UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 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
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(Exact name of Registrant as Specified in its Charter)
Delaware 80-0091851
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation on Organization)
400 Rella Blvd., Montebello, New York 10901
- --------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
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(Registrant's Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. YES |_| NO |X|
Indicate by check mark whether to Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities Act of 1934). YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of the common stock as of
December 2, 2005 was $460,470,881.
As of December 2, 2005 there were issued and outstanding 43,124,987 shares of
the Registrant's common stock.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders
(Part III) to be held in February 2006.
PROVIDENT NEW YORK BANCORP
FORM 10-K TABLE OF CONTENTS
September 30, 2005
PART I 1
ITEM 1. Business 1
ITEM 1A Risk Factors 29
ITEM 1B Unresolved Staff Comments 32
ITEM 2. Properties 33
ITEM 3. Legal Proceedings 34
ITEM 4. Submission of Matters to a Vote of Security Holders 34
PART II 34
ITEM 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 34
ITEM 6. Selected Financial Data 36
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 39
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 54
ITEM 8. Financial Statements and Supplementary Data 55
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 111
ITEM 9A. Controls and Procedures 111
ITEM 9B. Other Information 111
PART III 111
ITEM 10. Directors and Executive Officers of the Registrant 111
ITEM 11. Executive Compensation 111
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 112
ITEM 13. Certain Relationships and Related Transactions 112
ITEM 14. Principal Accountant Fees and Services 112
PART IV 113
ITEM 15. Exhibits and Financial Statement Schedules 113
SIGNATURES 119
PART I
ITEM 1. Business
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Provident New York Bancorp
Provident New York Bancorp ("Provident Bancorp" or the "Company") is a
Delaware corporation that owns all of the outstanding shares of common stock of
Provident Bank (the "Bank"). 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. At September
30, 2005, Provident Bancorp had consolidated assets of $2.6 billion, deposits of
$1.7 billion and stockholders' equity of $395.2 million. As of September 30,
2005, Provident Bancorp had 43,505,659 shares of common stock outstanding.
Acquisition of Warwick Community Bancorp, Inc.
On October 1, 2004 the Company completed the acquisition of Warwick
Community Bancorp, Inc. ("WSB" or "Warwick"). The Company paid $72.6 million in
cash and issued 6,257,896 shares of its common stock in connection with the
acquisition for total merger consideration of $147.2 million. Warwick had nine
branch locations: six in Orange County, New York, one in Putnam County, New York
and two office locations in Bergen County, New Jersey. Warwick had approximately
$703.7 million in consolidated assets, $284.5 million in loans and $475.1
million in deposits.
Second Step Common Stock Offering and Acquisition of E.N.B. Holding Company,
Inc.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC, the former mutual
holding company for the Bank. As part of the conversion, the Company succeeded
to Provident Bancorp, Inc., a federal corporation ("Provident Federal") as 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. 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 exchanged for 4.4323 new shares of the Company's common stock.
In addition, the Company simultaneously completed its acquisition of
E.N.B. Holding Company, Inc., ("ENB"), headquartered in Ellenville, New York.
Shareholders of ENB as of the close of business on January 14, 2004 received
total merger consideration of approximately $76.5 million, consisting of
3,969,671 shares of common stock of the Company and approximately $36.8 million
in cash. ENB had total assets of $349.7 million, total loans of $213.5 million
and total deposits of $326.8 million. ENB had five offices in Orange County, two
offices in Ulster County and two offices in Sullivan County, all in New York
State.
Financial statements as of September 30, 2005, reflect the effect of the
exchange of shares in the second-step conversion, the stock offering, the
acquisitions of ENB and WSB and the issuance of shares and contribution of cash
to the charitable foundation. Goodwill recorded in the ENB and WSB acquisitions
($52.6 million and $91.6 million, respectively) is not amortized to expense, but
instead is reviewed for impairment at least annually, with impairment losses
charged to expense, if and when they occur. The core deposit intangible asset
resulting from all acquisitions, of $13.8 million at September 30, 2005, is
recognized apart from goodwill and amortized to expense over its estimated
useful life and evaluated for impairment.
Provident Bank
Provident Bank, an independent, full-service community bank founded in
1888, is the banking subsidiary of Provident New York Bancorp, headquartered in
Montebello, New York. With $2.6 billion in assets and almost 600 employees, we
operate 35 branches that serve the Hudson Valley region, including 34 branches
located in Rockland, Orange, Sullivan, Ulster and Putnam Counties in New York,
and one branch in Bergen County, New Jersey that operates under the name
Towncenter Bank, a division of Provident Bank, New York. We also offer deposit
services to municipalities located in the State of New York through Provident
Bank's wholly-owned subsidiary, Provident Municipal Bank. Provident Bank offers
a complete line of commercial, community business and retail banking products
and services.
1
We have increased our number of branch offices from 11 branch offices at
September 30, 1998 to 35 branch offices at September 30, 2005. Subsequent to our
mutual holding company reorganization and initial stock offering, we have
broadened our market reach through de novo branching and our acquisitions of The
National Bank of Florida ("NBF") in April 2002 and the ENB and WSB acquisitions,
discussed above.
Provident Bank's website (www.providentbanking.com) contains a direct link
to the Company's filings with the Securities and Exchange Commission, including
copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to these filings, as well as ownership report
on Forms 3,4 and 5 filed by the Company's directors and executive officers.
Copies may also be obtained, without charge, by written request to Provident
Bancorp Investor Relations, Attention: Christina Maier, 400 Rella Boulevard,
Montebello, New York 10901.
Provident Municipal Bank
In April 2002, Provident Bank organized Provident Municipal Bank as a
wholly-owned subsidiary. Provident Municipal Bank is a New York State-chartered
commercial bank that is engaged in the business of accepting deposits from
municipalities in our market area, as New York State law requires municipalities
located in the State of New York to deposit funds with commercial banks,
effectively forbidding these municipalities from depositing funds with banks,
including federally chartered savings associations, such as Provident Bank.
Forward-Looking Statements
In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
(including documents incorporated herein by reference) that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believe", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause Provident Bancorp's
actual results to differ materially from those contemplated by such
forward-looking statements. These important factors include, without limitation,
Provident Bancorp's continued ability to originate quality loans, fluctuations
in interest rates, real estate conditions in Provident Bancorp's lending areas,
general and local economic conditions, Provident Bancorp's continued ability to
attract and retain deposits, Provident Bancorp's ability to control costs,
effect of new accounting pronouncements and changing regulatory requirements,
and the effect on Provident Bancorp's operation from the assimilation of recent
acquisitions. Provident Bancorp undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Market Area
Provident Bank is an independent community bank offering a broad range of
financial services to businesses and individuals as an alternative to money
centers and large regional banks in our market area. At September 30, 2005, our
35 full-service banking offices consisted of 13 offices in Rockland County, New
York, 16 offices in Orange County, New York, and five offices in contiguous
Ulster, Putnam, and Sullivan Counties, New York. There is one office located in
Lodi, New Jersey operating as Towncenter Bank, a division of Provident Bank, New
York. Our primary market for deposits is currently concentrated around the areas
where our full-service banking offices are located. Our primary lending area
consists of Rockland and Orange Counties as well as contiguous counties.
According to data published by the Federal Deposit Insurance Corporation
("FDIC") as of June 30, 2005, Provident Bank holds the #3 market share of
deposits in Rockland and #2 share of deposits in Orange County, and overall has
the #1 share of deposits in the combined markets of Rockland and Orange
Counties, New York.
Rockland and Orange counties constitute a suburban market with a broad
employment base. They also serve as bedroom communities for nearby New York City
and other suburban areas including Westchester County and northern New Jersey.
Orange County is one of the two fastest growing counties in New York State. The
economic environment in Rockland, Orange and contiguous counties continues to be
favorable and has supported increased commercial and residential activity in
recent years.
Lending Activities
2
General. We originate commercial real estate loans, commercial business
loans and construction loans (collectively referred to as the "commercial loan
portfolio"). We also originate in our market area fixed-rate and adjustable-rate
("ARM") residential mortgage loans collateralized by one- to four-family
residential real estate, and consumer loans such as home equity lines of credit,
homeowner loans and personal loans. We retain most of the loans we originate,
although we may sell longer-term one- to four-family residential loans and
participations in some commercial loans.
Commercial Real Estate Lending. We originate real estate loans secured
predominantly by first liens on commercial real estate. The commercial
properties are predominantly non-residential properties such as offices
buildings, shopping centers, retail strip centers, industrial and warehouse
properties and, to a lesser extent, more specialized properties such as
churches, mobile home parks, restaurants and motel/hotels. We may, from time to
time, purchase commercial real estate loan participations. We target commercial
real estate loans with initial principal balances between $1.0 million and $5.0
million. Loans secured by commercial real estate totaled $497.9 million, or
36.6% of our total loan portfolio at September 30, 2005, and consisted of 1,101
loans outstanding with an average loan balance of approximately $452,000,
although there are a large number of loans with balances substantially greater
than this average. Substantially all of our commercial real estate loans are
secured by properties located in our primary market area.
Most of our commercial real estate loans are written as five-year
adjustable-rate or ten-year fixed-rate mortgages and typically have balloon
maturities of ten years. Amortization on these loans is typically based on
20-year payout schedules. We also originate some 15- to 20-year fixed-rate,
fully amortizing loans. Margins generally range from 175 basis points to 300
basis points above the applicable Federal Home Loan Bank advance rate.
In the underwriting of commercial real estate loans, we generally lend up
to 75% of the property's appraised value. Decisions to lend are based on the
economic viability of the property and the creditworthiness of the borrower. In
evaluating a proposed commercial real estate loan, we emphasize primarily the
ratio of the property's projected net cash flow to the loan's debt service
requirement (generally targeting a ratio of 120%), computed after deduction for
a vacancy factor and property expenses we deem appropriate. In addition, a
personal guarantee of the loan or a portion thereof is generally required from
the principal(s) of the borrower. We require title insurance insuring the
priority of our lien, fire and extended coverage casualty insurance, and flood
insurance, if appropriate, in order to protect our security interest in the
underlying property. In addition, business interruption insurance or other
insurance may be required.
Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one-to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy. For commercial real estate loans in which the borrower is the
primary occupant, repayment experience also depends on the successful operation
of the borrower's underlying business.
Commercial Business Loans. We make various types of secured and unsecured
commercial loans to customers in our market area for the purpose of financing
equipment acquisition, expansion, working capital and other general business
purposes. The terms of these loans generally range from less than one year to
seven years. The loans are either negotiated on a fixed-rate basis or carry
adjustable interest rates indexed to (i) a lending rate that is determined
internally, or (ii) a short-term market rate index. At September 30, 2005, we
had 1,791 commercial business loans outstanding with an aggregate balance of
$148.8 million, or 10.9% of the total loan portfolio. As of September 30, 2005,
the average commercial business loan balance was approximately $83,000, although
there are a large number of loans with balances substantially greater than this
average.
Commercial credit decisions are based upon a credit assessment of the loan
applicant. A determination is made as to the applicant's ability to repay in
accordance with the proposed terms as well as an overall assessment of the risks
involved. An evaluation is made of the applicant to determine character and
capacity to manage. Personal guarantees of the principals are generally
required, except in the case of not-for-profit corporations. In addition to an
evaluation of the loan applicant's financial statements, a determination is made
of the probable adequacy of the primary and secondary sources of repayment to be
relied upon in the transaction. Credit agency reports of the applicant's credit
history supplement the analysis of the applicant's creditworthiness. Checking
with other banks and trade investigations also may be conducted. Collateral
supporting a secured transaction also is analyzed to determine its
marketability. For small business loans and
3
lines of credit, generally those not exceeding $250,000, we use a credit scoring
system that enables us to process the loan requests quickly and efficiently.
Commercial business loans generally bear higher interest rates than residential
loans of like duration because they involve a higher risk of default since their
repayment is generally dependent on the successful operation of the borrower's
business and the sufficiency of collateral, if any.
One- to Four-Family Real Estate Lending. We offer conforming and
non-conforming, fixed-rate and adjustable-rate residential mortgage loans with
maturities of up to 30 years and maximum loan amounts generally up to $1.1
million. This portfolio totaled $456.8 million, or 33.5% of our total loan
portfolio at September 30, 2005.
We currently offer both fixed- and adjustable-rate conventional mortgage
loans with terms of 10 to 30 years that are fully amortizing with monthly or
bi-weekly loan payments. One- to four-family residential mortgage loans are
generally underwritten according to Fannie Mae and Freddie Mac guidelines, and
loans that conform to such guidelines are referred to as "conforming loans." We
generally originate both fixed-rate and ARM loans in amounts up to the maximum
conforming loan limits as established by Fannie Mae and Freddie Mac, which are
currently $359,650 for single-family homes. Private mortgage insurance is
generally required for loans with loan-to-value ratios in excess of 80%. We also
originate loans above conforming limits, referred to as "jumbo loans," that have
been underwritten to the credit standards of Fannie Mae or Freddie Mac. These
loans are generally eligible for sale to various firms that specialize in the
purchase of such non-conforming loans, although we retained in our portfolio all
such loans originated in fiscal 2005, totaling $19.1 million. In our market
area, due to our proximity to New York City, such larger residential loans are
not uncommon.
We also originate loans at higher rates that do not meet the credit
standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable risks.
The amount of such loans originated for fiscal 2005 was $5.6 million, all of
which were retained in our loan portfolio.
We actively monitor our interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and our capital and liquidity position, we may retain all of our
newly originated longer term fixed-rate, residential mortgage loans, or from
time to time we may decide to sell all or a portion of such loans in the
secondary mortgage market to government sponsored entities such as Fannie Mae
and Freddie Mac or other purchasers. Our bi-weekly one- to four-family
residential mortgage loans that are retained in our portfolio result in shorter
repayment schedules than conventional monthly mortgage loans, and are repaid
through an automatic deduction from the borrower's savings or checking account.
As of September 30, 2005, biweekly loans totaled $167.6 million, or 36.7% of our
residential loan portfolio. We retain the servicing rights on a large majority
of loans sold to generate fee income and reinforce our commitment to customer
service, although we may also sell non-conforming loans to mortgage banking
companies, generally on a servicing-released basis. As of September 30, 2005,
loans serviced for others totaled $108.9 million.
We currently offer several ARM loan products secured by residential
properties with rates that are fixed for a period ranging from six months to ten
years. After the initial term, if the loan is not already refinanced, the
interest rate on these loans is generally reset every year based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year, as published weekly by
the Federal Reserve Board and subject to certain periodic and lifetime
limitations on interest rate changes. Many of the borrowers who select these
loans have shorter-term credit needs than those who select long-term, fixed-rate
loans. ARM loans generally pose different credit risks than fixed-rate loans
primarily because the underlying debt service payments of the borrowers rise as
interest rates rise, thereby increasing the potential for default. At September
30, 2005, our ARM portfolio included $5.8 million in loans that re-price every
six months, $46.1 million in loans that re-price once a year and $7.8 million in
loans that re-price periodically after an initial fixed-rate period of three
years or more.
We require title insurance on all of our one- to four-family mortgage
loans, and we also require that borrowers maintain fire and extended coverage or
all risk casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements, but in any event in an amount calculated to avoid the effect of
any coinsurance clause. For loans with initial loan-to-value ratios in excess of
80% we generally require private mortgage insurance, although occasional
exceptions may be made. Nearly all residential loans are generally required to
have a mortgage escrow account from which disbursements are made for real estate
taxes and for hazard and flood insurance.
4
Construction Loans, Land Acquisition and Development. We originate land
acquisition, development and construction loans to builders in our market area.
These loans totaled $66.7 million, or 4.9% of our total loan portfolio at
September 30, 2005. Acquisition loans help finance the purchase of land intended
for further development, including single-family houses, multi-family housing,
and commercial income property. In some cases, we may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a land acquisition loan is 60% of
the appraised value of the property. We also make development loans to builders
in our market area to finance improvements to real estate, consisting mostly of
single-family subdivisions, typically to finance the cost of utilities, roads,
sewers and other development costs. Builders generally rely on the sale of
single-family homes to repay development loans, although in some cases the
improved building lots may be sold to another builder. The maximum amount loaned
is generally limited to the cost of the improvements plus an interest reserve,
if one is required. Advances are made in accordance with a schedule reflecting
the cost of the improvements.
We also grant construction loans to area builders, often in conjunction
with development loans. In the case of residential subdivisions, these loans
finance the cost of completing homes on the improved property. Advances on
construction loans are made in accordance with a schedule reflecting the cost of
construction. Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers. In the case
of income-producing property, repayment is usually expected from permanent
financing upon completion of construction. We commit to provide the permanent
mortgage financing on most of our construction loans on income-producing
property.
Land acquisition, development and construction lending exposes us to
greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event we make an acquisition loan on
property that is not yet approved for the planned development, there is the risk
that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose us to the risk that improvements
will not be completed on time in accordance with specifications and projected
costs. In addition, the ultimate sale or rental of the property may not occur as
anticipated.
Consumer Loans. We originate a variety of consumer and other loans,
including homeowner loans, home equity lines of credit, new and used automobile
loans, and personal unsecured loans, including fixed-rate installment loans and
variable lines of credit. As of September 30, 2005, consumer loans totaled
$191.8 million, or 14.1% of the total loan portfolio.
At September 30, 2005, the largest group of consumer loans consisted of
$175.2 million of loans secured by junior liens on residential properties. We
offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner
loans, and we also offer adjustable-rate home equity lines of credit. As of
September 30, 2005, homeowner loans totaled $40.2 million or 3.0% of our total
loan portfolio. The disbursed portion of home equity lines of credit totaled
$135.0 million, or 9.9% of our total loan portfolio at September 30, 2005, with
$111.8 million remaining undisbursed.
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 2005, these loans totaled $16.6 million,
or 1.2% of our total loan portfolio. We originate consumer loans directly to our
customers or on an indirect basis through selected dealerships. We require
borrowers to maintain collision insurance on automobiles securing consumer
loans, with us listed as loss payee. Personal loans also include secured and
unsecured installment loans for other purposes. Unsecured installment loans
generally have shorter terms than secured consumer loans, and generally have
higher interest rates than rates charged on secured installment loans with
comparable terms. Personal loans are generally unsecured and carry higher
interest rates and shorter terms than homeowner loans or automobile loans.
Our procedures for underwriting consumer loans include an assessment of an
applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In addition, the
repayment of consumer loans depends on the borrowers' continued financial
stability, as repayment is more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy than a single family mortgage loan.
5
Loan Portfolio Composition. The following table sets forth the composition
of our loan portfolio, excluding loans held for sale, by type of loan at the
dates indicated.
September 30,
---------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------- ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
One- to four-family
residential mortgage loans $456,794 33.5% $380,749 38.2% $380,776 53.3% $366,111 54.6% $358,198 58.2%
---------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Commercial real estate loans 497,936 36.6 327,414 32.8 188,360 26.4 163,329 24.3 129,295 21.0
Commercial business loans 148,825 10.9 105,196 10.5 54,174 7.6 41,320 6.2 31,394 5.1
Construction loans 66,710 4.9 54,294 5.4 10,323 1.4 17,020 2.5 19,490 3.2
---------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total commercial loans 713,471 52.4 486,904 48.7 252,857 35.4 221,669 33.0 180,179 29.3
---------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Home equity lines of credit 134,997 9.9 80,013 8.1 50,197 7.0 39,727 5.9 31,125 5.1
Homeowner loans 40,221 3.0 26,921 2.7 25,225 3.6 36,880 5.5 39,501 6.4
Other consumer loans 16,590 1.2 23,047 2.3 5,198 0.7 6,812 1.0 6,266 1.0
---------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total consumer loans 191,808 14.1 129,981 13.1 80,620 11.3 83,419 12.4 76,892 12.5
---------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total loans 1,362,073 100.0% 997,634 100.0% 714,253 100.0% 671,199 100.0% 615,269 100.0%
---------- ===== --------- ===== --------- ===== --------- ===== --------- =====
Allowance for loan losses (22,008) (17,353) (11,069) (10,383) (9,123)
---------- --------- --------- --------- ---------
Total loans, net $1,340,065 $980,281 $703,184 $660,816 $606,146
========== ========= ========= ========= =========
6
Loan Portfolio Maturities and Yields. The following table summarizes the
scheduled repayments at our loan portfolio at September 30, 2005. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
Residential Mortgage Commercial Real Estate Commercial Business
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Due During the Years
Ending September 30,
- --------------------
2006 $ 29,108 6.31% $ 68,441 7.01% $ 97,489 $ 7.26%
2007 to 2010 52,498 5.85 156,590 6.79 45,241 6.64
2010 and beyond 375,188 5.93 272,904 6.71 6,095 6.77
---------- ---------- ---------- ---------- ---------- ----------
Total $ 456,794 5.95% $ 497,935 6.78% $ 148,825 7.05%
========== ========== ==========
Construction (1) Consumer Total
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Due During the Years
Ending September 30,
- --------------------
2006 $ 55,543 7.45% $ 10,050 9.13% $ 260,631 7.20%
2007 to 2010 572 6.92 16,005 7.30 270,906 6.62
2010 and beyond 10,595 7.30 165,752 6.16 830,534 6.26
---------- ---------- ---------- ---------- ---------- ----------
Total $ 66,710 7.42% $ 191,807 6.41% $1,362,071 6.51%
========== ========== ==========
- ----------
(1) Includes land acquisition loans.
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at September 30, 2005 that are contractually due after
September 30, 2006
Due After September 30, 2006
------------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
Residential mortgage loans $ 343,298 $ 84,388 $ 427,686
---------- ---------- ----------
Commercial real estate loans 300,386 129,108 429,494
Commercial business loans 45,284 6,052 51,336
Construction loans 2,111 9,056 11,167
---------- ---------- ----------
Total commercial loans 347,781 144,216 491,997
---------- ---------- ----------
Consumer loans 52,669 129,088 181,757
---------- ---------- ----------
Total loans $ 743,748 $ 357,692 $1,101,440
========== ========== ==========
7
Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon borrower demand, market interest rates, borrower preference for
fixed- versus adjustable-rate loans, and the interest rates offered on each type
of loan by other lenders in our market area. These include competing banks,
savings banks, credit unions, mortgage banking companies, life insurance
companies and similar financial services firms. Loan originations are derived
from a number of sources, including branch office personnel, existing customers,
borrowers, builders, attorneys, real estate broker referrals and walk-in
customers.
Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted generally using standard Fannie Mae/Freddie Mac purchase
contracts and master commitments as applicable. One- to four-family mortgage
loans may be sold both to Fannie Mae or Freddie Mac on a non-recourse basis
whereby foreclosure losses are generally the responsibility of the purchaser and
not Provident Bank.
We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our
policy has been to retain the servicing rights for all conforming loans sold. We
therefore continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. We retain a portion of the interest paid by the
borrower on the loans as consideration for our servicing activities.
Loan Approval/Authority and Underwriting. We have four levels of lending
authority beginning with the Board of Directors. The Board grants lending
authority to the Director Loan Committee, the members of which are Directors.
The Director Loan Committee, in turn, may grant authority to the Management Loan
Committee and individual loan officers. In addition, designated members of
management may grant authority to individual loan officers up to specified
limits. Our lending activities are subject to written policies established by
the Board. These policies are reviewed periodically.
The Director Loan Committee may approve loans in accordance with
applicable loan policies, up to the limits established in our policy governing
loans to one borrower. This policy places limits on the aggregate dollar amount
of credit that may be extended to any one borrower and related entities. Loans
exceeding the maximum loan-to-one borrower limit described below require
approval by the Board of Directors. The Management Loan Committee may approve
loans of up to an aggregate of $2 million to any one borrower and group of
related borrowers. Two loan officers with sufficient loan authority acting
together may approve loans up to $1 million. The maximum individual authority to
approve an unsecured loan is $50,000, however, for credit-scored small business
loans, the maximum individual authority is $150,000.
We have established a risk rating system for our commercial business
loans, commercial and multi-family real estate loans, and acquisition,
development and construction loans to builders. The risk rating system assesses
a variety of factors to rank the risk of default and risk of loss associated
with the loan. These ratings are performed by commercial credit personnel who do
not have responsibility for loan originations. We determine our maximum
loan-to-one-borrower limits based upon the rating of the loan. The large
majority of loans fall into three categories. The maximum for the best-rated
borrowers is $20 million, for the next group of borrowers is $15 million, and
for the third group is $12 million. Sublimits apply based on reliance on any
single property, and for commercial business loans.
In connection with our residential and commercial real estate loans, we
generally require property appraisals to be performed by independent appraisers
who are approved by the Board. Appraisals are then reviewed by the appropriate
loan underwriting areas. Under certain conditions, appraisals may not be
required for loans under $250,000 or in other limited circumstances. We also
require title insurance, hazard insurance and, if indicated, flood insurance on
property securing mortgage loans. Title insurance is not required for consumer
loans under $100,000, such as home equity lines of credit and homeowner loans.
Loan Origination Fees and Costs. In addition to interest earned on loans,
we also receive loan origination fees. Such fees vary with the volume and type
of loans and commitments made, and competitive conditions in the
8
mortgage markets, which in turn respond to the demand and availability of money.
We defer loan origination fees and costs, and amortize such amounts as an
adjustment to yield over the term of the loan by use of the level-yield method.
Deferred loan origination costs (net of deferred fees) were $2.1 million at
September 30, 2005.
To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities"). The capitalized amount is amortized
thereafter (over the period of estimated net servicing income) as a reduction of
servicing fee income. The unamortized amount is fully charged to income when
loans are prepaid. Originated mortgage servicing rights with an amortized cost
of $836,000 are included in other assets at September 30, 2005. See also Notes 3
and 6 of the Notes to Consolidated Financial Statements.
Loans to One Borrower. At September 30, 2005, our five largest aggregate
amounts loaned to any one borrower and certain related interests (including any
unused lines of credit) consisted of secured and unsecured financing of $13.8
million, $13.4 million, $10.4 million, $9.6 million and $9.5 million. See
"Regulation - Federal Banking Regulation - Loans to One Borrower" for a
discussion of applicable regulatory limitations.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Collection Procedures for Residential and Commercial Mortgage Loans and
Consumer Loans. Computer-generated late notice is sent by the16th day after the
payment due date on a loan requesting the payment due plus any late charge that
was assessed. Accounts are distributed to a collector or account officer to
contact borrowers, determine the reason for delinquency and arrange for payment,
and accounts are monitored electronically for receipt of payments. If payments
are not received within 30 days of the original due date, a letter demanding
payment of all arrearages is sent and contact efforts are continued. If payment
is not received within 60 days of the due date, loans are generally accelerated
and payment in full is demanded. Failure to pay within 90 days of the original
due date generally results in legal action, notwithstanding ongoing collection
efforts. Unsecured consumer loans are generally charged-off after 120 days. For
other commercial loans, procedures vary depending upon individual circumstances.
Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular
basis, and are placed on non-accrual status when either principal or interest is
90 days or more past due, unless well secured and in the process of collection
(primarily residential mortgages). In addition, loans are placed on non-accrual
status when, in the opinion of management, there is sufficient reason to
question the borrower's ability to continue to meet principal or interest
payment obligations. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is reversed from interest income related to current year
income and charged to the allowance for loan losses with respect to income that
was recorded in the prior fiscal year. Interest payments received on non-accrual
loans are not recognized as income unless warranted based on the borrower's
financial condition and payment record. At September 30, 2005, we had
non-accrual loans of $212,000 and $1.4 million of loans 90 days past due and
still accruing interest, which were well secured and in the process of
collection. (For the years ended September 30, 2004 and prior there were no
loans 90 days past due and still accruing).
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold.
When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses. At September 30, 2005 we had
two REO properties with a recorded balance of $92,000.
9
The following table sets forth certain information with respect to our loan
portfolio delinquencies at the dates indicated.
Loans Delinquent For
----------------------------------------------------------
60-89 Days 90 Days and Over Total
Number Amount Number Amount Number Amount
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
At September 30, 2005
- ---------------------
One- to four- family 6 $ 638 6 $ 1,070 12 $ 1,708
Commercial real estate -- -- 3 92 3 92
Commercial business 11 264 3 120 14 384
Consumer 28 150 22 359 50 509
---------- ---------- ---------- ---------- ---------- ----------
Total 45 $ 1,052 34 $ 1,641 79 $ 2,693
========== ========== ========== ========== ========== ==========
At September 30, 2004
- ---------------------
One- to four- family 6 $ 762 11 $ 1,597 17 $ 2,359
Commercial real estate 1 377 4 488 5 865
Commercial business 7 158 7 474 14 632
Consumer 25 107 19 178 44 285
---------- ---------- ---------- ---------- ---------- ----------
Total 39 $ 1,404 41 $ 2,737 80 $ 4,141
========== ========== ========== ========== ========== ==========
At September 30, 2003
- ---------------------
One- to four- family 6 $ 626 6 $ 951 12 $ 1,577
Commercial real estate 1 36 8 3,632 9 3,668
Commercial business 1 36 0 0 1 36
Consumer 7 63 3 114 10 177
---------- ---------- ---------- ---------- ---------- ----------
Total 15 $ 761 17 $ 4,697 32 $ 5,458
========== ========== ========== ========== ========== ==========
Non-Performing Assets. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we 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)
10
September 30,
-------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------- -------- -------- -------- --------
(Dollars in thousands)
90 days
past due
and still Non-
accruing Accrual Non-Accrual Loans
--------- -------- -----------------------------------------------
Non-performing loans:
One- to four- family $ 1,337 $ 65 $ 1,597 $ 951 $ 2,291 $ 1,684
Commercial real estate 92 -- 488 3,632 2,492 418
Commercial business -- 120 474 -- -- --
Consumer -- 27 178 114 171 175
-------- -------- -------- -------- -------- --------
Total non-performing loans $ 1,429 $ 212 $ 2,737 $ 4,697 $ 4,954 $ 2,277
-------- -------- -------- -------- -------- --------
Real estate owned:
One- to four family 92 -- -- -- 109
-------- -------- -------- -------- --------
Total real estate owned 92 -- -- 41 109
-------- -------- -------- -------- --------
Total non-performing assets $ 1,733 $ 2,737 $ 4,697 $ 4,995 $ 2,386
======== ======== ======== ======== ========
Ratios:
Non-performing loans to total loans 0.12% 0.27% 0.66% 0.74% 0.37%
Non-performing loans to total assets 0.07% 0.15% 0.40% 0.49% 0.27%
For the year ended September 30, 2005, gross interest income that would
have been recorded had the non-accrual loans at the end of the year remained on
accrual status throughout the year amounted to $8,000. Interest income actually
recognized on such loans totaled $7,000.
Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the bank will sustain some loss if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard with the added characteristic that the weaknesses present
make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable. Assets
classified as "loss" are those considered uncollectible and of such little value
that their continuance as assets is not warranted. Assets that do not expose us
to risk sufficient to warrant classification in one of the aforementioned
categories, but which possess potential weaknesses that deserve our close
attention, are required to be designated as special mention. As of September 30,
2005, we had $12.0 million of assets designated as special mention.
When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as deemed prudent
by management. The allowance for loan losses represents amounts that have been
established to recognize losses inherent in the loan portfolio that are both
probable and reasonably estimable at the date of the financial statements. When
we classify a problem asset as loss, we charge-off such amount. Our
determination as to the classification of our assets and the amount of our loss
allowances are subject to review by our regulatory agencies, which can order the
establishment of additional loss allowances. Management regularly reviews our
asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of management's review of
our assets at September 30, 2005, classified assets consisted of substandard
assets of $1.9 million and $119,000 of doubtful assets.
Allowance for Loan Losses. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes
11
provisions for loan losses in order to maintain the allowance for loan losses in
accordance with accounting principles generally accepted in the United States of
America. The allowance for loan losses consists of amounts specifically
allocated to non-performing loans and other criticized or classified loans (if
any) as well as allowances determined for each major loan category. After we
establish a provision for loans that are known to be non-performing, criticized
or classified, we calculate a percentage to apply to the remaining loan
portfolio to estimate the probable losses inherent in that portion of the
portfolio. When the loan portfolio increases, therefore, the percentage
calculation results in a higher dollar amount of estimated probable losses than
would be the case without the increase, and when the loan portfolio decreases,
the percentage calculation results in a lower dollar amount of estimated
probable losses than would be the case without the decrease. These percentages
are determined by management based on historical loss experience for the
applicable loan category, and are adjusted to reflect our evaluation of:
o levels of, and trends in, delinquencies and non-accruals;
o trends in volume and terms of loans;
o effects of any changes in lending policies and procedures;
o experience, ability, and depth of lending management and staff;
o national and local economic trends and conditions;
o concentrations of credit by such factors as location, industry,
inter-relationships, and borrower; and
o for commercial loans, trends in risk ratings.
We consider commercial real estate loans, commercial business loans, and land
acquisition, development and construction loans to be riskier than one to
four-family residential mortgage loans. Commercial real estate loans entail
significant additional credit risks compared to one- to four-family residential
mortgage loans, as they involve large loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience on
loans secured by income-producing properties typically depends on the successful
operation of the related real estate project (business operation of the borrower
who is also the primary occupant), and thus may be subject to a greater extent
to adverse conditions in the real estate market and in the general economy.
Commercial business loans involve a higher risk of default than residential
loans of like duration since their repayment is generally dependent on the
successful operation of the borrower's business and the sufficiency of
collateral, if any. Land acquisition, development and construction lending
exposes us to greater credit risk than permanent mortgage financing. The
repayment of land acquisition, development and construction loans depends upon
the sale of the property to third parties or the availability of permanent
financing upon completion of all improvements. In the event we make an
acquisition loan on property that is not yet approved for the planned
development, there is the risk that approvals will not be granted or will be
delayed. These events may adversely affect the borrower and the collateral value
of the property. Development and construction loans also expose us to the risk
that improvements will not be completed on time in accordance with
specifications and projected costs. In addition, the ultimate sale or rental of
the property may not occur as anticipated.
The carrying value of loans is periodically evaluated and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
12
The following table sets forth activity in our allowance for loan losses
for the years indicated.
At or For Years Ended September 30,
-------------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
Balance at beginning of year $ 17,353 $ 11,069 $ 10,383 $ 9,123 $ 7,653
----------- ----------- ----------- ----------- -----------
Charge-offs:
One- to four family (23) (1) -- -- (25)
Commercial real estate -- -- -- (31) --
Commercial business (750) (284) (212) (130) (1)
Consumer (380) (199) (140) (163) (133)
----------- ----------- ----------- ----------- -----------
Total charge-offs (1,153) (484) (352) (324) (159)
Recoveries:
One- to four family -- 86 -- -- --
Commercial real estate -- -- -- -- 96
Commercial business 69 32 40 40 42
Construction -- -- -- -- --
Consumer 109 100 98 107 51
----------- ----------- ----------- ----------- -----------
Total recoveries 178 218 138 147 189
Net (charge-offs) recoveries (975) (266) (214) (177) 30
Allowance recorded in acquisitions 4,880 5,750 -- 537 --
Provision for loan losses 750 800 900 900 1,440
----------- ----------- ----------- ----------- -----------
Balance at end of year $ 22,008 $ 17,353 $ 11,069 $ 10,383 $ 9,123
=========== =========== =========== =========== ===========
Ratios:
Net charge-offs to average loans
outstanding 0.07% 0.03% 0.03% 0.03% 0.00%
Allowance for loan losses to non-
performing loans 1,341.13% 634.00% 235.66% 209.59% 400.66%
Allowance for loan losses to total loans 1.6% 1.74% 1.55% 1.55% 1.48%
13
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category (excluding loans held for sale), and the percent of loans
in each category to total loans at the dates indicated. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses
in any particular category and does not restrict the use of the allowance to
absorb losses in other categories.
September 30,
----------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------- ---------------------------------- ----------------------------------
Percent of Percent of Percent of
Allowance Loan Loans in Allowance Loan Loans in Allowance Loan Loans in
for Balances Each for Balances Each for Balances Each
Loan by Category to Loan by Category to Loan by Category to
Losses Category Total Loans Losses Category Total Loans Losses Category Total Loans
--------- ---------- ----------- --------- --------- ----------- --------- ---------- -----------
(Dollars in thousands)
One- to four- family $ 526 $ 456,794 33.5% $ 1,588 $ 380,749 38.2% $ 1,513 $ 380,776 53.3%
Commercial real estate 11,149 497,936 36.6 7,443 327,414 32.8 6,009 188,360 26.4
Commercial business 6,118 148,825 10.9 4,571 105,196 10.5 2,413 54,174 7.6
Construction 2,450 66,710 4.9 2,090 54,294 5.4 420 10,323 1.4
Consumer 1,765 191,808 14.1 1,661 129,981 13.1 714 80,620 11.3
--------- ---------- ---------- --------- --------- ---------- --------- ---------- ---------
Total $ 22,008 $1,362,073 100.0% $ 17,353 $ 997,634 100.0% $ 11,069 $ 714,253 100.0%
========= ========== ========== ========= ========= ========== ========= ========== =========
September 30,
----------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Percent of Percent of
Allowance Loan Loans in Allowance Loan Loans in
for Balances Each for Balances Each
Loan by Category to Loan by Category to
Losses Category Total Loans Losses Category Total Loans
--------- ---------- ----------- --------- --------- -----------
(Dollars in thousands)
One- to four- family $ 3,315 $ 366,111 54.6% $ 2,638 $ 358,198 58.2%
Commercial real estate 4,275 163,329 24.3 3,930 129,295 21.0
Commercial business 925 41,320 6.2 841 31,394 5.1
Construction 871 17,020 2.5 871 19,490 3.2
Consumer 997 83,419 12.4 843 76,892 12.5
--------- ---------- ---------- --------- --------- ----------
Total $ 10,383 $ 671,199 100.0% $ 9,123 $ 615,269 100.0%
========= ========== ========== ========= ========= ==========
14
Securities Activities
Our securities investment policy is established by our Board of Directors.
This policy dictates that investment decisions be made based on the safety of
the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management strategy. The Board's
asset/liability committee oversees our investment program and evaluates on an
ongoing basis our investment policy and objectives. Our chief financial officer,
or our chief financial officer acting with our chief executive officer, is
responsible for making securities portfolio decisions in accordance with
established policies. Our chief financial officer, chief executive officer and
certain other executive officers have the authority to purchase and sell
securities within specific guidelines established by the investment policy. In
addition, all transactions are reviewed by the Board's asset/liability committee
at least quarterly.
Our current investment policy generally permits securities investments in
debt securities issued by the U.S. Government and U.S. Agencies, municipal
bonds, and corporate debt obligations, as well as investments in preferred and
common stock of government agencies and government sponsored enterprises such as
Fannie Mae, Freddie Mac and the Federal Home Loan Bank of New York (federal
agency securities) and, to a lesser extent, other equity securities. Securities
in these categories are classified as "investment securities" for financial
reporting purposes. The policy also permits investments in mortgage-backed
securities, including pass-through securities issued and guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations
("CMOs") issued or backed by securities issued by these government agencies.
Also permitted are investments in securities issued or backed by the Small
Business Administration, privately issued mortgage-backed securities and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. Our current investment strategy uses
a risk management approach of diversified investing in fixed-rate securities
with short- to intermediate-term maturities, as well as adjustable-rate
securities, which may have a longer term to maturity. The emphasis of this
approach is to increase overall investment securities yields while managing
interest rate risk.
SFAS No. 115 requires that, at the time of purchase, we designate a
security as held to maturity, available for sale, or trading, depending on our
ability and intent. Securities available for sale are reported at fair value,
while securities held to maturity are reported at amortized cost. We do not have
a trading portfolio.
In November 2003, the Emerging Issues Task Force ("EITF") issued issue
summary 03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments. EITF 03-01 addressed an entity's
treatment of the impairment of securities when such impairment is considered
other than temporary. The preliminary summary required disclosures only related
to other than temporary impairment. In March 2004, the EITF continued its
discussion and reached a consensus on the procedures for recognizing an
impairment of securities considered other than temporarily impaired. The
guidance in EITF 03-1 was intended to be effective for reporting periods
beginning after June 15, 2004. However, in September 2004, the FASB issued FSP
EITF 03-1-1, which deferred the effective date for the measurement and
recognition provisions of EITF 03-1 until further implementation guidance could
be established. Management does not believe the provisions of this standard, as
currently written, will have a material impact on the results of future
operations.
Government Securities. At September 30, 2005, we held government
securities available for sale with a fair value of $257.6 million, consisting
primarily of U.S. Treasury and Agency obligations with short- to medium-term
maturities (one to five years). While these securities generally provide lower
yields than other investments such as mortgage-backed securities, our current
investment strategy is to maintain investments in such instruments to the extent
appropriate for liquidity purposes, as collateral for borrowings, and for
prepayment protection.
Corporate and Municipal Bonds. At September 30, 2005, we held no corporate
debt securities. Although corporate bonds may offer a higher yield than that of
a U.S. Treasury or Agency security of comparable duration, corporate bonds also
have a higher risk of default due to adverse changes in the creditworthiness of
the issuer. In recognition of this potential risk, our policy limits investments
in corporate bonds to securities with maturities of ten years or less and rated
"A" or better by at least one nationally recognized rating agency, and to a
total investment of no more than $5.0 million per issuer and a total corporate
bond portfolio limit of $40.0 million. The policy also limits investments in
municipal bonds to securities with maturities of 20 years or less and rated AA
or better by at least one nationally recognized rating agency, and favors issues
that are insured unless the issuer is a local
15
government entity within our service area. Such local entity obligations
generally are not rated, and are subject to internal credit reviews. In
addition, the policy imposes an investment limitation of $5.0 million per
municipal issuer and a total municipal bond portfolio limit of 10% of assets. At
September 30, 2005, we held $93.6 million in bonds issued by states and
political subdivisions, $43.9 million of which were classified as held to
maturity at amortized cost and $49.7 million of which were classified as
available for sale at fair value.
Equity Securities. At September 30, 2005, our equity securities available
for sale had a fair value of $858,000 and consisted of stock issued by Freddie
Mac and Fannie Mae, and certain other equity investments. We also held $21.3
million (at cost) of Federal Home Loan Bank of New York ("FHLBNY") common stock,
a portion of which must be held as a condition of membership in the Federal Home
Loan Bank System, with the remainder held as a condition to our borrowing under
the Federal Home Loan Bank advance program. Dividends on FHLBNY stock recorded
in the year ended September 30, 2005 amounted to $688,000.
Mortgage-Backed Securities. We purchase mortgage-backed securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity. We invest primarily in mortgage-backed securities issued or sponsored
by Fannie Mae, Freddie Mac, and Ginnie Mae or private issuers for CMOs. To a
lesser extent, we also invest in securities backed by agencies of the U.S.
Government. At September 30, 2005, our mortgage-backed securities portfolio
totaled $541.5 million, consisting of $514.8 million available for sale at fair
value and $26.7 million held to maturity at amortized cost. The total
mortgage-backed securities portfolio includes CMOs of $24.5 million, consisting
of $22.6 million available for sale at fair value and $1.9 million held to
maturity at amortized cost. The remaining mortgage-backed securities of $517.0
million were pass-through securities, consisting of $492.2 million available for
sale at fair value and $24.8 million held to maturity at amortized cost.
Mortgage-backed securities are created by pooling mortgages and issuing a
security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (generally U.S. Government agencies and government sponsored
enterprises, including Fannie Mae, Freddie Mac and Gmnnie Mae) pool and resell
the participation interests in the form of securities to investors, such as us,
and guarantee the payment of principal and interest to these investors.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater or less than the prepayment rate estimated at the time of
purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments, thereby affecting the
net yield and duration of such securities. We review prepayment estimates for
our mortgage-backed securities at purchase to ensure that prepayment assumptions
are reasonable considering the underlying collateral for the securities at issue
and current interest rates, and to determine the yield and estimated maturity of
the mortgage-backed securities portfolio. Periodic reviews of current prepayment
speeds are performed in order to ascertain whether prepayment estimates require
modification that would cause amortization or accretion adjustments.
A portion of our mortgage-backed securities portfolio is invested in CMOs
or collateralized mortgage obligations, including Real Estate Mortgage
Investment Conduits ("REMICs"), backed by Fannie Mae and Freddie Mac. CMOs and
REMICs are types of debt securities issued by a special-purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of securities with varying maturities and amortization
schedules, as well as a residual interest, with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes that have descending priorities
with respect to the distribution of principal and interest cash flows, while
cash flows on pass-through mortgage-backed securities are distributed pro rata
to all security holders. Our practice is to limit fixed-rate CMO investments
primarily to the early-to-intermediate tranches, which have the greatest cash
flow stability. Floating rate CMOs are purchased with emphasis on the relative
trade-offs between lifetime rate caps, prepayment risk, and interest rates.
16
Available for Sale Portfolio. The following table sets forth the
composition of our available for sale portfolio at the dates indicated.
September 30,
-------------------------------------------------------------------------------------
2005 2004 2003
------------------------- ------------------------- -------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Investment Securities:
U.S. Government securities $ 19,006 $ 18,608 $ 4,992 $ 5,042 $ 20,374 $ 20,627
Federal agency obligations 243,763 239,017 187,796 187,260 110,018 112,983
Corporate debt securities -- -- -- -- 6,030 6,623
State and municipal securities 50,176 49,691 20,482 20,559 2,545 2,536
Equity securities 947 858 1,005 1,214 1,052 1,326
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities
available for sale 313,892 308,174 214,275 214,075 140,019 144,095
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae 422,867 416,611 238,112 237,474 80,233 80,546
Freddie Mac 71,733 70,231 66,466 66,807 50,439 51,516
Ginnie Mae 5,450 5,374 1,626 1,630 0 0
Other -- -- 4,322 4,695 4,377 4,879
CMOs and REMICs 22,759 22,562 9,711 9,616 19,733 19,679
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities
available for sale 522,809 514,778 320,237 320,222 154,782 156,620
---------- ---------- ---------- ---------- ---------- ----------
Total securities available for sale $ 836,701 $ 822,952 $ 534,512 $ 534,297 $ 294,801 $ 300,715
========== ========== ========== ========== ========== ==========
At September 30, 2005, our available for sale U. S. Treasury securities
portfolio, at fair value, totaled $18.6 million, or 0.7% of total assets, and
the federal agency securities portfolio, at fair value, totaled $239.0 million,
or 9.2% of total assets. Of the combined U.S. Government and agency portfolio,
based on amortized cost, $17.0 million had maturities of one year or less and a
weighted average yield of 2.56%, and $245.6 million had maturities of between
one and five years and a weighted average yield of 3.11%. The agency securities
portfolio includes both non-callable and callable debentures. The agency
debentures may be callable on a quarterly or one time basis depending on the
security's individual terms following an initial holding period of from twelve
to twenty-four months.
State and municipal securities portfolio, based on amortized cost, had
$0.7 million in securities with a final maturity of one year or less and a
weighted average yield of 2.95%, and $4.2 million maturing in one to five years
with a weighted average yield of 2.88%, $8.1 million maturing in five to ten
years with a weighted average yield of 3.81% and $37.2 million maturing in
greater than ten years with a weighted average yield of 4.06%. Equity securities
available for sale at September 30, 2005 had a fair value of $858,000.
At September 30, 2005, $492.2 million of our available for sale
mortgage-backed securities, at fair value, consisted of pass-through securities,
which totaled 19.0% of total assets with a weighted average yield of 4.43%. Of
this amount, $433.8 million with a weighted average yield of 4.49% had
contractual maturities in excess of ten years. At the same date, the fair value
of our available for sale CMO portfolio totaled $22.6 million, or 0.9% of total
assets, and consisted of CMOs issued by government sponsored agencies such as
Fannie Mae and Freddie Mac with a weighted average yield of 4.0%. We own both
fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our
portfolio of CMOs available for sale at September 30, 2005 had contractual
maturities of over ten years. However, as with mortgage-backed pass-through
securities, the actual maturity of a CMO may be less than its stated contractual
maturity due to prepayments of the underlying mortgages and the terms of the CMO
tranche owned.
17
Held to Maturity Portfolio. The following table sets forth the composition
of our held to maturity portfolio at the dates indicated.
September 30,
--------------------------------------------------------------------------------
2005 2004 2003
------------------------ ------------------------ ------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Investment Securities:
State and municipal securities $ 43,931 $ 44,092 $ 29,894 $ 30,523 $ 18,384 $ 19,386
Other 307 310 309 265 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities
held to maturity 44,238 44,402 30,203 30,788 18,384 19,386
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae 416 434 685 722 1,103 1,165
Fannie Mae 11,504 11,497 17,157 17,413 23,249 23,698
Freddie Mac 12,838 12,825 18,245 18,464 26,511 27,016
CMOs and REMICs 1,953 1,993 2,788 2,843 4,297 4,363
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities held to maturity 26,711 26,749 38,875 39,442 55,160 56,242
---------- ---------- ---------- ---------- ---------- ----------
Total securities held to
maturity $ 70,949 $ 71,151 $ 69,078 $ 70,230 $ 73,544 $ 75,628
========== ========== ========== ========== ========== ==========
At September 30, 2005, our held to maturity mortgage-backed securities
portfolio totaled $26.7 million at amortized cost, consisting of: $90,000 with a
weighted average yield of 7.43% and contractual maturities of one year or less
and $2.5 million with a weighted average yield of $5.90% and contractual
maturities within five years and $6.3 million with a weighted average yield of
6.04% and contractual maturities of greater than five years, but no more than
ten and $17.9 million with a weighted average yield of 4.39% with contractual
maturities of greater than ten years; CMOs of $2.0 million are included in this
portfolio. While the contractual maturity of the CMOs underlying collateral is
greater than ten years, the actual period to maturity of the CMOs may be shorter
due to prepayments on the underlying mortgages and the terms of the CMO tranche
owned.
State and municipal securities of $23.7 million a final maturity of one
year or less with a weighted average yield of 2.61%, and 8.0 million maturing in
one to five years with a weighted average yield of 3.69%, $9.4 million maturing
in five to ten years with a weighted average yield of 4.05% and $2.8 million
maturing in greater than ten years with a weighted average yield of 4.39%
18
Portfolio Maturities and Yields. The composition and maturities of the
investment debt securities portfolio and the mortgage backed securities
portfolio at September 30, 2005 are summarized in the following table.
Maturities are based on the final contractual payment dates, and do not reflect
the impact of prepayments or early redemptions that may occur. State and
municipal securities yields have not been adjusted to a tax-equivalent basis.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae $ -- --% $ 20,042 3.59% $ 19,169 4.07%
Freddie Mac -- -- 4,116 4.37 16,600 4.08
Other 47 7.18 11 6.08 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 47 7.18 24,169 3.72 35,769 4.07
---------- ---------- ---------- ---------- ---------- ----------
Investment Securities
U.S. Government and
agency securities 17,022 2.56 245,628 3.11 -- --
Equity Securities -- -- -- -- -- --
State and municipal
securities 699 2.95 4,244 2.88 8,057 3.81
---------- ---------- ---------- ---------- ---------- ----------
Total 17,721 2.58 249,872 3.11 8,057 3.81
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities
available for sale $ 17,768 2.59% $ 274,041 3.16% $ 43,826 3.94%
========== ========== ========== ========== ========== ==========
More than Ten Years Total Securities
------------------------ --------------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Fair Value Yield
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae $ 383,656 4.48% $ 422,867 $ 416,611 4.42%
Freddie Mac 51,017 4.45 71,733 70,231 4.36
Other 28,151 4.65 28,209 27,936 4.66
---------- ---------- ---------- ---------- ----------
Total 462,824 4.49 522,809 514,778 4.42
---------- ---------- ---------- ---------- ----------
Investment Securities
U.S. Government and
agency securities 118 4.17 262,768 257,625 3.07
Equity Securities 947 -- 947 858 --
State and municipal
securities 37,177 4.06 50,176 49,691 3.90
---------- ---------- ---------- ---------- ----------
Total 38,242 4.06 313,891 308,174 3.20
---------- ---------- ---------- ---------- ----------
Total debt securities
available for sale $ 501,065 4.46% $ 836,700 $ 822,952 3.96%
========== ========== ========== ========== ==========
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae $ -- --% $ 403 6.42% $ 4,631 5.83%
Freddie Mac 33 5.80 2,099 5.80 1,268 6.31
Ginnie Mae & Other 57 8.36 -- -- 359 7.71
---------- ---------- ---------- ---------- ---------- ----------
Total 90 7.43 2,502 5.90 6,258 6.04
---------- ---------- ---------- ---------- ---------- ----------
Investment Securities
State and municipal
securities 23,699 2.61 7,985 3.69 9,413 4.05
Other 150 7.20 157 2.50 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 23,849 2.62 8,142 3.67 9,413 4.05
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities
held to maturity $ 23,939 2.65% $ 10,644 4.19% $ 15,671 4.84%
========== ========== ========== ========== ========== ==========
More than Ten Years Total Securities
------------------------ --------------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Fair Value Yield
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae $ 6,470 4.58% $ $11,504 $ 11,497 5.15%
Freddie Mac 9,438 4.89 12,838 12,825 5.18
Ginnie Mae & Other 1,953 3.84 2,369 2,428 4.53
---------- ---------- ---------- ---------- ----------
Total 17,861 4.39 26,711 26,749 5.11
---------- ---------- ---------- ---------- ----------
Investment Securities
State and municipal
securities 2,834 4.39 43,931 44,092 3.23
Other -- -- 307 310 4.80
---------- ---------- ---------- ---------- ----------
Total 2,834 4.39 44,238 44,402 3.24
---------- ---------- ---------- ---------- ----------
Total debt securities
held to maturity $ 20,695 4.39% $ 70,949 $ 71,151 3.94%
========== ========== ========== ========== ==========
19
Sources of Funds
General. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings accounts, NOW accounts,
checking accounts, money market accounts, club accounts, certificates of deposit
and IRAs and other qualified plan accounts. We provide commercial checking
accounts for businesses. In addition, we provide low-cost checking account
services for low-income customers.
At September 30, 2005, our deposits totaled $1.7 billion. Interest-bearing
deposits totaled $1.3 billion, and non-interest-bearing demand deposits totaled
$385.1 million. NOW, savings and money market deposits totaled $869.7 million at
September 30, 2005. Also at that date, we had a total of $471.6 million in
certificates of deposit, of which $406.2 million had maturities of one year or
less. Although we have a significant portion of our deposits in shorter-term
certificates of deposit, management monitors activity on these accounts and,
based on historical experience and our current pricing strategy we believe we
will retain a large portion of such accounts upon maturity.
Our deposits are obtained predominantly from the areas in which our branch
offices are located. We rely on our favorable locations, customer service and
competitive pricing to attract and retain these deposits. While we accept
certificates of deposit in excess of $100,000 for which we may provide
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. With the commencement of operations of
our limited purpose commercial bank subsidiary, Provident Municipal Bank, in
April 2002, we began accepting municipal deposits. Municipal time accounts
(certificates of deposit) are generally obtained through a bidding process, and
tend to carry higher average interest rates than retail certificates of deposit
of similar term.
The following tables set forth the distribution of total deposit accounts,
by account type, at the dates indicated.
September 30,
--------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------- --------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
---------- -------- -------- ---------- -------- -------- -------- -------- --------
(Dollars in thousands)
Demand deposits:
Retail $ 170,434 9.9% --% $ 122,276 9.9% --% $ 90,471 10.4% --%
Commercial 214,647 12.4 -- 142,819 11.5 -- 70,611 8.1 --
---------- -------- ---------- -------- -------- --------
Total demand deposits 385,081 22.3 -- 265,095 21.4 -- 161,082 18.5 --
Business NOW deposits 60,214 3.5 0.44 44,176 3.6 0.31 15,483 1.8 0.22
Personal NOW deposits 105,730 6.1 0.29 63,528 5.1 0.21 48,811 5.6 0.19
Savings deposits 481,674 27.9 0.53 360,138 29.0 0.45 279,717 32.2 0.40
Money market deposits 222,091 12.9 1.27 173,272 14.0 0.64 128,222 14.7 0.52
---------- -------- ---------- -------- -------- --------
1,254,790 72.7 0.68 906,209 73.1 0.47 633,315 72.8 0.41
Certificates of deposit 471,611 27.3 2.94 333,323 26.9 1.86 236,238 27.2 1.85
---------- -------- ---------- -------- -------- --------
Total deposits $1,726,401 100.0% 1.15% $1,239,532 100.0% 0.74% $869,553 100.0% 0.72%
========== ======== ========== ======== ======== ========
20
The following table sets forth, by interest rate ranges, information
concerning certificates of deposit at the dates indicated.
At September 30, 2005
------------------------------------------------------------------------------------------------------------
Period to Maturity
------------------------------------------------------------------------------------------------------------
Total at September 30,
Less than One to Two Two to More than Percent of -----------------------
One Year Years Three Years Three Years Total Total 2004 2003
---------- ---------- ----------- ----------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest Rate
Range:
2.00% and below $ 40,459 $ 1,816 $ 30 $ -- $ 42,305 8.97% $ 249,625 $ 164,462
2.01% to 3.00% 164,207 16,145 3,393 1,555 185,300 39.29 42,691 28,265
3.01% to 4.00% 198,747 17,382 6,708 7,195 230,032 48.78 21,839 26,236
4.01% to 5.00% 2,239 5,569 -- 5,601 13,409 2.84 16,231 14,281
5.01% to 6.00% 453 35 -- -- 488 0.10 2,320 2,378
6.01% and above 77 -- -- -- 77 0.02 617 616
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 406,182 $ 40,947 $ 10,131 $ 14,351 $ 471,611 100% $ 333,323 $ 236,238
========== ========== ========== ========== ========== ========== ========== ==========
The following table sets forth certificates of deposit by time remaining
until maturity as of September 30, 2005.
Maturity
---------------------------------------------------------------------------
3 months or Over 3 to 6 Over 6 to 12 Over 12
Less Months Months Months Total
----------- ----------- ------------ ----------- -----------
Certificates of deposit less than $100,000 $ 91,702 $ 88,028 $ 108,506 $ 51,688 $ 339,924
Certificates of deposit of $100,000 or more (1) 71,783 23,321 22,841 13,742 131,687
----------- ----------- ----------- ----------- -----------
Total of certificates of deposit $ 163,485 $ 111,349 $ 131,347 $ 65,430 $ 471,611
=========== =========== =========== =========== ===========
- ----------
(1) The weighted interest rates for these accounts, by maturity period,
are 2.78% for 3 months or less; 2.70% for 3 to 6 months; 3.11% for 6
to 12 months; and 3.34% for over 12 months. The overall weighted
average interest rate for accounts of $100,000 or more was 3.23%.
Borrowings. Our borrowings consist of advances and repurchase agreements.
At September 30, 2005, we had access to additional Federal Home Loan Bank
advances of up to $31.6 million based upon pledged mortgages and an additional
$522.6 million on a collateralized basis. The following table sets forth
information concerning balances and interest rates on our Federal Home Loan Bank
and other advances and repurchase agreements at the dates and for the years
indicated.
At or For the Years Ended September 30,
---------------------------------------------
2005 2004 2003
----------- ----------- -----------
(Dollars in thousands)
Balance at end of year $ 442,203 $ 214,909 $ 164,757
Average balance during year 394,079 159,948 112,248
Maximum outstanding at any month end 442,203 214,910 164,757
Weighted average interest rate at end of year 3.78% 2.97% 2.98%
Average interest rate during year 3.38% 3.17% 3.83%
21
Activities of Subsidiaries and Affiliated Entities
Provident Municipal Bank is a wholly-owned subsidiary of Provident Bank.
Provident Municipal Bank is a New York State-chartered commercial bank whose
purpose is limited to accepting municipal deposits and investing funds obtained
into investment securities. New York State law requires municipalities located
in the State of New York to deposit funds with commercial banks, effectively
forbidding these municipalities from depositing funds with banks, including
federally chartered savings associations, such as Provident Bank. Provident
Municipal Bank began operations in 2002, and at September 30, 2005 had $116.9
million in deposits from municipal entities in the communities served by
Provident Bank.
Provest Services Corp.I is a wholly-owned subsidiary of Provident Bank,
holding an investment in a limited partnership that operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident
Bank that has engaged a third-party provider to sell annuities, life and health
insurance products to Provident Bank's customers. Through September 30, 2005,
the activities of these subsidiaries have had an insignificant effect on our
consolidated financial condition and results of operations. During fiscal 1999,
Provident Bank established Provident REIT, Inc., a wholly-owned subsidiary in
the form of a real estate investment trust. Provident REIT, Inc. holds both
residential and commercial real estate loans. WSB Funding was acquired in the
Warwick acquisition and operates in the same manner as Provident REIT.
Hardenburgh Abstract Company of Orange County Inc. ("Hardenburgh") is a title
insurance agency that we acquired in connection with the acquisition of WSB.
Hardenburgh had gross revenue from title insurance policies and abstracts of
$1.6 million and net income of $377 thousand.
At the time of our initial public offering, 46.7% of our common stock was
sold to the public, and the remaining 53.3% was retained by Provident Bancorp,
MHC, the successor to our original mutual savings association. The accounts of
Provident Bancorp, MHC are not included in our consolidated financial statements
for the year ending September 30, 2003.
Competition
We face significant competition in both originating loans and attracting
deposits. The New York metropolitan area has a high concentration of financial
institutions, many of which are significantly larger institutions with greater
financial resources than us, and many of which are our competitors to varying
degrees. Our competition for loans comes principally from commercial banks,
savings banks, mortgage banking companies, credit unions, insurance companies
and other financial service companies. Our most direct competition for deposits
has historically come from commercial banks, savings banks and credit unions. We
face additional competition for deposits from non-depository competitors such as
the mutual fund industry, securities and brokerage firms and insurance
companies. We have emphasized personalized banking and the advantage of local
decision making in our banking business and this strategy appears to have been
well received in our market area. We do not rely on any individual, group, or
entity for a material portion of our deposits.
Employees
As of September 30, 2005, we had 508 full-time employees and 59 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
22
Regulation
General
As a federally chartered savings association, Provident Bank is regulated
and supervised by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. Provident Municipal Bank is regulated by the New York
State Department of Banking and the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which a financial institution may engage and is intended primarily for the
protection of the Federal Deposit Insurance Corporation's deposit insurance
finds and depositors. Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates. After completing an
examination, the federal agency critiques the financial institution's operations
and assigns its rating (known as an institution's CAMELS). Under federal law, an
institution may not disclose its CAMELS rating to the public. Provident Bank
also is a member of, and owns stock in, the Federal Home Loan Bank of New York,
which is one of the twelve regional banks in the Federal Home Loan Bank System.
Provident Bank also is regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Provident Bank and
prepares reports for the consideration of its Board of Directors on any
operating deficiencies. Provident Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in matters concerning the ownership of deposit accounts and the form
and content of Provident Bank's loan documents.
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the New York State
Department of Banking or Congress, could have a material adverse impact on
Provident New York Bancorp, Provident Bank, Provident Municipal Bank and their
respective operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Provident Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain
types of debt securities and certain other loans and assets. Provident Bank also
may establish subsidiaries that may engage in activities not otherwise
permissible for Provident Bank directly, including real estate investment,
securities brokerage and insurance agency.
Capital Requirements. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The
prompt corrective action standards discussed below, in effect, establish a
minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, allowance for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At September 30, 2005, Provident Bank's capital exceeded all applicable
requirements.
23
Loans to One Borrower. A federal savings association generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which generally does not
include real estate. As of September 30, 2005, Provident Bank was in compliance
with the loans-to-one-borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Provident
Bank is subject to a qualified thrift lender, or "QTL," test. Under the QTL
test, Provident Bank must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" generally means total assets of a bank, less
the sum of specified liquid assets up to 20% of total assets, goodwill and other
intangible assets, and the value of property used in the conduct of the savings
association's business.
"Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Provident Bank also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
A savings association that fails the QTL test must either convert to a
bank charter or operate under specified restrictions. At September 30, 2005,
Provident Bank maintained approximately 82.5% of its portfolio assets in
qualified thrift investments, and therefore satisfied the QTL test.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the institution's
capital account. A savings association must file an application for approval of
a capital distribution if:
o the total capital distributions for the applicable calendar year exceed
the sum of the savings association's net income for that year to date plus
the savings association's retained net income for the preceding two years;
o the savings association would not be at least adequately capitalized
following the distribution;
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the savings association is not eligible for expedited treatment of its
filings.
Even if an application is not otherwise required, every savings
association that is a subsidiary of a holding company must still file a notice
with the Office of Thrift Supervision at least 30 days before the Board of
Directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application
if:
o the savings association would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness concerns; or
o the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
o the maximum amount of dividends that could be declared by Provident Bank
without regulatory approval as of October 1, 2005 was $19,864,000 plus net
income of the Bank for fiscal 2006
Liquidity. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
24
Community Reinvestment Act and Fair Lending Laws. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the savings association's record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings association's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by
the Office of Thrift Supervision, as well as other federal regulatory agencies
and the Department of Justice. Provident Bank received an "outstanding"
Community Reinvestment Act rating in its most recent federal examination.
Privacy Standards. Effective July 2001, financial institutions, including
Provident Bank, became subject to regulations implementing the privacy
protection provisions of the Gramm-Leach-Bliley Act. These regulations require
Provident Bank to disclose its privacy policy, including identifying with whom
it shares "nonpublic personnel information," to customers at the time of
establishing the customer relationship and annually thereafter. In addition,
Provident Bank is required to provide its customers with the ability to
"opt-out" of having Provident Bank share their nonpublic personal information
with unaffiliated third parties before it can disclose such information, subject
to certain exceptions. The implementation of these regulations did not have a
material adverse effect on Provident Bank. The Gramm-Leach-Bliley Act also
allows each state to enact legislation that is more protective of consumers'
personal information.
Also effective July 1, 2001 , the Office of Thrift Supervision and other
federal banking agencies adopted guidelines establishing standards for
safeguarding customer information to implement certain provisions of the
Gramm-Leach-Bliley Act. The guidelines describe the agencies' expectations for
the creation, implementation and maintenance of an information security program,
which would include administrative, technical and physical safeguards
appropriate to the size and complexity of a financial institution and the nature
and scope of its activities. The standards set forth in the guidelines are
intended to insure the security and confidentiality of customer records and
information, to protect against any anticipated threats or hazards to the
security or integrity of such records and to protect against unauthorized access
to or use of such records, or information that could result in substantial harm
or inconvenience to any customer. Provident Bank has implemented these
guidelines, and such implementation did not have a material adverse effect on
our operations.
Transactions with Related Parties. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act. The term "affiliates" for these purposes generally means any
company that controls or is under common control with an institution. Provident
Bancorp, Inc. and its non-bank subsidiaries will be affiliates of Provident
Bank. In general, transactions with affiliates must be on terms that are as
favorable to the savings association as comparable transactions with
non-affiliates. In addition, certain types of these transactions are restricted
to an aggregate percentage of the savings association's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the savings association. In addition, Office of Thrift Supervision
regulations prohibit a savings association from lending to any of its affiliates
that are engaged in activities that are not permissible for bank holding
companies and from purchasing the securities of any affiliate, other than a
subsidiary.
Provident Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (i)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of Provident Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by Provident Bank's Board of
Directors.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over federal banks and
25
has the authority to bring enforcement action against all
"institution-affiliated parties," including stockholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institution,
receivership, conservatorship or the termination of deposit insurance. Civil
penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. The Federal Deposit Insurance Corporation
also has the authority to recommend to the Director of the Office of Thrift
Supervision that enforcement action be taken with respect to a particular bank.
If action is not taken by the Director, the Federal Deposit Insurance
Corporation has authority to take action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Prompt Corrective Action Regulations. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the savings association's capital:
o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based
capital and 8% total risk-based capital);
o undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based
capital or 8% total risk-based capital);
o significantly undercapitalized (less than 3% leverage capital, 3% tier 1
risk-based capital or 6% total risk-based capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for a savings association that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
Office of Thrift Supervision within 45 days of the date a bank receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the savings association, including, but not limited
to, restrictions on growth, investment activities, capital distributions and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
savings associations, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At September 30, 2005, Provident Bank met the criteria for being
considered "well-capitalized."
Insurance of Deposit Accounts. Deposit accounts in Provident Bank are
insured by the Savings Association Insurance Fund and, to a limited extent, the
Bank Insurance Fund of the Federal Deposit Insurance Corporation,
26
generally up to a maximum of $100,000 per separately insured depositor.
Provident Bank's deposits, therefore, are subject to Federal Deposit Insurance
Corporation deposit insurance assessments. The Federal Deposit Insurance
Corporation has adopted a risk-based system for determining deposit insurance
assessments. The Federal Deposit Insurance Corporation is authorized to raise
the assessment rates as necessary to maintain the required ratio of reserves to
insured deposits of 1.25%. In addition, all Federal Deposit Insurance
Corporation-insured institutions must pay assessments to the Federal Deposit
Insurance Corporation at an annual rate of 0.0144% of insured deposits to fund
interest payments on bonds maturing in 2017 through 2019 that were issued by a
federal agency to recapitalize the predecessor to the Savings Association
Insurance Fund.
Prohibitions Against Tying Arrangements. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
Federal Home Loan Bank System. Provident Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. As a member of The Federal Home Loan Bank of New York,
Provident Bank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1 % of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of September 30, 2005,
Provident Bank was in compliance with this requirement. As of December 1, 2005
new capital standards will be implemented. Based on our assets and borrowings,
as of September 30, 2005 we will be required to purchase an additional $1.2
million of stock in the Federal Home Loan Bank of New York.
Federal Reserve System
Federal Reserve Board regulations require savings associations to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At September 30,
2005, Provident Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.
The USA PATRIOT Act
The USA PATRIOT Act of 2001 gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Title III of the Act is the International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001, which includes
numerous provisions for fighting international money laundering and blocking
terrorist access to the U.S. financial system. The provisions of the USA PATRIOT
Act affecting banking organizations are generally set forth as amendments to the
Bank Secrecy Act. Certain provisions of the act impose affirmative obligations
on a broad range of financial institutions, such as Provident Bank. These
obligations include enhanced anti-money laundering programs, customer
identification programs and restrictions relating to private banking accounts or
correspondent accounts in the United States for non-United States persons or
their representatives (including foreign individuals visiting the United
States.) Federal law also requires all U.S. persons to comply with economic
restrictions and trade sanctions administered and enforced by the Office of
Foreign Assets Control ("OFAC"). OFAC rules apply to all financial institutions
through which funds might travel. We have established policies, procedures and
systems designed to comply with the USA PATRIOT Act and implementing
regulations, as well as with OFAC.
Holding Company Regulation
Provident Bancorp is a unitary savings and loan holding company, subject
to regulation and supervision by the Office of Thrift Supervision. The Office of
Thrift Supervision has enforcement authority over Provident Bancorp and its
non-bank subsidiaries. Among other things, this authority permits the Office of
Thrift Supervision to restrict or prohibit activities that are determined to be
a risk to Provident Bank.
27
Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it could
engage, provided that its subsidiary savings bank was a qualified thrift lender.
The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan
holding companies not existing on, or applied for before, May 4, 1999 to those
activities permissible for financial holding companies or for multiple savings
and loan holding companies. Provident Bancorp is not a grandfathered unitary
savings and loan holding company and, therefore, is limited to the activities
permissible for financial holding companies or for multiple savings and loan
holding companies. A financial holding company may engage in activities that are
financial in nature, including underwriting equity securities and insurance,
incidental to financial activities or complementary to a financial activity. A
multiple savings and loan holding company is generally limited to activities
permissible for bank holding companies under Section 4(c) (8) of the Bank
Holding Company Act, subject to the prior approval of the Office of Thrift
Supervision, and certain additional activities authorized by Office of Thrift
Supervision regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another bank or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with specified exceptions, more than 5% of the equity securities of a company
engaged in activities that are not closely related to banking or financial in
nature or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire banks, the
Office of Thrift Supervision must consider the financial and managerial
resources and future prospects of the bank involved the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
Federal Securities Law
The common stock of Provident Bancorp is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). Provident Bancorp is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act. Common stock of Provident Bancorp held by persons who
are affiliates (generally officers, directors and principal stockholders) of
Provident Bancorp may not be resold without registration or unless sold in
accordance with certain resale restrictions. If Provident Bancorp meets
specified current public information requirements, each affiliate of Provident
Bancorp is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate
governance, accounting and reporting measures for companies that have securities
registered under the Exchange Act, including publicly-held bank holding
companies such as Provident. Specifically, the Sarbanes-Oxley Act of 2002 and
the various regulations promulgated thereunder, established, among other things:
(i) new requirements for audit committees, including independence, expertise,
and responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of the reporting company's securities by
the Chief Executive Officer in the twelve-month period following the initial
publication of any financial statements that later require restatement; (iv) the
creation of an independent accounting oversight board; (v) new standards for
auditors and regulation of audits, including independence provisions that
restrict non-audit services that accountants may provide to their audit clients;
(vi) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers, including accelerated reporting of
stock transactions and a prohibition on trading during pension blackout periods;
(vii) a prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions on nonpreferential terms and in
compliance with other bank regulatory requirements; and (viii) a range of new
and increased civil and criminal penalties for fraud and other violations of the
securities law.
The Company's Chief Executive Officer and Chief Financial Officer are
required to certify that its quarterly and annual reports filled with the
Securities and Exchange Commission do not contain any untrue statement of a
material fact. Rules promulgated under the Sarbanes-Oxley Act require that these
officers certify that: they are
28
responsible for establishing, maintaining and regularly evaluating the
effectiveness of our internal controls; they have made certain disclosures to
our auditors and the audit committee of the Board of Directors about our
internal controls; and they have included information in our quarterly and
annual reports about their evaluation and whether there have been significant
changes in our internal controls or in other factors that could significantly
affect internal controls. The Company has existing policies, procedures and
systems designed to comply with the Sarbanes-Oxley Act.
ITEM 1A. Risk Factors
- ---------------------
Our Commercial Real Estate, Commercial Business and Construction Loans Expose Us
to Increased Credit Risks.
At September 30, 2005, our portfolio of commercial real estate loans
totaled $497.9 million, or 36.6 % of total loans, our commercial business loan
portfolio totaled $148.8 million, or 10.9%, and our portfolio of construction
loans totaled $66.7 million, or 4.9% of total loans. We plan to continue to
emphasize the origination of these types of loans. Commercial real estate,
commercial business and construction loans generally have greater credit risk
than one to four family residential mortgage loans because repayment of these
loans often depends on the successful business operations on the borrowers.
These loans typically have larger loan balances to single borrowers or groups of
related borrowers compared to one- to four-family residential mortgage loans.
Many of our borrowers also have more than one commercial real estate, commercial
business or construction loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship may expose us to
significantly greater risk of loss, compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
Changes in the Value of Goodwill Could Reduce Our Earnings.
We are required by accounting principles generally accepted in the United
States of America to test goodwill for impairment at least annually. Testing for
impairment of goodwill involves the identification of reporting units and the
estimation of fair values. The estimation of fair values involves a high degree
of judgment and subjectivity in the assumptions used. As of September 30, 2005,
if our goodwill were fully impaired and we were required to charge-off all of
our goodwill, the pro forma reduction to our stockholders' equity would be
approximately $3.62 per share.
We May Have Difficulty Managing Our Growth, Which May Divert Resources and Limit
Our Ability to Successfully Expand Our Operations.
We have experienced substantial growth from acquisitions, from $757.9
million of total assets and $595.1 million of total deposits at December 31,
1998 to $2.6 billion of total assets and $1.7 billion of total deposits at
September 30, 2005.
Since 1998, we have expanded our branch network by both acquiring
financial institutions and establishing de novo branches. At September 30, 1998,
we had 11 branch offices, compared to 35 branches at September 30, 2005.
We have incurred substantial expenses to build our management team and
personnel, develop our delivery systems and establish an infrastructure to
support future growth. Our future success will depend on the ability of our
officers and key employees to continue to implement and improve our operational,
financial and management controls, reporting systems and procedures, and to
manage a growing number of client relationships. We may not be able to
successfully implement improvements to our management information and control
systems in an efficient or timely manner, and we may discover deficiencies in
our existing systems and controls. Thus, we cannot assure you that our growth
strategy will not place a strain on our administrative and operational
infrastructure or require us to incur additional expenditures beyond current
projects to support our future growth. Our future profitability will depend in
part on our continued ability to grow. We cannot assure you that we will be able
to sustain our historical growth rate or continue to grow at all, absent
acquisitions.
Provident New York Bancorp's Financial Success Depends on the Successful
Integration of its Recent Acquisitions.
On October 1, 2004, we completed an acquisition of Warwick Community
Bancorp. (WCB). Our future
29
growth and profitability depends, in part, on our ability to successfully manage
the combined operations of WCB as well as the operations of E.N.B. Holding
Company, which was acquired on January 14, 2004. We cannot assure you that our
plan to integrate and operate the combined operations will be timely or
efficient, or that we will successfully retain existing customer relationships
of WCB.
Our Continuing Concentration of Loans in Our Primary Market Area May Increase
Our Risk.
Our success depends primarily on the general economic conditions in the
counties in which we conduct business, and in the New York metropolitan area in
general. Unlike large banks that are more geographically diversified, we provide
banking and financial services to customers primarily in Rockland and Orange
Counties, New York. We also have a branch presence in Ulster, Sullivan and
Putnam Counties in New York and in Bergen County, New Jersey. The local economic
conditions in our market area have a significant impact on our loans, the
ability of the borrowers to repay these loans and the value of the collateral
securing these loans. A significant decline in general economic conditions
caused by inflation, recession, unemployment or other factors beyond our control
would affect the local economic conditions and could adversely affect our
financial condition and results of operations. Additionally, because we have a
significant amount of commercial real estate loans, decreases in tenant
occupancy also may have a negative effect on the ability of many of our
borrowers to make timely repayments of their loans, which would have an adverse
impact on our earnings.
Changes in Market Interest Rates Could Adversely Affect Our Financial Condition
and Results of Operations.
Our financial condition and result of operations are significantly
affected by changes in market interest rates. Our results of operations depend
substantially on our net interest income, which is the difference between the
interest income that we earn on our interest-earning assets and the interest
expense that we pay on our interest-bearing liabilities. Our interest-bearing
liabilities generally reprice or mature more quickly than our interest-earning
assets. If rates increase rapidly as a result of an improving economy, we may
have to increase the rates paid on our deposits and borrowed funds more quickly
than loans and investments reprice, resulting in a negative impact on interest
spreads and net interest income. In addition, the impact of rising rates could
be compounded if deposit customers move funds from savings accounts back to
higher rate certificate of deposit accounts. Conversely, should market interest
rates continue to fall below current levels, our net interest margin could also
be negatively affected, as competitive pressures could keep us from further
reducing rates on our deposits, and prepayments and curtailments on assets may
continue. Such movements may cause a decrease in our interest rate spread and
net interest margin. 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 remain "flat", a
continued decline in net interest margin may occur, offsetting a portion, or all
gains in net interest income generated from an increasing volume of assets.
We also are subject to reinvestment risk associated with changes in
interest rates. Changes in interest rates may affect the average life of loans
and mortgage-related securities. Decreases in interest rates often result in
increased prepayments of loans and mortgage-related securities, as borrowers
refinance their loans to reduce borrowings costs. Under these circumstances, we
are subject to reinvestment risk to the extent that we are unable to reinvest
the cash received from such prepayments in loans or other investments that have
interest rates that are comparable to the interest rates on existing loans and
securities. Additionally, increases in interest rates may decrease loan demand
and/or may make it more difficult for borrowers to repay adjustable rate loans.
Changes in interest rates also affect the value of our interest earning
assets and in particular our securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest rates. At September 30,
2005, our investment and mortgage-backed securities available for sale totaled
$823.0 million. Unrealized losses on securities available for sale, net of tax,
amounted to $8.2 million and are reported as a separate component of
stockholders' equity. Decreases in the fair value of securities available for
sale, therefore, could have an adverse effect on stockholders' equity.
We Will Be Required to Change the Way We Recognize Expense for Our Stock
Options.
We account for our stock option plan in accordance with Accounting
Principles Board ("APB") Opinion
30
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, we recognize compensation expense only if the exercise price of an
option is less than the fair value of the underlying stock on the date of the
grant. As of October 1, 2005 we will change our method of accounting for stock
options granted. Statement of Financial Accounting Standards No.123R,
"Accounting for Stock Based Compensation," Under Statement of Financial
Accounting Standards No. 123R, the grant-date fair value of options is
recognized as compensation expense over the vesting period. Our net income will
decrease by approximately $939,000 per year based on options currently granted,
using the fair-value-based method of accounting for stock options. Our diluted
earnings per share will decrease by approximately $0.02 per share.
A Breach of Information Security Could Negatively Affect our Earnings.
Increasingly, we depend upon date processing, communication and
information exchange on a variety of computing platforms and networks, and over
the internet. We cannot be certain all our systems are entirely free from
vulnerability to attack, despite safeguards we have instituted. In addition, we
rely on the services of a variety of vendors to meet our data processing and
communication needs. If information security is breached, information can be
lost or misappropriated, resulting in financial loss or costs to us or damages
to others. These costs or losses could materially exceed the amount of insurance
coverage, if any, which would adversely affect our earnings.
We are Subject to Heightened Regulatory Scrutiny with respect to Bank Secrecy
and Anti-money Laundering Statutes and Regulations.
Recently, regulators have intensified their focus on the USA PATRIOT Act's
anti-money laundering and Bank Secrecy Act compliance requirements. There is
also increased scrutiny of our compliance with the rules enforced by the Office
of Foreign Assets Control. In order to comply with regulations, guidelines and
examination procedures in this area, we have been required to adopt new policies
and procedures and to install new systems. We cannot be certain that the
policies, procedures and systems we have in place are flawless. Therefore, there
is no assurance that in every instance we are in full compliance with these
requirements.
Various Factors May Make Takeover Attempts More Difficult to Achieve.
Our Board of Directors has no current intention to sell control of
Provident Bancorp. Provisions of our certificate of incorporation and bylaws,
federal regulations, Delaware law and various other factors may make it more
difficult for companies or persons to acquire control of Provident Bancorp
without the consent of our Board of Directors. You may want a take over attempt
to succeed because, for example, a potential acquirer could offer a premium over
the then prevailing market price of our common stock. The factors that may
discourage takeover attempts or make them more difficult include:
Office of Thrift Supervision regulations. Office of Thrift Supervision
regulations prohibit, for three years following the completion of a
mutual-to-stock conversion, the direct or indirect acquisition of more than 10%
of any class of equity security of a converted bank without the prior approval
of the Office of Thrift Supervision. We completed our mutual-to-stock conversion
on January 14, 2004.
Certificate of incorporation and statutory provisions. Provisions of the
certificate of incorporation and bylaws of Provident Bancorp and Delaware law
may make it more difficult and expensive to pursue a takeover attempt that
management opposes. These provisions also would make it more difficult to remove
our current Board of Directors or management, or to elect new directors. There
provisions include limitations on voting rights of beneficial owners of more
than 10% of our common stock, supermajority voting requirements for certain
business combinations and the election of directors to staggered terms of three
years. Our bylaws also contain provisions regarding the timing and content of
stockholder proposals and nominations and qualification for service on the Board
of Directors.
Required change in control payments and issuance of stock options and
recognition and retention plan shares. We have entered into employment
agreements with certain executive officers, which will require payments to be
made to them in the event their employment is terminated following a change in
control of Provident Bancorp or Provident Bank. We have also adopted the 2004
Provident Bancorp, Inc. Stock Option Plan to permit additional issuance of stock
options and recognition and retention plan shares to key employees and directors
that will require payments to them in connection with a change in control of
Provident Bancorp. We have granted additional
31
restricted shares and options under this plan. These payments will have the
effect of increasing the cost of acquiring Provident Bancorp, thereby
discouraging future takeover attempts.
ITEM 1B. Unresolved Staff Comments
- ----------------------------------
Not Applicable.
32
ITEM 2. Properties
- ------------------
As of September 30, 2005, Provident Bank leased 19 properties, including
its headquarters location, from third parties. In addition, Provident Bank owns
17 properties. At September 30, 2005, the net book value of our properties was
$26.1 million. The following is a list of our locations:
Corporate Office, Commercial Lending Division, and Investment Management and
Trust Department:
400 Rella Boulevard #
Montebello, NY 10901
(845) 369-8040
ROCKLAND COUNTY, NY
- -------------------
AIRMONT * SUFFERN * WALLKILL EAST *
196 Route 59, Airmont 10901 71 Lafayette Ave., Suffern 10901 1 Industrial Dr., Middletown 10941
(845) 369-8360 (845) 369-8350 (845) 695-2265
ORANGE COUNTY, NY
-----------------
BARDONIA # BLOOMING GROVE * WALLKILL PLAZA #
715 Route 304, Bardonia 10954 815 Route 208, Monroe 10950 400 Route 211 East, Middletown 10940
(845) 623-6340 (845) 782-4111 (845) 344-0125
CONGERS # CHESTER # WARWICK #
1 Lake Rd. West, Ste.1, Congers 10920 69 Brookside Ave., 18 Oakland Ave., Warwick 10990
(845) 267-2180 Chester 10918 (845) 986-2206
(845) 469-2255
HAVERSTRAW # FLORIDA * WARWICK # (Shoprite)
38-40 New Main St., Haverstraw 10927 7 Edward J. Lempka Dr., 153 Route 94 South, Warwick 10990
(845) 942-3880 Florida 10921 (845) 986-9540
(845) 651-4091
MOUNT IVY # (Pomona) GOSHEN # WOODBURY #
1633 Route 202, Pomona 10970 60 Matthews St., Goshen 10924 556 Route 32, Highland Mills 10930
(845) 364-5690 (845) 294-8353 (845) 928-6855
ULSTER COUNTY
-------------
NANUET # HARRIMAN # ELLENVILLE *
44 West Route 59, Nanuet 10954 300 Larkin Dr., Monroe 10950 70 Canal St., Ellenville 12428
(845) 627-6180 (845) 782-7226 (845) 647-4300
NEW CITY * MIDDLETOWN # (Shoprite) KERHONKSON *
179 South Main St. New City 10956 125 Dolson Ave., 6100 Route 209, Kerhonkson 12446
(845) 639-7750 Middletown 10940 (845) 626-3500
(845) 342-5777
SULLIVAN COUNTY
---------------
NEW CITY II # (Shoprite) MONROE * SOUTH FALLSBURG *
42 North Main St., New City 10956 591 Route 17M, Monroe 10950 5250 Main St., South Fallsburgh 12779
(845) 639-7650 (845) 782-8166 (845) 434-3070
ORANGBURG * NEWBURGH # WOODRIDGE *
375 Route 303, Orangeburg, 10962 1425 Route 300, Newburgh 12550 13 Broadway, Woodridge 12789
(845) 398-4810 (845) 566-6600 (845) 434-6440
PUTNAM COUNTY
-------------
PEARL RIVER # (Shoprite) NEWBURGH * (Stony Brook) CARMEL *
26 North Middletown, Pearl River 10965 200 Stony Brook Ct., 1875 Route 6, Carmel 10512
(845) 627-6170 Newburgh 12550 (845) 225-2265
(845) 561-1000
SPRING VALLEY * PINE BUSH # Towncenter Bank [LOGO]
72 W. Eckerson Rd., 2380 Route 52, Pine Bush 12566 a division of Provident Bank, New York
Spring Valley 10977 (845) 744-2088
(845) 426-7230
BERGEN COUNTY, NJ
-----------------
STONY POINT * SLATE HILL * LODI #
148 Route 9W, Stony Point 10980 1992 Route 284, Slate Hill 10973 2 Arnot St., Lodi 07644
(845) 942-3890 (845) 355-6181 (973) 591-1400
* Owned # Leased
33
ITEM 3. Legal Proceedings
- -------------------------
Provident Bancorp is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to Provident Bancorp's financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of stockholders during the quarter
ended September 30, 2005.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- ------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
(A)
The shares of common stock of Provident New York Bancorp are quoted on the
Nasdaq National Market ("NASDAQ") under the symbol "PBNY." Prior to June 29,
2005 the Company traded on the NASDAQ under the symbol "PBCP". As of September
30, 2005, Provident Bancorp had 11 registered market makers, 6,488 stockholders
of record (excluding the number of persons or entities holding stock in street
name through various brokerage firms), and 43,505,659 shares outstanding.
The following table sets forth market price and dividend information for the
common stock for the past two fiscal years. Information prior to January 14,
2004 has been restated to reflect the 4.4323-to-1 stock split in conjunction
with the Company's second-step stock offering.
Cash Dividends
Quarter Ended High Low Declared
- --------------------- ---------- ------------ -----------------
September 30, 2005 $12.60 $11.33 $0.05
June 30, 2005 12.17 10.13 0.045
March 31, 2005 13.21 12.04 0.045
December 31, 2004 13.76 11.50 0.04
September 30, 2004 11.75 10.58 0.04
June 30, 2004 11.90 10.25 0.04
March 31, 2004 12.15 10.64 0.035
December 31, 2003 10.87 9.33 0.035
Payment of dividends on Provident Bancorp's common stock is subject to
determination and declaration by the Board of Directors and depends on a number
of factors, including capital requirements, regulatory limitations on the
payment of dividends, the results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends will continue. Repurchases of the Company's shares
of common stock during the fourth quarter of the fiscal year ended September 30,
2005 are detailed in (C) below. There were no sales of unregistered securities
during the quarter ended September 30, 2005.
(B)
Not Applicable
34
(C)
Issuer Purchases of Equity Securities
-------------------------------------
Maximum Number
Total Number of (or Approximate
Average Shares (or Units) Dollar Value) of
Total Number Price Purchased as Part Shares (or Units)
of Shares Paid of Publicly that may yet be
(or Units) per share Announced Plans Purchased Under the
Purchased (1) (or Unit) or Programs (2) Plans or Programs
------------- --------- --------------- -----------------
Period (2005)
July 1 - July 31 -- $ -- -- 1,650,600
August 1 - August 31 269,548 11.90 261,800 1,388,800
September 1 - September 30 100,118 11.97 81,400 1,307,400
----------- --------- ---------
Total 369,666 $ 11.92 343,200
=========== ========= =========
(1) The total number of shares purchased during the periods 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.)
35
ITEM 6. Selected Financial Data
- -------------------------------
The following financial condition data and operating data are derived from
the audited consolidated financial statements of Provident Bancorp. Additional
information is provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included as Item 7 and Item 8 of this report, respectively.
At September 30,
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(In thousands)
Selected Financial Condition Data:
Total assets $ 2,597,362 $ 1,826,151 $ 1,174,305 $ 1,027,701 $ 881,260
Loans, net (1) 1,340,065 (980,281) (703,184) (660,816) (606,146)
Securities available for sale 822,952 534,297 300,715 206,146 163,928
Securities held to maturities 70,949 69,078 73,544 86,791 71,355
Deposits 1,726,401 1,239,532 869,553 799,626 653,100
Borrowings 442,203 214,909 164,757 102,968 110,427
Equity 395,157 349,512 117,857 110,867 102,620
Years Ended September 30,
--------------------------------------------------------------------------
2005(10) 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(In thousands)
Selected Operating Data:
Interest and dividend income $ 115,270 $ 74,508 $ 57,790 $ 59,951 $ 60,978
Interest expense 29,400 12,982 12,060 17,201 26,244
----------- ----------- ----------- ----------- -----------
Net interest income 85,870 61,526 45,730 42,750 34,734
Provision for loan losses 750 800 900 900 1,440
----------- ----------- ----------- ----------- -----------
Net interest income after provission for loan
losses 85,120 60,726 44,830 41,850 33,294
Non-interest income 17,908 11,573 9,555 5,401 4,706
Non-interest expense 70,582 56,146 36,790 32,161 26,431
----------- ----------- ----------- ----------- -----------
Income before income tax expense 32,446 16,153 17,595 15,090 11,569
Income tax expense 11,204 5,136 6,344 5,563 4,087
----------- ----------- ----------- ----------- -----------
Net income $ 21,242 $ 11,017 $ 11,251 $ 9,527 $ 7,482
=========== =========== =========== =========== ===========
(footnotes on following pages)
36
At or For the Years Ended September 30,
-----------------------------------------------------------------
2005(10) 2004(8) 2003 2002(9) 2001
--------- --------- --------- --------- ---------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets) 0.84% 0.69% 1.04% 0.99% 0.87%
Return on equity (ratio of net income to average
equity) 5.16 3.94 9.92 8.92 7.71
Average interest rate spread (2) 3.53 3.94 4.30 4.33 3.56
Net interest margin (3) 3.88 4.25 4.55 4.71 4.20
Efficiency ratio - GAAP(4) 68.01 76.81 66.55 66.79 67.02
Efficiency ratio - operating (11) 63.02 67.68 67.74 65.28 66.54
Non-interest expense to average total assets 2.79 3.49 3.40 3.36 3.06
Ratio of average interest-earning assets to
average interest-bearing liabilities 126.07 135.27 121.33 120.03 120.20
Per Share Related Data:
Basic earnings per share (7) $ 0.49 $ 0.30 $ 0.33 $ 0.28 $ 0.22
Diluted earnings per share 0.49 0.29 0.32 0.27 0.22
Dividends per share 0.17 0.15 0.13 0.09 0.05
Dividend payout ratio (5) 34.69% 50.00% 39.39% 32.14% 22.73%
Book value per share (6) 9.08 8.82 3.35 3.13 2.89
Asset Quality Ratios:
Non-performing assets to total assets 0.07% 0.15% 0.40% 0.49% 0.27%
Non-performing loans to total loans 0.12 0.27 0.66 0.74 0.37
Allowance for loan losses to non-performing
loans 1,341.13 634.02 235.66 209.59 400.66
Allowance for loan losses to total loans 1.62 1.74 1.55 1.55 1.48
Capital Ratios:
Equity to total assets at end of year 15.21% 19.14% 10.04% 10.79% 11.64%
Average equity to average assets 16.26 17.41 10.47 11.15 11.24
Tier 1 leverage ratio (bank only) 8.20 11.28 8.14 8.45 10.20
Other Data:
Number of full service offices 35 27 18 17 15
- --------------------------------------------------------------------------------
(1) Excludes loans held for sale.
(2) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) The dividend payout ratio represents dividends per share divided by basic
earnings per share.
(6) Book value per share is based on total stockholders' equity and
43,505,659, 39,618,373, 35,221,365, 35,447,372, and 35,565,510 outstanding
common shares at September 30, 2005, 2004, 2003, 2002 and 2001,
respectively. For this purpose, common shares include unallocated employee
stock ownership plan shares but exclude treasury shares.
(7) Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the Company's second step
conversion in January 2004.
37
(8) Includes $5.0 million ($3.0 million after tax) and $773,000 ($464,000
after tax) for the establishment of the charitable
foundation and merger integration costs, respectively.
(9) Includes $531,000 ($319,000 after tax) in merger integration costs. (10)
Includes $1.124 million ($674,000 after tax) of merger integration costs.
(11) Reconciliation between GAAP efficiency ratio and adjusted (non-GAAP)
efficiency ratio is as follows. This information is presented because the
Company believes it more accurately reflects operations of the Company.
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Non-interest expense $ 70,582 $ 56,146 $ 36,790 $ 32,161 $ 26,431
-------------------------------------------------------------------------
Interest & non-interest income $ 103,778 $ 73,099 $ 55,285 $ 48,151 $ 39,440
GAAP efficiency ratio 68.01% 76.81% 66.55% 66.79% 67.02%
Non-interest expense $ 70,582 $ 56,146 $ 36,790 $ 32,161 $ 26,431
less:
merger integration costs (1,124) (773) (4) (531) --
amortization of intangible assets (3,939) (2,063) (438) (286) (359)
Charitable foundation (5,000)
-------------------------------------------------------------------------
Adjusted non-interest expense $ 65,519 $ 48,310 $ 36,348 $ 31,344 $ 26,072
Interest & non-interest income $ 103,778 $ 73,099 $ 55,285 $ 48,151 $ 39,440
add: tax equivalent adjustment 1,241 736 377 325 273
less:
gains on sales of securities (369) (2,455) (2,006) (461) (531)
gain on low income housing LLP (681) --
-------------------------------------------------------------------------
Adjusted income $ 103,969 $ 71,380 $ 53,656 $ 48,015 $ 39,182
Operating efficiency ratio 63.02% 67.68% 67.74% 65.28% 66.54%
38
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
General
Our results of operations depend primarily on our net interest income,
which is the difference between the interest income on our earning assets, such
as loans and securities, and the interest expense paid on our deposits and
borrowings. Results of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense. Non-interest
income consists primarily of banking fees and service charges, gains (losses) on
sales of loans and securities available for sale and net increases in the cash
surrender value of bank-owned life insurance ("BOLI") contracts and title
insurance fees. Our non-interest expense consists primarily of salaries and
employee benefits, occupancy and office expenses, advertising and promotion
expense, professional fees, core deposit amortization and data processing
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities. The financial
condition and results of operations of Provident New York Bancorp are discussed
herein on a consolidated basis with the Bank. Reference to Provident New York
Bancorp or the Company may signify the Bank, depending on the context.
The following is an analysis of the financial condition and results of the
Company's operations. This item should be read in conjunction with the
consolidated financial statements and related notes filed herewith in Part II,
Item 8, "Financial Statements and Supplementary Data" and the description of the
Company's business filed here within Part I, Item I, "Business."
Overview
The Company provides financial services to individuals and businesses in
New York and New Jersey. The Company's business is primarily accepting deposits
from customers through its banking centers and investing those deposits,
together with funds generated from operations and borrowings, in residential
mortgages, commercial real estate loans, commercial business loans and leases,
consumer loans, and investment securities. Additionally, the Company offers
wealth management services.
Total assets increased to $2.6 billion at September 30, 2005 from $1.8
billion at September 30, 2004. This 42.2% increase resulted principally from the
acquisition of WSB in October 2005, which added $703.7 million of assets as of
the merger date. Also during 2005, the Company furthered its commercial lending
and banking initiatives. Excluding the loans acquired with WSB, commercial loans
increased 7.3%.
Net income for the year ended September 30, 2005 increased 92.8% to $21.2
million, or $0.49 per diluted share from $11.0 million, or $0.29 per diluted
share for the year ended September 30, 2004. Net income for fiscal 2004 included
a $3.0 million after-tax charge ($0.08 per diluted share) for the formation of
the Charitable Foundation. The increase is primarily due to the increase in
interest earning assets acquired from WSB and to a lesser extent, internal
growth. During 2005, the Company additionally benefited for a full year from the
investment of funds raised in the 2004 offering, the acquisitions of ENB in
January 2004, WSB in October 2005, increased commercial real estate and business
lending activity. These benefits were partially offset by the impact of the low
interest rate environment on its investment and loan portfolio yields, and high
costs of deposits and borrowings, which reduced the Company's net interest
margin.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. Accounting policies
considered critical to our financial results include the allowance for loan
losses, accounting for goodwill and other intangible assets, accounting for
deferred income taxes and the recognition of interest income.
The methodology for determining the allowance for loan losses is
considered by management to be a critical accounting policy due to the high
degree of judgment involved, the subjectivity of the assumptions utilized and
the potential for changes in the economic environment that could result in
changes to the amount of the allowance for loan losses considered necessary. We
evaluate our assets at least quarterly, and review their risk components as a
39
part of that evaluation. See Note 3, Summary of Significant Accounting Policies
- - Allowance for Loan Losses in our Notes to Consolidated Financial Statements
for a discussion of the risk components. We consistently review the risk
components to identify any changes in trends.
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. If goodwill is determined to be
impaired, it would be expensed in the period in which it became impaired.
We also use judgment in the valuation of other intangible assets (core
deposit base intangibles). A core deposit base intangible asset has been
recorded for core deposits (defined as checking, money market and savings
deposits) that were acquired in an acquisition that was accounted as a purchase
business combination. The core deposit base intangible asset has been recorded
using the assumption that the acquired deposits provide a more favorable source
of funding than more expensive wholesale borrowings. An intangible asset has
been recorded for the present value of the difference between the expected
interest to be incurred on these deposits and interest expense that would be
expected if these deposits were replaced by wholesale borrowings, over the
expected lives of the core deposits. If we find these deposits have a shorter
life than was estimated, we will write down the asset by expensing the amount
that is impaired.
We use the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable income. These
judgments and estimates are reviewed on a continual basis as regulatory and
business factors change.
Interest income on loans, securities and other interest-earning assets is
accrued monthly unless management considers the collection of interest to be
doubtful. Loans are placed on non-accrual status when payments are contractually
past due 90 days or more, or when management has determined that the borrower is
unlikely to meet contractual principal or interest obligations, unless the
assets are well secured and in the process of collection. At such time, unpaid
interest is reversed by charging interest income for interest in the current
fiscal year or the allowance for loan losses with respect to prior year income.
Interest payments received on non accrual loans (including impaired loans) are
not recognized as income unless future collections are reasonably assured. Loans
are returned to accrual status when collectibility is no longer considered
doubtful.
Management Strategy
We operate as an independent community bank that offers a broad range of
customer-focused financial services as an alternative to money center banks in
our market area. Management has invested in the infrastructure and staffing to
support our strategy of serving the financial needs of individuals, businesses
and municipalities in our market area focusing on core deposit generation and
quarterly loan growth. This has resulted in a change in our business mix,
providing a favorable platform for long-term sustainable growth. Highlights of
management's business strategy are as follows:
Operating as a Community Bank. As an independent community bank, we
emphasize the local nature of our decision-making to respond more effectively to
the needs of our customers while providing a full range of financial services to
the individuals, corporations and municipalities in our market area. We offer a
broad range of financial products to meet the changing needs of the marketplace,
including internet banking, cash management services and sweep accounts. In
addition, we offer asset management and trust services to meet the investing
needs of individuals, corporations and not-for-profit entities. As a result, we
are able to provide locally the financial services required to meet the needs of
the majority of existing and potential customers in our market.
40
Enhancing Customer Service. We are committed to providing superior
customer service as a way to differentiate us from our competition. As part of
our commitment to service, we have established Sunday banking (in 1995) and
extended service hours (since 1987). In addition, we offer multiple access
channels to our customers, including our branch and ATM network, internet
banking, our Customer Care Telephone Center and our Automated Voice Response
system. We reinforce in our employees a commitment to customer service through
extensive training, recognition programs and measurement of service standards.
Growing and Diversifying our Loan Portfolio. We offer a broad range of
loan products to commercial businesses, real estate owners, developers and
individuals. To support this activity, we have developed commercial, consumer
and residential loan departments staffed with experienced professionals to
promote the continued growth and prudent management of loan assets. We have
experienced consistent and significant growth in our commercial loan portfolio
while continuing to grow our residential mortgage and consumer lending
businesses. As a result, we believe that we have developed a high quality
diversified loan portfolio with a favorable mix of loan types, maturities and
yields.
Expanding our Retail Banking Franchise. Management intends to continue the
expansion of our retail banking franchise and to increase the number of
households and businesses served in our market area. Our strategy is to deliver
exceptional customer service, which depends on up-to-date technology and
convenient access, as well as courteous personal contact from a trained and
motivated workforce. This approach has resulted in continued growth in core
deposits, which has improved our overall cost of funds. Management intends to
maintain this strategy, which will require ongoing investment in retail banking
locations and technology to support exceptional service levels for Provident
Bank's customers.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
41
The following table sets forth average balance sheets, average yields and
costs, and certain other information for the years indicated. Tax-exempt
securities are reported on a tax-equivalent basis, using a 35% federal tax rate.
All average balances are daily average balances. Non-accrual loans were included
in the computation of average balances, but have been reflected in the table as
loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.
Years Ended September 30,
--------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------- ------------------------------ --------------------------------
Average Average Average
Outstanding Yield/ Outstanding Yield/ Outstanding Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- --------- ------ ----------- -------- ------ ---------- -------- ------
(Dollars in Thousands)
Interest Earning Assets:
Loans(1) $ 1,288,829 $80,773 6.27% $ 886,749 $ 54,093 6.10% $ 683,102 $ 43,815 6.41%
Securities taxable 835,754 31,361 3.75 508,123 18,865 3.71 290,717 12,885 4.25
Securities-tax exempt 63,598 3,546 5.57 38,505 2,102 5.46 18,861 1,078 4.79
Other 25,420 831 3.27 12,626 184 1.46 11,804 389 3.30
----------- --------- ----------- -------- ---------- --------
Total Interest-earnings
assets 2,213,601 116,511 5.26 1,446,003 75,244 5.20 1,004,484 58,167 5.79
--------- -------- --------
Non-interest earning assets 317,945 161,591 78,078
----------- ----------- ----------
Total assets $ 2,531,546 $ 1,607,594 $1,082,562
=========== =========== ==========
Interest Bearing Liabilities:
Savings deposits(2) $ 545,829 3,070 0.56 $ 356,998 1,570 0.44 276,527 1,497 0.54
Money market deposits 228,197 2,646 1.16 150,866 859 0.57 121,840 955 0.78
NOW deposits 153,058 509 0.33 88,677 189 0.21 77,165 200 0.26
Certificates of deposit 434,644 9,851 2.27 311,197 5,283 1.70 240,141 5,123 2.13
Borrowings 394,079 13,324 3.38 161,272 5,081 3.15 112,248 4,285 3.83
----------- --------- ----------- -------- ---------- --------
Total interest-bearing
liabilities 1,755,807 29,400 1.67 1,069,010 12,982 1.21 827,921 12,060 1.46
Non-interest bearing deposits 349,507 229,530 128,544
Other non-interest bearing
liabilities 14,587 29,166 12,728
----------- ----------- ----------
Total liabilities 2,119,901 1,327,706 969,193
Stockholders' equity 411,645 279,888 113,369
----------- ----------- ----------
Total liabilities and
Stockholders' equity $ 2,531,546 87,111 $ 1,607,594 62,262 $1,082,562 46,107
=========== --------- =========== -------- ========== --------
Less tax equivalent
adjustment (1,241) (736) (377)
--------- -------- --------
Net Interest income $ 85,870 $ 61,526 $ 45,730
========= ======== ========
Net interest rate spread(3) 3.59% 3.99% 4.33%
Net Interest-earning assets(4) $ 457,794 $ 376,993 $ 176,563
=========== =========== ==========
Net interest margin(5) 3.94% 4.31% 4.59%
Ratio of interest-earning
assets to interest bearing
liabilities 126.07% 135.27% 121.33%
========= ======== ========
- --------------------------------------------------------------------------------
(1) Balances include the effect of net deferred loan origination fees and
costs, and the allowance for the loan losses.
(2) Includes club accounts and interest-bearing mortgage escrow balances.
(3) Net interest rate spread represents the difference between the tax
equivalent yield on average interest-earning assets and the cost of
average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent)
divided by average total interest-earning assets.
42
The following table presents the dollar amount of changes in interest
income (on a fully tax-equivalent basis) and interest expense for the major
categories of our interest-earning assets and interest-bearing liabilities.
Information is provided for each category of interest-earning assets and
interest-bearing liabilities with respect to (i) changes attributable to changes
in volume (i.e., changes in average balances multiplied by the prior-period
average rate) and (ii) changes attributable to rate (i.e., changes in average
rate multiplied by prior-period average balances). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due to
rate.
-------------------------------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
---------------------------------------- ----------------------------------------
Increase (Decrease) Due Total Increase (Decrease) Due Total
to Increase to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Interest-earning assets:
Loans $ 25,894 $ 785 $ 26,679 $ 13,160 $ (2,882) $ 10,278
Securities taxable 12,291 205 12,496 8,351 (2,371) 5,980
Securities tax exempt 1,397 47 1,444 1,075 (51) 1,024
291 357 648 25 (230) (205)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning
assets 39,873 1,394 41,267 22,611 (5,534) 17,077
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing
liabilities:
Savings deposits 990 510 1,500 383 (310) 73
Money market deposits 592 1,195 1,787 195 (291) (96)
NOW deposits 179 141 320 29 (40) (11)
Certificates of deposit 2,475 2,093 4,568 1,323 (1,163) 160
Borrowings 7,845 397 8,242 1,641 (845) 796
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities 12,081 4,336 16,417 3,571 (2,649) 922
---------- ---------- ---------- ---------- ---------- ----------
Less tax equivalent
adjustment (490) (15) (505) (377) 18 (359)
---------- ---------- ---------- ---------- ---------- ----------
Change in net interest
income $ 27,302 $ (2,957) $ 24,345 $ 18,663 $ (2,867) $ 15,796
========== ========== ========== ========== ========== ==========
Comparison of Financial Condition at September 30, 2005 and September 30, 2004
Total assets as of September 30, 2005 were $2.6 billion, an increase of
$771.2 million, or 42.2%, over assets of $1.8 billion at September 30, 2004. The
increase 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, as well
as internal growth of the Company. Goodwill increased by $92.4 million from
September 30, 2004 as a result of the completion of the Warwick acquisition, and
core deposit intangibles increased by $8.1 million, net of $3.9 million in
amortization, from September 30, 2004 as a result of the Warwick and the South
Fallsburg HSBC branch acquisitions.
Net loans as of September 30, 2005 were $1.3 billion, an increase of
$359.8 million, or 36.7%, over net loan balances of $980.3 million at September
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 $226.6 million, or 46.5%, over balances at September 30, 2004.
Consumer loans increased by $61.8 million, or 47.6%, during the year ended
September 30, 2005, while residential loans increased by $76.0 million, or
20.0%. Total loan originations increased from $357.1 million for the year ended
September 30, 2004 to $515.4 million for the year ended September 30,
43
2005. However, repayments and sales of loans have also increased from $294.2
million for 2004 to $442.1 million for the year ended September 30, 2005. Loan
quality continues to be strong. At $1.6 million, non-performing loans as a
percentage of total loans was 0.12%, as opposed to 0.27% at September 30, 2004.
Securities increased by $290.5 million, or 48.2%, to $893.9 million at
September 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 $182.3 million, or 50.7%, and in
U.S. Government and federal agency securities, which increased by $108.2
million, or 44.3% and tax exempt securities which increased by $41.6 million or
85%.
Deposits as of September 30, 2005 were $1.7 billion, up $486.9 million, or
39.3%, from the balance at September 30, 2004. Deposits acquired from Warwick
and HSBC totaled $475.1 million and $23.3 million, respectively. As of September
30, 2005, retail and commercial transaction accounts were 31.9% of deposits
compared to 30.0% at September 30, 2004.
Borrowings increased by $227.3 million from $214.9 million at September
30, 2004 to $442.2 million at September 30, 2005. $160 million of the increase
is related to the borrowings assumed from Warwick.
Stockholders' equity increased by $45.6 million to $395.2 million at
September 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 $21.2 million and ESOP allocations of $809,000 for the
fiscal year also increased equity. Partially offsetting the increases were the
payments of cash dividends totaling $7.5 million and a decrease of $8.0 million
in other comprehensive income due to unrealized losses on available for sale
securities. Since September 30, 2004, we have purchased a total of 3.2 million
treasury shares, which further decreased stockholders' equity by $38.0 million.
As of September 30, 2005, 1,307,400 shares remain under our previously
announced repurchase authorization. Also during 2005, 762,400 shares of
restricted stock were granted from treasury shares. Tier I capital to assets
stands at 9.6% at September 30, 2005.
Comparison of Operating Results for the Years Ended September 30, 2005 and
- --------------------------------------------------------------------------
September 30, 2004
- ------------------
Net income for the year ended September 30, 2005, was $21.2 million. This
compares to $11.1 million for the year ended September 30, 2004. Diluted
earnings per share were $0.49 for the year ended September 30, 2005 compared to
$0.29 for the prior fiscal year. Earnings per share results for the prior year
have been restated to reflect the 4.4323-to-one exchange ratio as a result of
the Company's second-step conversion in 2004.
Interest Income. Interest income for the year ended September 30, 2005
increased to $115.3 million, an increase of $40.8 million, or 54.7%, compared to
the prior year. The increase was primarily due to higher average balances of
loans and securities, along with higher yields in both asset classes. Average
interest-earning assets for the year ended September 30, 2005 were $2.2 billion,
an increase of $767.6 million, or 53.1%, over average interest-earning assets
for the year ended September 30, 2003 of $1.4 billion. Average loan balances
grew by $402.1 million and average balances of securities and other earning
assets increased by $365.5 million. On a tax-equivalent basis, average yields on
interest earning assets increased by six basis points to 5.26% for the year
ended September 30, 2005, from 5.20% for the year ended September 30, 2004.
Higher market interest rates were the primary reason for the increase in asset
yields.
Interest income on loans for the year ended September 30, 2005 grew 49.3%
to $80.7 million from $54.1 million for the prior fiscal year. Interest income
on commercial loans for the year ended September 30, 2005 increased to $46.5
million, up 77.6% from commercial loan interest income of $26.2 million for the
prior fiscal year. Average balances of commercial loans grew $299.1 million to
$684.8 million, with no change in the average yield. Interest income on consumer
loans increased by $3.6 million, or 70.2%. Our fixed-rate consumer loans have
short average maturities, and our adjustable-rate consumer loans float with the
prime rate. Income earned on residential mortgage loans was $25.6 million for
the year ended September 30, 2005, up $2.8 million, or 12.1%, from the prior
year.
44
Interest income on securities and other earning assets increased to $34.5
million for the year ended September 30, 2005, compared to $20.4 million for the
prior year. This was due to a tax-equivalent increase of eight basis points in
yields along with the $365.5 million increase in the average balances of
securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2005
increased by $16.4 to $29.4 million, an increase of 126.5% compared to interest
expense of $13.0 million for the prior fiscal year. The increase was primarily
due to an increase in the average balance of interest-bearing liabilities of
$686.8 million, or 64.3%, which resulted primarily from the Warwick and HSBC
South Fallsburg branch acquisitions. In addition, average rates paid on
interest-bearing liabilities for the year ended September 30, 2005 increased by
46 basis points to 1.67% from 1.21% in fiscal 2004. The average interest rate
paid on certificates of deposit increased by 57 basis points to 2.27% for the
year ended September 30, 2005, from 1.70% for the prior year. For the year ended
September 30, 2005, average balances of lower cost savings and money market
accounts increased by $188.8 million and $77.3 million, respectively, while
average balances of certificates of deposit increased by $123.4 million compared
to the year ended September 30, 2004. The average interest rate paid on savings
and money market accounts increased by 12 and 59 basis points to 0.56% and
1.16%, respectively, for the year ended September 30, 2005, from 0.44% and 0.57%
for the prior year.
Net Interest Income for the fiscal year ended September 30, 2005 was $85.9
million, compared to $61.5 million for the year ended September 30, 2004, an
increase of $24.3 million or 39.6%. Interest income increased $40.8 million to
$115.3 million for the fiscal year ending September 30, 2005, compared to $74.5
million for the prior year. The increase in interest income was largely due to a
$767.6 million increase in average interest-earning assets to $2.2 billion
during the year ended September 30, 2005, as compared to $1.4 billion for 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 six
basis points, from 5.20% to 5.26%, on a fully taxable equivalent basis, also
contributed to the increase in net interest income. Average yields increased in
both the loan and securities and other earning assets portfolios, of 17 basis
points and eight basis points, respectively, with the overall yield on total
interest-earning assets increasing in every category. Interest expense increased
by $16.4 million for the fiscal year ended September 30, 2005 from $13.0 million
for the year ended September 30, 2004, to $29.4 million, as average
interest-bearing liabilities increased by $686.8 million and the average cost of
interest-bearing liabilities increased 46 basis points. The net interest margin
declined by 37 basis points to 3.94%, while the net interest spread declined by
40 basis points to 3.59%, 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-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 eleven times
since May 2004, increasing the target federal funds rate from 1% to 3.75%.
Conversely, the 10-year treasury rate has decreased from an average of 4.29% for
the fiscal year ended September 30, 2004 to 4.20% for the year ended September
30, 2005. The Bank's average cost of interest-bearing liabilities has increased
and, although the average asset yields increased during 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. We recorded $750,000 and $800,000 in loan loss
provisions for the year ended September 30, 2005 and September 30, 2004,
respectively. At September 30, 2005 the allowance for loan losses totaled $22.0
million, or 1.62% of the loan portfolio, compared to $17.4 million, or 1.74% of
the loan portfolio at September 30, 2004. Net charge-offs for the years ended
September 30, 2005 and 2004 were $975,000 and $266,000, respectively (an annual
rate of 0.07% and 0.03%, respectively, of the average loan portfolio). The
$709,000 increase occurred primarily due to the increase in volume and loans
acquired through our acquisitions.
The provision for loan losses was primarily attributable to growth in the
loan portfolio of $364.4 million, representing an increase of 36.5%, which
included $288.2 million of loans acquired, along with $4.9 million in acquired
allowance for loan losses, as part of our acquisition of WSB. In addition,
higher risk loan categories, primarily commercial real estate loans and
commercial business loans, provided most of this increase. However,
non-performing loans decreased $1.1 million from September 30, 2004, to $1.6
million at September 30, 2005.
45
We increased the percentage allowance requirements in the retail loan
portfolio to reflect the increase in home equity lines of credit, as they are
considered somewhat more risky than first mortgage loans, because they are
secured by second mortgages, and are tied to a recently increasing prime rate.
We also increased the percentage allowance in the commercial loan portfolio to
reflect the potential impact of loan growth in new adjacent markets, and
continued growth in larger, more complex loans. There has also been a slight
increase in the risk ratings of the performing loan portfolio.
Non-interest income was $17.9 million for the fiscal year ended September
30, 2005 compared to $11.6 million for the prior fiscal year. Deposit fees and
service charges increased by $3.8 million, or 57.5% to $10.4 million, of which
$1.8 million was generated from the acquired Warwick branches, while $2.0
million 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 $679,000 or 81.6% to $1.5 million largely due to pre-payment
penalties. Income derived from the Company's BOLI investments increased by $1.2
million, or 224.3%, due to the additional BOLI investment of $24.1 million
($13.3 million of which were added from the WSB acquisition), and the receipt of
death benefit proceeds. Title insurance fee income derived from the new
Hardenburgh Abstract Company, Inc. was $1.6 million. Gains on the sale of
securities were $369,000 for the 2005 fiscal year compared to $2.5 million for
the prior fiscal year. During the year ended September 30, 2005, the Company
also recorded gains on sales of loans totaling $206,000 compared to $320,000 for
the prior year. For the year ending September 30, 2005, there was 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 expense for the fiscal year ended September 30, 2005
increased by $14.4 million, or 25.7%. Excluding the 2004 charge of $5.0 million,
pre-tax, for the Charitable Foundation, non-interest expenses for the year ended
September 30, 2005 increased by $19.4 million, or 38.0%, to $70.6 million,
compared to $51.1 million for the same period in 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 $8.6
million, or 37.3%, to $31.6 million for the year ended September 30, 2005. The
increase was primarily attributable to the acquisitions. Occupancy and office
operations increased by $2.8 million, or 42.2%, for the year ended September 30,
2005, almost all of which was attributable to the acquisitions. Advertising and
promotion increased $1.1 million or 51.3%, primarily as a result of the
Company's new brand identity and the additional promotions in the Orange County
market. Amortization of core deposit intangible increased by $1.9 million as a
result of acquired deposits. Data and check processing expense increased $1.1
million, or 31.2%, 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 $2.5 million, or 44.4%, 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 Provident Bank following the
mergers. ATM and debit card expense increased $550,000, or 68.2%, primarily as a
result of the increase in the number of accounts.
Income Taxes. Income tax expense was $11.2 million for the fiscal year
ended September 30, 2005 compared to $5.1 million for fiscal 2004, representing
effective tax rates of 34.5% and 31.8%, respectively. The higher effective rate
in fiscal 2005 is primarily attributable to the lower proportion of non-taxable
securities to taxable, an increase in state taxes, and the release of tax
contingency reserves in 2004 that did not occur in 2005. These increases were
partially offset by a relative decrease in nondeductible stock-based
compensation expense.
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 establishing the charitable
foundation, and the after-tax effect of expenses associated with merging
acquired operations into the Company as well as a one time recognition of income
from a limited partnership. Although "net operating income" as defined by the
Company is not a GAAP measure, management believes that this information helps
investors understand the effect of acquisition activity and the establishment of
the charitable foundation in reported results. The following table describes the
effect of the Non-GAAP results.
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):
46
For the year ended September 30,
---------------------------------
2005 2004
---------- ----------
Diluted earnings per share $ 0.49 $ 0.29
Charge for establishment of
charitable foundation (1) 0.08
Merger integration expenses (1) 0.02 0.01
Income from partnership in low income housing (1) (0.01)
Rounding 0.01
---------- ----------
Diluted net operating earnings per share $ 0.50 $ 0.39
========== ==========
Net Income $ 21,242 $ 11,017
Charge for establishment of
charitable foundation (1) 3,000
Merger integration expenses (1) 674 464
Income from partnership in low income housing (1) (409)
---------- ----------
Net operating income $ 21,507 $ 14,481
========== ==========
----------
(1) After related tax effect at 40% marginal rate
Comparison of Operating Results for the Years Ended September 30, 2004 and
- --------------------------------------------------------------------------
September 30, 2003 Comparison of
- --------------------------------
Net income for the year ended September 30, 2004, was $11.0 million,
including after-tax charges of: (i) $3.0 million due to the establishment of the
charitable foundation in connection with the second-step conversion in January
2004, and (ii) $463,000 in merger integration costs for Ellenville National Bank
("ENB"). This compares to $11.3 million for the year ended September 30, 2003.
Diluted earnings per share were $0.29 for the year ended September 30, 2004
compared to $0.32 for the prior fiscal year. Excluding the above items, adjusted
diluted earnings per share would have been $0.39 for the fiscal year ended
September 30, 2004 compared to $0.32 for fiscal 2003. Earnings per share results
for the prior periods have been restated to reflect the 4.4323-to-one conversion
ratio as a result of the Company's second-step conversion.
Interest Income. Interest income on a tax-equivalent basis for the year
ended September 30, 2004 increased to $75.2 million, an increase of $17.1
million, or 29.4%, compared to the prior year. The increase was primarily due to
higher average balances of loans and securities, offset in large part by lower
average yields in both asset classes. Average interest-earning assets for the
year ended September 30, 2004 were $1.4 billion, an increase of $441.5 million,
or 44.0%, over average interest-earning assets for the year ended September 30,
2003 of $1.0 billion. Average loan balances grew by $203.6 million and average
balances of securities and other earning assets increased by $237.9 million. On
a tax-equivalent basis, average yields on interest earning assets fell by 59
basis points to 5.20% for the year ended September 30, 2004, from 5.79% for the
year ended September 30, 2003. Lower market interest rates were the primary
reason for the decline in asset yields.
Interest income on loans for the year ended September 30, 2004 grew 23.5%
to $54.1 million from $43.8 million for the prior fiscal year. Interest income
on commercial loans for the year ended September 30, 2004 increased to $26.2
million, up 72.7% from commercial loan interest income of $15.2 million for the
prior fiscal year. Average balances of commercial loans grew $165.4 million to
$385.7 million, and the impact of that increase offset a nine basis point
decline in average yield. The lower average yield was due, in part, to the
effect on commercial business loans of the lower average prime rate of 4.11% in
fiscal 2004 compared to 4.24% in fiscal 2003. Interest income on consumer loans
increased by $1.0 million, or 25.6%. Our fixed-rate consumer loans have short
average maturities, and our adjustable-rate consumer loans float with the prime
rate. Income earned on residential mortgage loans was $22.8 million for the year
ended September 30, 2004, down $1.8 million, or 7.3%, from the prior year.
Despite an increase of $8.7 million in average residential mortgage loan
balances, interest income was negatively impacted as yields declined by 60 basis
points to 5.84% from 6.44%, reflecting the impact of lower market rates and
refinancing activity.
47
Interest income on securities and other earning assets increased to $21.2
million for the year ended September 30, 2004, compared to $14.4 million for the
prior year. A 69 basis-point decline in yields was offset by a $237.9 million
increase in the average balances of securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2004
increased by $922,000 to $13.0 million, an increase of 7.6% compared to interest
expense of $12.1 million for the prior fiscal year. The increase was primarily
due to an increase of $241.1 million, or 29.1%, in average interest-bearing
liabilities resulting from the ENB acquisition. Average rates paid on
interest-bearing liabilities for the year ended September 30, 2004 declined by
25 basis points to 1.21% from 1.46% in fiscal 2003. The average interest rate
paid on certificates of deposit fell by 43 basis points to 1.70% for the year
ended September 30, 2004, from 2.13% for the prior year. For the year ended
September 30, 2004, average balances of lower cost savings and money market
accounts increased by $80.5 million and $29.0 million, respectively, while
average balances of certificates of deposit increased by $71.1 million compared
to the year ended September 30, 2003. The average interest rate paid on savings
and money market accounts fell by 10 and 21 basis points to 0.44% and 0.57%,
respectively, for the year ended September 30, 2004, from 0.54% and 0.78% for
the prior year.
Net Interest Income. On a tax-equivalent basis, net interest income for
the year ended September 30, 2004 increased to $62.3 million, compared to $46.1
million for the year ended September 30, 2003, an increase of $16.2 million or
35.0%, which was largely due to a $200.4 million increase in average net earning
assets. The increase in interest income of $17.1 million, or 29.4%, reflects a
decline in yield of 59 basis points to 5.20% on average earning assets, offset
by an increase in average earning asset balances of $441.5 million, or 44.0%, to
$1.4 billion as of September 30, 2004. The cost of interest bearing liabilities
increased by $922,000 as the average rate paid on interest bearing liabilities
decreased 25 basis points to 1.21%, but was offset by an increase in average
balances of $241.1 million to $1.1 billion. Net interest margin decreased from
4.59% to 4.31% and net interest spread decreased from 4.33% to 3.99%.
This increase in our net interest income was due, in large part, to the
relative changes in the yield and cost of our assets and liabilities as a result
of decreasing market interest rates since 2001. This decrease in market interest
rates has reduced the cost of interest-bearing liabilities faster and to a
greater extent than the rates on interest-earning assets such as loans and
securities. We have seen a reversal in recent months as the Board of Governors
of the Federal Reserve System has begun to increase the federal funds rate. By
historical standards, however, interest rates remain relatively low. However, if
recently low interest rate levels persist for an extended period of time, the
prepayment of assets could continue at a rate exceeding scheduled repayment.
Such funds received would most likely be reinvested at lower yields than that of
our previously held assets. Also, as the reduction in liability costs have
already exceeded the pace at which assets repriced downward, net interest margin
may be further compressed. Conversely, if market interest rates continue to rise
as a result of an economic recovery, (primarily if shorter term interest rates
rise without a corresponding increase in intermediate term interest rates)
competitive pressures could cause us to increase our funding costs and lead to
pressure on the net interest margin.
Provision for Loan Losses. We recorded $800,000 and $900,000,
respectively, in loan loss provisions for the years ended September 30, 2004 and
September 30, 2003, respectively. At September 30, 2004 the allowance for loan
losses totaled $17.4 million, or 1.74% of the loan portfolio, compared to $11.1
million, or 1.55% of the loan portfolio at September 30, 2003. Net charge-offs
for the year ended September 30, 2004 were $266,000 and $214,000, respectively
(an annual rate of 0.03% of the average loan portfolio).
The provision for loan losses was primarily attributable to growth in the
loan portfolio of $55.9 million, representing an increase of 9.09%. In addition,
higher risk loan categories, primarily commercial real estate loans and
commercial business loans provided most of this increase. In January 2004, we
acquired $219.2 million in loans as part of our acquisition of ENB. $5.7 million
of allowance for loan losses was acquired and recorded for the addition of the
loan portfolio of ENB. The allowance for loan losses was also increased as loans
that were delinquent, criticized or classified grew to $9.0 million at September
30, 2002 from $7.5 million at September 30, 2001, an increase of $1.5 million.
An increase in commercial mortgage loans of $2.9 million was partially offset by
a decrease in the retail categories (residential mortgages, equity lines of
credit and consumer loans) of $1.2 million and a decrease in commercial and
industrial loans of $294,000.
We increased the percentage allowance requirements in the retail loan
portfolio to reflect the higher delinquencies in the consumer loan portfolio. We
also increased the percentage allowance in the commercial loan portfolio to
reflect the potential impact of loan growth in new adjacent markets, and
continued growth in larger, more complex loans. There has also been a slight
increase in the risk ratings of the performing loan portfolio.
48
Non-Interest Income. Non-interest income for the fiscal year ended
September 30, 2004 was $11.6 million compared to $9.6 million for the fiscal
year ended September 30, 2003, an increase of $2.0 million, or 21.1%. Gains on
sales of securities and loans were $2.5 million and $320,000, respectively, for
the current year, representing a combined decrease of $327,000 from the
securities and loan sales gains of $2.0 million and $1.1 million, respectively,
for the prior year. Deposit fees and service charges increased to $6.6 million
for the current fiscal year, an increase of $2.1 million, or 48.2%, over the
same period last year. The increase is primarily attributable to increases in
service fees of $1.2 million resulting from the acquired branches, coupled with
volume-related increases in service fees on new and existing accounts at the
"legacy" Provident branches. Other income including loan fees and charges
increased by $207,000, or 10.2%, to $2.2 million for the year ended September
30, 2004, from $2.0 million for the same period last year. The increase is
primarily due to $552,000 in income from the Bank Owned Life Insurance ("BOLI")
for the current fiscal year compared to $483,000 for the same period last year,
as the BOLI program was only established for nine months of fiscal 2003, and
$107,000 in increased income on mutual funds and annuity sales.
Non-Interest Expense. Non-interest expense for the fiscal year ended
September 30, 2004 was $56.1 million, a $19.4 million, or 52.6%, increase over
expenses of $36.8 million for the fiscal year ended September 30, 2003. The
increase was primarily attributable to a contribution of $5.0 million for the
establishment of the Charitable Foundation in connection with the second-step
stock conversion in January, 2004 and other expenses associated with the
completed and pending acquisitions of ENB and Warwick, respectively. Major
increases in compensation and benefits ($2.5 million) and occupancy and office
operations ($1.1 million) were directly attributable to the increased operations
resulting from the acquisition of ENB. Compensation and benefits increased by an
additional $3.1 million due to annual salary increases and staff additions.
Stock-based compensation expense increased by $584,000, or 26.5%, as the
Company's per share value increased from an average of $7.43 per share for the
year ended September 30, 2003 to an average of $10.95 per share for the year
ended September 30, 2004. Also, the Company allocated additional shares related
to the $10.0 million ESOP plan purchase. Professional fees increased to $2.7
million for the year ended September 30, 2004, an increase of $1.1 million, or
68.0%, over the comparable period in the prior year. The increase is primarily
due to the additional fees associated with Sarbanes-Oxley compliance, and the
fees for contracted consultants engaged during the integration periods of ENB
and Warwick. Additional increases in non-interest expense categories for the
current fiscal year were advertising costs of $393,000, or 23.7%, and a
volume-related increase of $711,000, or 24.3%, in data and check processing
costs. The Company incurred $773,000 in integration costs for the current fiscal
year, due primarily to the expenses associated with the systems conversion of
ENB. Amortization of intangible assets increased by $1.6 million due to the
addition of the ENB core deposit intangible. Other non-interest expense
increased by $2.1 million, or 39.0%, primarily due to increases in SEC and
shareholder relations expenses ($231,000), supplies expenses ($520,000), postage
($269,000), ATM transaction expenses ($172,000), insurance expense ($199,000),
courier related expense ($148,000), and miscellaneous operational write-offs
($215,000).
Income Taxes. Income tax expense was $5.1 million for the fiscal year
ended September 30, 2004 compared to $6.3 million for fiscal 2003, representing
effective tax rates of 31.8% and 36.1%, respectively. The lower effective tax
rate in fiscal 2004 is attributable to an increase in tax-exempt securities, a
decrease in state taxes and the release of tax contingency reserves due, in
part, to closed examination years.
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 establishing the charitable
foundation, and the after-tax effect of expenses associated with merging
acquired operations into the Company as well as a one time recognition of income
from a limited partnership. Although "net operating income" as defined by the
Company is not a GAAP measure, management believes that this information helps
investors understand the effect of acquisition activity and the establishment of
the charitable foundation in reported results. The following table describes the
effect of the Non-GAAP results.
49
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):
For the year ended September 30,
--------------------------------
2004 2003
----------- -----------
Diluted earnings per share $ 0.29 $ 0.32
Charge for establishment of
charitable foundation (1) (0.08) --
Merger integration expenses (1) (0.01) --
Rounding 0.01 --
----------- -----------
Diluted net operating earnings per share $ 0.39 $ 0.32
=========== ===========
Net Income $ 11,017 $ 11,251
Charge for establishment of
charitable foundation (1) (3,000) --
Merger integration expenses (1) (464) --
----------- -----------
Net operating income $ 14,481 $ 11,251
=========== ===========
(1) After related tax effect at 40% marginal rate.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by the Company for general corporate purposes or for
customer needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include
lending commitments, are described below. At September 30, 2005 and 2004, the
Company had no interests in non-consolidated special purpose entities.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused business credit lines. These instruments are not
recorded in the consolidated balance sheet until funds are advanced under the
commitments. The Company provides these lending commitments to customers in the
normal course of business.
For commercial customers, loan commitments generally take the form of
revolving credit arrangements to finance customers' working capital
requirements. For retail customers, loan commitments are generally lines of
credit secured by residential property. At September 30, 2005, commercial and
retail loan commitments totaled $53.3 million. Standby letters of credit totaled
$17.1 million. Standby letters of credit are conditional commitments to
guarantee performance, typically of a contract or the financial integrity, of a
customer to a third party. Unused business and personal lines, which totaled
$230.0 million at September 30, 2005, are generally for short-term borrowings.
Provident Bank applies essentially the same credit policies and standards
as it does in the lending process when making these commitments. See Note 16 to
Consolidated Financial Statements in Item 8 hereof for additional information
regarding lending commitments.
Contractual Obligations. In the ordinary course of our operations, we
enter into certain contractual obligations. Such obligations include operating
leases for premises and equipment.
50
The following table summarizes our significant fixed and determinable
contractual obligations and other funding needs by payment date at September 30,
2005. The payment amounts represent those amounts due to the recipient and do
not include any unamortized premiums or discounts or other similar carrying
amount adjustments.
Payments Due by Period
---------------------------------------------------------------------------------
Less than One to Three Three to Five More Than
Contractual Obligations One Year Years Years Five Years Total
- ------------------------------------------ ------------ ------------ ------------- ------------ ------------
Long-term debt ........................... $ 235,212 $ 69,834 $ 68,763 $ 68,394 $ 442,203
Standby letters of credit ................ 16,734 377 30 -- 17,141
Operating leases ......................... 1,877 3,629 2,860 12,513 20,879
------------ ------------ ------------- ------------ ------------
Total ................................. $ 253,823 $ 73,840 $ 71,653 $ 80,907 $ 480,223
============ ============ ============= ============ ============
Commitments to extend credit ............. $ 61,110 $ 12,499 $ 1,213 $ 155,135 $ 229,957
============ ============ ============= ============ ============
Impact of Inflation and Changing Prices
The financial statements and related notes of Provident Bancorp have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). U.S. GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and
liabilities are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than the effects of
inflation.
Liquidity and Capital Resources
The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order 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.
Our primary sources of funds are deposits, principal and interest payments
on loans and securities, wholesale borrowings, the proceeds from maturing
securities and short-term investments, and the proceeds from the sales of loans
and securities. The scheduled amortization of loans and securities, as well as
proceeds from borrowings, are predictable sources of funds. Other funding
sources, however, such as deposit inflows, mortgage prepayments and mortgage
loan sales are greatly influenced by market interest rates, economic conditions
and competition.
Our cash flows are derived from operating activities, investing activities
and financing activities as reported in the Consolidated Statements of Cash
Flows in our consolidated financial statements. Our primary investing activities
are the origination of residential one- to four-family and commercial real
estate loans, and the purchase of investment securities and mortgage-backed
securities. During the years ended September 30, 2005, 2004 and 2003, our loan
originations totaled $515.4 million, $357.1 million and $451.1 million,
respectively. Purchases of securities available for sale totaled $385.3 million,
$468.4 million and $219.5 million for the years ended September 30, 2005, 2004
and 2003, respectively. Purchases of securities held to maturity totaled $23.7
million, $12.2 million and $27.6 million for the years ended September 30, 2005,
2004 and 2003, respectively. These activities were funded primarily by deposit
growth (a financing activity), and by principal repayments on loans and
securities. Loan origination commitments totaled $53.3 million at September 30,
2005, and consisted of $44.8 million at adjustable or variable rates and $8.5
million at fixed rates. Unused lines of credit granted to customers were $230.0
million at September 30, 2005. We anticipate that we will have sufficient funds
available to meet current loan commitments and lines of credit.
In December 2002 we invested $12.0 million in BOLI contracts and an
additional $10.0 million in April 2005. These 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. BOLI contracts totaled $37.7
million at September 30, 2005.
51
Deposit flows are generally affected by the level of market interest
rates, the interest rates and other conditions on deposit products offered by
our banking competitors, and other factors. The net (decrease)/increase in total
deposits (excluding deposits acquired during 2005, 2004 and 2002 as part of the
acquisitions of WSB, ENB and NBF, respectively) was $(11.7) million, $43.1
million and $69.9 million for the years ended September 30, 2005, 2004 and 2003,
respectively. Certificates of deposit that are scheduled to mature in one year
or less from September 30, 2005 totaled $406.2 million. Based upon prior
experience and our current pricing strategy, management believes that a
significant portion of such deposits will remain with us.
We generally remain fully invested and utilize additional sources of funds
through Federal Home Loan Bank of New York advances, of which $269.5 million was
outstanding at September 30, 2005. At September 30, 2005 we had the ability to
borrow an additional $31.6 million under our credit facilities with the Federal
Home Loan Bank. The Bank may borrow an additional $522,569 by pledging
securities not required to be pledged for other purposes as of September 30,
2005.
Recent Accounting Standards
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. The
provisions of this statement did not have a material impact on the consolidated
financial statements.
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 some differences. The Company estimates that annual expense
using the Black Scholes method beginning in fiscal 2006 will be approximately
$1,151 or $939 after tax and the diluted earnings per share impact will be
approximately $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.
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 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.
In December 2003, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. " The SOP is effective for loans acquired in
fiscal years beginning after December 15, 2004. The SOP addresses accounting for
differences
52
between contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities (loans) acquired in a
transfer if those differences are attributable, at least in part, to credit
quality. The SOP applies to loans acquired in business combinations but does not
apply to loans originated by the Company. Management does not believe the
provision of this standard will have a material impact on the results of future
operations.
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to
Loan Commitments. SAB No. 105 requires that when a company is recognizing and
valuing a loan commitment at fair value, only differences between the guaranteed
interest rate in the loan commitment and a market interest rate should be
included. Any expected future cash flows related to the customer relationships
or loan servicing should be excluded from the fair value measurement. The
expected future cash flows that are excluded from the fair-value determination
include anticipated fees for servicing the funded loan, late-payment charges,
other ancillary fees, or other cash flows from servicing rights. The guidance in
SAB No. 105 is effective for mortgage-loan commitments that are accounted for as
derivatives and are entered into after March 31, 2004. The adoption of the
provisions of this standard did not have a material impact on the results of
future operations.
53
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
Management of Interest Rate Risk
Management believes that our most significant form of market risk is
interest rate risk. The general objective of our interest rate risk management
is to determine the appropriate level of risk given our business strategy, and
then manage that risk in a manner that is consistent with our policy to limit
the exposure of our net interest income to changes in market interest rates.
Provident Bank's asset/liability management committee ("ALCO"), which consists
of certain members of senior management, evaluates the interest rate risk
inherent in certain assets and liabilities, our operating environment, and
capital and liquidity requirements, and modifies our lending, investing and
deposit gathering strategies accordingly. A committee of the Board of Directors
reviews the ALCO's activities and strategies, the effect of those strategies on
our net interest margin, and the effect that changes in market interest rates
would have on the economic value of our loan and securities portfolios as well
as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending,
investing, and deposit activities. We emphasize the origination of residential
fixed-rate mortgage loans that are repaid monthly and bi-weekly, fixed-rate
commercial mortgage loans, adjustable-rate residential and commercial mortgage
loans, commercial business loans and consumer loans. Depending on market
interest rates and our capital and liquidity position, we may retain all of the
fixed-rate, fixed-term residential mortgage loans that we originate or we may
sell all or a portion of such longer-term loans, generally on a
servicing-retained basis. We also invest in short-term securities, which
generally have lower yields compared to longer-term investments. Shortening the
average maturity of our interest-earning assets by increasing our investments in
shorter-term loans and securities helps to better match the maturities and
interest rates of our assets and liabilities, thereby reducing the exposure of
our net interest income to changes in market interest rates. These strategies
may adversely affect net interest income due to lower initial yields on these
investments in comparison to longer-term, fixed-rate loans and investments.
Management monitors interest rate sensitivity primarily through the use of
a model that simulates net interest income under varying interest rate
assumptions. Management also evaluates this sensitivity using a model that
estimates the change in Provident Bank's net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. Both models
assume estimated loan prepayment rates, reinvestment rates and deposit decay
rates that seem most likely based on historical experience during prior interest
rate changes.
The table below sets forth, as of September 30, 2005, the estimated
changes in our NPV and our net 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 (Decrease) Increase (Decrease) in
Change in in NPV Estimated Estimated Net Interest Income
Interest Rates Estimated ------------------------------ Net Interest -----------------------------
(basis points) NPV Amount Percent Income Amount Percent
- ------------------ ----------- ------------ ------------ ------------- ----------- ----------
(Dollars in thousands)
+300 $252,077 $(85,424) -25.3% $86,907 $(2,095) -2.4%
+200 281,491 (56,010) -16.6% 87,758 (1,244) -1.4%
+100 310,784 (26,717) -7.9% 88,535 (467) -0.5%
0 337,501 89,002
-100 349,054 11,553 3.4% 87,421 (1,581) -1.8%
-200 351,352 13,851 4.1% 84,159 (4,843) -5.4%
The table set forth above indicates that at September 30, 2005, in the
event of an immediate 200 basis point decrease in interest rates, we would be
expected to experience a 4.1% increase in NPV and a 5.4% decrease in net
interest income. In the event of an immediate 200 basis point increase in
interest rates, we would be expected to
54
experience a 16.6% decrease in NPV and a 1.4% decrease in net interest income.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest income table presented above assumes that the composition
of our interest-rate sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and, accordingly,
the data does not reflect any actions management may undertake in response to
changes in interest rates. The table also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or the repricing characteristics of specific assets and
liabilities. Accordingly, although the NPV and net interest income table
provides an indication of our sensitivity to interest rate changes at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.
During the past fiscal year, the federal funds rate has increased from
1.75% to 3.75% while U.S. Treasury rates in the five year maturities have
increased from 3.37% to 4.19% and in 10 year maturities from 4.12% to 4.32%.
This "flattening" of the yield curve has had the effect of increasing the rate
paid on interest bearing deposits at a faster pace than the rate earned on term
investments and fixed rate loans in the Bank's portfolio. Continued flattening
of the yield curve could cause further desintermediation of deposits into higher
yielding liabilities and further increase the rate paid for short term
borrowings while receiving little benefit on the yield earned on assets that are
invested in periods beyond the period of short term interest rates and could
cause a further decline in the market value of available sale securities without
a commensurate change in the national market value of liabilities used in the
calculation of "NPV".
ITEM 8. Financial statements and Supplementary Data
- ---------------------------------------------------
The following are included in this item:
(A) Report of Management on Internal Control Over Financial Reporting
(B) Report of Independent Registered Public Accounting Firm - Financial
Statements
(C) Report of Independent Registered Public Accounting Firm - Internal Control
Over Financial Reporting
(D) Consolidated Statements of Financial Condition as of September 30, 2005
and 2004
(E) Consolidated Statements of Income for the years ended September 30, 2005,
2004 and 2003
(F) Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended September 30, 2005, 2004 and 2003
(G) Consolidated Statements of Cash Flows for the years ended September 30,
2005, 2004 and 2003
(H) Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial
data) is provided in Note 21 of the Notes to Consolidated Financial Statements.
55
Report of Management on Internal Control Over Financial Reporting
-----------------------------------------------------------------
The Board of Directors and Stockholders
Provident New York Bancorp:
The management of Provident New York Bancorp, ("the Company") is
responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control system was designed to
provide reasonable assurance to the company's management and Board of Directors
regarding the preparation and fair presentation of published financial
statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
The Company's management assessed the effectiveness of the company's
internal control over financial reporting as of September 30, 2005. In making
this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control -Integrated
Framework. Based on our assessment we believe that, as of September 30, 2005,
the company's internal control over financial reporting is effective based on
those criteria.
KPMG LLP, an independent registered public accounting firm that audited
the financial statements in this Annual Report, has issued an attestation report
on management's assessment of the Company's internal control over financial
reporting as of September 30, 2005, which is included herein on page 59.
/s/ George Strayton
-------------------------------------------------
By: George Strayton
President, and Chief Executive Officer
(Principal Executive Officer)
December 8, 2005
/s/ Paul Maisch
-------------------------------------------------
By: Paul Maisch
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 8, 2005
56
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Provident New York Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Provident New York Bancorp and subsidiaries as of September 30,
2005 and 2004 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of September 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of September 30, 2005, based on the
criteria established in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated December 8, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
- -------------------
New York, New York
December 8, 2005
57
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Provident New York Bancorp:
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control Over Financial Reporting, that
Provident New York Bancorp and subsidiaries (the Company) maintained effective
internal control over financial reporting as of September 30, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of September 30, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
58
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company and subsidiaries as of September 30, 2005 and 2004, and
the related consolidated statements of income, stockholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 2005, and our report dated December 8, 2005 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York, New York
December 8, 2005
59
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2005 and 2004
(Dollars in thousands, except per share data)
Assets 2005 2004
----------- -----------
Cash and due from banks $ 64,117 $ 107,571
Securities (including $297,359 and $54,819 pledged as collateral
for borrowings in 2005 and 2004, respectively):
Available for sale, at fair value (note 4) 822,952 534,297
Held to maturity, at amortized cost (fair value of $71,151 and $70,230 in
2005 and 2004, respectively) (note 5) 70,949 69,078
----------- -----------
Total securities 893,901 603,375
----------- -----------
Loans (note 6):
One- to four-family residential mortgage loans 456,794 380,749
Commercial real estate, commercial business and construction loans 713,471 486,904
Consumer loans 191,808 129,981
Allowance for loan losses (22,008) (17,353)
----------- -----------
Total loans, net 1,340,065 980,281
----------- -----------
Loans held for sale -- 855
Federal Home Loan Bank ("FHLB") stock, at cost 21,333 10,247
Accrued interest receivable (note 7) 10,594 6,815
Premises and equipment, net (note 8) 32,101 16,846
Goodwill (note 3) 157,656 65,260
Core deposit intangible, net (note 3) 13,770 5,624
Bank owned life insurance 37,667 13,245
Deferred income taxes, net (note 11) 10,596 5,821
Other assets (notes 6, 11 and 12) 15,562 10,211
----------- -----------
Total assets $ 2,597,362 $ 1,826,151
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 1,726,401 $ 1,239,532
FHLB borrowings (note 10) 442,203 214,909
Mortgage escrow funds (note 6) 4,122 2,526
Other (note 11) 29,479 19,672
----------- -----------
Total liabilities 2,202,205 1,476,639
----------- -----------
Commitments and contingencies (notes 16 and 17)
Stockholders' equity (notes 1 and 15):
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; 43,505,659 shares
and 39,618,373 shares outstanding in 2005 and 2004, respectively) 459 397
Additional paid-in capital 345,631 269,325
Unallocated common stock held by employee stock ownership
plan ("ESOP") (note 12) (10,045) (10,854)
Treasury stock, at cost (2,423,893 shares in 2005 and 36,794 shares
in 2004) (note 15) (28,195) (432)
Common stock awards under recognition and retention plan
("RRP") (note 12) (8,810) --
Retained earnings 104,484 91,373
Accumulated other comprehensive loss, net of taxes (note 13) (8,367) (297)
----------- -----------
Total stockholders' equity 395,157 349,512
----------- -----------
Total liabilities and stockholders' equity $ 2,597,362 $ 1,826,151
=========== ===========
See accompanying notes to consolidated financial statements.
60
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended September 30, 2005, 2004 and 2003
(Dollars in thousands, except per share data)
2005 2004 2003
----------- ----------- -----------
Interest and dividend income:
Loans $ 80,773 $ 54,093 $ 43,815
Securities 34,353 20,231 13,586
Other earning assets 144 184 389
----------- ----------- -----------
Total interest and dividend income 115,270 74,508 57,790
----------- ----------- -----------
Interest expense:
Deposits (note 9) 16,076 7,901 7,775
Borrowings (note 10) 13,324 5,081 4,285
----------- ----------- -----------
Total interest expense 29,400 12,982 12,060
----------- ----------- -----------
Net interest income 85,870 61,526 45,730
Provision for loan losses (note 6) 750 800 900
----------- ----------- -----------
Net interest income after provision for loan losses 85,120 60,726 44,830
----------- ----------- -----------
Non-interest income:
Deposit fees and service charges 10,351 6,570 4,432
Loan fees and late charges 1,511 832 903
Net gain on sales of securities available for sale (note 4) 369 2,455 2,006
Net gain on sales of loans 206 320 1,096
Title insurance fees 1,560 -- --
Bank owned life insurance 1,790 552 483
Previously unrecognized low income housing
partnership investment 681 -- --
Other (note 6) 1,440 844 635
----------- ----------- -----------
Total non-interest income 17,908 11,573 9,555
----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits (note 12) 31,573 23,001 17,451
Stock-based compensation plans 2,960 2,790 2,206
Occupancy and office operations (note 17) 9,587 6,741 5,178
Advertising and promotion 3,102 2,050 1,657
Data and check processing 4,767 3,634 2,923
Professional fees 2,908 2,655 1,580
Stationery and office supplies 1,184 1,036 516
Merger integration costs (note 3) 1,124 773 4
Amortization of intangible assets (note 3) 3,939 2,063 438
ATM/debit card expense 1,357 807 647
Other 8,081 5,596 4,190
----------- ----------- -----------
Subtotal 70,582 51,146 36,790
Establishment of charitable foundation -- 5,000 --
----------- ----------- -----------
Total non-interest expense 70,582 56,146 36,790
----------- ----------- -----------
Income before income tax expense 32,446 16,153 17,595
Income tax expense (note 11) 11,204 5,136 6,344
----------- ----------- -----------
Net income $ 21,242 $ 11,017 $ 11,251
=========== =========== ===========
Earnings per common share (note 14):
Basic $ 0.49 $ 0.30 $ 0.33
Diluted 0.49 0.29 0.32
See accompanying notes to consolidated financial statements.
61
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss
Years Ended September 30, 2005, 2004 and 2003
(Dollars in thousands, except per share data)
Common Accumulated
Additional Unallocated Stock Other Total
Common Paid-in ESOP Awards Treasury Retained Comprehensive Stockholders'
Stock Capital Shares Under RRP Stock Earnings Loss Equity
------ ---------- ----------- --------- --------- --------- ------------- -------------
Balance at September 30, 2002 $ 828 $ 36,696 $ (1,974) $ (1,108) $ (5,874) $ 76,727 $ 5,572 $ 110,867
Net income -- -- -- -- -- 11,251 -- 11,251
Other comprehensive loss (note 13) -- -- -- -- -- -- (2,090) (2,090)
---------
Total comprehensive loss 9,161
Cash dividends paid ($0.13 per
common share) -- -- -- -- -- (2,421) -- (2,421)
Purchases of treasury stock
(307,233 shares) -- -- -- -- (2,343) -- -- (2,343)
ESOP shares allocated or committed
to be released for allocation -- 665 377 -- -- -- -- 1,042
Vesting (forfeiture) of RRP shares -- 521 -- 602 (96) -- -- 1,027
Stock option and other equity
transactions -- 150 -- -- 533 (159) -- 524
------ --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2003 828 38,032 (1,597) (506) (7,780) 85,398 3,482 117,857
Net income -- -- -- -- -- 11,017 -- 11,017
Other comprehensive loss (note 13) -- -- -- -- -- -- (3,779) (3,779)
---------
Total comprehensive income 7,238
Reorganization and common stock
offering (476) 185,254 -- -- 7,680 -- -- 192,458
Purchase of ENB Holding Co., Inc.
(3,969,671 shares) 40 39,657 -- -- -- -- -- 39,697
Establishment of ESOP Plan
(998,650 shares) -- -- (9,987) -- -- -- -- (9,987)
Formation of Charitable Foundation 4 3,996 -- -- -- -- -- 4,000
Cash dividends paid ($0.15 per
common share) -- -- -- -- -- (5,008) -- (5,008)
Purchases of treasury stock
(36,794 shares) -- -- -- -- (432) -- -- (432)
ESOP shares allocated or committed
to be released for allocation -- 1,166 730 -- -- -- -- 1,896
Vesting of RRP shares -- -- -- 506 -- -- -- 506
Stock option and other equity
transactions 1 1,220 -- -- 100 (34) -- 1,287
------ --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2004 397 269,325 (10,854) -- (432) 91,373 (297) 349,512
Net income -- 21,242 21,242
Other comprehensive loss (note 13) -- (8,070) (8,070)
---------
Total comprehensive income 13,172
Purchase of Warwick Community
Bancorp, Inc. ("WCBI")
(6,257,896 shares) 62 74,531 -- -- -- -- -- 74,593
Tax benefits:
Elimination of WCBI RRP Plan -- 276 -- -- -- -- -- 276
Stock-based compensation plans -- 265 -- -- -- -- -- 265
RRP awards -- -- -- (9,789) 9,803 (14) -- --
Stock option transactions -- 58 -- -- 695 (650) -- 103
ESOP shares allocated or committed
to be released for allocation -- 1,176 809 -- -- -- -- 1,985
Vesting of RRP shares -- -- -- 979 -- -- -- 979
Purchase of treasury stock
(3,206,318 shares) (38,261) (38,261)
Cash dividends paid ($0.17 per
common share) -- -- -- -- -- (7,467) -- (7,467)
------ --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2005 $ 459 $ 345,631 $ (10,045) $ (8,810) $ (28,195) $ 104,484 $ (8,367) $ 395,157
====== ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
62
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 2005, 2004 and 2003
(Dollars in thousands)
2005 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 21,242 $ 11,017 $ 11,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 750 800 900
Depreciation and amortization of premises
and equipment 3,227 2,381 2,025
Amortization of intangible assets 3,939 2,063 438
Net amortization of premiums and discounts
on securities 4,398 2,661 1,228
ESOP and RRP expense 2,964 2,402 2,069
Originations of loans held for sale (19,255) (14,638) (47,667)
Proceeds from sales of loans held for sale 20,316 16,467 48,765
Net gain on sales of securities available for sale (369) (2,455) (2,006)
Net gain on sales of loans (206) (320) (1,096)
Net gain on sales of fixed assets -- (73) --
Deferred income tax (benefit) expense 3,261 (1,076) 613
Net changes in accrued interest receivable
and payable (786) 208 468
Other adjustments (principally net changes in other
assets and other liabilities) (3,573) (3,239) 381
----------- ----------- -----------
Net cash provided by operating activities 35,908 16,198 17,369
----------- ----------- -----------
Cash flows from investing activities:
Purchases of securities:
Available for sale (385,270) (468,417) (219,481)
Held to maturity (23,673) (12,245) (27,605)
Proceeds from maturities, calls and other principal
payments on securities:
Available for sale 146,597 91,256 83,080
Held to maturity 23,872 19,634 40,533
Proceeds from sales of securities available for sale 61,522 163,263 39,416
Loan originations (496,117) (342,456) (403,456)
Loan principal payments 421,991 278,011 358,039
Purchase of Warwick Community Bancorp, Inc, net of cash
and cash equivalents acquired 164,486 -- --
Purchase of ENB Holding Co., Inc., net of cash
and cash equivalents acquired -- 60,355 --
Purchase of HSBC branch 18,938
Purchase of FHLB stock (3,481) (2,027) (2,872)
Increase in bank owned life insurance (11,102) (552) (12,000)
Purchases of premises and equipment (6,096) (3,631) (2,601)
Proceeds from sales of fixed assets -- 434 --
Proceeds from sales of other real estate owned -- 135 307
Other investing activities (55) --
----------- ----------- -----------
Net cash used in investing activities (88,333) (216,295) (146,640)
----------- ----------- -----------
63
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
Years Ended September 30, 2005, 2004 and 2003
(Dollars in thousands)
2005 2004 2003
----------- ----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits $ (11,671) $ 43,121 $ 69,927
Net increase in borrowings 68,636 50,152 61,789
Net (decrease) increase in mortgage escrow funds (2,910) (1,423) 202
Common stock offering proceeds, net -- 192,363 --
Treasury shares purchased (38,261) (432) (2,343)
Stock option transactions 103 125 524
Shares purchased for ESOP plan -- (9,987) --
Formation of charitable foundation -- 4,000 --
Recapitalization related to second-step stock conversion -- 95 --
Tax benefits generated from equity transactions 541 1,162 --
Cash dividends paid (7,467) (5,008) (2,421)
----------- ----------- -----------
Net cash provided by financing activities 8,971 274,168 127,678
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents $ (43,454) $ 74,071 $ (1,593)
Cash and cash equivalents at beginning of year 107,571 33,500 35,093
----------- ----------- -----------
Cash and cash equivalents at end of year $ 64,117 $ 107,571 $ 33,500
=========== =========== ===========
Supplemental information:
Interest payments $ 28,361 $ 8,948 $ 12,232
Income tax payments 8,511 4,461 5,088
Acquisition of Warwick Community Bancorp, Inc. (2005) and
ENB Holding Co., Inc. (2004), accounted for
using the purchase method:
Fair value of assets acquired $ 806,114 $ 406,267 $ --
Fair value of liabilities assumed 658,919 329,797 --
----------- -----------
Net fair value $ 147,195 $ 76,470 $ --
----------- -----------
Cash portion of purchase transaction $ 72,601 $ 36,773 $ --
Stock portion of purchase transaction 74,594 39,697 --
----------- -----------
Total consideration paid for acquisitions $ 147,195 $ 76,470 $
=========== ===========
Cash received from HSBC branch purchase $ 18,938 $ -- $ --
Loans transferred to real estate owned -- 112 151
Net change in unrealized gains recorded on securities
available for sale 13,494 (6,130) (3,513)
Change in deferred taxes on unrealized gains on securities
available for sale 5,375 2,447 1,008
Issuance of RRP shares 9,789 -- --
See accompanying notes to consolidated financial statements.
64
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Reorganization and Stock Offerings
Initial Public Offering
On January 7, 1999, Provident Bank (the Bank) completed its reorganization
into a mutual holding company structure (the Reorganization). As part of
the Reorganization, the Bank converted from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank (the Conversion).
The Bank became the wholly owned subsidiary of Provident Bancorp, Inc., a
federal corporation ("Provident Federal"), which became the majority-owned
subsidiary of Provident Bancorp, MHC ("the Mutual Holding Company").
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the Offering) and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113. Provident Bancorp, Inc. utilized net proceeds
of $24,000 to make a capital contribution to the Bank. The Company's
employee stock ownership plan (ESOP) purchased 309,120 shares (or 8% of
the number of shares sold in the Offering) in open market transactions,
during January and February 1999, at a total cost of $3,760.
Second Step Conversion
On January 14, 2004 Provident Bancorp, Inc. completed its stock offering
in connection with the second-step conversion from a mutual holding
company, a federal corporation, to a publicly held stock holding company,
incorporated in the State of Delaware. In anticipation of the second-step
conversion the Board of Directors of the MHC formed a Delaware corporation
known as "Provident Bancorp, Inc." Concurrent with the public stock
offering of shares, representing the former ownership interest of the MHC,
the MHC ceased to exist and Provident Federal was replaced by the new
Provident Bancorp. Inc.
As a result of the stock offering and conversion, the Bank was a wholly
owned subsidiary of Provident Bancorp, Inc. (Parent), which changed its
name as described below, a publicly held bank holding company.
Collectively, the Bank and Parent company are referred to herein as the
"Company". In addition, the Company simultaneously completed its
acquisition of E.N.B. Holding Company, Inc., ("ENB") located in
Ellenville, New York (see Note 3 "Acquisitions")
Provident Bancorp, Inc. 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 exchanged for 4.4323 new
shares of the Company's common stock.
Cash was paid in lieu of the issuance of fractional shares. In connection
with the Conversion, the number of shares of authorized but unissued
preferred stock was unchanged and the amount of common stock authorized
was increased to 75,000,000 shares par value $0.01. The Conversion was
accounted for as reorganization in corporate form with no change in the
historical basis of the Company's assets and liabilities. Outstanding
shares for purposes of calculating prior year per share amounts have been
adjusted to reflect to the exchange ratio applied in the Conversion.
65
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Prior year share data within the consolidated statements of condition not
been restated for the exchange ratio.
Costs related to the Offering, primarily marketing fees paid to the
Company's investment banking firm, professional fees, registration fees,
and printing and mailing costs were $3.5 million and accordingly, net
offering proceeds were $192.2 million.
On June 29, 2005 Provident Bancorp, Inc. changed its name to Provident New
York Bancorp in order to differentiate itself from the numerous bank
holding companies with similar names. It began trading on the NASDAQ under
the stock symbol "PBNY" on that date. Prior to that date its common stock
traded under the stock symbol "PBCP".
(2) Nature of Business and Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals
and businesses primarily in Rockland and Orange Counties, New York and the
contiguous Sullivan, Ulster and Putnam Counties, New York and Bergen
County, New Jersey. The Bank's principal business is accepting deposits
and, together with funds generated from operations and borrowings,
investing in various types of loans and securities. The Bank is a
federally-chartered savings association and its deposits are insured up to
applicable limits by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation (FDIC) and deposits related to the National
Bank of Florida ("NBF") and ENB acquisitions and Provident Municipal Bank
are insured by the Bank Insurance Fund of the FDIC. The Office of Thrift
Supervision (OTS) is the primary regulator for the Bank and for Provident
New York Bancorp. 83% of the Bank's loans are collateralized or dependent
on real estate.
(a) Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of
Provident New York Bancorp, Hardenburgh Abstract Title Company,
which provides title searches and insurance for residential and
commercial real estate, the Bank, and the Bank's wholly owned
subsidiaries. These subsidiaries are (i) Provident Municipal Bank
(PMB) which is a limited-purpose, New York State-chartered
commercial bank formed to accept deposits from municipalities in the
Company's market area, (ii) Provident REIT, Inc. and WSB Funding,
Inc. which are real estate investment trusts that hold a portion of
the Company's real estate loans, (iii) Provest Services Corp. I,
which has invested in a low-income housing partnership, and (iv)
Provest Services Corp. II, which has engaged a third-party provider
to sell mutual funds and annuities to the Bank's customers.
Intercompany transactions and balances are eliminated in
consolidation.
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and
expense. Actual results could differ significantly from these
estimates. An estimate that is particularly susceptible to
significant near-term change is the allowance for loan losses, which
is discussed below.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation. For purposes of reporting cash flows,
cash equivalents (if any) include highly-liquid, short-term
investments such as overnight federal funds.
66
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(b) Securities
Securities include US Treasury, US Government Agency, municipal and
corporate bonds, mortgage backed securities, collateralized mortgage
obligations, marketable and equity securities.
The Company can classify its securities among three categories -
held to maturity, trading, and available for sale. Management
determines the appropriate classification of the Company's
securities at the time of purchase.
Held-to-maturity securities are limited to debt securities for which
management has the intent and the Company has the ability to hold to
maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities held principally
for the purpose of selling them in the near term. These securities
are reported at fair value, with unrealized gains and losses
included in earnings. The Company does not engage in security
trading activities.
All other debt and marketable equity securities are classified as
available for sale. These securities are reported at fair value,
with unrealized gains and losses (net of the related deferred income
tax effect) excluded from earnings and reported in a separate
component of stockholders' equity (accumulated other comprehensive
income or loss). Available-for-sale securities include securities
that management intends to hold for an indefinite period of time,
such as securities to be used as part of the Company's
asset/liability management strategy or securities that may be sold
in response to changes in interest rates, changes in prepayment
risks, the need to increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest
income on a level-yield basis over the period to maturity or call
date. The cost of securities sold is determined using the specific
identification method. Unrealized losses are charged to earnings
when management determines that the decline in fair value of a
security is other than temporary.
Securities deemed to be other-than-temporarily impaired are
permanently written down from their original cost basis to reflect
the adjusted fair value subsequent to a measurement for impairment.
The impairment is deemed permanent if there are serious credit
concerns regarding a particular debt issuer, or severe fluctuation
in interest rates. The permanent adjustment is charged to current
earnings in the period of measurement. The method employed to
determine the loss in value is covered in Statement of Position
("SOP") 03-3, "Accounting for Certain Loans or Debt Securities
Acquired in a Transfer", which covers the requisite treatment for
purchased loans with potential credit loss and/or those which return
a lower than expected yield.
(c) Loans
Loans (other than loans held for sale) are reported at amortized
cost less the allowance for loan losses. Mortgage loans originated
and held for sale in the secondary market (if any) are reported at
the lower of aggregate cost or estimated fair value. Fair value is
estimated based on outstanding investor commitments or, in the
absence of such commitments, based on current investor yield
requirements. Net unrealized losses, if any, are recognized in a
valuation allowance by a charge to earnings. Interest income on
loans is accrued on a level yield method.
67
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A loan is placed on nonaccrual status when management has determined
that the borrower may be unable to meet contractual principal or
interest obligations, or when payments are 90 days or more past due,
unless well secured and in the process of collection (primarily
residential mortgages). Accrual of interest ceases and, in general,
uncollected past due interest is reversed and charged against
current interest income, related to the current year. Prior years'
non-accrual interest is charged to the allowance for loan losses.
Interest payments received on nonaccrual loans, including impaired
loans, are not recognized as income unless warranted based on the
borrower's financial condition and payment record.
The Company defers nonrefundable loan origination and commitment
fees, and certain direct loan origination costs, and amortizes the
net amount as an adjustment of the yield over the estimated life of
the loan. If a loan is prepaid or sold, the net deferred amount is
recognized in the statement of income at that time.
(d) Allowance for Loan Losses
The allowance for loan losses is established through provisions for
losses charged to earnings. Losses on loans (including impaired
loans) are charged to the allowance for loan losses when management
believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when
realized.
The allowance for loan losses is an amount that management believes
is necessary to absorb probable losses on existing loans that may
become uncollectible, based on evaluations of the collectability of
the loans. Management's evaluations, which are subject to periodic
review by the OTS, take into consideration factors such as the
Company's past loan loss experience, changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and collateral values, and current economic
conditions that may affect the borrowers' ability to pay. Future
adjustments to the allowance for loan losses may be necessary based
on changes in economic and real estate market conditions, further
information obtained regarding known problem loans, results of
regulatory examinations, the identification of additional problem
loans, and other factors.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that it will be unable to
collect all principal and interest contractually due. Certain loans
are individually evaluated for collectability in accordance with the
Company's ongoing loan review procedures (principally commercial
real estate, commercial business and construction loans).
Smaller-balance homogeneous loans are collectively evaluated for
impairment, such as residential mortgage loans and consumer loans.
Impaired loans are based on one of three measures -- the present
value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. If
the measure of an impaired loan is less than its recorded
investment, an impairment loss is recognized as a charge to the
allowance for loan losses.
(e) Mortgage Servicing Assets
The cost of an originated mortgage loan that is sold with servicing
retained is allocated between the loan and the servicing right. The
cost allocated to the retained servicing right is capitalized as a
separate asset and amortized thereafter in proportion to, and over
the period of, estimated net
68
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
servicing income. Capitalized mortgage servicing rights are included
in other assets and are assessed for impairment based on the fair
value of those rights, and impairment losses are recognized in a
valuation allowance by charges to income.
(f) Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) of New York, the
Bank is required to hold a certain amount of FHLB stock. This stock
is a nonmarketable equity security and, accordingly, is reported at
cost.
(g) Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets which range from three to 40 years. Leasehold improvements
are amortized on a straight-line basis over the terms of the
respective leases, including renewal options, or the estimated
useful lives of the improvements, whichever is shorter. Routine
holding costs are charged to expense as incurred, while significant
improvements are capitalized.
(h) Goodwill and Other Intangible Assets
Goodwill recorded in the acquisitions is not amortized to expense,
but instead is evaluated for impairment at least annually. The core
deposit intangibles recorded in acquisitions are amortized to
expense using an accelerated method over their estimated lives of
approximately eight years, and are evaluated for impairment at least
annually. Impairment losses on intangible assets are charged to
expense if and when they occur.
(i) Real Estate Owned
Real estate properties acquired through loan foreclosures are
recorded initially at estimated fair value less expected sales
costs, with any resulting write-down charged to the allowance for
loan losses. Subsequent valuations are performed by management, and
the carrying amount of a property is adjusted by a charge to expense
to reflect any subsequent declines in estimated fair value. Fair
value estimates are based on recent appraisals and other available
information. Routine holding costs are charged to expense as
incurred, while significant improvements are capitalized. Gains and
losses on sales of real estate owned are recognized upon
disposition. Real estate owned is included in other assets.
(j) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers
securities to counterparty under an agreement to repurchase the
identical securities at a fixed price on a future date. These
agreements are accounted for as secured financing transactions since
the Company maintains effective control over the transferred
securities and the transfer meets other specified criteria.
Accordingly, the transaction proceeds are recorded as borrowings and
the underlying securities continue to be carried in the Company's
securities portfolio. Disclosure of the pledged securities is made
in the consolidated statements of financial condition if the
counterparty has the right by contract to sell or repledge such
collateral.
69
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(k) Income Taxes
Net deferred taxes are recognized for the estimated future tax
effects attributable to "temporary differences" between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax laws or rates is recognized in income
tax expense in the period that includes the enactment date of the
change.
A deferred tax liability is recognized for all temporary differences
that will result in future taxable income. A deferred tax asset is
recognized for all temporary differences that will result in future
tax deductions, subject to reduction of the asset by a valuation
allowance in certain circumstances. This valuation allowance is
recognized if, based on an analysis of available evidence,
management determines that it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The
valuation allowance is subject to ongoing adjustment based on
changes in circumstances that affect management's judgment about the
realizability of the deferred tax asset. Adjustments to increase or
decrease the valuation allowance are charged or credited,
respectively, to income tax expense.
(l) Interest Rate Cap Agreements
Interest rate cap agreements are accounted for in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. These
agreements are cash flow hedges as they are used to reduce the
variability of cash flows from potentially higher interest payments
associated with upward interest rate repricings on a portion of the
Company's certificate of deposit accounts and borrowings. In
accordance with SFAS No. 133, the interest rate cap agreements are
reported at fair value. Changes in fair value attributable to time
value are reported in interest expense, while changes attributable
to intrinsic value are reported in accumulated other comprehensive
income until earnings are affected by the variability in cash flows
of the hedged liabilities. As of September 30, 2005 and 2004 the
Company had no derivative trading or hedging activities.
(m) Stock-Based Compensation Plans
Compensation expense is recognized for the ESOP equal to the fair
value of shares that have been allocated or committed to be released
for allocation to participants. Any difference between the fair
value at that time and the ESOP's original acquisition cost is
charged or credited to stockholders' equity (additional paid-in
capital). The cost of ESOP shares that have not yet been allocated
or committed to be released for allocation is deducted from
stockholders' equity. The Company accounts for the Stock Option Plan
in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation expense is recognized
only if the exercise price of an option is less than fair value of
the underlying stock on the date of the grant. The fair value of
shares awarded under the recognition and retention plan (RRP),
measured at the grant date, is recognized as unearned compensation
(a deduction from stockholders' equity) and amortized to
compensation expense as the shares become vested. Tax benefits
attributable to any tax deductions that are greater than the amount
of compensation expense recognized for financial statement purposes
are credited to additional paid-in capital. Beginning in October
2005, we will no longer account for stock options in
70
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
accordance with APB Opinion No. 25, as all publicly owned companies
will be required to account for stock-based compensation in
accordance with SFAS No. 123R, beginning in fiscal years ending
after December 30, 2005. SFAS No. 123R will require the recording of
compensation expense based on the fair value of the option grants in
the period they vest.
SFAS No. 123, Accounting for Stock-Based Compensation,
encourages the use of a fair-value-based method of accounting for
employee stock compensation plans, but permits the continued use of
the intrinsic-value-based method of accounting prescribed by APB
Opinion No. 25. Under SFAS No. 123, the grant-date fair value of
options is recognized as compensation expense over the vesting
period. The Company has elected to continue to apply APB Opinion No.
25 and disclose the pro forma information required by SFAS No. 123.
Had stock-based compensation expense been recognized in accordance
with SFAS No. 123, the Company's net income and earnings per common
share would have been adjusted to the following pro forma amounts:
Years ended September 30
---------------------------------------------
2005 2004 2003
----------- ----------- -----------
Net income, as reported $ 21,242 $ 11,017 $ 11,251
Add RRP expense included in
reported net income, net of
related tax effects 641 345 336
Deduct RRP and stock option
expense determined under
the fair-value-based method,
net of related tax effects (2,125) (539) (595)
----------- ----------- -----------
Pro forma net income $ 19,758 $ 10,823 $ 10,992
=========== =========== ===========
Earnigs per share:(1)
Basic, as reported $ 0.49 $ 0.30 $ 0.33
=========== =========== ===========
Basic, pro forma 0.46 0.29 0.32
=========== =========== ===========
Diluted, as reported 0.49 0.29 0.32
=========== =========== ===========
Diluted, pro forma 0.45 0.29 0.32
=========== =========== ===========
(1) Prior period share information has been adjusted to
reflect the 4.4323-to-one exchange ratio in connection with
the Company's second step conversion in January 2004.
The estimated per-share fair value of stock options granted in
fiscal 2005, 2004 and 2003 was $3.07, $2.71, and $1.13,
respectively, using the Black-Scholes option-pricing model with
assumptions as follows for the respective years: dividend yields of
1.4%, 1.4%, and 1.8%; expected volatility rates of 18.73%, 20.10%,
and 14.67%; risk-free interest rates of 4.46%, 2.7%, and 3.3%; and
expected option lives of approximately 7.9 years, 4 years, and 5
years.
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
71
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 option accelerations due to termination or
retirement of personnel, the effect of which cannot be measured with
any degree of certainty.
(n) Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding during the period.
Diluted EPS is computed in a similar manner, except that the
weighted average number of common shares is increased to include
incremental shares (computed using the treasury stock method) that
would have been outstanding if all potentially dilutive stock
options were exercised and unvested RRP shares became vested during
the periods. For purposes of computing both basic and diluted EPS,
outstanding shares include all shares issued to the Mutual Holding
Company (for the years ending September 30, 2004 and 2003), but
exclude unallocated ESOP shares.
(o) Segment Information
Public companies are required to report certain financial
information about significant revenue- producing segments of the
business for which such information is available and utilized by the
chief operating decision maker. As a community-oriented financial
institution, substantially all of the Company's operations involve
the delivery of loan and deposit products to customers. Management
makes operating decisions and assesses performance based on an
ongoing review of the community banking operation, which constitutes
the Company's only operating segment for financial reporting
purposes.
(3) Acquisitions
The Company has been active in acquisitions over the past several years.
All acquisitions were accounted for using 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. 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.
72
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Below is the 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 was 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 September 30, 2005
- ---------------------------
Goodwill $ -- $ 91,893 $ 52,297 $ 13,466 $157,656
Core deposit intangible 1,541 8,408 3,279 542 13,770
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.
73
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents unaudited pro forma information as if WSB and ENB
had been consummated on October 1, 2002. 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 necessarily reflect the results of
operations that would have occurred had the Company acquired WSB and ENB on
October 1, 2002.
Pro forma (unaudited)
2005 2004 2003
------------ ------------ ------------
Net interest income $ 85,013 $ 79,894 $ 82,504
Non-interest income 17,908 18,575 19,486
Non-interest expense 69,032 82,983 73,437
Net income 22,187 10,608 19,048
============ ============ ============
Basic earnings per share $ 0.52 $ 0.24 $ 0.43
============ ============ ============
Diluted earnings per share $ 0.51 $ 0.24 $ 0.42
============ ============ ============
The following table summarizes the purchase price allocation relating to the
acquisitions of WSB and ENB. This allocation is based on the estimated fair
values of assets acquired and liabilities assumed at the acquisition date.
WSB ENB
October 1, January 14,
2004 2004
------------ ------------
Cash and cash equivalents $ 83,458 $ 29,218
Securities available for sale 302,159 96,960
Loans, net 286,511 213,730
Goodwill 91,576 51,794
Core deposit intangible 10,395 6,624
Other assets 32,388 8,005
------------ ------------
Total assets 806,487 406,331
Deposits 480,054 327,284
Other liabilities 179,238 2,577
------------ ------------
Total liabilities assumed 659,292 329,861
------------ ------------
Net assets acquired $ 147,195 $ 76,470
============ ============
Consideration paid for acquisitions $ 147,195 $ 76,470
============ ============
The Company incurred $1,124 and $773 in costs associated with the integration of
acquisitions into the Company. These costs are included in non- interest expense
for the year ended September 30, 2005 and 2004, respectively.
74
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(4) Securities Available for Sale
The following is a summary of securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
September 30, 2005
- ------------------
Mortgage-backed securities
Fannie Mae $ 422,867 $ 99 $ (6,356) $ 416,610
Freddie Mac 71,733 9 (1,511) 70,231
Other 28,209 -- (272) 27,937
------------ ------------ ------------ ------------
522,809 108 (8,139) 514,778
------------ ------------ ------------ ------------
Investment securities
U.S. Government securities 19,006 -- (398) 18,608
Federal
agencies 243,763 -- (4,746) 239,017
State and municipal securities 50,176 87 (572) 49,691
Equities 947 5 (94) 858
------------ ------------ ------------ ------------
313,892 92 (5,810) 308,174
------------ ------------ ------------ ------------
Total available for sale $ 836,701 $ 200 $ (13,949) $ 822,952
============ ============ ============ ============
September 30, 2004
- ------------------
Mortgage-backed securities
Fannie Mae $ 238,112 $ 537 $ (1,175) $ 237,474
Freddie Mac 66,466 618 (277) 66,807
Other 15,659 377 (95) 15,941
------------ ------------ ------------ ------------
320,237 1,532 (1,547) 320,222
------------ ------------ ------------ ------------
Investment securities
U.S. Government and Agency securities 192,788 522 (1,008) 192,302
Corporate debt securities --
State and municipal securities 20,482 172 (95) 20,559
Equities 1,005 337 (128) 1,214
------------ ------------ ------------ ------------
214,275 1,031 (1,231) 214,075
------------ ------------ ------------ ------------
Total available for sale $ 534,512 $ 2,563 $ (2,778) $ 534,297
============ ============ ============ ============
Equity securities principally consist of Freddie Mac and Fannie Mae common and
preferred stock.
75
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of investment
securities available for sale (other than equity securities), by remaining
period to contractual maturity. Actual maturities may differ because certain
issuers have the right to call or prepay their obligations.
September 30, 2005
-----------------------------------
Amortized cost Fair Value
-------------- ------------
Remaining period to contractual maturity
Less than one year $ 17,721 $ 17,555
One to five years 249,872 244,839
Five to ten years 8,057 7,980
Greater than ten years 37,295 36,942
-------------- ------------
Total $ 312,945 $ 307,316
============== ============
Proceeds from sales of securities available for sale during the years ended
September 30, 2005, 2004 and 2003 totaled $61,522, $163,263 and $39,416,
respectively. These sales resulted in gross realized gains of $916, $2,556, and
$2,166 for the years ended September 30, 2005, 2004 and 2003, respectively, and
gross realized losses of $547, $101, and $160 in fiscal 2005, 2004 and 2003,
respectively.
Securities with carrying amounts of $162,580 and $54,819 were pledged as
collateral for borrowings under securities repurchase agreements at September
30, 2005 and September 30, 2004, respectively. U.S. Government and municipal
securities with carrying amounts of $134,779 and $113,491 were pledged as
collateral for municipal deposits and other purposes at September 30, 2005 and
September 30, 2004, respectively.
The following table summarizes those securities available for sale with
unrealized losses, segregated by the length of time in a continuous unrealized
loss position:
Continuous Unrealized Loss Position
--------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2005 Value Losses Value Losses Value Losses
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 318,663 $ (4,193) $ 178,500 $ (3,946) $ 497,163 $ (8,139)
U.S. Government and agency securities 162,731 (2,644) 94,895 (2,500) 257,626 (5,144)
State and municipal securities 37,665 (457) 5,546 (115) 43,211 (572)
Equity securities 105 -- 748 (94) 853 (94)
---------------------------------------------------------------------------------------
Total $ 519,164 $ (7,294) $ 279,689 $ (6,655) $ 798,853 $ (13,949)
=======================================================================================
76
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Continuous Unrealized Loss Position
-------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2004 Value Losses Value Losses Value Losses
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 171,592 $ (1,009) $ 28,750 $ (539) $ 200,342 $ (1,548)
U.S. Government and agency securities 102,026 (938) 4,956 (69) 106,982 (1,007)
State and municipal securities 9,898 (73) 1,409 (22) 11,307 (95)
Equity securities -- -- 871 (128) 871 (128)
---------------------------------------------------------------------------------------
Total $ 283,516 $ (2,020) $ 35,986 $ (758) $ 319,502 $ (2,778)
=======================================================================================
Substantially all of the unrealized losses at September 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 September 30, 2005. A total
of 269 available for sale securities were in a continuous unrealized loss
position for less than 12 months, and 97 securities for 12 months or longer. For
securities with fixed maturities, there are no securities past due or securities
for which the Company currently believes it is not probable that it will collect
all amounts due according to the contractual terms of the 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 September 30, 2005 except for an investment
in Freddie Mac perpetual preferred stock, for which it has 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).
77
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Securities Held to Maturity
The following is a summary of securities held to maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
September 30, 2005
- -------------------
Mortgage-backed securities
Fannie Mae $ 11,504 $ 152 $ (160) $ 11,496
Freddie Mac 12,838 122 (135) 12,825
Ginnie Mae & other 2,369 59 -- 2,428
---------- ---------- ---------- ----------
26,711 333 (295) 26,749
Investment securities
State and municipal 43,931 482 (321) 44,092
Other 307 7 (4) 310
---------- ---------- ---------- ----------
Subtotal 44,238 489 (325) 44,402
---------- ---------- ---------- ----------
Total held to maturity $ 70,949 $ 822 $ (620) $ 71,151
========== ========== ========== ==========
September 30, 2004
- -------------------
Mortgage-backed securities
Fannie Mae $ 17,157 $ 396 $ (140) $ 17,413
Freddie Mac 18,245 345 (126) 18,464
Other 3,473 92 -- 3,565
---------- ---------- ---------- ----------
38,875 833 (266) 39,442
Investment securities
State and municipal 29,894 922 (293) 30,523
Other 309 -- (44) 265
---------- ---------- ---------- ----------
30,203 922 (337) 30,788
---------- ---------- ---------- ----------
Total held to maturity $ 69,078 $ 1,755 $ (603) $ 70,230
========== ========== ========== ==========
78
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of investment
securities held to maturity, by remaining period to contractual maturity. Actual
maturities may differ because certain issuers have the right to call or repay
their obligations.
September 30, 2005
---------------------------
Amortized
cost Fair value
----------- -----------
Remaining period to contractual
maturity:
Less than one year $ 23,849 $ 23,816
One to five years 8,142 8,240
Five to ten years 9,413 9,508
Greater than ten years 2,834 2,838
----------- -----------
Total $ 44,238 $ 44,402
=========== ===========
There were no sales of securities held to maturity during the years ended
September 30, 2005, 2004 and 2003.
The following table summarizes those securities held to maturity with unrealized
losses, segregated by the length of time in a continuous unrealized loss
position:
Continuous Unrealized Loss Position
----------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2005 Value Losses Value Losses Value Losses
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 7,336 $ (175) $ 5,595 $ (120) $ 12,931 $ (295)
State and municipal securities 24,504 (161) 3,037 (160) 27,541 (321)
Other securities -- -- 100 (4) 100 (4)
----------- ----------- ----------- ----------- ----------- -----------
Total $ 31,840 $ ($336) $ 8,732 $ (284) $ 40,572 $ (620)
=========== =========== =========== =========== =========== ===========
Continuous Unrealized Loss Position
----------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2004 Value Losses Value Losses Value Losses
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ -- $ -- $ 16,409 $ (266) $ 16,409 $ (266)
State and municipal securities 4,421 (293) -- -- 4,421 (293)
Other securities 265 (44) -- -- 265 (44)
----------- ----------- ----------- ----------- ----------- -----------
Total $ 4,686 $ (337) $ 16,409 $ (266) $ 21,095 $ (603)
=========== =========== =========== =========== =========== ===========
79
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Substantially all of the unrealized losses on held to maturity securities
at September 30, 2005 relate to investment grade securities or local municipal
general obligation bonds 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 September 30, 2005. A total
of 68 held to maturity securities were in a continuous unrealized loss position
for less than 12 months, and 20 securities for 12 months or longer. For
securities with fixed maturities, there are no securities past due or securities
for which the Company currently believes it is not probable that it will collect
all amounts due according to the contractual terms of the investment. Because
the Company has the ability and intent to hold securities with unrealized losses
until maturity, the Company did not consider these investments to be
other-than-temporarily impaired at September 30, 2005. (See Recent Accounting
Standards for discussion of a new accounting pronouncement that will provide
additional guidance with respect to impairment evaluations).
(6) Loans
The components of the loan portfolio, excluding loans held for sale, were
as follows:
September 30,
----------------------------
2005 2004
----------- -----------
One- to four-family residential
mortgage loans:
Fixed rate $ 395,463 $ 328,337
Adjustable rate 61,331 52,412
----------- -----------
456,794 380,749
----------- -----------
497,936 327,414
Commercial business loans 148,825 105,196
Construction loans 66,710 54,294
----------- -----------
713,471 486,904
----------- -----------
Consumer loans:
Home equity lines of credit 134,997 80,013
Homeowner loans 40,221 26,921
Other consumer loans 16,590 23,047
----------- -----------
191,808 129,981
----------- -----------
Total loans 1,362,073 997,634
Allowance for loan losses (22,008) (17,353)
----------- -----------
Total loans, net $ 1,340,065 $ 980,281
=========== ===========
Total loans include net deferred loan origination costs of $2,110 and
$1,263 at September 30, 2005 and September 30, 2004, respectively.
A substantial portion of the Company's loan portfolio is secured by
residential and commercial real estate located in Rockland and Orange
Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam
Counties of New York and Bergen County, New Jersey. The ability of the
Company's borrowers to make principal and interest payments is dependent
upon, among other things, the level of overall
80
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
economic activity and the real estate market conditions prevailing within
the Company's concentrated lending area. Commercial real estate and
construction loans are considered by management to be of somewhat greater
credit risk than loans to fund the purchase of a primary residence due to
the generally larger loan amounts and dependency on income production or
sale of the real estate. Substantially all of these loans are
collateralized by real estate located in the Company's primary market
area.
The principal balances of non-performing loans were as follows:
2005 2004
------------------------------------ ------------------------------------
90 days past due 90 days past due
and still accruing Non-Accrual and still accruing Non-Accrual
------------------ ----------- ------------------ -----------
One- to four-family residential
mortgage loans $ 1,337 $ 65 $ -- $ 1,597
Commercial real estate loans 92 -- -- 488
Commercial business loans -- 120 -- 474
Consumer loans -- 27 -- 178
---------- ---------- ---------- ----------
Total non-performing loans $ 1,429 $ 212 $ -- $ 2,737
========== ========== ========== ==========
Gross interest income that would have been recorded if the foregoing non-accrual
loans had remained current in accordance with their contractual terms totaled
$8, $163, and $354, for the years ended September 30, 2005, 2004 and 2003,
respectively, compared to interest income actually recognized (including income
recognized on a cash basis) of $7, $119, and $167, respectively.
The Company's total recorded investment in impaired loans, as defined by SFAS
No. 114, was $0 and $231 at September 30, 2005 and September 30, 2004,
respectively. Substantially all of these loans were collateral-dependent loans
measured based on the fair value of the collateral. The Company determines the
need for an allowance for loan impairment under SFAS No. 114 on a loan-by-loan
basis. An impairment allowance was not required at September 30, 2005 and 2004
due to the adequacy of collateral values. The Company's average recorded
investment in impaired loans was $116 and $523 during the years ended September
30, 2005 and 2004, respectively.
Activity in the allowance for loan losses is summarized as follows:
Year ended September 30,
------------------------------------------
2005 2004 2003
---------- ---------- ----------
Balance at beginning of year $ 17,353 $ 11,069 $ 10,383
Provision for loan losses 750 800 900
Charge-offs (1,153) (484) (352)
Recoveries 178 218 138
Allowance recorded in acquisitions 4,880 5,750 --
---------- ---------- ----------
Balance at end of year $ 22,008 $ 17,353 $ 11,069
========== ========== ==========
81
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Provisions for losses and other activity in the allowance for losses on
real estate owned were insignificant during the years ended September 30,
2005, 2004 and 2003. Certain residential mortgage loans originated by the
Company are sold in the secondary market. Other non-interest income
includes net gains on such sales of $206 in fiscal 2005, $320 in fiscal
2004, and $1,096 in fiscal 2003. At September 30, 2005 and 2004 there was
$0 and $855 in loans held for sale, respectively. Other assets at
September 30, 2005 and 2004 include capitalized mortgage servicing rights
with an amortized cost of $836 and $746, respectively, which approximated
fair value.
The Company generally retains the servicing rights on mortgage loans sold.
Servicing loans for others involves collecting payments, maintaining
escrow accounts, making remittances to investors and, if necessary,
processing foreclosures. Mortgage loans serviced for others totaled
approximately $108,856 and $84,924 at September 30, 2005 and 2004,
respectively. Mortgage escrow funds include balances of $554 and $493 at
September 30, 2005 and 2004, respectively, related to loans serviced for
others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows:
September 30,
--------------------------
2005 2004
---------- ----------
Loans $ 4,908 $ 3,095
Securities 5,686 3,720
---------- ----------
Total accrued interest receivable $ 10,594 $ 6,815
========== ==========
(8) Premises and Equipment, Net
Premises and equipment are summarized as follows:
September 30,
--------------------------
2005 2004
---------- ----------
Land and land improvements $ 3,867 $ 1,772
Buildings 21,146 10,247
Leasehold improvements 7,784 6,312
Furniture, fixtures, and equipment 19,328 15,340
---------- ----------
52,125 33,671
Accumulated depreciation and amortization (20,024) (16,825)
---------- ----------
Total premises and equipment, net $ 32,101 $ 16,846
========== ==========
82
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(9) Deposits
Deposit balances and weighted average interest rates are summarized as
follows:
September 30,
------------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Amount Rate Amount Rate
----------- ---------- ----------- -----------
Demand deposits:
Retail $ 170,434 --% $ 122,276 --%
Commercial 214,647 -- 142,819 --
Business NOW deposits 60,214 0.44 44,176 0.31
Personal NOW deposits 105,730 0.29 63,528 0.21
Savings deposits 481,674 0.53 360,138 0.45
Money market deposits 222,091 1.27 173,272 0.64
Certificates of deposit 471,611 2.94 333,323 1.86
----------- -----------
Total deposits $ 1,726,401 1.15% $ 1,239,532 0.74%
=========== ===========
Municipal deposits held by PMB totaled $116.9 million and $106.7 million
at September 30, 2005 and September 30, 2004, respectively. PMB commenced
its public deposit operations on April 19, 2002. See note 4, Securities
Available for Sale, for the amount of securities that are pledged as
collateral for municipal deposits and other purposes.
Certificates of deposit had remaining periods to contractual maturity as
follows:
September 30,
---------------------------
2005 2004
----------- -----------
Remaining period to contractual maturity:
Less than one year $ 406,181 $ 277,812
One to two years 40,947 25,874
Two to three years 10,131 17,065
Greater than three years 14,352 12,572
----------- -----------
Total certificates of deposit $ 471,611 $ 333,323
=========== ===========
Certificate of deposit accounts with a denomination of $100 or more
totaled $131,687 and $93,912 at September 30, 2005 and 2004, respectively.
The FDIC generally insures depositor accounts up to $100 as defined in the
applicable regulations.
83
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Interest expense on deposits is summarized as follows:
Years ended September 30,
-------------------------------------------
2005 2004 2003
----------- ----------- -----------
Savings deposits $ 3,070 $ 1,570 $ 1,497
Money market and NOW deposits 3,155 1,048 1,155
Certificates of deposit 9,851 5,283 5,123
----------- ----------- -----------
Total interest expense $ 16,076 $ 7,901 $ 7,775
=========== =========== ===========
(10) FHLB and Other Borrowings
The Company's FHLB and other borrowings and weighted average interest
rates are summarized as follows:
September 30,
--------------------------------------------------------------
2005 2004
---------------------------- -----------------------------
Amount Rate Amount Rate
----------- ---------- ----------- ----------
By type of borrowing:
Advances $ 296,636 3.86% $ 164,947 2.81%
Repurchase agreements 145,567 3.62% 49,962 3.49
----------- -----------
Total borrowings $ 442,203 3.78% $ 214,909 2.97%
=========== ===========
By remaining period to maturity:
Less than one year $ 235,212 3.84% $ 94,961 2.11%
One to two years 18,115 3.62% 28,000 3.18
Two to three years 51,719 3.62% 18,651 3.65
Three to four years 52,450 3.73% 29,443 3.78
Four to five years 16,313 3.78% 40,017 3.76
Greater than five years 68,394 3.73% 3,837 4.89
----------- -----------
Total borrowings $ 442,203 3.78% $ 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
September 30, 2005 and September 30, 2004, the Bank had pledged mortgages
totaling $301,154 and $267,457, respectively. Based on outstanding
borrowings under the line totaling $269,529 and $164,969 as of September
30, 2005 and September 30, 2004, the bank had unused borrowing capacity
under the FHLB of New York Line of Credit of $31,625 and $102,489,
respectively. The Bank may borrow an additional $522,569 by pledging
securities not required to be pledged for other purposes as of September
30, 2005.
84
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Securities repurchase agreements had weighted average remaining terms to
maturity of approximately 3.4 years and 2.7 years at September 30, 2005
and 2004, respectively. Average borrowings under securities repurchase
agreements were $164,541 and $43,183 during the years ended September 30,
2005 and 2004, respectively, and the maximum outstanding month-end balance
was $167,062 and $50,246, respectively.
FHLB borrowings of $122.1 million and $20,000 at September 30, 2005 and
2004 respectively are callable quarterly, at the discretion of the FHLB.
These borrowings have a weighted average remaining term to the contractual
maturity dates of approximately 3.3 years and two years and weighted
average interest rates of 4.71% and 4.9% at September 30, 2005 and 2004,
respectively.
Interest expense on borrowings consists principally of overnight and
short-term advances from FHLB, and were $15.7 million, $5.1 million, and
$4.3 million for years ending September 30, 2005, 2004, and 2003,
respectively.
(11) Income Taxes
Income tax expense consists of the following:
Years ended September 30,
---------------------------------------------
2005 2004 2003
----------- ----------- -----------
Current tax expense:
Federal $ 7,340 $ 5,556 $ 5,137
State 603 656 594
----------- ----------- -----------
7,943 6,212 5,731
----------- ----------- -----------
Deferred tax expense (benefit):
Federal 2,634 (789) 610
State 627 (287) 3
----------- ----------- -----------
3,261 (1,076) 613
----------- ----------- -----------
Total income tax expense $ 11,204 $ 5,136 $ 6,344
=========== =========== ===========
85
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Actual income tax expense differs from the tax computed based on pre-tax income
and the applicable statutory Federal tax rate, for the following reasons:
Years ended September 30,
-----------------------------------------------
2005 2004 2003
----------- ----------- -----------
Tax at Federal statutory rate $ 11,356 $ 5,654 $ 6,158
State income taxes, net of Federal
tax benefit 800 240 388
Tax-exempt interest (653) (460) (234)
Nondeductible portion of ESOP
expense 416 408 222
BOLI income (627) (193) (169)
Low-income housing tax credits (72) (72) (72)
Other, net (16) (441) 51
----------- ----------- -----------
Actual income tax expense $ 11,204 $ 5,136 $ 6,344
=========== =========== ===========
Effective income tax rate 34.5% 31.8% 36.1%
=========== =========== ===========
86
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are summarized below. The net amount is reported in other assets
or other liabilities in the consolidated statements of financial condition.
September 30,
---------------------------
2005 2004
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 8,994 $ 7,092
Deferred compensation 3,194 2,540
Purchase accounting adjustments 2,663 --
Contribution carryforward 1,343 1,836
Depreciation of premises and equipment -- 661
Net unrealized loss on securities available for sale 5,483 124
Goodwill 893 --
Accrued post retirement expense 1,072 122
Other 984 468
----------- -----------
Total deferred tax assets 24,626 12,843
----------- -----------
Deferred tax liabilities:
Undistributed earnings of subsidiary not
consolidated for tax returns purposes (REIT income) 6,455 4,337
Prepaid pension costs 1,222 582
Core deposit intangibles 3,821 958
Purchase accounting fair value adjustments 883 493
Depreciation of premises and equipment 406 --
Other 1,243 652
----------- -----------
Total deferred tax liabilities 14,030 7,022
----------- -----------
Net deferred tax asset $ 10,596 $ 5,821
=========== ===========
87
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Based on management's consideration of historical and anticipated future
pre-tax income, as well as the reversal period for the items giving rise
to the deferred tax assets and liabilities, a valuation allowance for
deferred tax assets was not considered necessary at September 30, 2005 and
2004.
The Bank is subject to special provisions in the Federal and New York
State tax laws regarding its allowable tax bad debt deductions and related
tax bad debt reserves. Tax bad debt reserves consist of a defined
"base-year" amount, plus additional amounts accumulated after the base
year. Deferred tax liabilities are recognized with respect to reserves
accumulated after the base year, as well as any portion of the base-year
amount that is expected to become taxable (or recaptured) in the
foreseeable future. The Bank's base-year tax bad debt reserves for Federal
tax purposes were $9,313 and $4,600 at September 2005 and 2004
respectively. The Bank's tax bad debt reserves for NY State purposes were
$46,478 and $34,900 at September 30, 2005 and 2004, respectively.
Associated deferred tax liabilities of $5,988 and $3,660 have not been
recognized at those dates since the Company does not expect that the
Federal base-year reserves and New York State bad debt reserves will
become taxable in the foreseeable future. Under the tax laws, events that
would result in taxation of certain of these reserves include (i)
redemptions of the Bank's stock or certain excess distributions by the
Bank to Provident New York Bancorp and (ii) failure of the Bank to
maintain a specified qualifying-assets ratio or meet other thrift
definition tests for New York State tax purposes.
(12) Employee Benefit Plans and Stock-Based Compensation Plans
(a) Pension Plan
The Company has a noncontributory defined benefit pension plan
covering substantially all of its employees. Employees who are
twenty-one years of age or older and have worked for the Company for
one year are eligible to participate in the plan. The Company's
funding policy is to contribute annually an amount sufficient to
meet statutory minimum funding requirements, but not in excess of
the maximum amount deductible for Federal income tax purposes.
Contributions are intended to provide not only for benefits
attributed to service to date, but also for benefits expected to be
earned in the future. As part of the acquisitions of ENB and WSB the
Company assumed the ENB and WSB Pension Plans, both of which were
defined benefit plans. The ENB plan was frozen in connection with
the merger of ENB into the Company. The WSB Pension Plan, which was
already frozen at the time of acquisition, has also been assumed by
the Company.
88
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of changes in the projected benefit obligation and
fair value of plan assets, together with a reconciliation of the funded status
to the amount of prepaid pension costs reported in other assets in the
consolidated statements of financial condition:
September 30,
------------------------------
2005 2004
----------- -----------
Changes in projected benefit obligation:
Beginning of year $ 20,904 $ 11,520
Service cost 1,291 787
Interest cost 1,606 990
Actuarial loss 492 903
Acquisition of WSB/ENB plans 6,902 7,132
Benefits paid (932) (428)
----------- -----------
End of year 30,263 20,904
----------- -----------
Changes in fair value of plan assets:
Beginning of year 19,644 9,896
Actual gain on plan assets 2,444 802
Employer contributions 2,774 3,309
Employee contributions -- 20
Acquisition of WSB/ENB plans 5,843 6,236
Benefits and distributions paid (967) (619)
----------- -----------
End of year 29,738 19,644
----------- -----------
Funded status at end of year (525) (1,260)
Unrecognized net actuarial loss 3,690 4,154
Unrecognized prior service cost (32) (43)
Unrecognized net transition obligation -- 10
----------- -----------
Prepaid pension costs $ 3,133 $ 2,861
=========== ===========
2005 2004
----------- -----------
Amounts recognized in the consolidated balance sheet were:
Prepaid benefit cost (asset) $ 4,964 $ 3,706
Accrued benefit cost (liability) (1,911) (845)
Pre-tax charge to accumulated other comprehensive income 80 --
----------- -----------
$ 3,133 $ 2,861
=========== ===========
A discount rate of 5.75% and a rate of increase in future compensation levels of
4.0% were used in determining the actuarial present value of the projected
benefit obligation at September 30, 2005 (6.00% and 5.00%, respectively, at
September 30, 2004). The weighted average long-term rate of return on plan
assets was 7.21% for fiscal 2005 and 7.75% for fiscal 2004. The discount rate,
long-term rate of return on plan assets and
89
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
future compensation increase assumptions for the WSB and ENB Plan at the dates
of acquisition were 6.0%, 7.0% and 0.0%, respectively, for the year ended
September 30, 2005.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
2006 $ 1,183
2007 1,250
2008 1,373
2009 1,536
2010 1,754
2011-2015 10,832
90
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The components of the net periodic pension expense were as follows:
Years ended September 30,
2005 2004 2003
Service cost $ 1,291 $ 787 $ 669
Interest cost 1,606 990 673
Expected return on plan assets (1,789) (1,068) (647)
Amortization of prior service cost (11) (13) (14)
Amortization of net transition obligation 10 26 26
Recognized net actuarial loss 283 194 155
----------- ----------- -----------
Net periodic pension expense $ 1,390 $ 916 $ 862
=========== =========== ===========
Weighted-average pension plan asset allocations based on the fair
value of such assets at September 30, 2005, and target allocations
for 2006, by asset category, are as follows:
Target
September 30, 2005 Allocation 2006
------------------ ---------------
Equity securities 56% 40-60%
Fixed income 40 20-40
Cash 2 0-20
Real Estate 2 0
The expected long-term rate of return assumption as of each
measurement date was determined by taking into consideration asset
allocations as of each such date, historical returns on the types of
assets held and current economic factors. The Company's investment
policy for determining the asset allocation targets was developed
based on the desire to maximize total return while placing a strong
emphasis on preservation of capital. In general, it is hoped that,
in the aggregate, changes in the fair value of plan assets will be
less volatile than similar changes in appropriate market indices.
Returns on invested assets are periodically compared with target
market indices for each asset type to aid management in evaluating
such returns.
There were no pension plan assets consisting of Provident New
York Bancorp equity securities (common stock) at September 30, 2005
and at September 30, 2004.
The Company makes contributions to its funded qualified
pension plans as required by government regulation or as deemed
appropriate by management after considering the fair value of plan
assets, expected returns on such assets, and the present value of
benefit obligations of the plans. At this time, the Company can not
reasonably estimate the contributions it will make in 2006.
The Company has also established a non-qualified Supplemental
Executive Retirement Plan to provide certain executives with
supplemental retirement benefits in addition to the benefits
provided by the pension plan, due to amounts limited by the Internal
Revenue Code of 1986, as amended ("IRS Code"). The periodic pension
expense for the supplemental plan amounted to $172, $113, and $97
for the years ended September 30, 2005, 2004 and 2003, respectively.
The actuarial present value of the projected benefit obligation was
$1,373 and $877 at September 30, 2005 and 2004,
91
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
respectively, and the vested benefit obligation was $1,338 and $800
for the same periods, respectively, all of which is unfunded.
(b) Other Postretirement Benefits Plan
The Company's postretirement health care plan, which is unfunded,
provides optional medical, dental and life insurance benefits to
retirees. In accordance with SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, the cost of
postretirement benefits is accrued over the years in which employees
provide services to the date of their full eligibility for such
benefits. As permitted by SFAS No. 106, the Company has elected to
amortize the transition obligation for accumulated benefits as an
expense over a 20-year period.
92
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Data relating to the postretirement benefit plan follows:
September 30,
------------------------------
2005 2004
----------- -----------
Change in accumulated postretirement benefit obligation:
Beginning of year $ 377 $ 319
Service cost 74 8
Interest cost 116 23
Amendments 0 (32)
Actuarial (gain) loss (1,296) 59
Business combinations 2,158 --
Benefits paid (99) --
----------- -----------
End of year 1,330 377
----------- -----------
Changes in fair value of plan assets:
Beginning of year -- --
Actual return on plan assets -- --
Employer contributions 99 --
Benefits paid (99) --
----------- -----------
End of year -- --
----------- -----------
Funded status 1,330 377
Unrecognized net actuarial gain (1,296) (48)
Unrecognized service cost 11 16
Unrecognized transition obligation 101 111
----------- -----------
Accrued benefit obligation $ 2,514 $ 298
=========== ===========
The components of the net postretirement benefit expense were as follows:
For years ended September 30,
2005 2004 2003
----------- ----------- -----------
Service cost $ 74 $ 8 10
Interest cost 116 23 21
Amortization of transition obligation 10 10 12
Amortization of prior service cost 5 5 6
Amortization of actuarial gain (48) (3) (9)
----------- ----------- -----------
Total $ 157 $ 43 $ 40
=========== =========== ===========
Estimated Future Benefit Payments
The following benefit payments are expected to be paid in future years:
2006 $ 85
2007 90
2008 88
2009 92
2010 94
2011-2015 557
93
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Assumptions used for plan 2005 2004
------------------------------------------------ ---- ----
Medical trend rate next year 4.50% 5.00%
Ultimate trend rate 4.50% 4.50%
Discount rate 6.00% 6.00%
Discount rate used to value periodic cost 6.00% 6.75%
There is no impact of a 1% increase or decrease in health care trend
rate due to the Company's cap on cost.
(c) Employee Savings Plan
The Company also sponsors a defined contribution plan established
under Section 401(k) of the Internal Revenue Code. Eligible
employees may elect to contribute up to 50% of their compensation to
the plan. The Company currently makes matching contributions equal
to 50% of a participant's contributions up to a maximum matching
contribution of 3% of compensation. Voluntary and matching
contributions are invested, in accordance with the participant's
direction, in one or a number of investment options. Savings plan
expense was $493, $294, and $248 for the years ended September 30,
2005, 2004 and 2003, respectively.
(d) Employee Stock Ownership Plan
In connection with the Reorganization and Offering in 1999,
Provident Federal established an ESOP for eligible employees who
meet certain age and service requirements. The ESOP borrowed $3,760
from Provident Federal and used the funds to purchase 1,370,112
shares of common stock in the open market subsequent to the
Offering. The Bank makes periodic contributions to the ESOP
sufficient to satisfy the debt service requirements of the loan
which has a ten-year term and bears interest at the prime rate. The
ESOP uses these contributions, and any dividends received by the
ESOP on unallocated shares, to make principal and interest payments
on the loan.
In connection with the Second-Step Stock Conversion and Offering in
January 2004, the Company established an additional ESOP for
eligible employees. The ESOP borrowed $9,987 from Provident New York
Bancorp and used the funds to purchase 998,650 shares of common
stock in the offering. The term of the second ESOP loan is twenty
years.
ESOP shares are held by the plan trustee in a suspense account until
allocated to participant accounts. Shares released from the suspense
account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested
in the allocated shares over a period not to exceed five years. Any
forfeited shares are allocated to other participants in the same
proportion as contributions.
ESOP expense was $1,993, $1,896, and $1,012 for the years ended
September 30, 2005, 2004 and 2003, respectively. Through September
30, 2005 and 2004, a cumulative total of 1,120,336 shares and
923,717 shares, respectively, have been allocated to participants or
committed to be released for allocation, respectively. The cost of
ESOP shares that have not yet been allocated to participants or
94
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
committed to be released for allocation is deducted from
stockholders' equity (1,248,427 shares with a cost of $10,045 and a
fair value of approximately $14,569 at September 30, 2005 and
1,445,045 shares with a cost of $10,854 and a fair value of
approximately $16,965 at September 30, 2005, respectively).
A supplemental savings plan has also been established for certain
senior officers to compensate executives for benefits provided under
the Bank's tax qualified plans that are limited by the IRS Code.
Expense recognized for this plan was $157, $198, and $67 for the
years ended September 30, 2005, 2004 and 2003, respectively. Amounts
accrued and recorded in other liabilities at September 30, 2005 and
2004 were $2.1 million and $1.4 million respectively.
(e) Recognition and Retention Plan
In February 2000, the Company's stockholders approved the Provident
Bank 2000 Recognition and Retention Plan (the RRP). The principal
purpose of the RRP is to provide executive officers and directors a
proprietary interest in the Company in a manner designed to
encourage their continued performance and service. A total of
856,320 shares were awarded under the RRP in February 2000, and the
grant-date fair value of these shares of $(2,995) was charged to
stockholders' equity. The awards vest at a rate of 20% on each of
five annual vesting dates, the first of which was September 30,
2000. In January 2005, the Company's stockholders approved the
Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the terms
of which the Company is authorized to issue up to 798,920 shares of
common stock as restricted stock awards. On March 10, 2005 a total
of 762,400 shares were awarded under the RRP, and the grant-date
fair value $12.84 per share of the shares of $(9,789) was charged to
stockholders' equity. The awards vested 10% on September 30, 2005.
The remainder will vest 20% on each of four annual vesting dates
beginning on September 30, 2006 and 10% on March 10, 2010. RRP
expense was $979, $506, and $526 for the years ended September 30,
2005, 2004 and 2003, respectively. In 2003, 27,413 shares were
forfeited and returned to the plan as available for future grant.
Employees who retire under circumstances, approved by the Executive
Compensation Committee of the Board of Directors of the Company, may
be entitled to accelerate the vesting of individual awards. Such
acceleration would require a charge to earnings for the award shares
that would then vest.
(f) Stock Option Plan
The Company's stockholders approved the Provident Bank 2000 Stock Option
Plan (the Stock Option Plan) in February 2000. A total of 1,712,640 shares
of authorized but unissued common stock was reserved for issuance under
the Stock Option Plan, although the Company may also fund option exercises
using treasury shares. The Company's stockholders also approved the
Provident Bancorp, Inc. 2004 Stock Incentive Plan. In February 2005 under
terms of the plan, a total of 1,997,300 shares of authorized but unissued
common stock was reserved for issuance under the Stock Option Plan. In
March, 2005 1,718,300 options were granted. Under both plans, options have
a ten-year term and may be either non-qualified stock options or incentive
stock options. Reload options may be granted under the terms of the 2000
Stock Option Plan and provide for the automatic grant of a new option at
the then-current market price in exchange for each previously owned share
tendered by an employee in a stock-for-stock exercise. The 2004 Plan
options do not contain reload options. Each option entitles the holder to
purchase one share of common stock at an exercise price equal to the fair
market value of the stock on the grant date.
95
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of activity in the Stock Option Plan:
Weighted
Shares subject average
to option exercise price
-------------- --------------
Outstanding at September 30, 2002 1,343,151 $ 3.81
Granted 47,065 7.08
Exercised (154,327) 3.96
Forfeited (22,385) 3.50
----------- -----------
Outstanding at September 30, 2003 1,213,504 3.92
Granted 191,418 11.77
Exercised (82,059) 3.70
Forfeited -- --
----------- -----------
Outstanding at September 30, 2004 1,322,863 5.05
----------- -----------
Granted 1,741,341 12.84
Exercised (96,521) 4.13
Forfeited (45,377) 12.24
----------- -----------
Outstanding at September 30, 2005 2,922,306 $ 9.61
=========== ===========
At September 30, 2005 and 2004, respectively, there were 312,843 and 3,843
shares available for future grant.
A summary of stock options at September 30, 2005 follows:
Outstanding Exercisable
---------------------------------------------- --------------------------------
Weighted-Average Weighted-
------------------------- Average
Number of Exercise Life Number of Exercise
Stock Options Price (in Years) Stock Options Price
------------- ----------- ----------- ------------- -------------
Range of Exercise Price
$3.50 to $5.71 946,045 $ 3.66 3.5 946,045 $ 3.66
$6.09 to $10.61 101,094 7.05 3.5 101,094 7.05
$11.85 to $13.33 1,875,167 12.75 7.9 425,527 12.68
------------ -----------
2,922,306 $ 9.61 6.3 1,472,666 $ 6.50
============ ===========
The Company used an option pricing model to estimate the grant date
present value of stock options granted. The weighted-average estimated value per
option granted was $3.07 in 2005, $2.71 in 2004 and $1.13 in 2003. The values
were calculated using the following weighted-average assumptions: an option term
of 7.9 years (representing the estimated period between grant date and exercise
date based on historical data); a risk-free interest rate of 4.46% in 2005,
2.71% in 2004 and 3.30% in 2003 (representing the yield on a U.S.
96
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Treasury security with a remaining term equal to the expected option term);
expected volatility of 19% in 2005, 20% in 2004 and 15% in 2003 and estimated
dividend yields of 1.4% in 2005, 1.4% in 2004 and 1.8% in 2003 (representing the
approximate annualized cash dividend rate paid with respect to a share of common
stock at or near the grant date).
(13) Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net
unrealized gain or loss on securities available for sale. The Company has
reported its comprehensive income in the consolidated statements of
changes in stockholders' equity.
The components of other comprehensive income (loss) are summarized as
follows:
Year ended September 30,
-------------------------------------------------
2005 2004 2003
----------- ----------- -----------
Net unrealized holding gain (loss)
arising during the year on securities
available for sale, net of related
income taxes of $5,185, $1,463 and
$597, respectively $ (7,777) $ (2,195) $ (896)
Reclassification adjustment for net
realized gains included in net
income, net of related income
taxes of $148, $982 and $802,
respectively (221) (1,473) (1,204)
----------- ----------- -----------
(7,998) (3,668) (2,100)
Minimum liability on retirement plans net of ,
related income taxes of $48 and $76 (72) (111) --
Net unrealized gain on
derivatives, net of related
income taxes of $(0), $0 and $(6),
respectively (note 16) -- -- 10
----------- ----------- -----------
Other comprehensive loss $ (8,070) $ (3,779) $ (2,090)
=========== =========== ===========
The Company's accumulated other comprehensive income included in
stockholders' equity at September 30, 2005 and 2004 consists of the
after-tax net unrealized loss of $(8,184) and $(186) respectively and
minimum liability for retirement plans of $(183) and $(111) at September
30, 2005, and 2004, respectively.
97
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(14) Earnings Per Common Share
The following is a summary of the calculation of earnings per share (EPS):
Years ended September 30,
-----------------------------------------------
2005 2004 2003
----------- ----------- -----------
Net income $ 21,242 $ 11,017 $ 11,251
=========== =========== ===========
Weighted average common shares
outstanding for computation of
basic EPS(1)(2) 43,033 36,809 34,186
Common-equivalent shares due to
the dilutive effect of stock
options and RRP awards(2)(3) 670 635 477
----------- ----------- -----------
Weighted average common shares
for computation of diluted EPS 43,703 37,444 34,663
=========== =========== ===========
Earnings per common share:(2)
Basic $ 0.49 $ 0.30 $ 0.33
=========== =========== ===========
Diluted 0.49 0.29 0.32
=========== =========== ===========
(1) Includes all shares issued to the Mutual Holding Company (2004, up
until January 14, 2004, and for the year ending September 30, 2003),
but excludes unallocated ESOP shares.
(2) Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the Company's
second-step conversion in January 2004.
(3) Represents incremental shares computed using the treasury stock
method.
(15) Stockholders' Equity
(a) Regulatory Capital Requirements
OTS regulations require banks to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%, a minimum ratio
of Tier 1 (core) capital to total adjusted assets of 4.0%, and a
minimum ratio of total (core and supplementary) capital to
risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required
to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized
institution. Such actions could have a direct material effect on the
institution's financial statements. The regulations establish a
framework for the classification of banks into five categories -
well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and
98
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
critically undercapitalized. Generally, an institution is considered
well-capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a
total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the OTS about capital components, risk
weightings and other factors. These capital requirements apply only
to the Bank, and do not consider additional capital retained by
Provident New York Bancorp.
Management believes that, as of September 30, 2005 and 2004 the Bank
met all capital adequacy requirements to which it was subject.
Further, the most recent OTS notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's
capital classification.
99
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the Bank's actual regulatory capital amounts
and ratios at September 30, 2005 and 2004, compared to the OTS
requirements for minimum capital adequacy and for classification as a
well-capitalized institution. PMB is also subject to certain regulatory
capital requirements, which it satisfied as of September 30, 2005 and
2004.
OTS requirements
--------------------------------------------------------
Minimum capital Classification as well
Bank actual adequacy capitalized
--------------------------- --------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -------
September 30, 2005:
Tangible capital $ 198,828 8.2% $ 36,389 1.5% $ -- --
Tier 1 (core) capital 198,828 8.2 97,038 4.0 121,298 5.0%
Risk-based capital:
Tier 1 198,828 11.7 -- -- 102,223 6.0
Total 220,122 12.9 136,298 8.0 170,373 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
========== ========== ==========
Tangible and Tier 1 capital amounts represent the stockholder's equity of
the Bank, less intangible assets and after-tax net unrealized gains
(losses) on securities available for sale and any other disallowed assets,
such as deferred income taxes. Total capital represents Tier 1 capital
plus the allowance for loan losses up to a maximum amount equal to 1.25%
of risk-weighted assets.
100
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a reconciliation of the Bank's total stockholder's equity
under accounting principles generally accepted in the United States of
America ("GAAP") and its regulatory capital:
September 30,
------------------------------
2005 2004
------------ ------------
Total GAAP stockholder's equity (Provident Bank) $ 367,230 $ 259,790
Goodwill and intangible assets (169,704) (70,490)
Other disallowed assets (deferred income taxes) (6,882) --
Unrealized losses on securities available for sale
included in other comprehensive losses 8,184 186
------------ ------------
Tangible, tier 1 core and
Tier 1 risk-based capital 198,828 189,486
Allowance for loan losses 21,294 14,290
------------ ------------
Total risk-based capital $ 220,122 $ 203,776
============ ============
(b) Dividend Payments
Under OTS regulations, savings associations such as the Bank generally may
declare annual cash dividends up to an amount equal to the sum of net
income for the current year and net income retained for the two preceding
years. Dividend payments in excess of this amount require OTS approval.
After September 30, 2005 the amount that can be paid to Provident New York
Bancorp by Provident Bank is $19,864 plus net income in fiscal 2006 for
Provident Bank. The Bank paid no cash dividends to Provident New York
Bancorp during the year ended September 30, 2005 ($15 million during the
year ended September 30, 2004 and $3,500 during the year ended September
30, 2003).
Unlike the Bank, Provident New York Bancorp is not subject to OTS
regulatory limitations on the payment of dividends to its stockholders.
(c) Stock Repurchase Programs
During the year the Company announced two stock repurchase programs. The
first, which was announced in the first quarter of 2005, authorized the
repurchase of 2,295,000 shares and was completed in June 2005. The second,
which was announced in the second quarter of 2005, authorized the
repurchase of 2,200,000 shares, of which 1,307,400 remain to be purchased.
The total number of shares repurchased under repurchase programs during
the fiscal year ending September 30, 2005, was 3,187,600 at a total cost
of $38.0 million.
101
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(d) Liquidation Rights
Upon completion of the second-step conversion in January 2004, the Bank
established a special "liquidation account" in accordance with OTS
regulations. The account was established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders (as defined in
the plan of conversion) in an amount equal to the greater of (i) the
Mutual Holding Company's ownership interest in the retained earnings of
Provident Federal as of the date of its latest balance sheet contained in
the prospectus, or (ii) the retained earnings of the Bank at the time that
the Bank reorganized into the Mutual Holding Company in 1999. Each
Eligible Account Holder and Supplemental Eligible Account Holder that
continues to maintain his or her deposit account at the Bank would be
entitled, in the event of a complete liquidation of the Bank, to a pro
rata interest in the liquidation account prior to any payment to the
stockholders of the Holding Company. The liquidation account is reduced
annually on December 31 to the extent that Eligible Account Holders and
Supplemental Eligible Account Holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases in deposits do
not restore such account holder's interest in the liquidation account. The
Bank may not pay cash dividends or make other capital distributions if the
effect thereof would be to reduce its stockholder's equity below the
amount of the liquidation account.
(16) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying degrees,
elements of credit risk and interest rate risk in addition to the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of these instruments, which reflect the extent of the
Company's involvement in particular classes of off-balance-sheet financial
instruments, are summarized as follows:
September 30,
-------------------------
2005 2004
--------- ---------
Lending-related instruments:
Loan origination commitments 53,258 90,365
Unused lines of credit 229,957 120,695
Standby letters of credit 17,141 12,711
(a) Lending Related Instruments
The contractual amounts of loan origination commitments, unused lines of
credit and standby letters of credit represent the Company's maximum
potential exposure to credit loss, assuming (i) the instruments are fully
funded at a later date, (ii) the borrowers do not meet the contractual
payment obligations, and (iii) any collateral or other security proves to
be worthless. The contractual amounts of these instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. Substantially all of these lending-related instruments have
been entered into with customers located in the Company's primary market
area described in Note 6.
Loan origination commitments are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments have fixed expiration dates (generally ranging
up to 60 days) or other termination clauses, and may require payment of a
fee by the
102
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
customer. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral, if any, obtained by the
Company upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral varies but may include mortgages on
residential and commercial real estate, deposit accounts with the Company,
and other property. The Company's loan origination commitments at
September 30, 2005 provide for interest rates ranging principally from
5.42% to 8.75%.
Unused lines of credit are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Lines of credit generally have fixed expiration dates or
other termination clauses. The amount of collateral obtained, if deemed
necessary by the Company, is based on management's credit evaluation of
the borrower.
Standby letters of credit are commitments issued by the Company on behalf
of its customer in favor of a beneficiary that specify an amount the
Company can be called upon to pay upon the beneficiary's compliance with
the terms of the letter of credit. These commitments are primarily issued
in favor of local municipalities to support the obligor's completion of
real estate development projects. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending
loan facilities to customers.
As of September 30, 2005, the Company had $17,141 in outstanding letters
of credit, of which $7,225 were secured by cash collateral.
(b) Interest Rate Cap Agreements
At September 30, 2002, the Company was a party to two interest rate cap
agreements with a total notional amount of $50,000. These interest rate
caps matured in March and April 2003. These agreements were entered into
to reduce the variability of cash flows from potentially higher interest
payments associated with upward interest rate repricings on a portion of
the Company's certificate of deposit accounts and borrowings. The
counterparties to the agreements were obligated to make payments to the
Company, based on the notional amounts, to the extent that the three-month
LIBOR rate exceeded specified levels during the term of the agreements.
These specified rate levels were 8.25% and 6.50% for interest rate cap
agreements with notional amounts of $30,000 and $20,000, respectively.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as of October 1, 2000, and recorded an after-tax
transition adjustment of $41 to recognize the interest rate cap agreements
at fair value. The Company's interest rate cap agreements were accounted
for as cash flow hedges under SFAS No. 133 and were reported at fair
value, which was insignificant at September 30, 2002. Interest expense for
the years ended September 30, 2005, 2004, and 2003 includes charges of $0,
$0, and $16, respectively, for the effect of the interest rate cap
agreements. The remaining amount reported in accumulated other
comprehensive income with respect to these agreements at September 30,
2002 was reclassified into earnings during fiscal 2003.
(17) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under noncancelable operating leases with initial or
remaining terms of
103
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
more than one year at September 30, 2005 are $1,856 for fiscal 2006,
$1,829 for fiscal 2007, $1,800 for fiscal 2008, $1,546 for fiscal 2009,
$1,314 for fiscal 2010 and a total of $12,513 for later years. Occupancy
and office operations expense includes net rent expense of $1,666, $1,435,
and $1,202, for the years ended September 30, 2005, 2004 and 2003,
respectively.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management, after consultation with legal
counsel, does not anticipate losses on any of these claims or actions that
would have a material adverse effect on the consolidated financial
statements.
(18) Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value, whether or
not such financial instruments are recognized in the consolidated
statements of financial condition. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices
are available, although active markets do not exist for many types of
financial instruments. Fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. These estimates are highly subjective
and require judgments regarding significant matters, such as the amount
and timing of future cash flows and the selection of discount rates that
appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. Since these
estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values disclosed in accordance with SFAS
No. 107 do not reflect any premium or discount that could result from the
sale of a large volume of a particular financial instrument, nor do they
reflect possible tax ramifications or estimated transaction costs.
104
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the carrying amounts and estimated fair values of
financial assets and liabilities (none of which were held for trading purposes):
2005 2004
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
--------------- --------------- --------------- ----------------
Financial assets:
Cash and due from banks $ 64,117 $ 64,117 $ 107,571 $ 107,571
Securities available for sale 822,952 822,952 534,297 534,297
Securities held to maturity 70,949 71,151 69,078 70,230
Loans 1,340,065 1,333,200 980,281 1,024,002
Accrued interest receivable 10,954 10,954 6,815 6,815
FHLB stock 21,333 21,333 10,247 10,247
Financial liabilities:
Deposits 1,726,401 1,722,712 1,239,532 1,238,364
FHLB borrowings 442,203 441,750 214,909 214,940
Mortgage escrow funds 4,122 4,115 2,526 2,526
The following paragraphs summarize the principal methods and assumptions used by
management to estimate the fair value of the Company's financial instruments.
(a) Securities
The estimated fair values of securities were based on quoted market
prices.
(b) Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. For valuation purposes, the total loan portfolio was
segregated into adjustable-rate and fixed-rate categories. Fixed-rate
loans were further segmented by type, such as residential mortgage,
commercial mortgage, commercial business and consumer loans. Loans were
also segmented by maturity dates.
Fair values were estimated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the current
market rate on loans that are similar with regard to collateral, maturity
and the type of borrower. The discounted value of the cash flows was
reduced by a credit risk adjustment based on loan categories. Based on the
current composition of the Company' s loan portfolio, as well as past
experience and current economic conditions and trends, the future cash
flows were adjusted by prepayment assumptions that shortened the estimated
remaining time to maturity and therefore affected the fair value
estimates.
105
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(c) Deposits
In accordance with SFAS No. 107, deposits with no stated maturity
(such as savings, demand and money market deposits) were assigned
fair values equal to the carrying amounts payable on demand.
Certificates of deposit were segregated by account type and original
term, and fair values were estimated by discounting the contractual
cash flows. The discount rate for each account grouping was
equivalent to the current market rates for deposits of similar type
and maturity.
These fair values do not include the value of core deposit
relationships that comprise a significant portion of the Company's
deposit base. Management believes that the Company's core deposit
relationships provide a relatively stable, low-cost funding source
that has a substantial value separate from the deposit balances.
(d) FHLB Borrowings
Fair values of FHLB borrowings were estimated by discounting the
contractual cash flows. A discount rate was utilized for each
outstanding borrowing equivalent to the then-current rate offered by
the FHLB on borrowings of similar type and maturity.
(e) Other Financial Instruments
The other financial assets and liabilities listed in the preceding
table have estimated fair values that approximate the respective
carrying amounts because the instruments are payable on demand or
have short-term maturities and present relatively low credit risk
and interest rate risk.
The fair values of the Company's off-balance-sheet financial
instruments described in Note 16 were estimated based on current
market terms (including interest rates and fees), considering the
remaining terms of the agreements and the credit worthiness of the
counterparties. At September 30, 2005 and 2004, the estimated fair
values of these instruments approximated the related carrying
amounts, which were insignificant.
(19) Recent Accounting Standards and Interpretations
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. The
provisions of this statement did not have a material impact on the consolidated
financial statements.
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-
106
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
based method disclosed under the provisions of Statement 123 in most respects,
there 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 approximately
$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.
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 rates (`
Securities ("SFAS 115") and investmentsaccounted 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 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.
In December 2003, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. " The SOP is effective for loans acquired in
fiscal years beginning after December 15, 2004. The SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. The SOP applies to loans acquired in business
combinations but does not apply to loans originated by the Company. Management
does not believe the provision of this standard will have a material impact on
the results of future operations.
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to
Loan Commitments. SAB No. 105 requires that when a company is recognizing and
valuing a loan commitment at fair value, only differences between the guaranteed
interest rate in the loan commitment and a market interest rate should be
included. Any expected future cash flows related to the customer relationships
or loan servicing should be excluded from the fair value measurement. The
expected future cash flows that are excluded from the fair-value determination
include anticipated fees for servicing the funded loan, late-payment charges,
other ancillary fees, or other cash flows from servicing rights. The guidance in
SAB No. 105 is effective for mortgage-loan commitments that are accounted for as
derivatives and are entered into after March 31, 2004. The adoption of the
provisions of this standard did not have a material impact on the results of
future operations.
107
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of
Provident New York Bancorp and the related condensed statements of income
and cash flows:
Condensed Statements of Financial Condition September 30,
---------------------------
2005 2004
----------- -----------
Assets:
Cash $ 10,544 $ 74,726
Loan receivable from ESOP 10,779 11,491
Investment in Provident Bank 366,836 258,922
Investment in Hardenburgh Abstract Title Company 1,408 --
Other assets 6,473 5,182
----------- -----------
Total assets $ 396,040 $ 350,321
=========== ===========
Liabilities $ 883 $ 809
Stockholders' equity 395,157 349,512
----------- -----------
Total liabilities and
stockholders' equity $ 396,040 $ 350,321
=========== ===========
Year ended September 30,
---------------------------------------------
2005 2004 2003
----------- ----------- -----------
Condensed statements of income
Interest income $ 777 $ 919 $ 258
Dividends from Provident Bank -- 15,000 3,500
Gain on sale of securities available for sale -- 471 92
Non-interest expense (1,485) (5,207) (175)
Income tax expense 232 1,311 (73)
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiaries (476) 12,494 3,602
Equity in undistributed earnings of:
Provident Bank 21,341 (1,477) 7,649
Hardenburgh Abstract Title Co. 377 -- --
----------- ----------- -----------
Net income $ 21,242 $ 11,017 $ 11,251
=========== =========== ===========
108
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Year ended September 30,
----------- ----------- -----------
2005 2004 2003
----------- ----------- -----------
Condensed statements of cash flows
Cash flows from operating activities:
Net income $ 21,242 $ 11,017 $ 11,251
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of
Provident Bank (21,341) 1,477 (7,649)
Hardenburgh Abstract Company (377) -- --
Net gain on sales of securities -- 471 92
Other adjustments, net (1,377) 4,295 1,119
----------- ----------- -----------
Net cash (used in) provided by
operating activities (1,853) 17,260 4,813
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions 74,593 39,697 --
Purchases of securities available for sale -- (41,021) --
Proceeds from sales of securities available for sale -- 42,847 2,050
Origination of ESOP loan -- (9,987) --
ESOP loan principal repayments 711 376 376
----------- ----------- -----------
Net cash provided by investing activities 75,304 31,912 2,426
----------- ----------- -----------
Cash flows from financing activities:
Common stock offering proceeds net -- 192,363 --
Capital contribution to banking subsidiary (92,549) (160,404) --
Treasury shares purchased (38,261) (432) (2,343)
Cash dividends paid (7,467) (5,008) (2,421)
Stock option transactions 103 125 524
Shares purchased for ESOP plan -- (9,987) --
Formation of Charitable Foundation -- 4,000 --
Other equity transactions 541 1,257 --
----------- ----------- -----------
Net cash provided by (used in)financing activities (137,633) 21,914 (4,240)
----------- ----------- -----------
Net increase (decrease) in cash (64,182) 71,086 2,999
Cash at beginning of year 74,726 3,640 641
----------- ----------- -----------
Cash at end of year $ 10,544 $ 74,726 $ 3,640
=========== =========== ===========
109
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 2005 and 2004:
First Second Third Fourth
quarter quarter quarter quarter
---------- ---------- ---------- ----------
Year ended September 30, 2005
Interest and dividend income $ 28,012 $ 28,284 $ 28,911 $ 30,062
Interest expense 6,310 6,863 7,643 8,584
---------- ---------- ---------- ----------
Net interest income 21,702 21,421 21,268 21,478
Provision for loan losses 150 150 225 225
Non-interest income 4,025 3,841 5,433 4,610
Non-interest expense 17,709 17,068 18,141 17,665
---------- ---------- ---------- ----------
Income before income
tax expense 7,868 8,044 8,335 8,198
Income tax expense 2,853 2,864 2,676 2,810
---------- ---------- ---------- ----------
Net income $ 5,015 $ 5,180 $ 5,659 $ 5,388
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.11 $ 0.12 $ 0.13 $ 0.13
Diluted 0.11 0.12 0.13 0.13
========== ========== ========== ==========
Year ended September 30, 2004
Interest and dividend income $ 14,318 $ 19,085 $ 19,984 $ 21,121
Interest expense 2,767 3,147 3,487 3,581
---------- ---------- ---------- ----------
Net interest income 11,551 15,938 16,497 17,540
Provision for loan losses 150 200 225 225
Non-interest income 2,803 2,784 2,875 3,111
Non-interest expense* 9,570 18,650 13,505 14,421
---------- ---------- ---------- ----------
Income before income
tax expense 4,634 (128) 5,642 6,005
Income tax expense 1,589 (200) 1,988 1,759
---------- ---------- ---------- ----------
Net income $ 3,045 $ 72 $ 3,654 $ 4,246
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.09 $ -- $ 0.10 $ 0.11
Diluted 0.09 -- 0.10 0.11
========== ========== ========== ==========
* The second quarter of 2004 includes $5,000 in expense recognized for
the formation of the charitable foundation
110
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
None
ITEM 9A. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule l3a-15(e) and l5d-l5(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this annual report, our 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 periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There were no changes in our internal control over financial reporting
during the period covered by this report or, to our knowledge, in other factors,
that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
PART III
ITEM 9B. Other Information
- --------------------------
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The "Proposal I -- Election of Directors" section of Provident Bancorp's
Proxy Statement for the Annual Meeting of Stockholders to be held in February
2006 (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- -------------------------------
The "Proposal I - Election of Directors" section of the Proxy Statement is
incorporated herein by reference.
111
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
- ---------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
Provident Bancorp does not have any equity compensation programs that were
not approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2005, regarding
equity compensation that has been approved by stockholders.
---------------------------------------------------------------------------------------------------------------------
Number of securities to be
Equity compensation plans issued upon exercise of Number of securities remaining
approved by outstanding options and Weighted average available for issuance
stockholders rights Exercise price under plan
---------------------------------------------------------------------------------------------------------------------
Stock Option Plans 2,922,306 $9.61 312,843
---------------------------------------------------------------------------------------------------------------------
Recognition and Retention
Plan (1) 686,160 Not Applicable 36,520
---------------------------------------------------------------------------------------------------------------------
Total (2) 3,608,466 $9.61 349,363
---------------------------------------------------------------------------------------------------------------------
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only, since
RRP shares have no exercise price.
The "Proposal I - Election of Directors" section of the Proxy Statement is
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Proxy
Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Service
- ----------------------------------------------
The "Proposal II -- Ratification of Appointment of Independent Registered
Public Accounting Firm" section of the proxy statement is incorporated herein by
reference.
112
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(1) Financial Statements
--------------------
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition as of September 30, 2005
and 2004
(C) Consolidated Statements of Income for the years ended September 30, 2005,
2004 and 2003
(D) Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended September 30, 2005, 2004, and
2003
(E) Consolidated Statements of Cash Flows for the years ended September 30,
2005, 2004 and 2003
(F) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Notes to Consolidated Financial
Statements.
113
(3) Exhibits
--------
--------------------------------------------------------------------------
3.1 Certificate of Incorporation of Provident New York Bancorp(1)
--------------------------------------------------------------------------
3.2 Bylaws of Provident New York Bancorp(1)
--------------------------------------------------------------------------
4 Form of Common Stock Certificate of Provident New York Bancorp(1)
--------------------------------------------------------------------------
10.1 Employee Stock Ownership Plan(2)
--------------------------------------------------------------------------
10.2 Employment Agreement with George Strayton, as amended(2)
--------------------------------------------------------------------------
10.3 Form of Employment Agreement(2)
--------------------------------------------------------------------------
10.4 Deferred Compensation Agreement, as amended and restated(1)
--------------------------------------------------------------------------
10.5 Supplemental Executive Retirement Plan, as amended(2)
--------------------------------------------------------------------------
10.6 Management Incentive Program(2)
--------------------------------------------------------------------------
10.7 1996 Long-Term Incentive Plan for Officers and Directors, as
amended(2)
--------------------------------------------------------------------------
10.8 Provident Bank 2000 Stock Option Plan(3)
--------------------------------------------------------------------------
10.9 Provident Bank 2000 Recognition and Retention Plan(3)
--------------------------------------------------------------------------
10.10 Employment Agreement with Paul A. Maisch(5)
--------------------------------------------------------------------------
10.11 Provident Bancorp, Inc. 2004 Stock Incentive Plan(6)
--------------------------------------------------------------------------
10.12 Provident Bank Executive Officer Incentive Plan(7)
--------------------------------------------------------------------------
14 Code of Ethics(4)
--------------------------------------------------------------------------
21 Subsidiaries of Registrant
--------------------------------------------------------------------------
23 Consent of KPMG LLP
--------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------
32 Certification Pursuant to 18 U.S.C. Section 1350, as amended by
Section 906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------
(1) Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-108795), originally filed with the Commission on September 15,
2003 and amended on October 31, 2003 and November 10, 2003.
(2) Incorporated by reference to the Registration Statement on Form S-1 of
Provident Bancorp, Inc., a federal corporation (File No. 333-63593),
originally filed with the Commission on September 17, 1998 and amended on
November 6, 1998 and November 12, 1998.
(3) Incorporated by reference from the Proxy Statement for the 2000 Annual
Meeting of Stockholders of Provident Bancorp, Inc., a federal corporation
(File No. 0-25233), filed with the Commission on January 18, 2000.
(4) Incorporated by reference from the Annual Report on Form 10-K of Provident
Bancorp, Inc., a federal corporation (File No. 0-25233), filed with the
Commission on December 29, 2003.
(5) Incorporated by reference from the Quarterly Report on Form l0-Q of
Provident Bancorp, Inc., a Delaware corporation (File No. 0-25233), filed
with the Commission on August 12, 2004.
(6) Incorporated by reference to Appendix A to the proxy statement for the
Company's 2005 Annual Meeting of Stockholders (File No. 0-25233), filed
with the Commission on January 19, 2005.
(7) Incorporated by reference to Exhibit 10 to the Current Report on Form 8-K
(Commission File No. 0- 25233), filed with the Commission on December 5,
2004.
114
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Provident New York Bancorp has duly caused this report to be signed on
its behalf by the undersigned, there unto duly authorized.
Provident New York Bancorp
Date: December 8, 2005 By: /s/ George Strayton
------------------ ----------------------------------
George Strayton
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ George Strayton By: /s/ Paul A. Maisch
------------------- ------------------
George Strayton Paul A. Maisch
President Senior Vice President
Chief Executive Officer and Chief Financial Officer and
Director Principal Accounting Officer
Date: December 8, 2005 Date: December 8, 2005
By: /s/ William F. Helmer By: /s/ Dennis L. Coyle
-------------------- -------------------
William F. Helmer Dennis L. Coyle
Chairman of the Board Vice Chairman
Date: December 8, 2005 Date: December 8, 2005
By: /s/ Judith Hershaft By: /s/ Thomas F. Jauntig, Jr. By: /s/ Thomas G. Kahn
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Judith Hershaft, Thomas F. Jauntig, Jr. Thomas G. Kahn,
Director Director Director
Date: December 8, 2005 Date: December 8, 2005 Date: December 8, 2005
By: /s/ R. Michael Kennedy By: /s/ Victoria Kossover By: /s/ Donald T. McNelis
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R. Michael Kennedy, Victoria Kossover, Donald T. McNelis,
Director Director Director
Date: December 8, 2005 Date: December 8, 2005 Date: December 8, 2005
By: /s/ Richard A. Nozell By: /s/ Carl Rosenstock By: /s/ William Sichol, Jr.
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Richard A. Nozell, Carl Rosenstock, William Sichol Jr.,
Director Director Director
Date: December 8, 2005 Date: December 8, 2005 Date: December 8, 2005
By: /s/ Burt Steinberg By: /s/ F. Gary Zeh
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Burt Steinberg, F. Gary Zeh
Director Director
Date: December 8, 2005 Date: December 8, 2005