========
Net interest rate spread 3.64% 3.95%
========== ==========
Net earning assets $ 456,581 $ 359,620
========== ==========
Net interest margin 65,216 3.98% 44,493 4.27%
========== ========== ========== ==========
Ratio of interest-earning assets to
average interest-bearing
liabilities 126.29% 134.81%
========== ==========
Less tax equivalent adjustment (824) (507)
---------- ----------
Net interest income $ 64,392 $ 43,986
========== ==========
- ----------
(3) Includes non-accrual loans
(4) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
30
The table below details the changes in interest income and interest expense for
the periods indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Nine Months Ended June 30,
2005 vs. 2004
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- --------
Interest-earning assets
Commercial and commercial mortgage loans $ 15,970 $ 703 $ 16,673
Consumer loans 2,337 82 2,419
Residential mortgage loans 1,638 (162) 1,476
Securities-taxable 9,767 403 10,170
Securities-tax exempt(2) 853 55 908
Other earning assets 248 244 492
-------- -------- --------
Total interest income 30,813 1,325 32,138
-------- -------- --------
Interest-bearing liabilities
Savings 815 396 1,210
Money market 470 812 1,282
NOW checking 149 103 252
Certificates of deposit 1,657 1,125 2,782
Borrowings 5,667 222 5,889
-------- -------- --------
Total interest expense 8,758 2,658 11,415
-------- -------- --------
Net interest margin 22,055 (1,333) 20,723
-------- -------- --------
Less tax equivalent adjustment(2) (415) 97 (317)
-------- -------- --------
Net interest income $ 21,640 $ (1,236) $ 20,406
======== ======== ========
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
Net interest income after provision for loan losses for the nine months
ended June 30, 2005 was $64.4 million, compared to $44.0 million for the nine
months ended June 30, 2004, an increase of $20.4 million or 46.4%. Interest
income increased $31.8 million to $85.2 million for the nine months ending June
30, 2005, compared to $53.4 million for the 2004 period. The increase in
interest income was largely due to a $800 million increase in average earning
assets to $2.2 billion during the period ended June 30, 2005, as compared to
$1.4 billion for the same period in the prior fiscal year. The increase is
primarily due to the Warwick acquisition and continued internal growth. An
increase in average yield on earning assets of eight basis points, from 5.17% to
5.24% ($1.8 million), on a fully taxable equivalent basis, also contributed to
the increase in net interest income. Average yields increased in both the loan
and securities portfolios, of 17 basis points and 12 basis points, respectively,
with the overall yield on total interest-earning assets increasing in every
category except for other loans (residential mortgages), which decreased six
basis points in average yield. Interest expense increased by $11.4 million to
$20.8 million for the nine months ended June 30, 2005 from $9.4 million for the
nine month period ending June 30, 2004, as average interest-bearing liabilities
increased by $703.2 million and the average cost of interest-bearing liabilities
increased 39 basis points. The net interest margin declined by 29 basis points
to 3.98%, while the net interest spread declined by 30 basis points to 3.64%,
due to the assets acquired in the Warwick acquisition being recorded at then
current market interest rates and the increase in short-term interest rates.
This change in short-term rates, which affected funding costs to a larger degree
than existing earning assets (which are primarily fixed
31
rate until maturity) was disproportionately large as compared to the change in
longer term market interest rates, and thus has decreased net interest margin.
The Federal Reserve has increased short-term rates nine times since May 2004,
increasing the target federal funds rate from 1% to 3.25%. Conversely, the
10-year treasury rate has decreased from an average of 4.28% for the nine months
ended June 30, 2004 to 4.20% for the nine months ended June 30, 2005. The bank's
average cost of interest-bearing liabilities has increased, and, although the
average asset yields increased this period, they did so at a slower pace due to
continued market pressure. This has been offset somewhat by a greater increase
of interest earning assets compared to interest bearing liabilities Should the
yield curve continue to "flatten," a continued decline in net interest margin
may occur, offsetting a portion of gains in net interest income generated from
an increasing volume of assets.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $525 and $575, respectively, in loan loss
provisions during the nine months ended June 30, 2005 and 2004. Net charge-offs
for the nine months ended June 30, 2005 were $506 compared to net charge-offs of
$63 for the same period in 2004. (See Note 6 for further discussion).
Non-interest income was $13.3 million for the nine months ended June 30,
2005 compared to $8.5 million for the nine months ended June 30, 2004. Deposit
fees and service charges increased by $2.9 million, or 59.9%, of which $2.0
million was generated from the acquired Warwick and ENB branches, while $900,000
was primarily due to volume-driven increases in overdraft, non-sufficient funds,
and ATM and debit card fees. Loan fees and late charges increased by $420,000 or
71.1% largely due to pre-payment penalties. Income derived from the Company's
BOLI investments increased by $956,000 or 226.5% due to the additional BOLI
investment and the death benefit previously discussed. Title insurance fee
income derived from the new Hardenburgh Abstract Company, Inc., was $1.0
million. Gains on the sale of securities were $369,000 for the current
nine-month period, compared to $1.9 million for the same period in the prior
fiscal year. During the nine-month period ended June 30, 2005, the Company also
recorded gains on sales of loans totaling $185,000 compared to $231,000 for the
same period last year. For the year to date period ended June 30, 2005, there
was income from the low income housing investment included above in the quarter
to date information.
Non-interest expenses for the nine months ended June 30, 2005 increased by
$11.2 million, or 26.8%. Excluding the 2004 charge of $5.0 million, pre-tax, for
the Charitable Foundation, non-interest expenses for the nine months ended June
30, 2005 increased by $16.2 million, or 44.1%, to $52.9 million, compared to
$36.7 million for the nine months ended June 30, 2004. The acquisitions of ENB
in January 2004 and Warwick in October 2004 played a major role in the increases
in most categories. Compensation and employee benefits increased by $7.5
million, or 45.6%, to $24.0 million for the nine-month period ended June 30,
2005. The increase was primarily attributable to the acquisitions. Occupancy and
office operations increased by $2.2 million, or 45.4%, for the nine months ended
June 30, 2005, almost all of which was attributable to the acquisitions.
Advertising and promotion increased $1.1 million or 69.7%, primarily as a result
of the new brand identity the Company has unveiled and the additional promotions
in the Orange County market. Amortization of core deposit intangible increased
by $1.6 million as a result of acquired deposits. Data and check processing
increased $1.0 million, or 38.9%, primarily due to the higher level of services
related to the accounts acquired in the mergers and in the acquisition of the
new HSBC South Fallsburg branch. Other expenses increased by $2.0 million, or
51.1%, primarily due to increases in correspondent bank expense, postage,
telephone expense, loan servicing and credit report expenses, and insurance
premium expense, all of which directly related to the increased size of the Bank
following the mergers. ATM and debit card expense increased $383,000, or 67.8%,
primarily as a result of the increase in the number of accounts.
Income Taxes Income tax expense was $8.4 million for the nine months ended
June 30, 2005 compared to $3.4 million expense for the same period in 2004. The
effective tax rates were 34.6% and 33.3%, respectively.
32
Supplemental Reporting of Non-GAAP Results of Operations. The Company is
providing supplemental reporting of its results on a "net operating" basis, from
which the Company excludes the after-tax charge for expenses associated with
merging acquired operations into the Company and excludes the after-tax charge
for establishing the charitable foundation. Although "net operating income" as
defined by the Company is not a GAAP measure, management believes that this
information helps investors understand the effects of acquisition activity and
the establishment of the charitable foundation on reported results. Merger
integration costs were $149 ($0.003 per diluted share) and $34 ($0.00 per
diluted share), after-tax for the three months ended June 30, 2005 and 2004,
respectively. Similar merger expenses for the nine months ended June 30, 2005
and 2004 were $579 ($0.01 per diluted share) and $464 ($0.01 per diluted share)
respectively. Income arising from the investment in the low-income housing
partnership for the three and nine months ended June 30, 2005, was $409,000 net
of taxes ($0.01 per share for both the three and nine months ended June 30,
2005). The after-tax effect of the establishment of the charitable foundation
was $3.0 million ($0.08 per share for the nine months ended June 30, 2004).
Net operating income on this basis for the most recent quarter was $5.4
million, an increase of 46.4% from $3.7 million in the prior year. Net operating
income on this basis for the current nine-month period was $16.0 million, an
increase of 56.6% from $10.2 million in the comparable period in fiscal 2004.
Net operating income, as an annualized rate of return on average assets and
average stockholders' equity, was 0.86% and 5.49% respectively, in the quarter
ended June 30, 2005, compared with 0.83% and 4.28% in the quarter ended June 30,
2004. Net operating income, as an annualized rate of return on average assets
and stockholders' equity, was 0.85% and 5.19%, respectively, for the nine months
ended June 30, 2005, compared with 0.89% and 5.30%, respectively for the nine
months ended June 30, 2004.
Reconciliation of GAAP and Non-GAAP results of operations: A
reconciliation of diluted earnings per share and net income with diluted net
operating earnings per share and net operating income follows (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
June 30, June 30
-------------------- --------------------
2005 2004 2005 2004
------- ------- ------- -------
Diluted cash earnings per share $ 0.13 $ 0.10 $ 0.36 $ 0.18
Charge for establishment of Charitable Foundation(1) -- -- -- 0.08
Income from low-income housing partnership(1) (0.01) -- (0.01) --
Merger integration expenses(1) 0.00 -- 0.01 0.01
------- ------- ------- -------
Diluted net operating earnings per share $ 0.12 $ 0.10 $ 0.36 $ 0.27
======= ======= ======= =======
Net income $ 5,659 $ 3,654 $15,854 $ 6,771
Charge for establishment of Charitable Foundation(1) -- -- -- 3,000
Income from low-income housing partnership(1) (409) -- (409) --
Merger integration expenses(1) 149 34 579 464
------- ------- ------- -------
Net operating income $ 5,399 $ 3,688 $16,024 $10,235
======= ======= ======= =======
(1) After related tax effect at 40% marginal rate
Liquidity and Capital Resources
-------------------------------
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
33
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the nine-months
ended June 30, 2005 and June 30, 2004, loan originations, excluding loans
originated for sale, totaled $330.1 million and $251.3 million, respectively,
and purchases of securities totaled $375.4 million and $452.6 million,
respectively. For the nine-month periods ended June 30, 2005 and 2004, these
investing activities were funded primarily by principal repayments on loans, by
proceeds from sales and maturities of securities, and by deposit growth. Loan
origination commitments totaled $296.9 million at June 30, 2005. The Company
anticipates that it will have sufficient funds available to meet current loan
commitments. At September 30, 2004 the Company had investments of $13.2 million
in BOLI contracts. The Company recorded an additional $13.3 million in BOLI as a
result of the Warwick acquisition. In April 2005, the Company invested an
additional $10.0 million in BOLI contracts. Such investments are 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.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, the appeal of
non-deposit investments, and other factors. Excluding the Warwick and HSBC
acquisitions, the net increase in total deposits for the nine months ended June
30, 2005 was $10.1 million, compared to a $44.3 million increase, which excludes
the deposits acquired from ENB, for the nine months ended June 30, 2004.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Federal were sold to investors. In addition, the Company
simultaneously completed its acquisition of ENB, located in Ellenville, New
York.
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the Bank as of June 30, 2002 and September 30, 2003. The Company
also issued 400,000 shares of common stock and contributed $1.0 million in cash
to the Provident Bank Charitable Foundation. In addition, each outstanding share
of common stock of Provident Federal as of January 14, 2004 was converted into
4.4323 new shares of the Company's common stock.
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.47 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.77
million in cash.
Shareholders of Warwick as of the close of business on October 1, 2004
received total merger consideration of approximately $147.2 million, consisting
of 6,257,896 shares of common stock of the Company and approximately $72.6
million in cash.
The Company monitors its liquidity position on a daily basis. We generally
remain fully invested and utilize additional sources of funds through Federal
Home Loan Bank of New York overnight and term advances, of which $204.4 million
were outstanding at June 30, 2005. The Company has the ability to borrow an
additional $257,703 million under its credit facilities with the Federal Home
Loan Bank of New York. The Company may borrow additional amounts by pledging
securities not required to be pledged for other purposes with a market value of
$596,881 as of June 30,2005.
At June 30, 2005, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $198.5million, or 8.3% of
adjusted assets (which is above the required level of $95.4 million, or 4.0%)
and a total risk-based capital level of $219.3 million, or 13.2% of
risk-weighted assets (which is above the required level of $132.6 million, or
8.0%). Regulations require leverage and total risk-based capital ratios of 5.0%
and 10.0%, respectively, in order to be classified as well-capitalized. In
performing this calculation, the intangible assets recorded in the NBF, ENB,
Warwick, and HSBC acquisitions are deducted from capital and from total adjusted
assets for purposes of regulatory capital measures. At June 30, 2005, the Bank
exceeded all capital requirements for the well-capitalized classification. These
capital requirements, which are applicable to the Bank only, do not consider
additional capital retained at the holding company level.
34
The following table sets forth the Bank's regulatory capital position at June
30, 2005 and September 30, 2004, compared to OTS requirements.
OTS Requirements
----------------
Minimum Capital For Classification as
Bank Actual Adequacy Well Capitalized
----------- --------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in
thousands)
-----------
June 30, 2005
- -------------
Tangible Capital $198,535 8.3% $ 35,761 1.5% $ -- --%
Tier 1 (core) capital 198,535 8.3 95,363 4.0 119,204 5.0
Risk-based capital:
Tier 1 198,535 12.0 -- -- 99,443 6.0
Total 219,271 13.2 132,590 8.0 165,738 10.0
September 30, 2004
- ------------------
Tangible Capital $189,486 11.3% $ 25,285 1.5% $ -- --%
Tier 1 (core) capital 189,486 11.3 67,427 4.0 84,284 5.0
Risk-based capital:
Tier 1 189,486 16.6 -- -- 68,593 6.0
Total 203,776 17.8 91,458 8.0 114,322 10.0
Recent Accounting Standards
In December 2003, the FASB issued FASB Interpretation No. 46 (revised),
Consolidation of Variable Interest Entities ("FIN 46R"), which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and, accordingly,
should consolidate the variable interest entity ("VIE"). FIN 46R replaces FASB
Interpretation No. 46, which was issued in January 2003. As a public company
that is not a small business issuer (as defined in applicable SEC regulations),
the Company is required to apply FIN 46R to variable interests generally as of
March 31, 2004 and to special-purpose entities as of December 31, 2003. For any
VIE's that must be consolidated under FIN 46R that were created before January
1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured at their carrying amounts and any difference between
the net amount added to the balance sheet and any previously recognized interest
would be recorded as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. The adoption of FIN 46R did not and is not
expected to have a significant effect on the Company's consolidated financial
statements.
35
In December 2003, the FASB also issued Statement of Financial Accounting
Standards No. 132 (revised), Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers'
disclosures about pension plans and other postretirement benefit plans, but does
not change the measurement or recognition of those plans. SFAS No. 132R retains
and revises the disclosure requirements contained in the original standard. It
also requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. As a public company, the Company was required to
provide substantially all of the revised disclosures beginning with its
September 30, 2004 consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
requires that an issuer classify financial instruments that are considered a
liability (or an asset in some circumstances) when that financial instrument
embodies an obligation of the issuer.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 had no impact
on the Company's consolidated statement of financial condition or results of
operations upon implementation during the third quarter of 2003. In November
2003, the FASB also issued a staff position that indefinitely deferred the
effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests. The Company currently believes that the deferral of
the effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests will not have any impact on its consolidated statement
of financial condition or results of operations when implemented.
The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal
Reserve Board announcing potential future reconsideration of trust preferred
securities as elements of regulatory capital. The Company currently has no
issuances of trust preferred securities.
Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments ("EITF 03-1") was issued. EITF 03-1 provides guidance for
determining the meaning of "other-than-temporarily impaired" and its application
to certain debt and equity securities within the scope of Statement of Financial
Accounting Standards No. 115 Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and investments accounted for under the cost
method. The guidance requires that investments which have declined in value due
to credit concerns or solely due to changes in interest rates ("other than
temporary impairment") must be recorded for as are loans under the AICPA's
Statement of Position 03-3 ("SOP 03-3") on purchased loans, which provides
guidance on the treatment of potential credit losses (unrecoverable principle)
and decreased, or lower then expected yields.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results.
36
In December 2004, the FASB Issued Statement of Financial Accounting
Standards No. 123R (Statement 123R), "Share-Based Payments", the provisions of
which become effective for the corporation in fiscal 2006. This Statement
eliminates the alternative to use APB No. 25's intrinsic value method of
accounting that was provided in Statement 123 as originally issued. Statement
123R requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. While the fair-value-based method prescribed by Statement 123R is
similar to the fair-value-based method disclosed under the provisions of
Statement 123 in most respects, there are some differences. The Company
estimates that annual expense using the Black Sholes method beginning in fiscal
2006 will be approximately $1,151 or $939 after tax and the diluted earnings per
share impact will be $0.02. This impact does not include the effect of reload
options or forfeitures or options accelerations due to termination or retirement
of personnel, the effect of which cannot be measured with any degree of
certainty.
In May 2005, the FASB Issued Statement of Financial Accounting Standards
No. 154 ("SFAS 154"), "Accounting changes and error corrections," replacing APB
Opinion No. 20 and FASB Statement No. 3, which changes the treatment and
reporting requirements for both accounting errors and changes of accounting
principles, and provides guidance on determining the treatment of the
retrospective application of a change. This Statement applies to all voluntary
changes in accounting principles. At this time, management believes this
statement will have no impact on the reporting of our operations or financial
condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate risk,
as the majority of its assets and liabilities are sensitive to changes in
interest rates need Quantitative and qualitative disclosure about market risk is
presented at September 30, 2004 in Item 7A in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on December 14,
2004. The following is an update of the discussion provided therein.
The table below sets forth, as of June 30, 2005, the estimated changes in
our NPV and our net tax equivalent interest income 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 upon as indicative of
actual results.
NPV Net Interest Income
--------------------------------------- -------------------------------------------
Estimated Increase Estimated Increase (Decrease)
Change in (Decrease) in NPV Estimated in Net Interest Income
Interest Rates Estimated ------------------------ Net Interest -----------------------------
(basis points) NPV Amount Percent Income Amount Percent
- -------------- --------- --------- ------- ------------ --------- -------
(Dollars in thousands)
+300 $262,244 $(81,036) -23.61% $ 87,449 $ (1,619) -1.82%
+200 291,346 (51,934) -15.13% 88,174 (894) -1.00%
+100 319,772 (23,508) -6.85% 88,821 (247) -0.28%
0 343,280 -- 0.00% 89,068 -- 0.00%
-100 350,106 6,826 1.99% 83,458 (5,610) -6.31%
-200 348,408 5,128 1.49% 83,609 (5,459) -6.13%
37
The table set forth above indicates that at June 30, 2005, in the event of
an immediate 100 basis point decrease in interest rates, we would be expected to
experience a 1.99% increase in NPV and a 6.31% decrease in net interest income.
In the event of an immediate 200 basis point increase in interest rates, we
would be expected to experience a 15.13% decrease in NPV and a 1.00% decrease in
net interest income.
The Bank's interest rate profile has not changed significantly since
September 30, 2004. Although the acquisition of Warwick was completed, the
nature of the assets and liabilities acquired is consistent with the Bank's
previously existing assets. As a result, the Bank has maintained an overall
relatively neutral net interest income sensitivity position. As the Federal
Reserve has increased term rates nine times since May 2004, increasing the
target Federal Funds Rate from 1% to 3.25%, while longer term interest rates (10
year treasury) have only decreased from an average of 4.28% for the nine months
ended June 30, 2004 to 4.20% for the nine months ended June 30, 2005, the Bank's
average cost of interest bearing liabilities has increased faster than the
average increase in asset yields. Should the yield curve continue to "flatten",
a continued decline in net interest margin may occur, offsetting a portion of
gains in net interest income arising from increasing volume of assets generated.
Conversely, should market interest rates continue to fall below today's level
the Company's net interest margin could also be negatively affected, as
competitive pressures could keep the Bank from lowering rates on its deposits,
and prepayments and curtailments on assets may continue. Such movements may
cause a decrease in the interest rate spread and net interest margin. Other
types of market risk, such as foreign exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
General: The Company's largest component of market risk continues to be
interest rate risk. The Company is not subject to foreign currency exchange or
commodity price risk. At June 30, 2005, neither the Company nor the Bank owned
any trading assets, nor did they utilize hedging transactions such as interest
rate swaps and caps.
Interest Rate Risk Compliance: The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at September 30, 2004. There have been no changes in the board
approved limits of acceptable variances in net interest income and net portfolio
value change through June 30, 2005 compared to September 30, 2004, and the
impact of possible changes within the Company's models continue to fall within
all board approved limits for potential interest rate volatility.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the
"Exchange Act") as of the end of the period covered by this report. Based upon
that evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time frames specified in the SEC's rules and
forms.
There were no significant changes made in the Company's internal controls
over financial reporting or in other factors that could significantly affect the
Company's internal control over financial reporting during the period covered by
this report.
38
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) - (d) Not applicable
(e)
Issuer Purchases of Equity Securities
-------------------------------------
Total Number Average Total Number of Maximum Number
of Shares (or Price Paid Shares (or Units) (or Approximate
Units) Purchased(1) per Share Purchased as Part Dollar Value) of
(or Unit) of Publicly Shares (or Units)
Announced Plans that may yet be
or Programs(2) Purchased Under the
Period (2005) Plans or Programs
April 1 - April 30 146,500 $ 10.62 146,500 960,700
May 1 - May 31 990,400 11.11 990,400 2,170,300
June 1 - June 30 519,700 11.78 519,700 1,650,600
--------- --------- ---------
Total 1,656,600 $ 11.28 1,656,600
========= ========= =========
- ----------
(1) The total number of shares purchased during the period1s indicated
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, 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 in May, 2005 that it authorized the repurchase of
2,200,000 shares, or approximately 5% of common shares currently
outstanding, having completed its first repurchase program of 2,295,000
shares in May 2005.
39
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibit Number Description
-------------- -----------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident New York Bancorp
--------------------------
(Registrant)
By: /s/ George Strayton
----------------------------
George Strayton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: August 8, 2005
By: /s/ Paul A. Maisch
----------------------------
Paul A. Maisch
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized
Representative)
Date: August 8, 2005
41