SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------------------------ ---------------
Commission File Number: 0-25233
PROVIDENT NEW YORK BANCORP
--------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 80-0091851
------------------------------- ----------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
- ----------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
--------------
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
42,424,255
----------
$0.01 per share as of May 1, 2006
----- -----------
1
PROVIDENT NEW YORK BANCORP
QUARTERLY PERIOD ENDED MARCH 31, 2006
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition (unaudited)
at March 31, 2006 and September 30, 2005 3
Consolidated Statements of Income (unaudited) for the Three and Six
Months Ended March 31, 2006 and 2005 5
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
for the Six Months Ended March 31, 2006 6
Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended March 31, 2006 and 2005 7
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for
the Three and Six Months Ended March 31, 2006 and 2005 9
Notes to Consolidated Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 35
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits 38
Signatures 45
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets March 31, September 30,
- ------ 2006 2005
----------- -----------
Cash and due from banks $ 55,110 $ 64,117
Securities (note 6):
Available for sale, at fair value 926,037 822,952
Held to maturity, at amortized cost (fair value of
$67,027 and $71,151 at March 31, 2006 and
September 30, 2005, respectively) 67,364 70,949
----------- -----------
Total securities 993,401 893,901
----------- -----------
Loans held for sale 460 --
Gross loans (note 4) 1,405,596 1,362,073
Allowance for loan losses (note 5) (20,093) (22,008)
----------- -----------
Total loans, net 1,385,503 1,340,065
----------- -----------
Federal Home Loan Bank ("FHLB") stock, at cost 27,260 21,333
Accrued interest receivable 12,319 10,594
Premises and equipment, net 32,461 32,101
Goodwill (note 2) 157,526 157,656
Core deposit intangible, net (note 2) 12,122 13,770
Bank owned life insurance 38,475 37,667
Deferred income taxes, net 20,834 10,596
Other assets 10,157 15,562
----------- -----------
Total assets $ 2,745,628 $ 2,597,362
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity
- ------------------------------------ March 31, September 30,
2006 2005
----------- -----------
Liabilities:
Deposits (note 7):
Non-interest bearing $ 362,018 $ 385,081
Interest bearing 1,417,271 1,341,320
----------- -----------
Total deposits 1,779,289 1,726,401
Borrowings (note 8 ) 546,210 442,203
Mortgage escrow funds 9,894 4,122
Other 22,942 29,479
----------- -----------
Total liabilities 2,358,335 2,202,205
----------- -----------
Stockholders' equity:
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized;
none issued or outstanding) -- --
Common stock (par value $0.01 per share; 75,000,000 shares authorized;
45,929,552 shares issued; 42,424,255 shares and 43,505,659 shares
outstanding at March 31, 2006 and September 30, 2005, respectively) 459 459
Additional paid-in capital 348,480 345,631
Unallocated common stock held by employee stock ownership
plan ("ESOP") (1,128,153 shares at March 31, 2006 and
1,248,427 shares at September 30, 2005) (9,537) (10,045)
Treasury stock, at cost (3,505,297 shares at March 31, 2006
and 2,423,893 shares at September 30, 2005) (40,394) (28,195)
Common stock awards under recognition and retention plan
("RRP") (637,060 shares and 686,160 shares at March 31, 2006
and September 30, 2005, respectively) (7,252) (8,810)
Retained earnings 109,120 104,484
Accumulated other comprehensive loss, net of taxes (13,583) (8,367)
----------- -----------
Total stockholders' equity 387,293 395,157
----------- -----------
Total liabilities and stockholders' equity $ 2,745,628 $ 2,597,362
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except share data)
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2006 2005 2006 2005
---- ---- ---- ----
Interest and dividend income:
Loans $ 22,940 $ 19,506 $ 45,126 $ 38,919
Securities 9,267 8,641 17,896 17,027
Other earning assets 358 137 656 350
----------- ----------- ----------- -----------
Total interest and dividend income 32,565 28,284 63,678 56,296
----------- ----------- ----------- -----------
Interest expense:
Deposits 6,096 3,494 11,354 6,913
Borrowings 5,643 3,369 10,439 6,261
----------- ----------- ----------- -----------
Total interest expense 11,739 6,863 21,793 13,174
----------- ----------- ----------- -----------
Net interest income 20,826 21,421 41,885 43,122
Provision for loan losses (Note 5) 300 150 600 300
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 20,526 21,271 41,285 42,822
----------- ----------- ----------- -----------
Non-interest income:
Deposit fees and service charges 2,531 2,405 5,199 4,940
Loan fees and late charges 312 248 712 631
Net gains on sales of securities available for sale -- 263 -- 317
Net gains on sales of loans 86 21 67 80
Title insurance fees 390 300 807 658
Bank owned life insurance 394 295 807 611
Other 429 309 912 629
----------- ----------- ----------- -----------
Total non-interest income 4,142 3,841 8,504 7,866
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 8,351 7,955 16,191 15,787
Stock-based compensation plans (Note 1) 1,670 446 3,182 1,286
Occupancy and office operations 3,015 2,459 5,652 4,607
Advertising and promotion 402 650 994 1,812
Professional fees 795 610 1,649 1,279
Data and check processing 789 1,158 1,666 2,406
Merger integration costs -- 341 -- 721
Amortization of intangible assets 811 990 1,648 2,117
ATM/debit card expense 338 304 683 630
Other 1,974 2,155 3,897 4,130
----------- ----------- ----------- -----------
Total non-interest expense 18,145 17,068 35,562 34,775
----------- ----------- ----------- -----------
Income before income tax expense 6,523 8,044 14,227 15,913
Income tax expense 2,118 2,864 4,663 5,718
----------- ----------- ----------- -----------
Net income $ 4,405 $ 5,180 $ 9,564 $ 10,195
=========== =========== =========== ===========
Weighted average common shares:
Basic 40,939,326 43,868,765 41,069,557 44,098,312
Diluted 41,406,485 44,439,229 41,541,154 44,687,028
Per common share: (Note 9)
Basic $ 0.11 $ 0.12 $ 0.23 $ 0.23
Diluted $ 0.11 $ 0.12 $ 0.23 $ 0.23
See accompanying notes to unaudited consolidated financial statements.
5
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except share and per share data)
Accumulated
Common Other
Additional Unallocated Stock Compre- Total
Number of Common Paid-In ESOP Awards Treasury Retained hensive Stockholders'
Shares Stock Capital Shares Under RRP Stock Earnings Loss Equity
Balance at September 30, 2005 43,505,659 $ 459 $ 345,631 $ (10,045) $ (8,810) $ (28,195) $ 104,484 $ (8,367) $ 395,157
---------- --------- --------- ---------- --------- ---------- ---------- ---------- ----------
Net income 9,564 9,564
Other comprehensive loss (5,216) (5,216)
----------
Total comprehensive income 4,348
Deferred compensation
transactions 1,404 1,404
Stock option transactions, net 62,596 592 867 (809) 650
ESOP shares allocated or
committed to be
released for allocation
(120,279 shares) 853 508 1,361
RRP awards 4,000 (43) 51 (8) 0
Vesting of RRP shares 947 947
Other RRP transactions (33,429) 654 (412) 242
Purchase of treasury stock (1,114,571) (12,705) (12,705)
Cash dividends paid ($0.10 per
common share) (4,111) (4,111)
---------- --------- --------- ---------- --------- ---------- ---------- ---------- ----------
Balance at March 31, 2006 42,424,255 $ 459 $ 348,480 $ (9,537) $ (7,252) $ (40,394) $ 109,120 $ (13,583) $ 387,293
========== ========= ========= ========== ========= ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except share amounts)
For the Six Months
Ended March 31
--------------
2006 2005
---- ----
Cash flows from operating activities:
Net income $ 9,564 $ 10,195
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 600 300
Depreciation and amortization of premises and equipment 2,027
1,504
Amortization of core deposit intangible 1,647 2,117
Gain on sales of securities available for sale -- (317)
Gain on sales of loans held for sale (67) (80)
Net amortization of premiums and discounts on securities 1,727 2,172
ESOP and RRP expense 2,308 1,477
Stock option compensation expense 592 --
Originations of loans held for sale (5,165) (7,689)
Proceeds from sales of loans held for sale 4,772 7,971
Deferred income tax benefit (6,616) (278)
Net changes in accrued interest receivable and payable (543) (236)
Other adjustments (principally net changes in other assets and other
liabilities) (5,909) (11,673)
--------- ---------
Net cash provided by operating activities 4,937 5,463
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (177,290) (310,254)
Held to maturity (9,609) (6,671)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale 63,688 59,789
Held to maturity 13,142 13,130
Proceeds from sales of securities available for sale -- 63,735
Loan originations (297,470) (213,240)
Loan principal payments 253,097 198,132
Purchase of FHLB stock (net) (5,927) (2,717)
Purchase of Warwick Community Bancorp, Inc. -- 164,486
Increase in bank owned life insurance (808) (611)
Purchases of premises and equipment (2,387) (1,574)
Other investing activities 131 (30)
--------- ---------
Net cash used in investing activities (163,433) (35,825)
--------- ---------
See accompanying notes to unaudited consolidated financial statements.
7
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(Dollars in thousands, except share amounts)
For the Six Months
Ended March 31,
---------------
2006 2005
---- ----
Cash flows from financing activities:
Net decrease in transaction and savings deposits $ (64,197) $ (27,860)
Net increase (decrease) in time deposits 117,156 (2,743)
Net increase in borrowings 105,870 21,264
Net increase in mortgage escrow funds 5,772 816
Treasury shares purchased (12,705) (15,275)
Stock option transactions 58 91
Other stock-based compensation transactions 1,646 --
Cash dividends paid (4,111) (3,463)
--------- ---------
Net cash provided by financing activities 149,489 (27,170)
--------- ---------
Net decrease in cash and cash equivalents (9,007) (57,532)
Cash and cash equivalents at beginning of period 64,117 107,571
--------- ---------
Cash and cash equivalents at end of period $ 55,110 $ 50,039
========= =========
Supplemental information:
Interest payments $ 20,611 $ 12,150
Income tax payments 1,516 7,970
Fair value of assets acquired (incl. intangibles) $ -- $ 806,114
Fair value of liabilities assumed -- 658,919
--------- ---------
Net fair value $ -- $ 147,195
========= =========
Cash portion of Warwick Community Bancorp Inc. purchase transaction $ -- $ 72,601
Stock portion of Warwick Community Bancorp Inc. purchase transaction -- 74,594
--------- ---------
Total paid for Warwick Community Bancorp Inc. -- $ 147,195
Net change in unrealized losses recorded on securities available for sale $ (8,842) $ (13,934)
Change in deferred taxes on unrealized losses on securities available for sale $ 3,626 $ 5,574
Number of RRP shares issued 4,000 762,400
See accompanying notes to unaudited consolidated financial statements.
8
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (Dollars in thousands)
Three Months Six Months
Ended March 31, Ended March 31,
--------------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Net Income: $ 4,405 $ 5,180 $ 9,564 $ 10,195
Other comprehensive loss:
Net unrealized holding losses arising during the period, net of
taxes of $2,145, $4,242, $3,477 and $5,447 (3,217) (6,370) (5,216) (8,170)
Less reclassification adjustment for net realized gains included
in net income, net of taxes of $0, $105, $0 and $127 -- (158) -- (190)
-------- -------- -------- --------
Total comprehensive loss (3,217) (6,528) (5,216) (8,360)
-------- -------- -------- --------
Total comprehensive income (loss) $ 1,188 $ (1,348) $ 4,348 $ 1,835
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
On June 29, 2005, the Company changed its name from Provident Bancorp,
Inc. to Provident New York Bancorp in order to differentiate itself from the
numerous bank holding companies with similar names.
The consolidated financial statements and other financial information
presented in this document as of March 31, 2006 include the accounts of
Provident New York Bancorp, a Delaware corporation (the "Company"), Provident
Bank (the "Bank") and Hardenburgh Abstract Company of Orange County, Inc.
("Hardenburgh"), and each subsidiary of Provident Bank: Provest Services Corp.,
(an inactive subsidiary), Provest Services Corp. I, Provest Services Corp. II,
Provident REIT, Inc., WSB Funding, Inc., Warsave Development Corp., Provident
Municipal Bank and WSB Financial Services, Inc. (an inactive subsidiary).
Collectively, these entities are referred to herein as the "Company". Provident
New York Bancorp is a publicly-held company and the parent of the Bank. Provest
Services Corp. I holds a limited partnership interest in a low-income housing
partnership that provides certain favorable tax consequences. Warsave holds an
investment in a rental property that generates rental income. Hardenburgh is a
title insurance agency that generates title insurance fees and commissions.
Provest Services Corp. II has engaged a third-party provider to sell annuities
and life insurance to the customers of the Bank. Through March 31, 2006, the
activities of these wholly-owned subsidiaries have had a minor impact on the
Company's consolidated financial condition and results of operations. Provident
REIT, Inc. and WSB Funding, Inc. hold a portion of the Company's real estate
loans and are real estate investment trusts for federal income tax purposes.
Provident Municipal Bank ("PMB") is a limited purpose New York State-chartered
commercial bank and is authorized to accept deposits from municipalities in the
Bank's New York business area.
The Company's off-balance sheet activities are limited to loan
origination commitments, lines of credit and letters of credit extended to
customers or, in the case of letters of credit, on behalf of customers in the
ordinary course of its lending activities. The Company does not engage in
off-balance sheet financing transactions or other activities involving the use
of special-purpose or variable interest entities.
The consolidated financial statements have been prepared by management
without audit, but, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company's financial position and results of operations as of the dates and
for the periods presented. Although certain information and footnote disclosures
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q,
the Company believes that the disclosures are adequate to make the information
presented clear. The results of operations for the three months and six months
ended March 31, 2006 are not necessarily indicative of results to be expected
for other interim periods or the entire fiscal year ending September 30, 2006.
The unaudited consolidated financial statements presented herein should be read
in conjunction with the annual audited financial statements included in the
Company's Form 10-K for the fiscal year ended September 30, 2005.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses (see Note 5), which is a
critical accounting policy.
10
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Stock-Based Compensation
------------------------
The Company applies Statement of Financial Accounting Standards
("SFAS") No. 123R, Accounting for Stock-Based Compensation, and related
interpretations in accounting for its stock option plan. SFAS No. 123R, issued
in December of 2004, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans, and required adoption for all publicly owned companies for fiscal periods
ending after July 15, 2005. As of October 1, 2005, the Company has begun to
expense these grants as required by SFAS No. 123R. Stock-based employee
compensation cost pertaining to stock options is reflected in net income, as all
unvested options granted under the Company's stock option plans had a value
based on the fair value calculations using the Black-Scholes option pricing
model, even though the exercise prices were equal to the market value of the
underlying common stock on the date of the grant. Prior to October 1, 2005, the
Company applied the requirements of APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its stock-based plans. Under APB 25, no compensation expense was recognized for
the Company's stock-based plans regarding employee stock-options. The Company
did, however, recognize expense for its plans which were compensatory per APB
25, and had grant-date intrinsic value (which occurs if the exercise price is
less than the market value on the day of the grant) such as restricted stock
grants (RRPs).
The Company's stock-based compensation plans allow for accelerated
vesting when an employee reaches retirement age and ceases continuous service.
Under SFAS No. 123R, grants issued subsequent to adoption of SFAS 123R which are
subject to such an accelerated vesting upon the recipient's attainment of
retirement age, are expensed over the shorter of the time to retirement age or
the vesting schedule in accordance with the grant. Thus the vesting period can
be far less than the plan's five-year vesting period depending on the age of the
grantee. As of March 31, 2006, 779,820 grants valued under SFAS No. 123R were
subject to this accelerated vesting.
The Company elected the modified prospective transition method for
adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply
to all awards granted or modified after the date of adoption. During the six
months ended March 31, 2006, the Company issued 35,000 new stock-based option
awards and recognized total non-cash stock-based compensation cost of $591,000
primarily for shares awarded during the transition period, along with the
fair-value of these new grants. As of March 31, 2006, the total remaining
unrecognized compensation cost related to non-vested stock options was $3.8
million. In addition to the recording requirements, the Company has disclosure
requirements under SFAS No. 123 and No. 123R. The following table illustrates
the effect on net income if the fair-value-based method per SFAS No. 123R had
been applied to all outstanding awards for the three and six months ended March
31, 2005.
11
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Six Months
Ended Ended
March 31, March 31,
2005 2005
---- ----
Net income, as reported $ 5,180 $ 10,195
Deduct stock option expense determined under
the fair-value-based method, net of related
tax effects (886) (934)
---------- ----------
Pro forma net income $ 4,294 $ 9,261
========== ==========
Earnings per share:
Basic, as reported $ 0.12 $ 0.23
Basic, pro forma 0.10 $ 0.21
Diluted, as reported 0.12 $ 0.23
Diluted, pro forma 0.10 $ 0.21
While the fair-value-based method prescribed by Statement No. 123R is similar to
the fair-value-based method disclosed under the provisions of Statement No. 123
in most respects, there are some differences. (Generally, the amounts charged to
income will be somewhat consistent with the amounts disclosed for pro-forma
purposes in the past). The following table describes currently unvested grants
that were used in the fair-value calculations for stock-based compensation
expense during 2006, and previously vested exercisable grants that were excluded
from the fair-value calculation:
March 31, 2006
-----------------------------------------------------------------------------
Stock Options Subject to SFAS No. 123R Stock Options NOT Subject to SFAS No. 123R
---
--------------------------------------------- ---------------------------------------------
Weighted-Average Weighted-Average
----------------------------- -----------------------------
Number of Exercise Life Number of Exercise Life
Stock Options Price (in Years) Stock Options Price (in Years)
------------- ------------- ------------- ------------- ------------- -------------
Range of Exercise Price
$3.50 to $6.08 -- n/a n/a 876,221 $ 3.66 3.00
$6.09 to $10.61 -- n/a n/a 74,693 7.18 3.00
$10.62 to $11.85 142,113 $ 11.58 6.13 58,000 11.85 6.75
------------- ------------- ------------- ------------- ------------- -------------
$11.86 to $13.33 1,265,440 12.84 7.01 320,484 12.83 6.93
------------- -------------
1,407,553 $ 12.71 6.92 1,329,398 $ 6.42 4.11
============= =============
As a portion of these shares were anti-dilutive as of March 31, 2006, the
portion that was anti-dilutive was not included in common stock equivalents for
earnings per share purposes. There were 2,265,354 shares that were anti-dilutive
as of March 31, 2006.
12
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
The following table summarizes Provident's stock options for the six months
ended March 31, 2006:
Weighted
Average
Number Exercise
of Shares Price
---------- ----------
Outstanding at October 1, 2005 2,922,306 $ 9.61
Granted 72,629 11.38
Exercised (100,225) 4.78
Forfeited (157,759) 12.67
----------
Outstanding at March 31, 2006 2,736,951 $ 9.66
========== ==========
Exercisable at March 31, 2006 1,706,271 $ 7.80
========== ==========
Weighted average estimated fair value of options
granted during the period $ 2.73
==========
The fair value was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
Risk-free interest rate 4.48%
Dividend yield 1.76%
Volatility of the market price 22.53%
Weighted-average expected
life of options 6.5 years
The following table summarizes Provident's restricted stock plan for the six
month ended March 31, 2006:
Weighted
Average
Number Grant-Date
of Shares Fair Value
------------ ------------
Nonvested shares at October 1, 2005 686,160 $ 12.84
Granted 4,000 10.85
Vested (30,100) 12.84
Forfeited (23,000) 12.84
------------
Nonvested shares at March 31, 2006 637,060 $ 12.83
============ ============
13
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
2. Acquisitions
------------
The Company has been active in acquisitions over the past several
years. All acquisitions were accounted for using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed were
recorded by the Company at their fair values at the acquisition date.
On October 1, 2004 the Company completed its acquisition of Warwick
Community Bancorp, Inc. ("WSB" or "Warwick"), located in Warwick, New York. WSB
was the holding company for The Warwick Savings Bank, headquartered in Warwick,
New York, The Towne Center Bank, headquartered in Lodi, New Jersey and
Hardenburgh Abstract Company of Orange County, Inc., headquartered in Goshen,
New York.
On January 14, 2004, the Company completed its acquisition of E.N.B.
Holding Company, Inc. ("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.
Below is a summary of the financial transactions, including the most
recent branch purchase on May 19, 2005 of an HSBC Bank USA, National Association
("HSBC") branch office in South Fallsburg New York, which has been consolidated
with the Bank's existing branch in South Fallsburg.
--------------------------------------------------------------------
HSBC WSB ENB NBF Total
---- --- --- --- -----
At Acquisition Date
- -------------------
Number of shares issued -- 6,257,896 3,969,676 -- 10,227,572
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
Core deposit intangible 1,690 10,395 6,624 1,787 20,496
At March 31, 2006
- -----------------
Goodwill $ -- $ 91,007 $ 53,183 $ 13,336 $ 157,526
Accumulated core deposit amortization 322 2,789 3,930 1,333 8,374
Net core deposit intangible 1,368 7,606 2,694 454 12,122
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.
3. Critical Accounting Policies
----------------------------
The accounting and reporting policies of the Company are prepared in
accordance with accounting principles generally accepted within the United
States of America and conform to general practices within the banking industry.
Accounting policies considered critical to the Company's financial results
include the allowance for loan losses, accounting for goodwill and the
recognition of interest income. The methodology for determining the allowance
for loan losses is considered by management to be a critical accounting policy
due to the high degree of judgment involved, the subjectivity of the assumptions
utilized and the potential for changes in the economic environment that
14
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
could result in changes to the amount of the allowance for loan losses
considered necessary. Accounting for goodwill is considered to be a critical
policy because goodwill must be tested for impairment at least annually using a
"two-step" approach that involves the identification of reporting units and the
estimation of fair values. The estimation of fair values involves a high degree
of judgment and subjectivity in the assumptions utilized. Interest income on
loans, securities and other interest-earning assets is accrued monthly unless
management considers the collection of interest to be doubtful. 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. Accrual of interest ceases and, in general, uncollected past due
interest is reversed and charged against current interest income if such unpaid
interest relates 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.
Application of assumptions different than those used by management could result
in material changes in the Company's financial position or results of
operations. Footnote 2 (Summary of Significant Accounting Policies) of the
Annual Report on Form 10-K for the year ending September 30, 2005 provides
detail with regard to the Company's accounting for the allowance for loan
losses. With the exception of the adoption of SFAS 123R (accounting for
stock-based compensation), on October 1, 2005, and the resulting expensing of
stock options, there have been no significant changes in the application of
accounting policies since September 30, 2005.
4. Loans
-----
Major classifications of loans, excluding loans held for sale, are
summarized below:
March 31, 2006 September 30, 2005
-------------- ------------------
Real estate - residential mortgage $ 463,003 $ 456,794
Real estate - commercial mortgage 518,742 497,936
Real estate - construction 75,434 66,710
Commercial and industrial 144,100 148,825
Consumer loans 204,317 191,808
---------- ----------
Total $1,405,596 $1,362,073
========== ==========
5. Allowance for Loan Losses and Non-Performing Assets
---------------------------------------------------
The allowance for loan losses is established through provisions for
losses charged to earnings. Loan losses are charged against the allowance when
management believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when realized. The
allowance for loan losses is the amount that management has determined to be
necessary to absorb probable loan losses inherent in the existing portfolio.
Management's evaluations, which are subject to periodic review by the Company's
regulators, are made using a consistently-applied methodology that takes into
consideration such factors as the Company's past loan loss experience, changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans and collateral values, and current economic
conditions that may affect the borrowers' ability to pay. Changes in the
allowance for loan losses may be necessary in the future based on changes in
economic and real estate market conditions, new information obtained regarding
known problem loans, regulatory examinations, the identification of additional
problem loans, and other factors. Non-performing loans increased $2.5 million
from September 30, 2005 primarily due to two commercial loan relationships from
the acquired ENB portfolio. The Bank charged off $770,000 of one of those
relationships. The Bank acquired $5,750,000 in allowance for loan losses in
connection with the ENB acquisition.
15
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2006 2005 2006 2005
---- ---- ---- ----
Balance at beginning of period $ 21,819 $ 22,165 $ 22,008 $ 17,353
Allowance acquired through acquisition -- -- -- 4,880
Transfer to reserve for contingent loan commitments
(1,034) -- (1,034) --
Charge-offs (1,023) (119) (1,537) (385)
Recoveries 31 53 56 101
-------- -------- -------- --------
Net charge-offs (992) (66) (1,481) (284)
-------- -------- -------- --------
Provision for loan losses 300 150 600 300
-------- -------- -------- --------
Balance at end of period $ 20,093 $ 22,249 $ 20,093 $ 22,249
======== ======== ======== ========
Net charge-offs to average loans outstanding
(annualized) 0.28% 0.02% 0.22% 0.04%
The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated. At both dates, the
Company had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
March 31, 2006 September 30, 2005
------------------------------ -------------------------------
(Dollars in thousands) (Dollars in thousands)
90 days past due Non- 90 days past due Non-
Still accruing Accrual Still accruing Accrual
-------------- ------------ -------------- ------------
Non-performing loans:
One- to four- family $ 1,461 $ -- $ 1,337 $ 65
Commercial real estate 808 1,330 92 --
Commercial business -- 416 -- 120
Consumer 129 -- -- 27
------------ ------------ ------------ ------------
Total non-performing loans $ 2,398 1,746 $ 1,429 212
------------ ------------ ------------ ------------
Real estate owned:
One- to four family 90 92
------------ ------------
Total real estate owned 90 92
------------ ------------
Total non-performing assets $ 4,234 $ 1,733
============ ============
Ratios:
Non-performing loans to total loans 0.29% 0.12%
Non-performing assets to total assets 0.15% 0.07%
Allowance for loan losses to total non-performing loans 485% 1,341%
Allowance for loan losses to total loans 1.43% 1.62%
16
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
6. Securities
----------
The following is a summary of securities available for sale at March 31, 2006
and September 30, 2005:
Available for Sale Portfolio
March 31, 2006
===================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===================================================
Mortgage-backed securities
Mortgage-backed securities $ 555,173 $ 64 $ (14,774) $ 540,463
Collateralized mortgage obligations 30,128 -- (668) 29,460
---------- ---------- ---------- ----------
Total mortgage-backed and SBA securities 585,301 64 (15,442) 569,923
---------- ---------- ---------- ----------
Investment Securities
U.S. Government and federal agency securities 300,036 -- (5,762) 294,274
State and municipal securities 62,344 29 (1,458) 60,915
Equity securities 6 (28) 925
---------- ---------- ---------- ----------
947
Total investment securities 363,327 35 (7,248) 356,114
---------- ---------- ---------- ----------
Total available for sale $ 948,628 $ 99 $ (22,690) $ 926,037
========== ========== ========== ==========
Available for Sale Portfolio
September 30, 2005
===================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===================================================
Mortgage-backed securities
Mortgage-backed securities $ 500,844 $ 108 $ (7,956) $ 492,996
Collateralized mortgage obligations 21,965 -- (183) 21,782
---------- ---------- ---------- ----------
Total mortgage-backed and SBA securities 522,809 108 (8,139) 514,778
---------- ---------- ---------- ----------
Investment securities
U.S. Government and federal agency securities 262,769 -- (5,144) 257,625
State and municipal securities 50,176 87 (572) 49,691
Equity securities 947 5 (94) 858
---------- ---------- ---------- ----------
Total investment securities 313,892 92 (5,810) 308,174
---------- ---------- ---------- ----------
Total available for sale $ 836,701 $ 200 $ (13,949) $ 822,952
========== ========== ========== ==========
17
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
The following is a summary of securities held to maturity at March 31, 2006 and
September 30, 2005:
Held to Maturity Portfolio
March 31, 2006
==================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
==================================================
Mortgage-backed securities
Mortgage-backed securities $ 22,089 $ 117 $ (421) $ 21,785
Collateralized mortgage obligations 1,693 44 -- 1,737
---------- ---------- ---------- ----------
Total mortgage-backed securities 23,782 161 (421) 23,522
---------- ---------- ---------- ----------
Investment securities
State and municipal securities 43,326 275 (356) 43,245
Other investments 256 6 (2) 260
---------- ---------- ---------- ----------
Total investment securities 43,582 281 (358) 43,505
---------- ---------- ---------- ----------
Total held to maturity $ 67,364 $ 442 $ (779) $ 67,027
========== ========== ========== ==========
Held to Maturity Portfolio
September 30, 2005
==================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
==================================================
Mortgage-backed securities
Mortgage-backed securities $ 24,758 $ 293 $ (295) $ 24,756
Collateralized mortgage obligations 1,953 40 -- 1,993
---------- ---------- ---------- ----------
Total mortgage-backed securities 26,711 333 (295) 26,749
---------- ---------- ---------- ----------
Investment securities
State and municipal securities 43,931 482 (321) 44,092
Other 307 7 (4) 310
---------- ---------- ---------- ----------
Total investment securities 44,238 489 (325) 44,402
---------- ---------- ---------- ----------
Total held to maturity $ 70,949 $ 822 $ (620) $ 71,151
========== ========== ========== ==========
18
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
At March 31, 2006 and September 30, 2005, the accumulated unrealized
net loss on securities available for sale (net of tax of $9,191 and $5,565
respectively) that was included in accumulated other comprehensive loss, a
separate component of stockholders' equity, was $(13,400) and $(8,184)
respectively. Gross realized gains were $0 and $859, respectively and gross
realized losses were $0 and $542 for the six months ended March 31, 2006 and
2005, respectively.
Securities with a carrying amount of $513,415 and $297,359 were pledged
as collateral for municipal deposits, borrowings and other purposes at March 31,
2006 and September 30, 2005, respectively.
The following table summarizes, for all securities in an unrealized
loss position at March 31, 2006, the aggregate fair value and gross unrealized
loss by length of time those securities have continuously been in an unrealized
loss position:
-------------------------------------------------------------------------------------
Less than 12 Months 12 months or longer Total
-------------------------------------------------------------------------------------
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
----------- ----------- ----------- ----------- ----------- -----------
Available For Sale:
Mortgage-backed securities $ (5,002) $ 260,368 $ (10,440) $ 298,565 $ (15,442) $ 558,933
U.S. Government Agency securities (329) 54,484 (5,433) 239,790 (5,762) 294,274
Municipal securities (1,247) 51,965 (211) 7,698 (1,458) 59,663
Equity securities (28) 918 -- -- (28) 918
----------- ----------- ----------- ----------- ----------- -----------
Total available-for-sale: (6,606) 367,735 (16,084) 546,053 (22,690) 913,788
----------- ----------- ----------- ----------- ----------- -----------
Held to Maturity:
Mortgage-backed securities (58) 5,271 (363) 9,784 (421) 15,055
State and municipal securities (149) 21,005 (207) 5,128 (356) 26,133
Other securities -- -- (2) 100 (2) 100
----------- ----------- ----------- ----------- ----------- -----------
Total held to maturity: (207) 26,276 (572) 15,012 (779) 41,288
----------- ----------- ----------- ----------- ----------- -----------
Total securities: $ (6,813) $ 394,011 $ (16,656) $ 561,065 $ (23,469) $ 955,076
=========== =========== =========== =========== =========== ===========
Substantially all of the unrealized losses at March 31, 2006 relate to
investment grade securities and are attributable to changes in market interest
rates subsequent to purchase. There were no individual securities with
unrealized losses of significant dollar amounts at March 31, 2006. A total of
283 securities were in a continuous unrealized loss position for less than 12
months, and 252 securities for 12 months or longer. For fixed maturities, there
are no securities past due or securities for which the Company currently
believes it is not probable that it will collect all amounts due according to
the contractual terms of the investment. Because the Company has the ability and
intent to hold securities with unrealized losses until a market price recovery
(which, for securities with fixed maturities, may be until maturity) the Company
did not consider these investments to be other-than-temporarily impaired at
March 31, 2006, except for an investment in
19
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Freddie Mac perpetual preferred stock, previously determined to have other than
temporary impairment loss of $94 on a recorded basis of $935.
7. Deposits
--------
Major classifications of deposits are summarized below:
March 31, 2006 September 30, 2005
-------------- ------------------
Demand deposits:
Retail $ 168,340 $ 170,434
Commercial and municipal 193,678 214,647
Business NOW deposits 47,468 60,214
Personal NOW deposits 112,077 105,730
---------- ----------
Total transaction accounts 521,563 551,025
Money market deposits 235,652 222,091
Savings deposits 433,306 481,674
Certificates of deposit 588,768 471,611
---------- ----------
Total deposits $1,779,289 $1,726,401
========== ==========
8. FHLB and Other Borrowings
-------------------------
The Company's FHLB and other borrowings and weighted average interest
rates are summarized as follows:
------------------- --------------------
March 31, 2006 September 30, 2005
------------------- --------------------
Amount Rate Amount Rate
-------- -------- -------- --------
By type of borrowing:
Advances $374,799 4.64% $296,636 3.86%
Repurchase agreements 171,411 4.11 145,567 3.62
-------- --------
Total borrowings $546,210 4.48% $442,203 3.78%
======== ========
By remaining period to maturity:
One year or less $370,514 4.82% $235,212 3.84%
One to two years 33,859 3.84 18,115 3.62
Two to three years 38,946 3.88 51,719 3.65
Three to four years 27,251 3.38 52,450 3.73
Four to five years 29,746 3.81 16,313 3.78
Five years or greater 45,894 3.75 68,394 3.73
-------- --------
Total borrowings $546,210 4.48% $442,203 3.78%
======== ========
20
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Of the $171.4 million in repurchase agreements, $108.7 million are
callable quarterly through their respective maturities. 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 March 31, 2006 and September 30, 2005, the
Bank had pledged mortgages with collateral value totaling $343,357 and $301,154
respectively. Based on outstanding borrowings under the line totaling $218,568
and $269,529 as of March 31, 2006 and September 30, 2005, the Bank had unused
borrowing capacity under the FHLB of New York line of credit of $124,789 and
$31,625 respectively. The Bank may borrow additional amounts by pledging
securities not required to be pledged for other purposes with a market value of
$473,579 as of March 31, 2006.
9. Earnings Per Common Share
-------------------------
The number of shares used in the computation of both basic and diluted
earnings per share excludes unallocated ESOP shares held to fund deferred
compensation plans, and unallocated restricted stock shares that have not been
released to participants.
Common stock equivalent shares are incremental shares (computed using
the treasury stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became vested
during the periods.
Basic earnings per common share is computed as follows:
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2006 2005 2006 2005
---- ---- ---- ----
Weighted average common shares
outstanding (basic), in `000s 40,939 43,869 41,070 44,098
------- ------- ------- -------
Net income $ 4,405 $ 5,180 $ 9,564 $10,195
Basic earnings per common share $ 0.11 $ 0.12 $ 0.23 $ 0.23
Diluted earnings per common share is computed as follows:
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2006 2005 2006 2005
---- ---- ---- ----
Weighted average common shares
outstanding (basic), in `000s 40,939 43,869 41,070 44,098
Effect of common stock equivalents 467 570 471 589
------- ------- ------- -------
Total diluted shares 41,406 44,439 41,541 44,687
Net income $ 4,405 $ 5,180 $ 9,564 $10,195
Diluted earnings per common share $ 0.11 $ 0.12 $ 0.23 $ 0.23
21
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
10. Pension and Other Post Retirement Plans
---------------------------------------
Net post retirement cost, which is recorded within salaries and
employee benefits expense in the consolidated statements of income, is comprised
of the following:
Pension Plans Other Post Retirement Plans
------------------ ------------------
Six Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2006 2005 2006 2005
------------------ ------------------
Service cost $ 656 $ 645 $ 18 $ 51
Interest cost 660 806 39 75
Expected return on plan assets (843) (895) -- --
Unrecognized net transition obligation -- 5 5 5
Amortization of prior service cost (6) (5) 3 3
Amortization of gain or loss 163 167 (52) (1)
------------------ ------------------
Net periodic cost $ 630 $ 723 $ 13 $ 133
======= ======= ======= =======
The contribution expected to be made to all plans in fiscal 2006 is
$1,631. As of March 31, 2006, the Company has contributed $1,631. As part of the
acquisition of WSB, the Company assumed the WSB Pension Plan, a defined benefit
plan. The WSB plan was frozen on April 30, 2002. As part of the acquisition of
ENB, the Company assumed the ENB Pension Plan, a defined benefit plan. The ENB
plan was frozen in connection with the merger of ENB into the Company. On April
1, 2006 the Company approved merging both the ENB and WSB pension plans into the
Provident Bank Pension Plan.
11. Guarantor's Obligations Under Guarantees
----------------------------------------
Nearly all letters of credit issued by or on behalf of the Company are
standby letters of credit. Standby letters of credit are commitments issued by
the Company on behalf of its customer/obligor in favor of a beneficiary that
specify an amount the Company can be called upon to pay upon the beneficiary's
compliance with the terms of the letter of credit. These commitments are
primarily issued in favor of local municipalities to support the obligor's
completion of real estate development projects. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
As of March 31, 2006, the Company had $15.7 million in outstanding
letters of credit, of which $7.0 million were secured by cash collateral.
12. Subsequent Event
----------------
On April 13, 2006, the Company entered into a definitive agreement to
acquire substantially all the assets of Hudson Valley Investment Advisors, Inc.
for which it will pay $5 million, 50% of which will be in stock. We expect this
acquisition to enhance our non-interest income. The transaction is expected to
close during the third quarter of the Company's fiscal year.
22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
--------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 2006 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and
those factors identified elsewhere herein, the following factors could cause
actual results to differ materially from such forward-looking statements;
pricing pressures on loan and deposit products; changes in local and national
economic conditions; the extent and timing of actions of the Company's
regulators; customer deposit disintermediation; changes in customers' acceptance
of the Company's products and services; general actions of competitors, other
normal business risks such as credit losses, litigation and increases in the
levels of non-performing assets. The Company's forward-looking statements speak
only as of the date on which such statements are made. The Company assumes no
duty to update forward-looking statements to reflect new, changing or
unanticipated events or circumstances.
The Company's significant accounting policies are summarized in Note 2
to the consolidated financial statements included in its Annual Report on Form
10-K for the fiscal year ended September 30, 2005. An accounting policy
considered particularly critical to the Company's financial results is the
allowance for loan losses. The methodology for assessing the appropriateness of
the allowance for loan losses and non-performing loans is considered a critical
accounting policy by management due to the high degree of judgment involved, the
subjectivity of the assumptions utilized, and the potential for changes in the
economic environment that could result in changes in the necessary allowance.
As discussed in Note 2 to the consolidated financial statements
included in Item 1 of this quarterly report, the Company completed its
acquisition of WSB on October 1, 2004. The acquisition was accounted for as a
purchase and, accordingly, amounts attributable to Warwick have been included in
the Company's consolidated financial statements from the date of acquisition.
Comparison of Financial Condition at March 31, 2006 and September 30,
-----------------------------------------------------------------------
2005
----
Total assets as of March 31, 2006 were $2.7 billion, an increase of
$148.3 million, or 5.7%, from September 30, 2005. The increase from September
30, 2005 was primarily due to an increase in securities, and to a lesser extent,
loans. Securities increased $99.5 million, or 11.1%, and loans increased $43.5
million, or 3.2%. Net deferred income taxes increased from $10.6 million at
September 30, 2005 to $20.8 million at March 31, 2006, an increase of $10.2
million, or 96.6%. The change in deferred income taxes is primarily attributable
to the tax effects of the increase in unrealized loss on our available-for-sale
securities portfolio and the distribution of earnings from the Company's REIT.
Core deposit intangibles decreased by $1.6 million in net amortization from
September 30, 2005.
Net loans as of March 31, 2006 were $1.4 billion, an increase of $45.4
million, or 3.4%, over net loan balances of $1.3 billion at September 30, 2005.
Commercial loans, primarily commercial mortgage loans, increased by $24.8
million, or 3.5%, over balances at September 30, 2005. Consumer loans
23
increased by $12.5 million, or 6.5%, during the six-month period ended March 31,
2006, while residential loans increased by $6.2 million, or 1.4%. Total loan
originations, excluding loans originated for sale, were $297.5 million for the
six months ended March 31, 2006. However, repayments were $253.1 million for the
six months ended March 31, 2006. Non-performing loans increased $2.5 million
from September 30, 2005, in addition to net charge-offs of $1.0 million, due
primarily to two commercial loan relationships from the acquired ENB portfolio.
The Bank also charged off $770,000 of one of those relationships. (The Bank
acquired $5,750,000 in allowance for loan losses in connection with the ENB
acquisition.) In spite of this, net charge-offs to average loans outstanding, on
an annualized basis, was only 0.22% for the six months ended March 31, 2006.
Loan quality continues to be strong. At $4.1 million, non-performing loans as a
percentage of total loans was 0.29%, as compared to 0.12% at September 30, 2005
and 0.21% at March 31, 2005.
Total securities increased by $99.5 million, or 11.1%, to $993.4
million at March 31, 2006 from $893.9 million at September 30, 2005. Investments
were made primarily in mortgage-backed securities, which increased by $51.7
million, or 9.8%. Government and federal agency securities and municipal
securities also increased, by $37.3 million, or 14.2%, and $11.6 million, or
12.3%, respectively. This increase was partially offset by mark-to-market
adjustments on available for sale securities due to changes in market interest
rates.
Deposits as of March 31, 2006 were $1.8 billion, a growth of $52.9
million, or 3.1%, from September 30, 2005. As of March 31, 2006 retail and
commercial transaction accounts were 29.3% of deposits compared to 31.9% at
September 30, 2005. The decrease of $29.5 million, or 5.3%, in demand deposits
is seasonal and the decrease in savings and money market deposits of $34.8
million, or 4.9%, was largely due to the migration of the lower-yielding
non-transaction accounts to our certificate of deposit products or, in some
cases, to other institutions offering higher yields. These decreases were offset
by an increase of $117.2 million, or 24.8%, in certificates of deposit. As of
January 2006, we have begun to offer certain new products that offer higher,
market-sensitive interest rates and others that offer transaction account
incentives.
Borrowings increased by $104.0 million from September 2005, or 23.5%,
to $546.2 million. Much of the increase is related to the borrowings used to
fund the increases in securities and loans and for repurchases of shares of the
Company's common stock.
Stockholders' equity decreased by $7.9 million, or 2.0%, to $387.3
million at March 31, 2006 compared to $395.2 million at September 30, 2005. The
decrease is largely attributable to the purchase of 1.1 million treasury shares
at a cost of $12.7 million, and an increase of $5.2 million in other
comprehensive loss for unrealized losses on available for sale securities, as
well as dividend payments of $4.1 million. This decrease was partially offset by
$9.6 million in current earnings for the six-month period, a $2.8 million
increase in additional paid in capital for stock-based compensation, and $1.6
million in RRP transactions. Since September 2005, we have purchased a total of
1,114,571 shares of common stock, which are held as treasury shares.
During the second quarter of fiscal 2006, the Company neared completion
of its second stock repurchase program and announced a third repurchase plan for
up to 2.1 million shares. Repurchases under the authorized plan for the current
quarter totaled 641,400 shares at a purchase price of $7.4 million. As of March
31, 2006 the Company had authorization to purchase up to an additional 2,292,829
shares of common stock. Also during the first six months of fiscal 2006, 4,000
shares of restricted stock were granted from treasury shares. Bank Tier I
capital to assets stands at 7.4% at March 31, 2006. Tangible capital at the
holding company level is 8.4%.
24
Comparison of Operating Results for the Three Months Ended
March 31, 2006 and March 31, 2005
Net Income. For the three months ended March 31, 2006 net income was
$4.4 million, a decrease of $775,000 compared to $5.2 million for the same
period in fiscal 2005. Net interest income after provision for loan losses for
the three months ended March 31, 2006 decreased by $745,000, or 3.5%, to $20.5
million compared to $21.3 million for the same period in the prior year.
Non-interest income increased $301,000, or 7.8%, to $4.1 million for the three
months ended March 31, 2006 compared to $3.8 million for the three months ended
March 31, 2005. Non-interest expense increased $1.1 million, or 6.3%, to $18.1
million for the three months ended March 31, 2006 compared to $17.1 million for
the same prior-year period.
The relevant performance measures follow:
Three Months Ended
March 31,
2006 2005
---- ----
Per common share:
Basic earnings $ 0.11 $ 0.12
Diluted earnings 0.11 0.12
Dividends declared 0.05 0.04
Return on average (annualized):
Assets 0.67% 0.83%
Equity 4.57% 5.00%
25
The following table sets forth the consolidated average balance sheets
for the Company for the periods indicated. Also set forth is information
regarding weighted average yields on interest-earning assets and weighted
average rates paid on interest-bearing liabilities (dollars in thousands).
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage
loans(1) $ 724,425 $ 13,098 7.33% $ 677,753 $ 11,223 6.72%
Consumer loans(1) 197,232 3,145 6.47 163,041 2,046 5.09
Residential mortgage loans(1) 452,513 6,697 6.00 430,670 6,237 5.87
---------- ---------- ---------- ----------
Total loans 1,374,170 22,939 6.77 1,271,464 19,506 6.22
---------- ---------- ---------- ----------
Securities-taxable 825,284 8,321 4.09 874,647 8,160 3.78
Securities-tax exempt(2) 100,693 1,455 5.86 50,687 740 5.92
Other earning assets 30,675 357 4.72 20,881 137 2.66
---------- ---------- ---------- ----------
Total securities and other earning
assets 956,652 10,134 4.30 946,215 9,037 3.87
---------- ---------- ---------- ----------
Total interest-earning assets 2,330,822 33,073 5.75 2,217,679 28,543 5.22
---------- ---------- ---------- ----------
Non-interest-earning assets 333,952 315,161
---------- ----------
Total assets $2,664,774 $2,532,840
========== ==========
Interest bearing liabilities:
NOW checking $ 141,064 $ 137 0.39% $ 156,838 $ 127 0.33%
Savings, clubs and escrow 448,084 564 0.51 553,936 786 0.58
Money market accounts 222,169 909 1.66 234,592 605 1.05
Certificate accounts 521,399 4,485 3.49 393,508 1,976 2.04
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,332,716 6,095 1.86 1,338,874 3,494 1.06
Borrowings 556,201 5,643 4.11 417,952 3,369 3.27
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,888,917 11,738 2.52 1,756,826 6,863 1.58
---------- ---------- ---------- ----------
Non-interest bearing liabilities:
Non-interest-bearing checking 362,955 337,793
Other non-interest-bearing
liabilities 21,944 17,802
---------- ----------
Total non-interest bearing liabilities 384,899 355,595
---------- ----------
Total liabilities 2,273,816 2,112,421
Stockholder's equity 390,958 420,419
---------- ----------
Total liabilities and equity $2,664,774 $2,532,840
========== ==========
Net interest rate spread 3.23% 3.64%
========== ==========
Net earning assets $ 441,905 $ 460,853
========== ==========
Net interest margin 21,335 3.71% 21,680 3.96%
========== ========== ========== ==========
Less tax equivalent adjustment(2) (508) (259)
---------- ----------
Net interest income $ 20,826 $ 21,421
========== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities
123.39% 126.23%
========== ==========
- -----------------------------
(1) Includes non-accrual loans.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
26
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended March 31,
2006 vs. 2005
Increase/(Decrease) Due to
--------------------------
Volume(1) Rate(1) Total
--------- ------- -----
Interest-earning assets
Commercial and commercial mortgage loans $ 809 $ 1,066 $ 1,875
Consumer loans 480 619 1,099
Residential mortgage loans 320 140 460
Securities-taxable (487) 648 161
Securities-tax exempt(2) 723 (8) 715
Other earning assets 83 137 220
------- ------- -------
Total interest income 1,928 2,602 4,530
------- ------- -------
Interest-bearing liabilities
NOW checking (13) 23 10
Savings (136) (86) (222)
Money market (35) 339 304
Certificates of deposit 787 1,722 2,509
Borrowings 1,279 995 2,274
------- ------- -------
Total interest expense 1,882 2,993 4,875
------- ------- -------
Net interest margin 46 (391) (345)
------- ------- -------
Less tax equivalent adjustment(2) 253 (3) 250
------- ------- -------
Net interest income $ (207) $ (388) $ (595)
======= ======= =======
- ----------------------------
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
Net interest income for the three months ended March 31, 2006 decreased
by $595,000, or 2.8%, to $20.8 million compared to $21.4 million for the quarter
ended March 31, 2005. Gross interest income on a tax-equivalent basis increased
by $4.5 million, or 15.9%, to $33.0 million for the quarter ended March 31,
2006, compared to $28.5 million for the same three months in 2005. The increase
in interest income was largely due to a $113.1 million increase in average
earning assets, at higher yields, to $2.3 billion during the quarter ended March
31, 2006, as compared to $2.2 billion for the same quarter in the prior year.
The increase is primarily due to the increase in loans, with the highest
concentration coming from commercial loans, followed by consumer loans. The
increase in average earning assets was also enhanced by an increase in average
yield of 53 basis points from 5.22% to 5.75%, on a fully taxable equivalent
basis. The average yields on the loan portfolio increased by 55 basis points.
The average yields on investments and other earning assets increased by 43 basis
points. Interest expense increased by $4.9 million for the quarter compared to
the same quarter in 2005, as average interest-bearing liabilities increased by
$132.1 million and the average cost of interest-bearing liabilities increased by
94 basis points. The increase in liabilities was used to fund loan and
securities growth and stock repurchases. The
27
tax equivalent net interest margin declined by 25 basis points to 3.71%, while
net interest spread declined by 41 basis points to 3.23%. This was primarily the
result of the increase in borrowings as previously mentioned, along with the
impact of the increase in the cost of interest-bearing liabilities resulting
from the 275 basis point increase in the target federal funds rate since
September of 2004.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $300,000 in loan loss provisions for the three
months ended March 31, 2006 compared to $150,000 for the three months ended
March 31, 2005. Net charge-offs for the three months ended March 31, 2006 were
$992,000 compared to $66,000 for the same period in 2005. (See Note 5 in Item 1
for further detail).
Non-interest income was $4.1 million for the three months ended March
31, 2006 compared to $3.8 million for the three months ended March 31, 2005, an
increase of $301,000, or 7.8%. Deposit fees and service charges increased by
$126,000 or 5.2%, which was primarily due to volume-driven increases in
uncollected funds and debit card fees. Income derived from the Company's bank
owned life insurance ("BOLI") investments increased by $99,000 or 33.6% due to
additional BOLI investments of $10 million made subsequent to March 2005. Title
insurance fee income derived from the Company's wholly-owned title insurance
agency subsidiary, Hardenburgh, was $390,000 for the quarter, up $90,000, or 30%
from the prior year. There were no sales of securities this quarter and thus no
gains or losses, compared to the $263,000 in gains for the same period last
year. During the three-month period ended March 31, 2006, the Company also
recorded gains on sales of loans totaling $86,000 compared to $21,000 in gains
for the same period last year.
Non-interest expense for the three months ended March 31, 2006
increased by $1.1 million, or 6.3%, primarily as the result of an increase of
$1.2 million in stock-based compensation (discussed below). Compensation and
employee benefits expense increased by $396,000, or 5.0%, this period as
compared to the same period last year. The increase was due to annual salary
increases, as well as the movement of our data processing services in house,
which shifted certain data and check processing costs to salaries and benefits.
There was an increase in the cost of stock-based compensation benefits of $1.2
million primarily due to the adoption of SFAS No. 123R, the amortization of a
greater number of restricted stock shares, the expensing of ESOP shares at an
increased cost due to appreciation in the Company's stock price and the expense
due to additional ESOP shares released. These increases totaled $232,000,
$348,000, $42,000 and $388,000, respectively. Occupancy and office operations
increased by $556,000 or 22.6%, to $3.0 million for the three months ended March
31, 2006, due to the increased office space required to accommodate the increase
in the Bank's size subsequent to the acquisitions, as well as space necessary to
fulfill the requirements of our new in-house data center, completed November
2005. We chose to move our data services in house, to (1) achieve greater
efficiencies and security, (2) maintain a fixed level of operational costs, and
(3) be in the position to accommodate an increase in volume, such as from an
acquisition, without adding incremental costs. Advertising and promotion
decreased $248,000 or 38.2%, primarily as a result of the completion of our new
brand identity initiative in fiscal 2005. Data and check processing fees
decreased $369,000, or 31.9%, primarily due to the new in-house data center,
which decreased our reliance on outside services. Merger and integration costs
decreased $341,000, or 100.0% from the same quarter last year, as there was no
acquisition-related activity during the quarter. Other non-interest expense
decreased $181,000, or 8.4%, due to the gains in efficiency previously
mentioned.
28
The efficiency ratio increased to 72.7% for the current quarter from
67.6% for the quarter ending March 31, 2005. The change reflects the increase in
interest expense relative to interest income, partially offset by an increase in
non interest-related income, creating a lower income base for the current
period. As discussed, the non-interest expenses comprising the numerator of the
ratio have increased as they include the increase in stock-based compensation.
Income Taxes. Income tax expense was $2.1 million for the three months
ended March 31, 2006, compared to $2.9 million for the same period in 2005. The
effective tax rates were 32.5% and 35.6%, respectively. The reduction in the
effective rate is primarily due to higher utilization of tax-advantaged assets
such as tax-exempt securities and bank-owned life insurance.
Comparison of Operating Results for the Six Months Ended
March 31, 2006 and March 31, 2005
Net Income. For the six months ended March 31, 2006 net income was $9.6
million, a decrease of $631,000 compared to $10.2 million for the same period in
fiscal 2005. Net interest income after provision for loan losses for the six
months ended March 31, 2006 decreased by $1.5 million, or 3.6%, compared to the
same period in fiscal 2005. Non-interest income increased $638,000, or 8.1% to
$8.5 million for the six months ended March 31, 2006 compared to $7.9 million
for the six months ended March 31, 2005. Non-interest expense increased
$787,000, or 2.3%, to $35.6 million for the six months ended March 31, 2006
compared to $34.8 million for the same period in fiscal 2005.
The relevant performance measures follow:
Six Months Ended
March 31,
2006 2005
---- ----
Per common share:
Basic earnings $0.23 $0.23
Diluted earnings 0.23 0.23
Dividends declared 0.10 0.08
Return on average (annualized):
Assets 0.73% 0.81%
Equity 4.90% 4.84%
29
The following table sets forth the consolidated average balance sheets
for the Company for the periods indicated. Also set forth is information
regarding weighted average yields on interest-earning assets and weighted
average rates paid on interest-bearing liabilities (dollars in thousands).
Six Months Ended March 31,
--------------------------
2006 2005
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage
loans(3) $ 713,142 $ 25,772 7.25% $ 670,034 $ 22,321 6.68%
Consumer loans(1) 194,057 6,018 6.22 161,713 3,930 4.87
Residential mortgage loans(1) 450,485 13,336 5.94 432,633 12,668 5.87
---------- ---------- ---------- ----------
Total loans 1,357,684 45,126 6.67 1,264,380 38,919 6.17
---------- ---------- ---------- ----------
Securities-taxable 811,046 16,063 3.97 850,550 16,093 3.79
Securities-tax exempt(4) 97,473 2,818 5.80 49,354 1,437 5.84
Other earning assets 28,626 656 4.60 30,980 350 2.27
---------- ---------- ---------- ----------
Total securities and other
earning assets 937,145 19,538 4.18 930,884 17,880 3.85
---------- ---------- ---------- ----------
Total interest-earning assets 2,294,829 64,663 5.65 2,195,264 56,799 5.19
---------- ----------
Non-interest-earning assets: 338,079 326,380
---------- ----------
Total assets $2,632,908 $2,521,644
========== ==========
Interest bearing liabilities:
NOW checking $ 139,654 268 0.38% $ 149,671 259 0.35%
Savings, clubs and escrow 463,207 1,184 0.51 556,635 1,658 0.60
Money market accounts 218,509 1,613 1.48 258,573 1,197 0.93
Certificate accounts 504,778 8,289 3.29 398,847 3,799 1.91
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,326,148 11,354 1.72 1,363,726 6,913 1.02
Borrowings 520,614 10,439 4.02 386,379 6,261 3.25
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,846,762 21,793 2.37% 1,750,105 13,174 1.51%
---------- ---------- ---------- ----------
Non-interest-bearing liabilities:
Non-interest-bearing
checking 372,586 336,652
Other non-interest-bearing
liabilities 22,057 12,675
---------- ----------
Total non-interest-bearing
liabilities 394,643 349,327
---------- ----------
Total liabilities 2,241,405 2,099,432
Stockholders' equity 391,503 422,212
---------- ----------
Total liabilities and equity $2,632,908 $2,521,644
========== ==========
Net interest rate spread 3.28% 3.68%
========== ==========
Net earning assets $ 448,067 $ 445,159
========== ==========
Net interest margin 42,870 3.75% 43,625 3.99%
========== ========== ========== ==========
Less tax equivalent adjustment(2) (985) (503)
---------- ----------
Net interest income $ 41,885 $ 43,122
========== ==========
Ratio of average interest-earning
assets to average interest-
bearing liabilities 124.26% 125.44%
========== ==========
- -----------------------
(1) Includes non-accrual loans
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
30
The table below details the changes in interest income and interest expense for
the periods indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Six Months Ended March 31,
2006 vs. 2005
Increase/(Decrease) Due to
--------------------------
Volume (1) Rate (1) Total
---------- -------- -----
Interest-earning assets
Commercial and commercial mortgage loans $ 1,483 $ 1,968 $ 3,451
Consumer loans 875 1,213 2,088
Residential mortgage loans 519 149 668
Securities-taxable (772) 742 (30)
Securities-tax exempt(2) 1,391 (10) 1,381
Other earning assets (29) 335 306
------- ------- -------
Total interest income 3,467 4,397 7,864
------- ------- -------
Interest-bearing liabilities
Savings (250) (224) (474)
Money market (209) 625 416
NOW checking (16) 25 9
Certificates of deposit 1,207 3,283 4,490
Borrowings 2,484 1,694 4,178
------- ------- -------
Total interest expense 3,216 5,403 8,619
------- ------- -------
Net interest margin 251 (1,006) (755)
------- ------- -------
Less tax equivalent adjustment(2) 484 (2) (482)
------- ------- -------
Net interest income $ (233) $(1,004) $(1,237)
======= ======= =======
- ----------------------------------------------------------
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
Net Interest Income. Net interest income for the six months ended March
31, 2006 was $41.9 million, compared to $43.1 million for the six months ended
March 31, 2005, a decrease of $1.2 million, or 2.9%. The increase in interest
income was largely due to a $99.6 million increase in average earning assets
with higher yields to $2.3 billion during the period ended March 31, 2006, as
compared to $2.2 billion for the same period in the prior fiscal year. The
increase was primarily due to continued internal growth. The increase in average
earning assets was further enhanced by an improvement in average yield of 46
basis points, from 5.19% to 5.65%, on a fully taxable equivalent basis. Interest
expense increased by $8.6 million for the six months ended March 31, 2006 from
$13.2 million for the same period in fiscal 2005 to $21.8 million, as average
interest-bearing liabilities increased by $96.7 million and the average cost of
interest-bearing liabilities increased 86 basis points. The tax-equivalent net
interest margin declined by 24 basis points to 3.75%, while the net interest
spread declined by 40 basis points to 3.28%, due to the increase in short-term
market interest rates. The Board of Governors of the Federal Reserve has
increased short term rates 11 times since September 2004, increasing the target
federal funds rate from 2.0% to 4.75%. However, longer term interest rates
(10-year treasury) have only increased from an average of 4.23% for the six
months ended March 31, 2005 to 4.52% for the six months ended March 31, 2006.
31
As the yield has increased on short-term rates faster than longer term rates,
the Bank's average cost of interest-bearing liabilities has increased faster
than the average increase in asset yields. Should the yield curve continue to
remain flat, a continued decline in net interest margin may occur, offsetting a
portion of gains in net interest income arising from increasing volume of assets
generated.
Provision for Loan Losses. The Company records provisions for loan
losses, which are charged to earnings, in order to maintain the allowance for
loan losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $600,000 and $300,000, respectively, in loan
loss provisions during the six months ended March 31, 2006 and 2005. Net
charge-offs for the six months ended March 31, 2006 were $1.5 million compared
to net charge-offs of $284,000 for the same period in 2005. (See Note 5 for
further discussion).
Non-Interest Income was $8.5 million for the six months ended March 31,
2006 compared to $7.9 million for the six months ended March 31, 2005. Deposit
fees and service charges increased by $259,000, or 5.2%, which was primarily due
to volume-driven increases in uncollected fees and debit card fees. Income
derived from the Company's BOLI investments increased by $196,000, or 32.1%, due
to the additional BOLI investment previously discussed. Title insurance fee
income derived from Hardenburgh was $807,000, an increase of $149,000, or 22.6%.
There were no sales of securities during the current six-month period, compared
to $317,000 in net gains on securities sales for the same period in the prior
fiscal year. During the six-month period ended March 31, 2006, the Company also
recorded net gains on sales of loans totaling $67,000 compared to $80,000 for
the same period last year.
Non-Interest Expense for the six months ended March 31, 2006 increased
by only $787,000, or 2.3%, to $35.6 million, compared to $34.8 million for the
six months ended March 31, 2005. Despite an increase of $1.9 million in
stock-based compensation plans expense, which was generated from a rising stock
price, the acceleration of certain restricted stock grants and a change in
accounting rules, the Company was able to hold expenses relatively stable as a
result of our continued efforts towards efficiency, as well as the full
integration of our acquisitions. In addition, as a result of our integration
efforts, we closed three branches and combined them with other larger branches.
As mentioned in the discussion for the three-month period, the movement of our
data center in house resulted in the reclassification of certain expenses,
primarily into compensation and employee benefits and occupancy and office
operations, and out of data and check processing expense. As a result,
compensation and employee benefits, which was also impacted by annual merit
raises, increased by $404,000, or 2.6%. Occupancy and office operations, which
was also impacted by increased real estate taxes, grew by $1.0 million, or
22.7%. Partially offsetting these increases was a decrease in data and check
processing expense of $740,000, or 30.8%. The completion of our branding project
in 2005 resulted in a decrease of $818,000, or 45.1%, in advertising and
promotion costs. Professional fees increased by $370,000, or 28.9%, as
additional services were required. The full integration of all acquisitions
allowed us to reduce stationery and office supplies by $100,000, or 19.6%, while
the lack of acquisition activity in the current fiscal year served to reduce
merger integration costs by 100%, or $721,000, compared to the six-month period
last year. Other expenses decreased by $133,000, or 3.7%, due to the gains in
efficiency and branch closings previously mentioned.
Income Taxes. Income tax expense was $4.7 million for the six months
ended March 31, 2006 compared to $5.7 million expense for the same period in
2005. The effective tax rates were 32.8% and 35.9%, respectively. As mentioned,
the Company's strategies for utilization of tax-advantaged investments has had a
positive impact on its income tax liabilities.
32
Liquidity and Capital Resources
-------------------------------
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, wholesale borrowings,
the proceeds from maturities of securities and short-term investments, and
proceeds from sales of loans originated for sale and securities available for
sale. Maturities and scheduled amortization of loans and securities, as well as
proceeds from borrowings, are predictable sources of funds. Other funding
sources, however, such as deposit inflows and mortgage prepayments are greatly
influenced by market interest rates, economic conditions and competition.
The Company's primary investing activities are the origination of
commercial mortgage loans, residential one- to four-family mortgage loans,
commercial and industrial loans, second mortgages and home equity loans and the
purchase of investment securities and mortgage-backed securities. During the six
months ended March 31, 2006 and March 31, 2005, loan originations, excluding
loans originated for sale, totaled $297.5 million and $213.2 million,
respectively, and purchases of securities totaled $177.3 million and $310.3
million, respectively. The decrease in security purchases for the six-month
period ended March 31, 2006, as compared to the same period last year, reflects
our focus to increase our loan portfolio, which increased $103.4 million from
March 31, 2005. For the six-month periods ended March 31, 2006, these investing
activities were funded primarily by principal repayments on loans, by proceeds
from sales and maturities of securities, by increased deposit balances, and by
short-term borrowings. Loan origination commitments and undrawn lines of credit
totaled $356.7 million at March 31, 2006. The Company anticipates that it will
have sufficient funds available to meet current loan commitments. At March 31,
2006 the Company had investments of $38.5 million in BOLI contracts. Such
investments are illiquid and are therefore classified as other assets. Earnings
from BOLI are derived from the net increase in cash surrender value of the BOLI
contracts and the proceeds from the payment on the insurance policies, if any.
Deposit flows are generally affected by the level of interest rates,
the interest rates and products offered by local competitors, the appeal of
non-deposit investments, and other factors. The net increase in total deposits
for the six months ended March 31, 2006 was $53.0 million, compared to a $30.6
million decrease during the same period last year. In 2006, certificates
increased $117.2 million, while transaction, savings and money market accounts
decreased by $64.2 million.
The Company monitors its liquidity position on a daily basis. We
generally remain fully invested and utilize additional sources of funds through
Federal Home Loan Bank of New York advances and repurchase agreements, of which
$533.3 million was outstanding at March 31, 2006. At March 31, 2006 we had the
ability to borrow an additional $124.8 million under our credit facilities with
the Federal Home Loan Bank. The Bank may borrow an additional $473.6 by pledging
securities not required to be pledged for other purposes as of March 31, 2006.
At March 31, 2006, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $191.8 million, or 7.4%
of adjusted assets (which is above the required level of $103.2 million, or
4.0%, minimum requirement) and a total risk-based capital level of $211.9
million, or 11.9% of risk-weighted assets (which is above the required level of
$142.2 million, or 8.0%). Regulations require leverage and total risk-based
capital ratios of 5.0% and 10.0%, respectively, in order to be classified as
well-capitalized. In performing this calculation, the intangible assets recorded
as a result of acquisitions are deducted from capital and from total adjusted
assets for purposes of regulatory capital measures. At March 31, 2006, the Bank
exceeded all capital requirements for the well-capitalized classification. These
capital requirements, which are applicable to the Bank only, do not consider
additional capital retained at the holding company level.
33
The following table sets forth the Bank's regulatory capital position at March
31, 2006 and September 30, 2005, compared to OTS requirements.
OTS Requirements
Minimum Capital For Classification as
Bank Actual Adequacy Well Capitalized
----------- -------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in
thousands)
March 31, 2006
- --------------
Tangible Capital $191,775 7.4% $ 38,699 1.5% $ -- --%
Tier 1 (core) capital 191,775 7.4 103,197 4.0 128,996 5.0
Risk-based capital:
Tier 1 191,775 10.8 -- -- 106,677 6.0
Total 211,868 11.9 142,236 8.0 177,795 10.0
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
Recent Accounting Standards
In December 2002, the Financial Accounting Standards Board ("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 SFAS No. 123R ("SFAS" No. 123R), "Share-Based
Payments", the provisions of which became effective for the Company beginning in
fiscal 2006. This Statement eliminates the alternative to use APB No. 25's
intrinsic value method of accounting that was provided in Statement No. 123 as
originally issued. SFAS No. 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 No. 123R is similar to the fair-value-based method
disclosed under the provisions of Statement No. 123 in most respects, there are
some differences. The effects of SFAS No. 123R for the six months ending March
31, 2006 were a $591,000 charge to pretax income and a $383,000 reduction of net
income.
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
34
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. There were no additional
securities considered impaired during the six months ended March 31, 2006.
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.
In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-a replacement of FASB
Statement No. 125" ("SFAS 140"). SFAS 156 permits entities to subsequently
measure servicing rights at fair value and report changes in fair value in
earnings rather than amortize servicing rights in proportion to and over the
estimated net servicing income or loss and assets the rights for impairment or
the need for an increased obligation as required under SFAS 140. Entities that
elect to subsequently measure their servicing rights at fair value may no longer
find it necessary to qualify for and apply the provisions of FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," to achieve
an income statement effect similar to the application of hedge accounting for
instruments used to manage the effect of interest rate changes on servicing
rights.
SFAS 156 is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. Earlier adoption of the Statement is permitted
as of the beginning of an entity's fiscal year, provided the entity has not yet
issued financial statements for any interim period of that fiscal year.
Management does not expect the adoption to have a material impact on the
Company's financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of its assets and liabilities are sensitive to changes in
interest rates. The Bank's interest rates risk profile has become more
"liability" sensitive since September 30, 2005. Quantitative and qualitative
disclosure about market risk is presented at September 30, 2005 in Item 7A of
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on December 12, 2005. The following is an update of the discussion
provided therein.
The table below sets forth, as of March 31, 2006, the estimated changes
in our net portfolio value 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.
35
NPV Net Interest Income
----------------------------------------------------- --------------------------------------------------
Estimated Increase (Decrease) in
Change in Estimated Increase (Decrease) in NPV Estimated Net Interest Income
Interest Rates Estimated -------------------------------------- Net Interest ---------------------------------
(basis points) NPV Amount Percent Income Amount Percent
- --------------- ------------- ---------------- -------------------- --------------- --------------- ----------------
(Dollars in thousands)
+300 $231,663 $(119,803) (34.09)% $77,548 $(10,837) (12.26)%
+200 270,161 (81,304) (23.13)% 81,251 (7,134) (8.07)%
+100 311,158 (40,307) (11.47)% 84,941 (3,444) (3.90)%
0 351,465 -- -- 88,385 -- --
-100 378,124 26,659 7.59% 89,886 1,501 1.70%
-200 392,054 40,589 11.55% 89,590 1,205 1.36%
The table set forth above indicates that at March 31, 2006, in the
event of an immediate 100 basis point decrease in interest rates, we would be
expected to experience a 7.59% increase in Net Portfolio Value (NPV) and a 1.70%
increase in net interest income. In the event of an immediate 200 basis point
increase in interest rates, we would be expected to experience a 23.13% decrease
in NPV and an 8.07% decrease in net interest income.
Since September 30, 2005 the Bank's liabilities have moved from an
average duration of 2.06 years to 1.46 years as of March 31, 2006. This is
primarily a result of a shortening in average duration of its borrowings, which
has decreased from 1.79 years of September 30, 2005 to 0.62 years as of March
31, 2006. The Company has chosen to shorten the duration of its borrowings.
Management believes that general market interest rates levels are nearing a peak
as the Federal Reserve Board will end its cycle of Federal Funds Rate increases.
Further, savings accounts, which have a longer duration than money market
accounts or certificates of deposit, declined $46 million while certificates of
deposit increased $113 million. This shift in the interest rate sensitivity of
the Bank's liabilities, without a commensurate decrease in the duration of
assets, has caused the Bank to become "liability sensitive".
The yield curve remains relatively "flat" with the federal funds rates
having risen from 3.75% to 4.75% during the six-month period ending March 31,
2006 and the ten year treasury having risen just over 50 basis points during the
period. As a result of this the Bank's average cost of interest bearing
liabilities has increased faster than the average increase in asset yields,
resulting in a compression of the Bank's net interest margin. Should the yield
curve remain "flat", a continued decline in net interest margin may occur until
a sufficient amount of shorter term assets reprice to reflect current market
yields. This could offset a portion of gains in net interest income arising from
increasing the volume of assets generated. Conversely, should market interest
rates fall below today's level, the Company's net interest margin could also be
negatively affected, as competitive pressures could keep the Bank from lowering
rates on its deposits, and prepayments and curtailments on assets may be
reinvested at lower than current rates. Such movements may cause a decrease in
the interest rate spread and net interest margin.
The Company's largest component of market risk continues to be interest
rate risk. The Company is not subject to foreign currency exchange or commodity
price risk. At March 31, 2006, neither the Company nor the Bank owned any
trading assets, nor did they utilize hedging transactions such as interest rate
swaps and caps.
The Bank continues to monitor the impact of interest rate volatility
upon net interest income and net portfolio value in the same manner as at
September 30, 2005. There have been no changes in the board approved limits of
acceptable variances in net interest income and net portfolio value change
through March 31, 2006 compared to September 30, 2005, and the impact of
possible changes within the Company's models continues to fall within all board
approved limits for potential interest rate volatility.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
(the "Exchange Act") as of the end of the period covered by this report. Based
upon that evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that, as of the end of the period
covered by this report, the Company's disclosure controls and procedures were
effective to ensure that information required to be
36
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time frames
specified in the SEC's rules and forms.
There were no changes in the Company's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, management believes to be material to the consolidated
financial condition and operations of the Company.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) - (d) Not applicable.
(e)
Issuer Purchases of Equity Securities
-------------------------------------
Total Number of Maximum Number (or
Shares (or Units) Approximate Dollar
Total Number Average Purchased as Part Value) of Shares (or
of Shares (or Price Paid of Publicly Units) that may yet be
Units) per Share Announced Plans Purchased Under the
Period (2006) Purchased (1) (or Unit) or Programs (2) Plans or Programs (2)
------------- --------- --------------- ---------------------
Jan. 1 - Jan. 31 117,027 $11.29 95,100 739,129
Feb. 1 - Feb. 28 361,900 11.32 361,900 2,477,229
Mar. 1 - Mar 31 184,400 12.15 184,400 2,292,829
------- ------ -------
Total 663,327 $11.54 641,400
======= ====== =======
The total number of shares purchased during the periods indicated includes
shares deemed to have been received from employees who exercised stock options
(14,727) 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. It also includes restricted shares forfeited during the
period (7,200) which, under the terms of the plan, have been purchased by the
issuer.
(2) The Company announced in February 2006 that it authorized the repurchase of
2,100,000 shares, or approximately 5% of common shares currently outstanding,
having neared the completion of its second repurchase program of 2,200,000
shares.
37
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On February 16, 2006, the Company held its annual meeting of
stockholders for the purpose of the election of five Directors to three year
terms and the ratification of the appointment of KPMG LLP as the Company's
independent registered public accounting firm for the fiscal year ending
September 30, 2006.
The number of votes cast at the meeting as to each matter acted upon
was as follows:
1. ELECTION OF DIRECTORS:
VOTES FOR % VOTES WITHHELD %
Judith Hershaft 37,120,464 98.7 485,567 1.3
Thomas F. Jauntig, Jr. 37,128,637 98.7 477,394 1.3
Thomas G. Kahn 36,984,195 98.3 621,836 1.7
Richard A. Nozell 37,109,900 98.7 496,131 1.3
Carl J. Rosenstock 37,041,440 98.5 564,591 1.5
2. The ratification of the appointment of KPMG LLP as the Company's
independent registered public accounting firm for the fiscal year
ending September 30, 2006.
FOR % AGAINST % ABSTAIN %
36,973,361 98.3 479,655 1.3 153,015 0.4
Item 5. Other Information
None
Item 6. Exhibits
Exhibit Number Description
-------------- -----------
10.1 Form of Amendment to Deferred Compensation Agreement
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident New York Bancorp
(Registrant)
By: /s/ George Strayton
George Strayton
President and Chief Executive Officer
Date: May 8, 2006
By: /s/ Paul A. Maisch
Paul A. Maisch
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 8, 2006
39