UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended September 30, 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
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(Exact name of Registrant as Specified in its Charter)
Delaware 80-0091851
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation on Organization)
400 Rella Blvd., Montebello, New York 10901
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(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
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(Registrant's Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class On Which Registered
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Common Stock, par value $0.01 per share The NASDAQ Stock Market, LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasonal issuer, as
defined in Rule 405 of the Securities Act. YES [_] NO [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. YES [_] NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.YES [_] NO [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer - See definition of "accelerated
and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one).
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]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of the common stock as of
March 31, 2006 was $497,950,906.
As of December 3, 2006 there were issued and outstanding 42,695,846 shares of
the Registrant's common stock.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to
be held in February 2007.
PROVIDENT NEW YORK BANCORP
FORM 10-K TABLE OF CONTENTS
September 30, 2006
PART I 1
ITEM 1. Business 1
ITEM 1A. Risk Factors 30
ITEM 1B. Unresolved Staff Comments 32
ITEM 2. Properties 33
ITEM 3. Legal Proceedings 34
ITEM 4. Submission of Matters to a Vote of Security Holders 34
PART II 34
ITEM 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of 34
Equity Securities
ITEM 6. Selected Financial Data 36
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 38
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 53
ITEM 8. Financial Statements and Supplementary Data 54
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 112
ITEM 9A. Controls and Procedures 112
ITEM 9B. Other Information 112
PART III 112
ITEM 10. Directors and Executive Officers of the Registrant 112
ITEM 11. Executive Compensation 112
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 113
ITEM 13. Certain Relationships and Related Transactions 113
ITEM 14. Principal Accountant Fees and Services 113
PART IV 114
ITEM 15. Exhibits and Financial Statement Schedules 114
SIGNATURES 121
PART I
ITEM 1. Business
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Provident New York Bancorp
Provident New York Bancorp ("Provident Bancorp" or the "Company") is a
Delaware corporation that owns all of the outstanding shares of common stock of
Provident Bank (the "Bank"). At September 30, 2006, Provident Bancorp had
consolidated assets of $2.8 billion, deposits of $1.7 billion and stockholders'
equity of $405.3 million. As of September 30, 2006, Provident Bancorp had
42,699,046 shares of common stock outstanding.
Acquisition of Warwick Community Bancorp, Inc.
On October 1, 2004 the Company completed the acquisition of Warwick
Community Bancorp, Inc. ("WSB" or "Warwick"). The Company paid $72.6 million in
cash and issued 6,257,896 shares of its common stock in connection with the
acquisition for total merger consideration of $147.2 million. Warwick had nine
branch locations: six in Orange County, New York, one in Putnam County, New York
and two office locations in Bergen County, New Jersey. Warwick had approximately
$703.7 million in consolidated assets, $284.5 million in loans and $475.1
million in deposits.
Second Step Common Stock Offering and Acquisition of E.N.B. Holding Company,
Inc.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC, the former mutual
holding company for the Bank. As part of the conversion, the Company succeeded
to Provident Bancorp, Inc., a federal corporation ("Provident Federal") as the
stock holding company of the Bank. In the stock offering, shares representing
Provident Bancorp, MHC's ownership interest in Provident Federal were sold to
investors. The Company sold 19,573,000 shares of common stock at $10.00 per
share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The
Company also issued 400,000 shares of common stock and contributed $1.0 million
in cash to the Provident Bank Charitable Foundation. In addition, each
outstanding share of common stock of Provident Federal as of January 14, 2004
was exchanged for 4.4323 new shares of the Company's common stock.
The Company simultaneously completed its acquisition of E.N.B. Holding
Company, Inc. ("ENB"), headquartered in Ellenville, New York. Shareholders of
ENB as of the close of business on January 14, 2004 received total merger
consideration of approximately $76.5 million, consisting of 3,969,671 shares of
common stock of the Company and approximately $36.8 million in cash. ENB had
total assets of $349.7 million, total loans of $213.5 million and total deposits
of $326.8 million. ENB had five offices in Orange County, two offices in Ulster
County and two offices in Sullivan County, all in New York State.
Financial statements as of September 30, 2006 reflect the effect of the
exchange of shares in the second-step conversion, the stock offering, the
acquisitions of ENB and WSB and the issuance of shares and contribution of cash
to the charitable foundation. Goodwill recorded in the ENB and WSB acquisitions
($52.3 million and $91.7 million, respectively) is not amortized to expense, but
instead is reviewed for impairment at least annually, with impairment losses
charged to expense, if and when they occur. Core deposit and other amortizable
intangible assets resulting from all acquisitions of $13.3 million at September
30, 2006 is recognized apart from goodwill and amortized to expense over its
estimated useful life and evaluated for impairment.
Provident Bank
Provident Bank, an independent, full-service community bank founded in
1888, is the banking subsidiary of Provident New York Bancorp, headquartered in
Montebello, New York. With $2.8 billion in assets and 537 full time equivalent
employees, we operate 33 branches that serve the Hudson Valley region, including
32 branches located in Rockland, Orange, Sullivan, Ulster and Putnam Counties in
New York, and one branch in Bergen County, New Jersey that operates under the
name Towncenter Bank, a division of Provident Bank, New York. We also offer
deposit services to municipalities located in the State of New York through
Provident Bank's wholly-owned subsidiary, Provident Municipal Bank. Provident
Bank offers a complete line of commercial, community business and retail banking
products and services.
We have increased our number of branch offices from 11 branch offices at
September 30, 1998 to 33 branch offices at September 30, 2006. Subsequent to our
mutual holding company reorganization and initial stock offering, we have
broadened our market reach through de novo branching, our acquisitions of The
National Bank of Florida ("NBF") in April
1
2002 and the ENB and WSB acquisitions discussed above.
Provident Bank's website (www.providentbanking.com) contains a direct link
to the Company's filings with the Securities and Exchange Commission, including
copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to these filings, as well as ownership report
on Forms 3,4 and 5 filed by the Company's directors and executive officers.
Copies may also be obtained, without charge, by written request to Provident New
York Bancorp Investor Relations, Attention: Miranda Grimm, 400 Rella Boulevard,
Montebello, New York 10901.
Provident Municipal Bank
Provident Municipal Bank, a wholly-owned subsidiary of Provident Bank, is
a New York State-chartered commercial bank that is engaged in the business of
accepting deposits from municipalities in our market area. New York State law
requires municipalities located in the State of New York to deposit funds with
commercial banks, effectively forbidding these municipalities from depositing
funds with savings banks, including federally chartered savings associations,
such as Provident Bank.
Forward-Looking Statements
In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
(including documents incorporated herein by reference) that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believe," "anticipates," "plans," "expects,"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause Provident Bancorp's
actual results to differ materially from those contemplated by such
forward-looking statements. These important factors include, without limitation,
Provident Bancorp's continued ability to originate quality loans, fluctuations
in interest rates, real estate conditions in Provident Bancorp's lending areas,
general and local economic conditions, Provident Bancorp's continued ability to
attract and retain deposits, Provident Bancorp's ability to control costs,
effect of new accounting pronouncements and changing regulatory requirements,
and the effect on Provident Bancorp's operation from the assimilation of recent
acquisitions. Provident Bancorp undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Market Area
Provident Bank is an independent community bank offering a broad range of
financial services to businesses and individuals as an alternative to money
centers and large regional banks in our market area. At September 30, 2006, our
33 full-service banking offices consisted of 12 offices in Rockland County, New
York, 15 offices in Orange County, New York, and five offices in contiguous
Ulster, Putnam, and Sullivan Counties, New York. There is one office located in
Lodi, New Jersey operating as Towncenter Bank, a division of Provident Bank, New
York. Our primary market for deposits is currently concentrated around the areas
where our full-service banking offices are located. Our primary lending area
consists of Rockland and Orange Counties as well as contiguous counties.
According to data published by the Federal Deposit Insurance Corporation
("FDIC") as of June 30, 2006, Provident Bank holds the #2 market share of
deposits in Rockland County and #1 share of deposits in Orange County, and
overall has the #1 share of deposits in the combined markets of Rockland and
Orange Counties, New York.
Rockland and Orange counties constitute a suburban market with a broad
employment base. They also serve as bedroom communities for nearby New York City
and other suburban areas including Westchester County and northern New Jersey.
Orange County is one of the two fastest growing counties in New York State. The
economic environment in Rockland, Orange and contiguous counties continues to be
favorable and has supported increased commercial and residential activity in
recent years.
Lending Activities
General. We originate commercial real estate loans, commercial business
loans and construction loans (collectively referred to as the "commercial loan
portfolio"). We also originate in our market area fixed-rate and adjustable-rate
("ARM") residential mortgage loans collateralized by one- to four-family
residential real estate, and consumer loans such as home equity lines of credit,
homeowner loans and personal loans. We retain most of the loans we originate,
although we may sell longer-term one- to four-family residential loans and
participations in some commercial loans.
2
Commercial Real Estate Lending. We originate real estate loans secured
predominantly by first liens on commercial real estate. The commercial
properties are predominantly non-residential properties such as offices
buildings, shopping centers, retail strip centers, industrial and warehouse
properties and, to a lesser extent, more specialized properties such as
churches, mobile home parks, restaurants and motel/hotels. We may, from time to
time, purchase commercial real estate loan participations. We target commercial
real estate loans with initial principal balances between $1.0 million and $8.0
million. Loans secured by commercial real estate totaled $529.6 million, or
35.9% of our total loan portfolio at September 30, 2006, and consisted of 1,037
loans outstanding with an average loan balance of approximately $510,000,
although there are a large number of loans with balances substantially greater
than this average. Substantially all of our commercial real estate loans are
secured by properties located in our primary market area.
Most of our commercial real estate loans are written as five-year
adjustable-rate or ten-year fixed-rate mortgages and typically have balloon
maturities of ten years. Amortization on these loans is typically based on
20-year payout schedules. We also originate some 15- to 20-year fixed-rate,
fully amortizing loans. Margins generally range from 175 basis points to 300
basis points above the applicable Federal Home Loan Bank advance rate.
In the underwriting of commercial real estate loans, we generally lend up
to 75% of the property's appraised value. Decisions to lend are based on the
economic viability of the property and the creditworthiness of the borrower. In
evaluating a proposed commercial real estate loan, we primarily emphasize the
ratio of the property's projected net cash flow to the loan's debt service
requirement (generally targeting a ratio of 120%), computed after deduction for
a vacancy factor and property expenses we deem appropriate. In addition, a
personal guarantee of the loan or a portion thereof is generally required from
the principal(s) of the borrower. We require title insurance insuring the
priority of our lien, fire and extended coverage casualty insurance, and flood
insurance, if appropriate, in order to protect our security interest in the
underlying property. In addition, business interruption insurance or other
insurance may be required.
Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one-to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy. For commercial real estate loans in which the borrower is the
primary occupant, repayment experience also depends on the successful operation
of the borrower's underlying business.
Commercial Business Loans. We make various types of secured and unsecured
commercial loans to customers in our market area for the purpose of financing
equipment acquisition, expansion, working capital and other general business
purposes. The terms of these loans generally range from less than one year to
seven years. The loans are either negotiated on a fixed-rate basis or carry
adjustable interest rates indexed to a lending rate that is determined
internally, or a short-term market rate index. At September 30, 2006, we had
2,007 commercial business loans outstanding with an aggregate balance of $160.8
million, or 10.9% of the total loan portfolio. As of September 30, 2006, the
average commercial business loan balance was approximately $80,000 although
there are a large number of loans with balances substantially greater than this
average.
Commercial credit decisions are based upon a credit assessment of the loan
applicant. A determination is made as to the applicant's ability to repay in
accordance with the proposed terms as well as an overall assessment of the risks
involved. An evaluation is made of the applicant to determine character and
capacity to manage. Personal guarantees of the principals are generally
required, except in the case of not-for-profit corporations. In addition to an
evaluation of the loan applicant's financial statements, a determination is made
of the probable adequacy of the primary and secondary sources of repayment to be
relied upon in the transaction. Credit agency reports of the applicant's credit
history supplement the analysis of the applicant's creditworthiness. Checking
with other banks and trade investigations also may be conducted. Collateral
supporting a secured transaction also is analyzed to determine its
marketability. For small business loans and lines of credit, generally those not
exceeding $400,000, we use a credit scoring system that enables us to process
the loan requests quickly and efficiently. Commercial business loans generally
bear higher interest rates than residential loans of like duration because they
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business and the sufficiency of
collateral, if any.
One- to Four-Family Real Estate Lending. We offer conforming and
non-conforming, fixed-rate and adjustable-rate residential mortgage loans with
maturities of up to 30 years and maximum loan amounts generally up to $1.1
million. This portfolio totaled $463 million, or 31.4% of our total loan
portfolio at September 30, 2006.
3
We currently offer both fixed- and adjustable-rate conventional mortgage
loans with terms of 10 to 30 years that are fully amortizing with monthly or
bi-weekly loan payments. One- to four-family residential mortgage loans are
generally underwritten according to Fannie Mae and Freddie Mac guidelines, and
loans that conform to such guidelines are referred to as "conforming loans." We
generally originate both fixed-rate and ARM loans in amounts up to the maximum
conforming loan limits as established by Fannie Mae and Freddie Mac, which are
currently $417,000 for single-family homes. Private mortgage insurance is
generally required for loans with loan-to-value ratios in excess of 80%. We also
originate loans above conforming limits, referred to as "jumbo loans," that have
been underwritten to the credit standards of Fannie Mae or Freddie Mac. These
loans are generally eligible for sale to various firms that specialize in the
purchase of such non-conforming loans, although we retained in our portfolio all
such loans originated in fiscal 2006, totaling $88.1 million. In our market
area, due to our proximity to New York City, such larger residential loans are
not uncommon.
We also originate loans at higher rates that do not meet the credit
standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable risks.
The amount of such loans originated for fiscal 2006 was $2.1 million, all of
which were retained in our loan portfolio.
We actively monitor our interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and our capital and liquidity position, we may retain all of our
newly originated longer term fixed-rate residential mortgage loans, or from time
to time we may decide to sell all or a portion of such loans in the secondary
mortgage market to government sponsored entities such as Fannie Mae and Freddie
Mac or other purchasers. Our bi-weekly one- to four-family residential mortgage
loans that are retained in our portfolio result in shorter repayment schedules
than conventional monthly mortgage loans, and are repaid through an automatic
deduction from the borrower's savings or checking account. As of September 30,
2006, bi-weekly loans totaled $177.2 million, or 38.3% of our residential loan
portfolio. We retain the servicing rights on a large majority of loans sold to
generate fee income and reinforce our commitment to customer service, although
we may also sell non-conforming loans to mortgage banking companies, generally
on a servicing-released basis. As of September 30, 2006, loans serviced for
others, including loan participations, totaled $131.3 million.
We currently offer several ARM loan products secured by residential
properties with rates that are fixed for a period ranging from six months to ten
years. After the initial term, if the loan is not already refinanced, the
interest rate on these loans is generally reset every year based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year, as published weekly by
the Federal Reserve Board and subject to certain periodic and lifetime
limitations on interest rate changes. Many of the borrowers who select these
loans have shorter-term credit needs than those who select long-term, fixed-rate
loans. ARM loans generally pose different credit risks than fixed-rate loans
primarily because the underlying debt service payments of the borrowers rise as
interest rates rise, thereby increasing the potential for default. At September
30, 2006, our ARM portfolio included $2.7 million in loans that re-price every
six months, $44.3 million in loans that re-price once a year and $8.2 million in
loans that re-price periodically after an initial fixed-rate period of one year
or more.
We require title insurance on all of our one- to four-family mortgage
loans, and we also require that borrowers maintain fire and extended coverage or
all risk casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements, but in any event in an amount calculated to avoid the effect of
any coinsurance clause. For loans with initial loan-to-value ratios in excess of
80% we generally require private mortgage insurance, although occasional
exceptions may be made. Nearly all residential loans are generally required to
have a mortgage escrow account from which disbursements are made for real estate
taxes and for hazard and flood insurance.
Construction Loans, Land Acquisition and Development Loans. We originate
land acquisition, development and construction loans to builders in our market
area. These loans totaled $96.7 million, or 6.6% of our total loan portfolio at
September 30, 2006. Acquisition loans help finance the purchase of land intended
for further development, including single-family houses, multi-family housing,
and commercial income property. In some cases, we may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a land acquisition loan is 50% of
the appraised value of the property. We also make development loans to builders
in our market area to finance improvements to real estate, consisting mostly of
single-family subdivisions, typically to finance the cost of utilities, roads,
sewers and other development costs. Builders generally rely on the sale of
single-family homes to repay development loans, although in some cases the
improved building lots may be sold to another builder. The maximum amount loaned
is generally limited to the cost of the improvements plus an interest reserve,
if one is required. Advances are made in accordance with a schedule reflecting
the cost of the improvements.
4
We also grant construction loans to area builders, often in conjunction
with development loans. In the case of residential subdivisions, these loans
finance the cost of completing homes on the improved property. Advances on
construction loans are made in accordance with a schedule reflecting the cost of
construction. Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers. In the case
of income-producing property, repayment is usually expected from permanent
financing upon completion of construction. We commit to provide the permanent
mortgage financing on most of our construction loans on income-producing
property.
Land acquisition, development and construction lending exposes us to
greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event we make an acquisition loan on
property that is not yet approved for the planned development, there is the risk
that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose us to the risk that improvements
will not be completed on time in accordance with specifications and projected
costs. In addition, the ultimate sale or rental of the property may not occur as
anticipated.
Consumer Loans. We originate a variety of consumer and other loans,
including homeowner loans, home equity lines of credit, new and used automobile
loans, and personal unsecured loans, including fixed-rate installment loans and
variable lines of credit. As of September 30, 2006, consumer loans totaled
$223.5 million, or 15.2% of the total loan portfolio.
At September 30, 2006, the largest group of consumer loans consisted of
$205.8 million of loans secured by junior liens on residential properties. We
offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner
loans, and we also offer adjustable-rate home equity lines of credit. As of
September 30, 2006, homeowner loans totaled $56.0 million or 3.8% of our total
loan portfolio. The disbursed portion of home equity lines of credit totaled
$149.9 million, or 10.2% of our total loan portfolio at September 30, 2006, with
$141.2 million remaining undisbursed.
Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 2006, these loans totaled $17.6 million,
or 1.2% of our total loan portfolio. We originate consumer loans directly to our
customers or on an indirect basis through selected dealerships. We require
borrowers to maintain collision insurance on automobiles securing consumer
loans, with us listed as loss payee. Personal loans also include secured and
unsecured installment loans for other purposes. Unsecured installment loans,
which includes most personal loans, generally have shorter terms than secured
consumer loans, and generally have higher interest rates than rates charged on
secured installment loans with comparable terms.
Our procedures for underwriting consumer loans include an assessment of an
applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In addition, the
repayment of consumer loans depends on the borrowers' continued financial
stability, as repayment is more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy than a single family mortgage loan.
Student Loans. We also originate student loans in connection with a third
party who has contracted to repurchase the loans upon completion of the annual
advances. Such loans are classified as held for sale. At September 30, 2006 we
had $7.5 million in outstanding loans which were expected to be sold to the
third party upon completion of the annual advances.
5
Loan Portfolio Composition. The following table sets forth the composition
of our loan portfolio, excluding loans held for sale, by type of loan at the
dates indicated.
September 30,
--------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------- ------------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
One- to four-family
residential mortgage loans $ 462,996 31.4% $ 456,794 33.5% $380,749 38.2% $380,776 53.3% $366,111 54.6%
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Commercial real estate loans 529,607 35.9 497,936 36.6 327,414 32.8 188,360 26.4 163,329 24.3
Commercial business loans 160,823 10.9 148,825 10.9 105,196 10.5 54,174 7.6 41,320 6.2
Construction loans 96,656 6.6 66,710 4.9 54,294 5.4 10,323 1.4 17,020 2.5
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total commercial loans 787,086 53.4 713,471 52.4 486,904 48.7 252,857 35.4 221,669 33.0
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Home equity lines of credit 149,862 10.2 134,997 9.9 80,013 8.1 50,197 7.0 39,727 5.9
Homeowner loans 55,968 3.8 40,221 3.0 26,921 2.7 25,225 3.6 36,880 5.5
Other consumer loans 17,646 1.2 16,590 1.2 23,047 2.3 5,198 0.7 6,812 1.0
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans 223,476 15.2 191,808 14.1 129,981 13.1 80,620 11.3 83,419 12.4
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total loans 1,473,558 100.0% 1,362,073 100.0% 997,634 100.0% 714,253 100.0% 671,199 100.0%
===== ===== ===== ===== =====
Allowance for loan losses (20,373) (21,047) (16,648) (10,698) (10,187)
---------- --------- -------- -------- --------
Total loans, net $1,453,185 $1,341,06 $980,986 $703,555 $661,012
========== ========= ======== ======== ========
6
Loan Portfolio Maturities and Yields. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2006. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
Residential Commercial Commercial
Mortgage Real Estate Business Construction (1) Consumer Total
----------------- ----------------- ----------------- ----------------- ---------------- ------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
(Dollars in thousands)
Due During the Years
Ending September 30,
- ----------------------
2007 $ 27,414 6.30% $ 82,624 7.54% $104,939 8.68% $ 72,787 8.81% $158,191 7.94% $ 445,955 8.08%
2008 to 2011 52,621 5.85 150,466 6.97 45,895 7.27 22,060 8.44 22,669 7.91 293,711 7.00
2011 and beyond 382,961 6.01 296,517 6.90 9,989 7.61 1,809 7.20 42,616 6.72 733,892 6.38
-------- -------- -------- -------- -------- ---------
Total $462,996 6.01% $529,607 7.00% $160,823 8.21% $ 96,656 8.69% $223,476 7.71% $1,473,558 7.04%
======== ======== ======== ======== ======== ==========
- ----------
(1) Includes land acquisition loans.
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at September 30, 2006 that are contractually due after
September 30, 2007.
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
Residential mortgage loans $ 386,819 $ 48,763 $ 435,582
---------- ---------- ----------
Commercial real estate loans 284,374 162,609 446,983
Commercial business loans 45,135 10,749 55,884
Construction loans 1,545 22,324 23,869
---------- ---------- ----------
Total commercial loans 331,054 195,682 526,736
---------- ---------- ----------
Consumer loans 65,285 -- 65,285
---------- ---------- ----------
Total loans $ 783,158 $ 244,445 $1,027,603
========== ========== ==========
7
Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon borrower demand, market interest rates, borrower preference for
fixed- versus adjustable-rate loans, and the interest rates offered on each type
of loan by other lenders in our market area. These include competing banks,
savings banks, credit unions, mortgage banking companies, life insurance
companies and similar financial services firms. Loan originations are derived
from a number of sources, including branch office personnel, existing customers,
borrowers, builders, attorneys, real estate broker referrals and walk-in
customers.
Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted generally using standard Fannie Mae/Freddie Mac purchase
contracts and master commitments as applicable. One- to four-family mortgage
loans may be sold to Fannie Mae or Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not
Provident Bank.
We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our
policy has been to retain the servicing rights for all conforming loans sold. We
therefore continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. We retain a portion of the interest paid by the
borrower on the loans as consideration for our servicing activities.
Loan Approval/Authority and Underwriting. We have four levels of lending
authority beginning with the Board of Directors. The Board grants lending
authority to the Director Loan Committee, the members of which are Directors.
The Director Loan Committee, in turn, may grant authority to the Management Loan
Committee and individual loan officers. In addition, designated members of
management may grant authority to individual loan officers up to specified
limits. Our lending activities are subject to written policies established by
the Board. These policies are reviewed periodically.
The Director Loan Committee may approve loans in accordance with
applicable loan policies, up to the limits established in our policy governing
loans to one borrower. This policy places limits on the aggregate dollar amount
of credit that may be extended to any one borrower and related entities. Loans
exceeding the maximum loan-to-one borrower limit described below require
approval by the Board of Directors. The Management Loan Committee may approve
loans of up to an aggregate of $2 million to any one borrower and group of
related borrowers. Two loan officers with sufficient loan authority acting
together may approve loans up to $1 million. The maximum individual authority to
approve an unsecured loan is $50,000, however, for credit-scored small business
loans, the maximum individual authority is $150,000.
We have established a risk rating system for our commercial business
loans, commercial and multi-family real estate loans, and acquisition,
development and construction loans to builders. The risk rating system assesses
a variety of factors to rank the risk of default and risk of loss associated
with the loan. These ratings are performed by commercial credit personnel who do
not have responsibility for loan originations. We determine our maximum
loan-to-one-borrower limits based upon the rating of the loan. The large
majority of loans fall into three categories. The maximum for the best-rated
borrowers is $20 million, $15 million for the next group of borrowers and $12
million for the third group. Sublimits apply based on reliance on any single
property, and for commercial business loans. On occasion, the Board of Directors
may approve higher exposure limits for loans to one borrower in an amount not to
exceed the legal lending limit of the Bank.
In connection with our residential and commercial real estate loans, we
generally require property appraisals to be performed by independent appraisers
who are approved by the Board. Appraisals are then reviewed by the appropriate
loan underwriting areas. Under certain conditions, appraisals may not be
required for loans under $250,000 or in other limited circumstances. We also
require title insurance, hazard insurance and, if indicated, flood insurance on
property securing mortgage loans. Title insurance is not required for consumer
loans under $100,000, such as home equity lines of credit and homeowner loans
and in connection with certain residential mortgage refinances. The Board of
Directors may approve higher exposure limits for loans to one borrower in an
amount not to exceed the legal limit of the Bank.
8
Loan Origination Fees and Costs. In addition to interest earned on loans,
we also receive loan origination fees. Such fees vary with the volume and type
of loans and commitments made, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. We defer
loan origination fees and costs, and amortize such amounts as an adjustment to
yield over the term of the loan by use of the level-yield method. Deferred loan
origination costs (net of deferred fees) were $2.9 million at September 30,
2006.
To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities"). The capitalized amount is amortized
thereafter (over the period of estimated net servicing income) as a reduction of
servicing fee income. The unamortized amount is fully charged to income when
loans are prepaid. Originated mortgage servicing rights with an amortized cost
of $877,000 are included in other assets at September 30, 2006. See also Notes 3
and 6 of the "Notes to Consolidated Financial Statements".
Loans to One Borrower. At September 30, 2006, our five largest aggregate
amounts loaned to any one borrower and certain related interests (including any
unused lines of credit) consisted of secured and unsecured financing of $24.2
million, $19.6 million, $15.5 million, $13.8 million and $13.5 million. See
"Regulation - Federal Banking Regulation - Loans to One Borrower" for a
discussion of applicable regulatory limitations.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Collection Procedures for Residential and Commercial Mortgage Loans and
Consumer Loans. A computer-generated late notice is sent by the 16th day after
the payment due date on a loan requesting the payment due plus any late charge
that was assessed. Accounts are distributed to a collector or account officer to
contact borrowers, determine the reason for delinquency and arrange for payment,
and accounts are monitored electronically for receipt of payments. If payments
are not received within 30 days of the original due date, a letter demanding
payment of all arrearages is sent and contact efforts are continued. If payment
is not received within 60 days of the due date, loans are generally accelerated
and payment in full is demanded. Failure to pay within 90 days of the original
due date generally results in legal action, notwithstanding ongoing collection
efforts. Unsecured consumer loans are generally charged-off after 120 days. For
commercial loans, procedures vary depending upon individual circumstances.
Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular
basis, and are placed on non-accrual status when either principal or interest is
90 days or more past due, unless well secured and in the process of collection.
In addition, loans are placed on non-accrual status when, in the opinion of
management, there is sufficient reason to question the borrower's ability to
continue to meet principal or interest payment obligations. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is reversed from
interest income related to current year income and charged to the allowance for
loan losses with respect to income that was recorded in the prior fiscal year.
Interest payments received on non-accrual loans are not recognized as income
unless warranted based on the borrower's financial condition and payment record.
At September 30, 2006, we had non-accrual loans of $3.4 million and $1.6 million
of loans 90 days past due and still accruing interest, which were well secured
and in the process of collection. At September 30, 2005 we had non-accrual loans
of $212,000 and $1.4 million of loans 90 days past due and still accruing
interest. For the years ended September 30, 2004 and prior there were no loans
90 days past due and still accruing.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold.
When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses. At September 30, 2006 we had
one REO property with a recorded balance of $87,000.
9
Loan Portfolio Delinquencies. The following table sets forth certain information
with respect to our loan portfolio delinquencies at the dates indicated.
Loans Delinquent For
---------------------------------
60-89 Days 90 Days and Over Total
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in thousands)
At September 30, 2006
- ---------------------
One- to four- family 6 $ 580 10 $1,102 16 $1,682
Commercial real estate -- -- 6 2,980 6 2,980
Commercial business -- -- 12 489 12 489
Consumer 18 120 42 453 60 573
------ ------ ------ ------ ------ ------
Total 24 $ 700 70 $5,024 94 $5,724
====== ====== ====== ====== ====== ======
At September 30, 2005
- ---------------------
One- to four- family 6 $ 638 6 $1,070 12 $1,708
Commercial real estate -- -- 3 92 3 92
Commercial business 11 264 3 120 14 384
Consumer 28 150 22 359 50 509
------ ------ ------ ------ ------ ------
Total 45 $1,052 34 $1,641 79 $2,693
====== ====== ====== ====== ====== ======
At September 30, 2004
- ---------------------
One- to four- family 6 $ 762 11 $1,597 17 $2,359
Commercial real estate 1 377 4 488 5 865
Commercial business 7 158 7 474 14 632
Consumer 25 107 19 178 44 285
------ ------ ------ ------ ------ ------
Total 39 $1,404 41 $2,737 80 $4,141
====== ====== ====== ====== ====== ======
At September 30, 2003
- ---------------------
One- to four- family 6 $ 626 6 $ 951 12 $1,577
Commercial real estate 1 36 8 3,632 9 3,668
Commercial business 1 36 0 0 1 36
Consumer 7 63 3 114 10 177
------ ------ ------ ------ ------ ------
Total 15 $ 761 17 $4,697 32 $5,458
====== ====== ====== ====== ====== ======
At September 30, 2002
- ---------------------
One- to four- family 6 $ 577 22 $2,291 28 $2,868
Commercial real estate -- -- 3 2,492 3 2,492
Consumer 7 37 14 171 21 208
------ ------ ------ ------ ------ ------
Total 13 $ 614 39 $4,954 52 $5,568
====== ====== ====== ====== ====== ======
10
Non-Performing Assets. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates) .
September 30,
-------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------- --------------------- --------- --------- ---------
(Dollars in thousands)
90 days 90 days
past due past due
and still Non- and still
accruing Accrual accruing Non-Accrual Loans
--------- --------- --------- ------------------------------------------------
Non-performing loans:
One- to four- family $ 629 $ 472 $ 1,337 $ 65 $ 1,597 $ 951 $ 2,291
Commercial real estate 613 2,367 92 -- 488 3,632 2,492
Commercial business 30 459 -- 120 474 -- --
Consumer 310 144 -- 27 178 114 171
--------- --------- --------- --------- --------- --------- ---------
Total non-performing loans $ 1,582 $ 3,442 $ 1,429 $ 212 $ 2,737 $ 4,697 $ 4,954
--------- --------- --------- --------- --------- --------- ---------
Real estate owned:
One- to four- family 87 92 -- -- 41
--------- --------- --------- --------- ---------
Total real estate owned 87 92 -- -- 41
--------- --------- --------- --------- ---------
Total non-performing assets $ 5,111 $ 1,733 $ 2,737 $ 4,697 $ 4,995
========= ========= ========= ========= =========
Ratios:
- -------
Non-performing loans to total loans 0.34% 0.12% 0.27% 0.66% 0.74%
Non-performing assets to total assets 0.18% 0.07% 0.15% 0.40% 0.49%
For the year ended September 30, 2006, gross interest income that would have
been recorded had the non-accrual loans at the end of the year remained on
accrual status throughout the year amounted to $372,000. Interest income
actually recognized on such loans totaled $127,000.
Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the bank will sustain some loss if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified as "substandard" with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified as "loss" are those considered uncollectible and of such
little value that their continuance as assets is not warranted. Assets that do
not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess potential weaknesses that deserve
our close attention, are required to be designated as "special mention". As of
September 30, 2006, we had $5.8 million of assets designated as "special
mention."
When we classify assets as either "substandard" or "doubtful", we allocate
a portion of the related general loss allowances to such assets as deemed
prudent by management. The allowance for loan losses represents amounts that
have been established to recognize losses inherent in the loan portfolio that
are both probable and reasonably estimable at the date of the financial
statements. When we classify a problem asset as "loss," we charge-off such
amount. Our determination as to the classification of our assets and the amount
of our loss allowances are subject to review by our regulatory agencies, which
can order the establishment of additional loss allowances. Management regularly
reviews our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets at September 30, 2006, classified assets
consisted of substandard assets of $5.4 million and $95,000 of doubtful assets.
11
Allowance for Loan Losses. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the allowance for loan losses in accordance
with accounting principles generally accepted in the United States of America.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and other criticized or classified loans (if any), as well
as allowances determined for each major loan category. After we establish a
provision for loans that are known to be non-performing, criticized or
classified, we calculate a percentage to apply to the remaining loan portfolio
to estimate the probable losses inherent in that portion of the portfolio. When
the loan portfolio increases, therefore, the percentage calculation results in a
higher dollar amount of estimated probable losses than would be the case without
the increase, and when the loan portfolio decreases, the percentage calculation
results in a lower dollar amount of estimated probable losses than would be the
case without the decrease. These percentages are determined by management, based
on historical loss experience for the applicable loan category, and are adjusted
to reflect our evaluation of:
o levels of, and trends in, delinquencies and non-accruals;
o trends in volume and terms of loans;
o effects of any changes in lending policies and procedures;
o experience, ability, and depth of lending management and staff;
o national and local economic trends and conditions;
o concentrations of credit by such factors as location, industry,
inter-relationships, and borrower; and
o for commercial loans, trends in risk ratings.
We consider commercial real estate loans, commercial business loans, and land
acquisition, development and construction loans to be riskier than one- to
four-family residential mortgage loans. Commercial real estate loans entail
significant additional credit risks compared to one- to four-family residential
mortgage loans, as they involve large loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience on
loans secured by income-producing properties typically depends on the successful
operation of the related real estate project and/or business operation of the
borrower who is also the primary occupant, and thus may be subject to a greater
extent to adverse conditions in the real estate market and in the general
economy. Commercial business loans involve a higher risk of default than
residential loans of like duration since their repayment is generally dependent
on the successful operation of the borrower's business and the sufficiency of
collateral, if any. Land acquisition, development and construction lending
exposes us to greater credit risk than permanent mortgage financing. The
repayment of land acquisition, development and construction loans depends upon
the sale of the property to third parties or the availability of permanent
financing upon completion of all improvements. In the event we make an
acquisition loan on property that is not yet approved for the planned
development, there is the risk that approvals will not be granted or will be
delayed. These events may adversely affect the borrower and the collateral value
of the property. Development and construction loans also expose us to the risk
that improvements will not be completed on time in accordance with
specifications and projected costs. In addition, the ultimate sale or rental of
the property may not occur as anticipated.
The carrying value of loans is periodically evaluated and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
12
Allowance for Loan Losses By Year. The following table sets forth activity
in our allowance for loan losses for the years indicated.
At or For Years Ended September 30,
------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Balance at beginning of year $ 21,047 $ 16,648 $ 10,698 $ 10,187 $ 9,123
-------- -------- -------- -------- --------
Transfer to reserve for contingent loan commitments (395) (256) (334) (175) (196)
Charge-offs:
One- to four- family -- (23) (1) -- --
Commercial real estate -- -- -- -- (31)
Commercial business (1,509) (750) (284) (212) (130)
Consumer (327) (380) (199) (140) (163)
-------- -------- -------- -------- --------
Total charge-offs (1,836) (1,153) (484) (352) (324)
Recoveries:
One- to four- family -- -- 86 -- --
Commercial business 236 69 32 40 40
Consumer 121 109 100 98 107
-------- -------- -------- -------- --------
Total recoveries 357 178 218 138 147
Net charge-offs (1,479) (975) (266) (214) (177)
Allowance recorded in acquisitions -- 4,880 5,750 -- 537
Provision for loan losses 1,200 750 800 900 900
-------- -------- -------- -------- --------
Balance at end of year $ 20,373 $ 21,047 $ 16,648 $ 10,698 $ 10,187
======== ======== ======== ======== ========
Ratios:
Net charge-offs to average loans
outstanding 0.11% 0.08% 0.03% 0.03% 0.03%
Allowance for loan losses to non-
performing loans 405.51% 1,282.57% 608.26% 227.76% 205.63%
Allowance for loan losses to total loans 1.38% 1.55% 1.67% 1.50% 1.52%
The tables below reflect the nature of the portfolios acquired and their impact
on the combined portfolio composition and asset quality:
Residential Equity Line of Total Comm'l Const & Total
ENB Acquisition Mortgage Credit Consumer Retail C & I Mortgage land Comm'l
-------- -------- -------- -------- -------- -------- -------- --------
Provident Bank before
1/14/04 acquisition 52% 7% 4% 63% 7% 28% 2% 37%
ENB 6% 5% 19% 30% 17% 53% 0% 70%
-------- -------- -------- -------- -------- -------- -------- --------
Provident Bank after
1/14/04 acquisition 41% 7% 8% 55% 9% 34% 1% 45%
======== ======== ======== ======== ======== ======== ======== ========
Percentage point change (10.75)% (0.66)% +3.61% (7.80)% +2.54% +5.72 (0.46)% +7.80%
Residential Equity Line of Total Comm'l Const & Total
WSB Acquisition Mortgage Credit Consumer Retail C & I Mortgage land Comm'l
-------- -------- -------- -------- -------- -------- -------- --------
Provident Bank before
10/1/04 acquisition 38% 8% 5% 51% 11% 33% 5% 49%
WSB 23% 10% 0% 34% 10% 57% 0% 66%
-------- -------- -------- -------- -------- -------- -------- --------
Provident Bank after
10/1/04 acquisition 35% 8% 4% 47% 10% 38% 4% 53%
======== ======== ======== ======== ======== ======== ======== ========
Percentage point change (3.38)% +0.46% (1.02)% (3.94)% (0.16)% +5.32% (1.22)% +3.94%
13
ENB Acquisition
---------------
Retail Com'l
------ -----
Critized Critized Total Critized
-------- -------- --------------
Provident Bank pre-acquisition 0.23% 0.70% 0.93%
ENB 0.55% 1.52% 2.07%
---- ---- ----
Provident Bank post-acquisition 0.30% 0.90% 1.20%
==== ==== ====
Percentage point change 0.08% 0.19% 0.27%
WSB Acquisition
---------------
Retail Com'l
------ -----
Critized Critized Total Critized
-------- -------- --------------
Provident Bank pre-acquisition 0.28% 0.65% 0.93%
WSB 0.07% 0.10% 0.17%
---- ---- ----
Provident Bank post-acquisition 0.27% 0.59% 0.85%
==== ==== ====
Percentage point change (0.01)% (0.07)% (0.08)%
The E.N.B. Holding Company, Inc. (""ENB") acquisition increased the proportion
of commercial loan assets due to the greater concentration in commercial
mortgage and commercial & industrial loans compared to the Provident Bank
portfolio. In addition, the proportion of criticized loans in both the retail
and commercial portfolios in the acquired portfolio was higher than in the
Provident portfolio. As a result of the greater proportion of commercial loans
and a higher proportion of criticized loans, asset quality was modestly reduced.
The acquisition of Warwick Community Bancorp, Inc. ("WSB") increased the
proportion of commercial loan assets due to a higher concentration of commercial
mortgage loans in the WSB portfolio compared to the Provident portfolio. The
acquired portfolio had a lower proportion of criticized loans in the retail and
commercial portfolios than the Provident portfolio, which provided an
improvement in that measure of asset quality. This resulted in an overall
neutral effect on asset quality, as the increase in commercial loan assets was
offset by a reduction in the proportion of criticized loans.
Following is the chart of the allocation of the allowance for loan losses for
the acquired portfolios:
Impact of ENB Acquisition on Allowance Account
----------------------------------------------
Retail Retail Commercial Commercial Total Total
$000's % $ 000's % $000's %
Provident before $ 4,525 40% $ 6,724 60% $11,249 100%
ENB 690 12% 5,060 88% 5,750 100%
------- ------- ------- ------- ------- -------
Provident after $ 5,215 31% $11,784 69% $16,999 100%
======= ======= ======= -------
Impact of WSB Acquisition on Allowance Account
----------------------------------------------
Retail Retail Commercial Commercial Total Total
$000's % $ 000's % $000's %
Provident before $ 6,290 36% $11,062 64% $17,352 100%
WSB 373 8% 4,507 92% 4,880 100%
------- ------- -------
Provident after $ 6,663 30% $15,569 70% $22,232 100%
======= ======= =======
As a result of the ENB acquisition, $5.8 million in loan loss reserve was
recorded and $4.9 million was recorded with respect to the WSB acquisition.
These represent the amounts, which in the opinion of management, were necessary
to absorb the losses inherent in the acquired portfolios in accordance with the
same standards as then applied to the Provident loan portfolio.
14
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category (excluding loans held for sale), and the percent of loans
in each category to total loans at the dates indicated. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses
in any particular category and does not restrict the use of the allowance to
absorb losses in other categories.
September 30,
------------------------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------------- ----------------------------------- -----------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Allowance Loan Each Allowance Loan Each Allowance Loan Each
for Loan Balances by Category to for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans Losses Category Total Loans
--------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- -----------
(Dollars in thousands)
One- to four- family $ 765 462,996 31.4% $ 503 $ 456,794 33.5% $ 1,523 $ 380,749 38.2%
Commercial real estate 9,382 529,607 35.9 10,662 497,936 36.6 7,141 327,414 32.8
Commercial business 5,461 160,823 10.9 5,851 148,825 10.9 4,385 105,196 10.5
Construction 2,862 96,656 6.6 2,343 66,710 4.9 2,005 54,294 5.4
Consumer 1,903 223,476 15.2 1,688 191,808 14.1 1,594 129,981 13.1
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 20,373 1,473,558 100.0% $ 21,047 $1,362,073 100.0% $ 16,648 $ 997,634 100.0%
========= ========== ========== ========== ========== ========== ========== ========== ==========
September 30,
-----------------------------------------------------------------------
2003 2002
---------------------------------- -----------------------------------
Percent of Percent of
Loans in Loans in Loans in
Allowance Loan Each Allowance Loan Each
for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans
--------- ---------- ----------- ---------- ---------- -----------
(Dollars in thousands)
One- to four- family $ 1,462 $ 380,776 53.3% $ 3,252 $ 366,111 54.6%
Commercial real estate 5,808 188,360 26.4 4,194 163,329 24.3
Commercial business 2,332 54,174 7.6 908 41,320 6.2
Construction 406 10,323 1.4 855 17,020 2.5
Consumer 690 80,620 11.3 978 83,419 12.4
--------- ---------- ---------- ---------- ---------- ----------
Total $ 10,698 $ 714,253 100.0% $ 10,187 $ 671,199 100.0%
========= ========== ========== ========== ========== ==========
15
Securities Activities
Our securities investment policy is established by our Board of Directors.
This policy dictates that investment decisions be made based on the safety of
the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management strategy. The Board's
Asset/Liability Committee oversees our investment program and evaluates on an
ongoing basis our investment policy and objectives. Our chief financial officer,
or our chief financial officer acting with our chief executive officer, is
responsible for making securities portfolio decisions in accordance with
established policies. Our chief financial officer, chief executive officer and
certain other executive officers have the authority to purchase and sell
securities within specific guidelines established by the investment policy. In
addition, all transactions are reviewed by the Board's Asset/Liability Committee
at least quarterly.
Our current investment policy generally permits securities investments in
debt securities issued by the U.S. government and U.S. agencies, municipal
bonds, and corporate debt obligations, as well as investments in preferred and
common stock of government agencies and government sponsored enterprises such as
Fannie Mae, Freddie Mac and the Federal Home Loan Bank of New York (federal
agency securities) and, to a lesser extent, other equity securities. Securities
in these categories are classified as "investment securities" for financial
reporting purposes. The policy also permits investments in mortgage-backed
securities, including pass-through securities issued and guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations
("CMOs") issued or backed by securities issued by these government agencies.
Also permitted are investments in securities issued or backed by the Small
Business Administration, privately issued mortgage-backed securities and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. Our current investment strategy uses
a risk management approach of diversified investing in fixed-rate securities
with short- to intermediate-term maturities, as well as adjustable-rate
securities, which may have a longer term to maturity. The emphasis of this
approach is to increase overall investment securities yields while managing
interest rate risk.
Statement of Financial Accounting Standard (SFAS) No. 115 requires that,
at the time of purchase, we designate a security as held to maturity, available
for sale, or trading, depending on our ability and intent. Securities available
for sale are reported at fair value, while securities held to maturity are
reported at amortized cost. We do not have a trading portfolio.
In November 2003, the Emerging Issues Task Force ("EITF") issued issue
summary 03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments. EITF 03-1 addressed an entity's
treatment of the impairment of securities when such impairment is considered
other than temporary. The preliminary summary required disclosures only related
to other than temporary impairment. In March 2004, the EITF continued its
discussion and reached a consensus on the procedures for recognizing an
impairment of securities considered other than temporarily impaired. The
guidance in EITF 03-1 was intended to be effective for reporting periods
beginning after June 15, 2004. However, in September 2004, the FASB issued FSP
EITF 03-1-1, which deferred the effective date for the measurement and
recognition provisions of EITF 03-1 until further implementation guidance could
be established. Management does not believe the provisions of this standard, as
currently written, will have a material impact on the results of future
operations.
Government and Agency Securities. At September 30, 2006, we held
government securities available for sale with a fair value of $286.2 million,
consisting primarily of U.S. Treasury and Agency obligations with short- to
medium-term maturities (one to five years). While these securities generally
provide lower yields than other investments such as mortgage-backed securities,
our current investment strategy is to maintain investments in such instruments
to the extent appropriate for liquidity purposes, as collateral for borrowings,
and for prepayment protection.
Corporate and Municipal Bonds. At September 30, 2006, we held no corporate
debt securities. Although corporate bonds may offer a higher yield than that of
a U.S. Treasury or Agency security of comparable duration, corporate bonds also
have a higher risk of default due to adverse changes in the creditworthiness of
the issuer. In recognition of this potential risk, our policy limits investments
in corporate bonds to securities with maturities of ten years or less and rated
"A" or better by at least one nationally recognized rating agency, and to a
total investment of no more than $5.0 million per issuer and a total corporate
bond portfolio limit of $40.0 million. The policy also
16
limits investments in municipal bonds to securities with maturities of 20 years
or less and rated AA or better by at least one nationally recognized rating
agency, and favors issues that are insured unless the issuer is a local
government entity within our service area. Such local entity obligations
generally are not rated, and are subject to internal credit reviews. In
addition, the policy imposes an investment limitation of $5.0 million per
municipal issuer and a total municipal bond portfolio limit of 10% of assets. At
September 30, 2006, we held $136.9 million in bonds issued by states and
political subdivisions, $40.9 million of which were classified as held to
maturity at amortized cost and $96.0 million of which were classified as
available for sale at fair value.
Equity Securities. At September 30, 2006, our equity securities available
for sale had a fair value of $879,000 and consisted of stock issued by Freddie
Mac and Fannie Mae, and certain other equity investments. We also held $33.5
million (at cost) of Federal Home Loan Bank of New York ("FHLBNY") common stock,
a portion of which must be held as a condition of membership in the Federal Home
Loan Bank System, with the remainder held as a condition to our borrowing under
the Federal Home Loan Bank advance program. Dividends on FHLBNY stock recorded
in the year ended September 30, 2006 amounted to $1.3 million.
Mortgage-Backed Securities. We purchase mortgage-backed securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity, (iv) maintain our status as a thrift for charter purposes and income
tax purposes. We invest primarily in mortgage-backed securities issued or
sponsored by Freddie Mac, Fannie Mae and Ginnie Mae or private issuers for CMOs.
To a lesser extent, we also invest in securities backed by agencies of the U.S.
Government. At September 30, 2006, our mortgage-backed securities portfolio
totaled $588.6 million, consisting of $568.7 million available for sale at fair
value and $19.9 million held to maturity at amortized cost. The total
mortgage-backed securities portfolio includes CMOs of $38.9 million, consisting
of $37.4 million available for sale at fair value and $1.5 million held to
maturity at amortized cost. The remaining mortgage-backed securities of $549.7
million were pass-through securities, consisting of $531.3 million available for
sale at fair value and $18.4 million held to maturity at amortized cost.
Mortgage-backed securities are created by pooling mortgages and issuing a
security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (generally U.S. Government agencies and government sponsored
enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell
the participation interests in the form of securities to investors, such as us,
and guarantee the payment of principal and interest to these investors.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater or less than the prepayment rate estimated at the time of
purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments, thereby affecting the
net yield and duration of such securities. We review prepayment estimates for
our mortgage-backed securities at purchase to ensure that prepayment assumptions
are reasonable considering the underlying collateral for the securities at issue
and current interest rates, and to determine the yield and estimated maturity of
the mortgage-backed securities portfolio. Periodic reviews of current prepayment
speeds are performed in order to ascertain whether prepayment estimates require
modification that would cause amortization or accretion adjustments.
A portion of our mortgage-backed securities portfolio is invested in CMOs
or collateralized mortgage obligations, including Real Estate Mortgage
Investment Conduits ("REMICs"), backed by Fannie Mae and Freddie Mac. CMOs and
REMICs are types of debt securities issued by a special-purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of securities with varying maturities and amortization
schedules, as well as a residual interest, with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes that have descending priorities
with respect to the distribution of principal and interest cash flows, while
cash flows on pass-through mortgage-backed securities are distributed pro rata
to all security holders. Our practice is to limit fixed-rate CMO investments
primarily to the early-to-intermediate tranches, which have the greatest cash
flow stability. Floating rate CMOs are purchased with emphasis on the relative
trade-offs between lifetime rate caps, prepayment risk, and interest rates.
17
Available for Sale Portfolio. The following table sets forth the
composition of our available for sale portfolio at the dates indicated.
September 30,
---------------------------------------------------------------------------
2006 2005 2004
----------------------- ----------------------- -----------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Investment Securities:
U.S. Government securities $ 17,012 $ 16,718 $ 19,006 $ 18,608 $ 4,992 $ 5,042
Federal agency obligations 272,494 269,462 243,763 239,017 187,796 187,260
Corporate debt securities -- -- -- --
State and municipal securities 95,405 95,970 50,176 49,691 20,482 20,559
Equity securities 947 879 947 858 1,005 1,214
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities
available for sale 385,858 383,029 313,892 308,174 214,275 214,075
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae 404,168 396,484 422,867 416,611 238,112 237,474
Freddie Mac 132,921 131,119 71,733 70,231 66,466 66,807
Ginnie Mae 3,798 3,701 5,450 5,374 1,626 1,630
Other -- -- -- -- 4,322 4,695
CMOs and REMICs 37,668 37,396 22,759 22,562 9,711 9,616
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities
available for sale 578,555 568,700 522,809 514,778 320,237 320,222
---------- ---------- ---------- ---------- ---------- ----------
Total securities available for sale $ 964,413 $ 951,729 $ 836,701 $ 822,952 $ 534,512 $ 534,297
========== ========== ========== ========== ========== ==========
At September 30, 2006, our available for sale U. S. Treasury securities
portfolio, at fair value, totaled $16.7 million, or 0.6% of total assets, and
the federal agency securities portfolio, at fair value, totaled $269.5 million,
or 9.5% of total assets. Of the combined U.S. government and agency portfolio,
based on amortized cost, $180.4 million had maturities of one year or less and a
weighted average yield of 3.07%, and $109.1 million had maturities of between
one and five years and a weighted average yield of 4.05%. The agency securities
portfolio includes both non-callable and callable debentures. The agency
debentures may be callable on a quarterly or one time basis depending on the
security's individual terms following an initial holding period of from 12 to 24
months.
State and municipal securities portfolio, available for sale, based on
amortized cost, had $3.0 million in securities with a final maturity of one year
or less and a weighted average yield of 2.73%; $5.6 million maturing in one to
five years with a weighted average yield of 3.3%; $10.9 million maturing in five
to ten years with a weighted average yield of 3.86% and $75.9 million maturing
in greater than ten years with a weighted average yield of 4.09%. Equity
securities available for sale at September 30, 2006 had a fair value of
$879,000.
At September 30, 2006, $531.3 million of our available for sale
mortgage-backed securities, at fair value, consisted of pass-through securities,
which totaled 18.7% of total assets. The total amortized cost of these pass-
through securities was $540.9 million and consisted of $404.2 million, $132.9
million and $3.8 million of Fannie Mae, Freddie Mac and Ginnie Mae MBS,
respectively, with respective weighted averages yields of 4.62%, 4.90% and
5.75%. At the same date, the fair value of our available for sale CMO portfolio
totaled $37.4 million, or 1.3% of total assets, and consisted of CMOs issued by
government sponsored agencies such as Fannie Mae, Freddie Mac and private party
issuers. The amortized cost of this CMO had a weighted average yield of 4.66%.
We own both fixed-rate and floating-rate CMOs. The underlying mortgage
collateral for our portfolio of CMOs available for sale at September 30, 2006
had contractual maturities of over ten years. However, as with mortgage-backed
pass-through securities, the actual maturity of a CMO may be less than its
stated contractual maturity due to prepayments of the underlying mortgages and
the terms of the CMO tranche owned.
18
Held to Maturity Portfolio. The following table sets forth the composition
of our held to maturity portfolio at the dates indicated.
September 30,
---------------------------------------------------------------------------
2006 2005 2004
----------------------- ----------------------- -----------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Investment Securities:
State and municipal securities $ 40,892 $ 40,927 $ 43,931 $ 44,092 $ 29,894 $ 30,523
Other 156 160 307 310 309 265
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities
held to maturity 41,048 41,087 44,238 44,402 30,203 30,788
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae 9,102 8,982 11,504 11,497 17,157 17,413
Freddie Mac 9,138 9,058 12,838 12,825 18,245 18,464
Ginnie Mae 232 238 416 434 685 722
CMOs and REMICs 1,467 1,511 1,953 1,993 2,788 2,843
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities held to maturity 19,939 19,789 26,711 26,749 38,875 39,442
---------- ---------- ---------- ---------- ---------- ----------
Total securities held to
maturity $ 60,987 $ 60,876 $ 70,949 $ 71,151 $ 69,078 $ 70,230
========== ========== ========== ========== ========== ==========
At September 30, 2006, our held to maturity mortgage-backed securities
portfolio totaled $19.9 million at amortized cost, consisting of: $363,000 with
a weighted average yield of 4.45% and contractual maturities of one year or less
and $1.0 million with a weighted average yield of 6.09% and contractual
maturities within five years and $4.9 million with a weighted average yield of
6.08% and contractual maturities of greater than five years, but no more than
ten and $13.7 million with a weighted average yield of 4.76% with contractual
maturities of greater than ten years; CMOs of $1.5 million are included in this
portfolio. While the contractual maturity of the CMOs underlying collateral is
greater than ten years, the actual period to maturity of the CMOs may be shorter
due to prepayments on the underlying mortgages and the terms of the CMO tranche
owned.
State and municipal securities consisted of $22.5 million, with a final
maturity of one year or less and a weighted average yield of 3.69%; and $7.8
million, maturing in one to five years, with a weighted average yield of 3.78%;
$6.1 million maturing in five to ten years, with a weighted average yield of
4.05% and $4.5; million, maturing in greater than ten years, with a weighted
average yield of 4.21%.
19
Portfolio Maturities and Yields. The following table summarizes the
composition and maturities of the investment debt securities portfolio and the
mortgage backed securities portfolio at September 30, 2006. Maturities are based
on the final contractual payment dates, and do not reflect the impact of
prepayments or early redemptions that may occur. State and municipal securities
yields have not been adjusted to a tax-equivalent basis.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years More than Ten Years Total Securities
---------------- ------------------ ----------------- ------------------- --------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Fair Value Yield
-------- ------ -------- ------ -------- ------ -------- ------ -------- ---------- ------
(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae $ 1 5.58% $ 18,149 3.82% $ 15,123 4.10% $370,895 4.69% $404,168 $396,484 4.62%
Freddie Mac 114 4.19 3,134 4.35 14,205 4.13 115,468 5.01 132,921 131,119 4.90
Ginnie Mae -- 3.39 6 6.26 37 5.39 3,755 5.76 3,798 3,701 5.75
CMOs and REMICs -- -- -- -- 584 4.78 37,084 4.66 37,668 37,396 4.66
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Total 115 4.23 21,289 3.90 29,949 4.13 527,202 4.76 578,555 568,700 4.70
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Investment Securities
U.S. Government and
agency securities 180,360 3.07 109,050 4.05 -- -- 96 6.00 289,506 286,180 3.44
State and municipal
securities 2,981 2.73 5,628 3.30 10,861 3.86 75,935 4.09 95,405 95,970 3.97
Equity Securities -- -- -- -- 947 0.71 -- -- 947 879 0.71
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Total 183,341 3.06 114,678 4.01 11,808 3.61 76,031 4.09 385,858 383,029 3.56
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Total debt securities
available for sale $183,456 3.07% $135,967 3.99% $ 41,757 3.98% $603,233 4.68% $964,413 $951,729 4.24%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======== ======
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae $ -- --% $ 222 6.25% $ 3,727 5.82% $ 5,153 4.51% $ 9,102 $ 8,982 5.09%
Freddie Mac 363 4.45 779 6.04 906 6.71 7,090 4.84 9,138 9,058 5.12
Ginnie Mae -- -- -- -- 232 7.91 -- -- 232 238 7.91
CMOs and REMICs -- -- -- -- -- -- 1,467 5.23 1,467 1,511 5.23
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Total 363 4.45 1,001 6.09 4,865 6.08 13,710 4.76 19,939 19,789 5.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Investment Securities
State and municipal
securities 22,492 3.69 7,788 3.78 6,148 4.05 4,464 4.21 40,892 40,927 3.82
Other 101 2.06 55 3.32 -- -- -- -- 156 160 2.50
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Total 22,593 3.68 7,843 3.78 6,148 4.05 4,464 4.21 41,048 41,087 3.81
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------
Total debt
securities held
to maturity $ 22,956 3.69% $ 8,844 4.04% $ 11,013 4.95% $ 18,174 4.62% $ 60,987 $ 60,876 4.25%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======== ======
20
Sources of Funds
General. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings accounts, NOW accounts,
checking accounts, money market accounts, club accounts, certificates of deposit
and IRAs and other qualified plan accounts. In fiscal 2006 we introduced our
`power money market account.' With this account, interest is earned at a higher
rate, but requires substantial balances and a checking account relationship. We
provide a variety of commercial checking accounts and other products for
businesses. In addition, we provide low-cost checking account services for
low-income customers.
At September 30, 2006, our deposits totaled $1.7 billion. Interest-bearing
deposits totaled $1.4 billion, and non-interest-bearing demand deposits totaled
$366.8 million. NOW, savings and money market deposits totaled $771.0 million at
September 30, 2006. Also at that date, we had a total of $591.8 million in
certificates of deposit, of which $552.6 million had maturities of one year or
less. Although we have a significant portion of our deposits in shorter-term
certificates of deposit, our management monitors activity on these accounts and,
based on historical experience and our current pricing strategy, we believe we
will retain a large portion of such accounts upon maturity, although we may have
to match competitive rates to retain many of these accounts.
Our deposits are obtained predominantly from the areas in which our branch
offices are located. We rely on our favorable locations, customer service and
competitive pricing to attract and retain these deposits. While we accept
certificates of deposit in excess of $100,000 for which we may provide
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. Our limited purpose commercial bank
subsidiary, Provident Municipal Bank, accepts municipal deposits. Municipal time
accounts (certificates of deposit) are generally obtained through a bidding
process, and tend to carry higher average interest rates than retail
certificates of deposit of similar term.
Distribution of Deposit Accounts by Type. The following table sets forth
the distribution of total deposit accounts, by account type, at the dates
indicated.
For the year ended September 30,
-----------------------------------------------------------------------------
2006 2005 2004
-----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Demand deposits:
Retail $ 163,582 9.5% $ 170,434 9.9% $ 122,276 9.9%
Commercial 203,265 11.8 214,647 12.4 142,819 11.5
---------- ---------- ---------- ---------- ---------- ----------
Total demand deposits 366,847 21.2 385,081 22.3 265,095 21.4
Business NOW deposits 50,546 2.9 60,214 3.5 44,176 3.6
Personal NOW deposits 103,186 6.0 105,730 6.1 63,528 5.1
Savings deposits 378,337 21.9 481,674 27.9 360,138 29.0
Money market deposits 238,977 13.8 222,091 12.9 173,272 14.0
---------- ---------- ---------- ---------- ---------- ----------
Subtotal 1,137,893 65.8 1,254,790 72.7 906,209 73.1
Certificates of deposit 591,766 34.2 471,611 27.3 333,323 26.9
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $1,729,659 100.0% $1,726,401 100.0% $1,239,532 100.0%
========== ========== ========== ========== ========== ==========
21
The following table sets forth the distribution of average deposit accounts by
account category with the average rates paid at the dates indicated.
September 30,
-------------------------------------------------------------------------------------------------
2006 2005 2004
-------------------------------- -------------------------------- -------------------------------
Average Average Rate Average Average Rate Average Average Rate
Balance Interest Paid Balance Interest Paid Balance Interest Paid
--------- -------- ------- --------- -------- ------- --------- -------- -------
Non interest bearing deposits $ 356,869 $ -- -- $ 349,507 $ -- -- $ 229,530 $ -- --
NOW depostis 154,708 511 0.33% 153,058 509 0.33% 88,677 189 0.21%
Savings deposits 445,419 2,258 0.51% 545,829 3,070 0.56% 356,998 1,570 0.44%
Money market deposits 230,933 4,178 1.81% 228,197 2,646 1.16% 150,866 859 0.57%
Certificates deposits 538,045 19,855 3.69% 434,644 9,851 2.27% 311,197 5,283 1.70%
---------- ------- ------- ---------- ------- ------- ---------- ------- -------
Total interest bearing deposits 1,369,105 $26,802 1.96% 1,361,727 $16,076 1.18% 907,738 $ 7,901 0.87%
---------- ---------- ----------
Total deposits $1,725,974 $1,711,235 $1,137,268
========== ========== ==========
Certificates of Deposit by Interest Rate Range. The following table sets forth
information concerning certificates of deposit by interest rate ranges at the
dates indicated.
At September 30, 2006
-----------------------------------------------------------------------------------
Period to Maturity
-----------------------------------------------------------------------------------
Less than One to Two Two to More than Percent of Total at September 30,
-------------------------
One Year Years Three Years Three Years Total Total 2005 2004
----------- ----------- ------------ ------------ ----------- ----------- -------------------------
(Dollars in thousands)
Interest Rate
Range:
2.00% and below $ 2,013 $ 30 $ -- $ -- $ 2,043 0.35% $ 42,305 $ 249,625
2.01% to 3.00% 20,778 3,111 1,173 105 25,167 4.25% 185,300 42,691
3.01% to 4.00% 122,524 9,746 3,296 4,346 139,912 23.64% 230,032 21,839
4.01% to 5.00% 302,025 3,208 8,174 548 313,955 53.05% 13,409 16,231
5.01% to 6.00% 105,258 5,258 173 -- 110,689 18.70% 488 2,320
6.01% and above -- -- -- -- -- -- 77 617
----------- ----------- ------------ ------------ ----------- ----------- ----------- -----------
Total $ 552,598 $ 21,353 $ 12,816 $ 4,999 $ 591,766 100% $ 471,611 $ 333,323
=========== =========== ============ ============ =========== =========== =========== ===========
Certificates of Deposit by Time to Maturity. The following table sets forth
certificates of deposit by time remaining until maturity as of September 30,
2006.
Maturity
------------------------------------------------------------------------
3 months or Over 3 to 6 Over 6 to 12 Over 12
Less Months Months Months Total
------------ ------------ ------------ ------------ ------------
Certificates of deposit less than $100,000 $ 139,260 $ 90,997 $ 126,297 $ 32,529 $ 389,083
Certificates of deposit of $100,000 or more (1) 118,944 42,628 34,473 6,638 202,683
------------ ------------ ------------ ------------ ------------
Total of certificates of deposit $ 258,204 $ 133,625 $ 160,770 $ 39,167 $ 591,766
============ ============ ============ ============ ============
- ------------------------
(1) The weighted interest rates for these accounts, by maturity period,
are 4.82% for 3 months or less; 4.97% for 3 to 6 months; 4.49% for 6
to 12 months; and 3.99% for over 12 months. The overall weighted
average interest rate for accounts of $100,000 or more was 4.77%.
22
Short-term Borrowings. Our short-term borrowings (less than one year)
consist of advances, repurchase agreements and overnight borrowings. At
September 30, 2006, we had access to additional Federal Home Loan Bank advances
of up to an additional $406.1 million on a collateralized basis. The following
table sets forth information concerning balances and interest rates on our
short-term borrowings at the dates and for the years indicated.
At or For the Years Ended September 30,
--------------------------------------
2006 2005 2004
---------- ---------- ----------
(Dollars in thousands)
Balance at end of year $ 538,437 $ 187,600 $ 70,000
Average balance during year 373,471 124,004 42,356
Maximum outstanding at any month end 538,437 187,600 70,246
Weighted average interest rate at end of year 5.46% 3.99% 2.04%
Average interest rate during year 4.96% 3.61% 1.35%
Activities of Subsidiaries and Affiliated Entities
Provident Municipal Bank is a wholly-owned subsidiary of Provident Bank.
Provident Municipal Bank is a New York State-chartered commercial bank whose
purpose is limited to accepting municipal deposits and investing funds obtained
into investment securities. New York State law requires municipalities located
in the state of New York to deposit funds with commercial banks, effectively
forbidding these municipalities from depositing funds with savings banks,
including federally chartered savings associations, such as Provident Bank. At
September 30, 2006 Provident Municipal Bank had $147.6 million in deposits from
municipal entities in the communities served by Provident Bank.
Provest Services Corp. I is a wholly-owned subsidiary of Provident Bank,
holding an investment in a limited partnership that operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident
Bank that has engaged a third-party provider to sell annuities, life and health
insurance products to Provident Bank's customers. Through September 30, 2006,
the activities of these subsidiaries have had an insignificant effect on our
consolidated financial condition and results of operations. During fiscal 1999,
Provident Bank established Provident REIT, Inc., a wholly-owned subsidiary in
the form of a real estate investment trust. Provident REIT, Inc. holds both
residential and commercial real estate loans. WSB Funding was acquired in the
Warwick acquisition and operates in the same manner as Provident REIT.
Hardenburgh Abstract Company of Orange County Inc. ("Hardenburgh") is a
title insurance agency that we acquired in connection with the acquisition of
WSB. Hardenburgh had gross revenue from title insurance policies and abstracts
of $1.7 million and net income of $493,000 in 2006.
The Company acquired Hudson Valley Investment Advisors, LLC ("HVIA") on
June 1, 2006. HVIA is an investment advisory firm that generates investment
management fees. HVIA generated $594,000 in fee income in 2006 for the Company
and net income of $57,000 in 2006.
Competition
We face significant competition in both originating loans and attracting
deposits. The New York metropolitan area has a high concentration of financial
institutions, many of which are significantly larger institutions with greater
financial resources than us, and many of which are our competitors to varying
degrees. Our competition for loans comes principally from commercial banks,
savings banks, mortgage banking companies, credit unions, insurance companies
and other financial service companies. Our most direct competition for deposits
has historically come from commercial banks, savings banks and credit unions. We
face additional competition for deposits from non-depository competitors such as
the mutual fund industry, securities and brokerage firms and insurance
companies. We have emphasized personalized banking and the advantage of local
decision-making in our banking business and this strategy appears to have been
well received in our market area. We do not rely on any individual, group, or
entity for a material portion of our deposits.
Employees
As of September 30, 2006, we had 507 full-time employees and 58 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
23
Regulation
General
As a federally chartered savings association, Provident Bank is regulated
and supervised by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. Provident Municipal Bank is regulated by the New York
State Department of Banking and the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which a financial institution may engage and is intended primarily for the
protection of the Federal Deposit Insurance Corporation's deposit insurance
funds and depositors. Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates. After completing an
examination, the federal agency critiques the financial institution's operations
and assigns its rating, known as an institution's "CAMELS". Under federal law,
an institution may not disclose its CAMELS rating to the public. Provident Bank
also is a member of, and owns stock in, the Federal Home Loan Bank of New York,
which is one of the 12 regional banks in the Federal Home Loan Bank System.
Provident Bank also is regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, which governs reserves maintained against deposits
and other matters. The Office of Thrift Supervision examines Provident Bank and
prepares reports for the consideration of its Board of Directors on any
operating deficiencies. Provident Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in matters concerning the ownership of deposit accounts and the form
and content of Provident Bank's loan documents.
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the New York State
Department of Banking or Congress, could have a material adverse impact on
Provident New York Bancorp, Provident Bank, Provident Municipal Bank and their
respective operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Provident Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain
types of debt securities and certain other loans and assets. Provident Bank also
may establish subsidiaries that may engage in activities not otherwise
permissible for Provident Bank directly, including real estate investment, and
securities and insurance brokerage.
Capital Requirements. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio; a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, allowance for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At September 30, 2006, Provident Bank's capital exceeded all applicable
requirements.
Loans to One Borrower. A federal savings association generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which generally does not
include real estate. As of September 30, 2006, Provident Bank was in compliance
with the loans-to-one-borrower limitations.
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Qualified Thrift Lender Test. As a federal savings association, Provident
Bank is subject to a qualified thrift lender, or "QTL," test. Under the QTL
test, Provident Bank must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" generally means total assets of a bank, less
the sum of specified liquid assets up to 20% of total assets, goodwill and other
intangible assets, and the value of property used in the conduct of the savings
association's business. Provident Bank also may satisfy the QTL test by
qualifying as a "domestic building and loan association" as defined in the
Internal Revenue Code of 1986.
A savings association that fails the QTL test must either convert to a
bank charter or operate under specified restrictions. At September 30, 2006,
Provident Bank maintained approximately 82% of its portfolio assets in qualified
thrift investments, and therefore satisfied the QTL test.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the institution's
capital account. A savings association must file an application for approval of
a capital distribution if:
o the total capital distributions for the applicable calendar year exceed
the sum of the savings association's net income for that year to date plus
the savings association's retained net income for the preceding two years;
o the savings association would not be at least adequately capitalized
following the distribution;
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the savings association is not eligible for expedited treatment of its
filings.
Even if an application is not otherwise required, every savings
association that is a subsidiary of a holding company must still file a notice
with the Office of Thrift Supervision at least 30 days before the Board of
Directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application
if:
o the savings association would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness concerns; or
o the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
As of October 1, 2006, the maximum amount of dividends that could be
declared by Provident Bank for fiscal 2007, without regulatory approval, was
$22.9 million plus net income for fiscal 2007.
Liquidity. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the savings association's record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings association's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by
the Office of Thrift Supervision, as well as other federal regulatory agencies
and the Department of Justice. Provident Bank received an "outstanding"
Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act. The term "affiliates" for these purposes generally means any
company that controls or is under common control
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with an institution. Provident Bancorp, Inc. and its non-bank subsidiaries will
be affiliates of Provident Bank. In general, transactions with affiliates must
be on terms that are as favorable to the savings association as comparable
transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings
association's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings association. In
addition, Office of Thrift Supervision regulations prohibit a savings
association from lending to any of its affiliates that are engaged in activities
that are not permissible for bank holding companies and from purchasing the
securities of any affiliate, other than a subsidiary.
Provident Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (i)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent, than those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of Provident Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by Provident Bank's Board of
Directors.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over federal banks and has the authority to bring enforcement
action against all "institution-affiliated parties," including stockholders, and
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order, to removal of officers and/or directors of the
institution, receivership, conservatorship or the termination of deposit
insurance. Civil penalties cover a wide range of violations and actions, and
range up to $25,000 per day, unless a finding of reckless disregard is made, in
which case penalties may be as high as $1 million per day. The Federal Deposit
Insurance Corporation also has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular bank. If action is not taken by the Director, the Federal Deposit
Insurance Corporation has authority to take action under specified
circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Prompt Corrective Action Regulations. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the savings association's capital:
o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based
capital and 8% total risk-based capital);
o undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based
capital or 8% total risk-based capital);
o significantly undercapitalized (less than 3% leverage capital, 3% tier 1
risk-based capital or 6% total risk-based capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for a savings association that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
Office
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of Thrift Supervision within 45 days of the date a bank receives notice that it
is "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the savings association, including, but not limited
to, restrictions on growth, investment activities, capital distributions and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
savings associations, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At September 30, 2006, Provident Bank met the criteria for being
considered "well-capitalized."
Insurance of Deposit Accounts. Deposit accounts in Provident Bank are
insured by the Federal Deposit Insurance Corporation, generally up to a maximum
of $100,000 per separately insured depositor and up to a maximum of $250,000 for
self-directed retirement accounts. Provident Bank's deposits, therefore, are
subject to Federal Deposit Insurance Corporation deposit insurance assessments.
On February 15, 2006, federal legislation to reform federal deposit
insurance was enacted. This new legislation requires, among other things, an
increase in the amount of federal deposit insurance coverage from $100,000 to
$130,000 (with a cost of living adjustment to become effective in five years).
The legislation also requires the reserve ratio to be modified to provide for a
range between 1.15% and 1.50% of estimated insured deposits.
On November 2, 2006, the Federal Deposit Insurance Corporation adopted
final regulations that assess insurance premiums based on risk. As a result, the
new regulation will enable the Federal Deposit Insurance Corporation to more
closely tie each financial institution's deposit insurance premiums to the risk
it poses to the deposit insurance fund. Under the new risk-based assessment
system, which becomes effective in the beginning of 2007, the Federal Deposit
Insurance Corporation will evaluate the risk of each financial institution based
on its supervisory rating, its financial ratios, and its long-term debt issuer
rating. The new rates for nearly all of the financial institution industry will
vary between five and seven cents for every $100 of domestic deposits. At the
same time, the Federal Deposit Insurance Corporation also adopted final
regulations designating the reserve ratio for the deposit insurance fund during
2007 at 1.25% of estimated insured deposits.
Effective March 31, 2006, the Federal Deposit Insurance Corporation merged
the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF") into a single fund called the "Deposit Insurance Fund." As a result of
the merger, the BIF and the SAIF were abolished. The merger of the BIF and the
SAIF into the Deposit Insurance Fund does not affect the authority of the
Financing Corporation ("FICO") to impose and collect, with the approval of the
Federal Deposit Insurance Corporation, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the Federal Savings and Loan Insurance Corporation. The bonds
issued by the FICO are due to mature in the years 2017 through 2019. For the
quarter ended September 30, 2006, the annualized FICO assessment was equal to
1.24 basis points for each $100 in domestic deposits maintained at an
institution.
Prohibitions Against Tying Arrangements. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates, or not obtain services of a
competitor of the institution.
Federal Home Loan Bank System. Provident Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. As a member of The Federal Home Loan Bank of New York,
Provident Bank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1 % of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of September 30, 2006,
Provident Bank was in compliance with this requirement.
Federal Reserve System
Federal Reserve Board regulations require savings associations to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At September 30,
2006, Provident Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision. As of September 30, 2006 the required balance for
Provident Bank was $6.3 million and
27
was satisfied by the cash on hand in the Bank's branches.
Other Regulations
Interest and other charges collected or contracted for by Provident Bank
are subject to state usury laws and federal laws concerning interest rates.
Provident Bank's operations are also subject to federal laws applicable to
credit transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
o Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet
the housing needs of the community it serves;
o Equal Credit Opportunity Act, prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending credit;
o Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
o Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection agencies; and
o rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The operations of Provident Bank also are subject to the:
o Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
o Electronic Funds Transfer Act and Regulation E promulgated thereunder,
which govern automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of automated
teller machines and other electronic banking services;
o Check Clearing for the 21st Century Act (also known as "Check 21"), which
gives "substitute checks," such as digital check images and copies made
from that image, the same legal standing as the original paper check;
o Title III of The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(referred to as the "USA PATRIOT Act"), which significantly expanded the
responsibilities of financial institutions, including savings and loan
associations, in preventing the use of the U.S. financial system to fund
terrorist activities. Among other provisions, the USA PATRIOT Act and the
related regulations of the Office of Thrift Supervision require savings
associations operating in the United States to develop new anti-money
laundering compliance programs, due diligence policies and controls to
ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance
requirements, also applicable to financial institutions, under the Bank
Secrecy Act and the Office of Foreign Assets Control Regulations; and
o The Gramm-Leach-Bliley Act, which placed limitations on the sharing of
consumer financial information by financial institutions with unaffiliated
third parties. Specifically, the Gramm-Leach-Bliley Act requires all
financial institutions offering financial products or services to retail
customers to provide such customers with the financial institution's
privacy policy and provide such customers the opportunity to "opt out" of
the sharing of certain personal financial information with unaffiliated
third parties.
The USA PATRIOT Act
The USA PATRIOT Act of 2001 gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Title III of the Act is the International Money
Laundering Abatement and Anti-
28
Terrorist Financing Act of 2001, which includes numerous provisions for fighting
international money laundering and blocking terrorist access to the U.S.
financial system. The provisions of the USA PATRIOT Act affecting banking
organizations are generally set forth as amendments to the Bank Secrecy Act.
Certain provisions of the act impose affirmative obligations on a broad range of
financial institutions, such as Provident Bank. These obligations include
enhanced anti-money laundering programs, customer identification programs and
restrictions relating to private banking accounts or correspondent accounts in
the United States for non-United States persons or their representatives
(including foreign individuals visiting the United States.) Federal law also
requires all U.S. persons to comply with economic restrictions and trade
sanctions administered and enforced by the Office of Foreign Assets Control
("OFAC"). OFAC rules apply to all financial institutions through which funds
might travel. We have established policies, procedures and systems designed to
comply with the USA PATRIOT Act and implemented regulations, as well as with
OFAC.
Holding Company Regulation
Provident Bancorp is a unitary savings and loan holding company, subject
to regulation and supervision by the Office of Thrift Supervision. The Office of
Thrift Supervision has enforcement authority over Provident Bancorp and its
non-bank subsidiaries. Among other things, this authority permits the Office of
Thrift Supervision to restrict or prohibit activities that are determined to be
a risk to Provident Bank.
Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it could
engage, provided that its subsidiary savings bank was a qualified thrift lender.
The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan
holding companies not existing on, or applied for before, May 4, 1999 to those
activities permissible for financial holding companies or for multiple savings
and loan holding companies. Provident Bancorp is not a grandfathered unitary
savings and loan holding company and, therefore, is limited to the activities
permissible for financial holding companies or for multiple savings and loan
holding companies. A financial holding company may engage in activities that are
financial in nature, including underwriting equity securities and insurance,
incidental to financial activities or complementary to a financial activity. A
multiple savings and loan holding company is generally limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain additional activities authorized by Office of Thrift Supervision
regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another bank or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with specified exceptions, more than 5% of the equity securities of a company
engaged in activities that are not closely related to banking or financial in
nature or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire banks, the
Office of Thrift Supervision must consider the financial and managerial
resources and future prospects of the bank involved the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
Federal Securities Law
The common stock of Provident Bancorp is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). Provident Bancorp is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act. Common stock of Provident Bancorp held by persons who
are affiliates (generally officers, directors and principal stockholders) of
Provident Bancorp may not be resold without registration or unless sold in
accordance with certain resale restrictions. If Provident Bancorp meets
specified current public information requirements, each affiliate of Provident
Bancorp is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate
governance, accounting and reporting measures for companies that have securities
registered under the Exchange Act, including publicly-held bank holding
companies such as Provident Bancorp. Specifically, the Sarbanes-Oxley Act of
2002 and the various regulations promulgated thereunder, established, among
other things: (i) new requirements for audit committees, including independence,
expertise, and responsibilities; (ii) additional responsibilities regarding
financial statements for the Chief Executive Officer and Chief Financial Officer
of the reporting company; (iii) the forfeiture of bonuses or other
incentive-based compensation and profits from the sale of the reporting
company's securities by the Chief Executive Officer in the 12-month period
following the initial publication of any financial statements that later require
29
restatement; (iv) the creation of an independent accounting oversight board; (v)
new standards for auditors and regulation of audits, including independence
provisions that restrict non-audit services that accountants may provide to
their audit clients; (vi) increased disclosure and reporting obligations for the
reporting company and their directors and executive officers, including
accelerated reporting of stock transactions and a prohibition on trading during
pension blackout periods; (vii) a prohibition on personal loans to directors and
officers, except certain loans made by insured financial institutions on
nonpreferential terms and in compliance with other bank regulatory requirements;
and (viii) a range of new and increased civil and criminal penalties for fraud
and other violations of the securities law.
The Company's Chief Executive Officer and Chief Financial Officer are
required to certify that its quarterly and annual reports filed with the
Securities and Exchange Commission do not contain any untrue statement of a
material fact. Rules promulgated under the Sarbanes-Oxley Act require that these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal controls; they have made
certain disclosures to our auditors and the audit committee of the Board of
Directors about our internal controls; and they have included information in our
quarterly and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls. The Company has existing policies,
procedures and systems designed to comply with the Sarbanes-Oxley Act.
ITEM 1A. Risk Factors
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Our Commercial Real Estate, Commercial Business and Construction Loans Expose Us
to Increased Credit Risks.
At September 30, 2006, our portfolio of commercial real estate loans
totaled $529.6 million, or 35.9% of total loans, our commercial business loan
portfolio totaled $160.8 million, or 10.9% of total loans, and our portfolio of
construction loans totaled $96.7 million, or 6.6% of total loans. We plan to
continue to emphasize the origination of these types of loans. Commercial real
estate, commercial business and construction loans generally have greater credit
risk than one- to four-family residential mortgage loans because repayment of
these loans often depends on the successful business operations of the
borrowers. These loans typically have larger loan balances to single borrowers
or groups of related borrowers compared to one- to four-family residential
mortgage loans. Many of our borrowers also have more than one commercial real
estate, commercial business or construction loan outstanding with us.
Consequently, an adverse development with respect to one loan or one credit
relationship may expose us to significantly greater risk of loss, compared to an
adverse development with respect to a one- to four-family residential mortgage
loan.
Changes in the Value of Goodwill Could Reduce Our Earnings.
We are required by accounting principles generally accepted in the United
States of America to test goodwill for impairment at least annually. Testing for
impairment of goodwill involves the identification of reporting units and the
estimation of fair values. The estimation of fair values involves a high degree
of judgment and subjectivity in the assumptions used. As of September 30, 2006,
if our goodwill were fully impaired and we were required to charge-off all of
our goodwill, the pro forma reduction to our stockholders' equity would be
approximately $3.74 per share.
We May Have Difficulty Managing Our Growth, Which May Divert Resources and Limit
Our Ability to Successfully Expand Our Operations.
We have experienced substantial growth from acquisitions, from $757.9
million of total assets and $595.1 million of total deposits at December 31,
1998 to $2.8 billion of total assets and $1.7 billion of total deposits at
September 30, 2006.
Since 1998, we have expanded our branch network by both acquiring
financial institutions and establishing de novo branches. At September 30, 1998,
we had 11 branch offices, compared to 33 branches at September 30, 2006.
We have incurred substantial expenses to build our management team and
personnel, develop our delivery systems and establish an infrastructure to
support future growth. Our future success will depend on the ability of our
officers and key employees to continue to implement and improve our operational,
financial and management controls, reporting systems and procedures, and to
manage a growing number of client relationships. We may not be able to
successfully implement improvements to our management information and control
systems in an efficient or timely manner, and we may discover deficiencies in
our existing systems and controls. Thus, we cannot be certain that our growth
strategy will not place a strain on our administrative and operational
infrastructure or require us to incur additional expenditures beyond current
projects to support our future growth. Our future profitability will depend in
30
part on our continued ability to grow. We cannot be certain that we will be able
to sustain our historical growth rate or continue to grow at all, absent
acquisitions.
Our Continuing Concentration of Loans in Our Primary Market Area May Increase
Our Risk.
Our success depends primarily on the general economic conditions in the
counties in which we conduct business, and in the New York metropolitan area in
general. Unlike large banks that are more geographically diversified, we provide
banking and financial services to customers primarily in Rockland and Orange
Counties, New York. We also have a branch presence in Ulster, Sullivan and
Putnam Counties in New York and in Bergen County, New Jersey. The local economic
conditions in our market area have a significant impact on our loans, the
ability of the borrowers to repay these loans and the value of the collateral
securing these loans. A significant decline in general economic conditions
caused by inflation, recession, unemployment or other factors beyond our
control, would affect the local economic conditions and could adversely affect
our financial condition and results of operations. Additionally, because we have
a significant amount of commercial real estate loans, decreases in tenant
occupancy also may have a negative effect on the ability of many of our
borrowers to make timely repayments of their loans, which would have an adverse
impact on our earnings.
Changes in Market Interest Rates Could Adversely Affect Our Financial Condition
and Results of Operations.
Our financial condition and result of operations are significantly
affected by changes in market interest rates. Our results of operations
substantially depend on our net interest income, which is the difference between
the interest income that we earn on our interest-earning assets and the interest
expense that we pay on our interest-bearing liabilities. Our interest-bearing
liabilities generally reprice or mature more quickly than our interest-earning
assets. If rates increase rapidly as a result of an improving economy, we may
have to increase the rates paid on our deposits and borrowed funds more quickly
than loans and investments reprice, resulting in a negative impact on interest
spreads and net interest income. In addition, the impact of rising rates could
be compounded if deposit customers move funds from savings accounts back to
higher rate certificate of deposit accounts. Conversely, should market interest
rates continue to fall below current levels, our net interest margin could also
be negatively affected, as competitive pressures could keep us from further
reducing rates on our deposits, and prepayments and curtailments on assets may
continue. Such movements may cause a decrease in our interest rate spread and
net interest margin. The Bank's average cost of interest-bearing liabilities has
increased, and, although the average asset yields increased this period, they
did so at a slower pace due to continued market pressure. This has been offset
somewhat by the increase of interest earning assets compared to interest bearing
liabilities. Should the yield curve continue to remain "flat" or inverted, a
continued decline in net interest margin may occur, offsetting a portion, or all
gains in net interest income generated from an increasing volume of assets.
We also are subject to reinvestment risk associated with changes in
interest rates. Changes in interest rates may affect the average life of loans
and mortgage-related securities. Decreases in interest rates often result in
increased prepayments of loans and mortgage-related securities, as borrowers
refinance their loans to reduce borrowings costs. Under these circumstances, we
are subject to reinvestment risk to the extent that we are unable to reinvest
the cash received from such prepayments in loans or other investments that have
interest rates that are comparable to the interest rates on existing loans and
securities. Additionally, increases in interest rates may decrease loan demand
and/or may make it more difficult for borrowers to repay adjustable rate loans.
Changes in interest rates also affect the value of our interest earning
assets and in particular our securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest rates. At September 30,
2006, our investment and mortgage-backed securities available for sale totaled
$951.7 million. Unrealized losses on securities available for sale, net of tax,
amounted to $7.5 million and are reported as a separate component of
stockholders' equity. Decreases in the fair value of securities available for
sale, therefore, could have an adverse effect on stockholders' equity.
A Breach of Information Security Could Negatively Affect our Earnings.
Increasingly, we depend upon data processing, communication and
information exchange on a variety of computing platforms and networks, and over
the internet. We cannot be certain all our systems are entirely free from
vulnerability to attack, despite safeguards we have instituted. In addition, we
rely on the services of a variety of vendors to meet our data processing and
communication needs. If information security is breached, information can be
lost or misappropriated, resulting in financial loss or costs to us or damages
to others. These costs or losses could materially exceed the amount of insurance
coverage, if any, which would adversely affect our earnings.
31
We are Subject to Heightened Regulatory Scrutiny with respect to Bank Secrecy
and Anti-money Laundering Statutes and Regulations.
Recently, regulators have intensified their focus on the USA PATRIOT Act's
anti-money laundering and Bank Secrecy Act compliance requirements. There is
also increased scrutiny of our compliance with the rules enforced by the Office
of Foreign Assets Control. In order to comply with regulations, guidelines and
examination procedures in this area, we have been required to adopt new policies
and procedures and to install new systems. We cannot be certain that the
policies, procedures and systems we have in place are flawless. Therefore, there
is no assurance that in every instance we are in full compliance with these
requirements.
Various Factors May Make Takeover Attempts More Difficult to Achieve.
Our Board of Directors has no current intention to sell control of
Provident Bancorp. Provisions of our certificate of incorporation and bylaws,
federal regulations, Delaware law and various other factors may make it more
difficult for companies or persons to acquire control of Provident Bancorp
without the consent of our Board of Directors. One may want a take over attempt
to succeed because, for example, a potential acquirer could offer a premium over
the then prevailing market price of our common stock. The factors that may
discourage takeover attempts or make them more difficult include:
Office of Thrift Supervision regulations. Office of Thrift Supervision
regulations prohibit, for three years following the completion of a
mutual-to-stock conversion, the direct or indirect acquisition of more than 10%
of any class of equity security of a converted bank without the prior approval
of the Office of Thrift Supervision. We completed our mutual-to-stock conversion
on January 14, 2004.
Certificate of incorporation and statutory provisions. Provisions of the
certificate of incorporation and bylaws of Provident Bancorp and Delaware law
may make it more difficult and expensive to pursue a takeover attempt that
management opposes. These provisions also would make it more difficult to remove
our current Board of Directors or management, or to elect new directors. These
provisions also include limitations on voting rights of beneficial owners of
more than 10% of our common stock, supermajority voting requirements for certain
business combinations and the election of directors to staggered terms of three
years. Our bylaws also contain provisions regarding the timing and content of
stockholder proposals and nominations and qualification for service on the Board
of Directors.
Required change in control payments and issuance of stock options and
recognition and retention plan shares. We have entered into employment
agreements with executive officers, which will require payments to be made to
them in the event their employment is terminated following a change in control
of Provident Bancorp or Provident Bank. We have also adopted the 2004 Provident
Bancorp, Inc. Stock Incentive Plan to permit additional issuance of stock
options and recognition and retention plan shares to key employees and directors
that will require payments to them in connection with a change in control of
Provident Bancorp. We have granted additional restricted shares and options
under this plan. In 2006 we adopted the Provident Bank & Affiliates Transition
Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one
year for employees not covered by separate agreements if they are terminated in
connection with a change in control of the Company. These payments will have the
effect of increasing the cost of acquiring Provident Bancorp, thereby
discouraging future takeover attempts.
The Federal Deposit Insurance Corporation has Issued New Rules.
Under prior rules, the Federal Deposit Insurance Corporation did not
assess deposit insurance premiums on financial institutions, such as Provident
Bank, that were, among other criteria, well-capitalized. On November 2, 2006,
the Federal Deposit Insurance Corporation adopted final regulations that assess
insurance premium based on risk. As a result, the new regulation will enable the
Federal Deposit Insurance Corporation to more closely tie each financial
institution's deposit insurance premiums to the risk it poses to the deposit
insurance fund. Under the new rules, the Federal Deposit Insurance Corporation
will evaluate the risk of each financial institution based on its supervisory
rating, its financial ratios, and its long-term debt issuer rating. The new
rates for nearly all of the financial institution industry will vary between
five and seven cents for every $100 of domestic deposits. If this rule had been
in effect September 30, 2006, we would have paid an annual deposit insurance
assessment to the Federal Deposit Insurance Corporation of approximately $1.3
million, which would have reduced our net income. We have a tentative credit for
future FDIC assessments of $1.4 million, which can be applied against future
assessments.
ITEM 1B. Unresolved Staff Comments
- ------------------------------------
Not Applicable.
32
ITEM 2. Properties
- ---------------------
As of September 30, 2006, Provident Bank leased 19 properties, including
its headquarters location, from third parties. In addition, Provident Bank owns
19 properties. At September 30, 2006, the net book value of our properties was
$24.9 million. The following is a list of our locations:
Corporate Office, Commercial Lending Division, and Investment Management and
Trust Department:
400 Rella Boulevard #
Montebello, NY 10901
(845) 369-8040
ROCKLAND COUNTY, NY CHESTER # WALLKILL PLAZA #
- -------------------
AIRMONT * 69 Brookside Ave., 400 Route 211 East, Middletown 10940
196 Route 59, Airmont 10901 Chester 10918 (845) 344-0125
(845) 369-8360 (845) 469-2255
BARDONIA # FLORIDA * WARWICK *
715 Route 304, Bardonia 10954 7 Edward J. Lempka Dr., 18 Oakland Ave., Warwick 10990
(845) 623-6340 Florida 10921 (845) 986-2206
(845) 651-4091
CONGERS # GOSHEN # WARWICK # (Shoprite)
1 Lake Rd. West, Ste.1, Congers 10920 60 Matthews St., Goshen 10924 153 Route 94 South, Warwick 10990
(845) 267-2180 (845) 294-8353 (845) 986-9540
HAVERSTRAW # HARRIMAN # WOODBURY *
38-40 New Main St., Haverstraw 10927 300 Larkin Dr., Monroe 10950 556 Route 32, Highland Mills 10930
(845) 942-3880 (845) 782-7226 (845) 928-6855
MOUNT IVY # (Pomona) MIDDLETOWN # (Shoprite) HARDENBURG ABSTRACT CO. OF ORANGE
1633 Route 202, Pomona 10970 125 Dolson Ave., COUNTY, INC. #
(845) 364-5690 Middletown 10940 12 Scotchtown Ave.
(845) 342-5777 Goshen, NY 10920
NANUET # MONROE * HUDSON VALLEY INVESTMENT ADVISORS, LLC #
44 West Route 59, Nanuet 10954 591 Route 17M, Monroe 10950 97 West Main Street
(845) 627-6180 (845) 782-8166 Goshen, NY 10924
NEW CITY * NEWBURGH # ULSTER COUNTY
-------------
179 South Main St. New City 10956 1425 Route 300, Newburgh 12550 ELLENVILLE *
(845) 639-7750 (845) 566-6600 70 Canal St., Ellenville 12428
(845) 647-4300
ORANGBURG * NEWBURGH * (Stony Brook) KERHONKSON *
375 Route 303, Orangeburg, 10962 200 Stony Brook Ct., 6100 Route 209, Kerhonkson 12446
(845) 398-4810 Newburgh 12550 (845) 626-3500
(845) 561-1000
PEARL RIVER # (Shoprite) PINE BUSH # SULLIVAN COUNTY
---------------
26 North Middletown, Pearl River 10965 2380 Route 52, Pine Bush 12566 SOUTH FALLSBURG *
(845) 627-6170 (845) 744-2088 5250 Main St., South Fallsburgh 12779
(845) 434-3070
SPRING VALLEY * PINE BUSH # WOODRIDGE *
72 W. Eckerson Rd., Boniface Drive 13 Broadway, Woodridge 12789
Spring Valley 10977 Pine Bush 12566 (845) 434-6440
(845) 426-7230
PUTNAM COUNTY
-------------
STONY POINT * SLATE HILL * CARMEL *
148 Route 9W, Stony Point 10980 1992 Route 284, Slate Hill 10973 1875 Route 6, Carmel 10512
(845) 942-3890 (845) 355-6181 (845) 225-2265
SUFFERN * WALLKILL EAST * BERGEN COUNTY, NJ
-----------------
71 Lafayette Ave., Suffern 10901 1 Industrial Dr., Middletown 10941 LODI #
(845) 369-8350 (845) 695-2265 2 Arnot St., Lodi 07644
(973) 591-1400
ORANGE COUNTY, NY
- -----------------
BLOOMING GROVE *
815 Route 208, Monroe 10950
(845) 782-4111
* Owned # Leased
33
ITEM 3. Legal Proceedings
- --------------------------
Provident Bancorp is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts that are believed by management to be
immaterial to Provident Bancorp's financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of stockholders during the quarter
ended September 30, 2006.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
(A)
The shares of common stock of Provident New York Bancorp are quoted on the
Nasdaq Global Select ("NASDAQ") under the symbol "PBNY." Prior to June 29, 2005
the Company traded on the NASDAQ under the symbol "PBCP". As of September 30,
2006, Provident Bancorp had 31 registered market makers, 6,282 stockholders of
record (excluding the number of persons or entities holding stock in street name
through various brokerage firms), and 42,699,046 shares outstanding.
Market Price and Dividends. The following table sets forth market price
and dividend information for the common stock for the past two fiscal years.
Information prior to January 14, 2004 has been restated to reflect the
4.4323-to-1 stock split in conjunction with the Company's second-step stock
offering.
Cash Dividends
Quarter Ended High Low Declared
- ------------------------ ------------- --------------- --------------
September 30, 2006 $ 14.33 $ 12.61 $ 0.05
June 30, 2006 13.49 12.35 0.05
March 31, 2006 12.97 10.93 0.05
December 31, 2005 12.05 10.50 0.05
September 30, 2005 12.60 11.33 0.05
June 30, 2005 12.17 10.13 0.045
March 31, 2005 13.21 12.04 0.045
December 31, 2004 13.76 11.50 0.04
Payment of dividends on Provident Bancorp's common stock is subject to
determination and declaration by the Board of Directors and depends on a number
of factors, including capital requirements, regulatory limitations on the
payment of dividends, the results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends will continue. Repurchases of the Company's shares
of common stock during the fourth quarter of the fiscal year ended September 30,
2006 are detailed in (C) below. There were no sales of unregistered securities
during the quarter ended September 30, 2006.
(B)
Not Applicable
34
(C)
Issuer Purchases of Equity Securities
-------------------------------------
Maximum Number
Total Number of (or Approximate
Shares (or Units) Dollar Value) of
Total Number Average Purchased as Part Shares (or Units)
of Shares Price Paid of Publicly that may yet be
(or Units) per share Announced Plans Purchased Under the
Purchased (1) (or Unit) or Programs (2) Plans or Programs
--------------- ---------- -------------------- -------------------
Period (2006)
July 1 - July 31 -- $ -- 2,281,129
August 1 - August 31 4,000 13.00 4,000 2,277,129
September 1 - September 30 31,623 13.68 -- 2,277,129
--------------- ---------- -------------------- -------------------
Total 35,623 $ 13.60 4,000
=============== ========== ====================
(1) The total number of shares purchased during the periods indicated includes
shares deemed to have been received from employees who exercised stock
options by submitting previously acquired shares of common stock in
satisfaction of the exercise price, or shares withheld for tax purposes,
as is permitted under the Company's stock benefit plans and shares
repurchased as part of a previously authorized repurchase program.
(2) The Company announced in 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 repurchase program of
2,200,000 shares.
35
ITEM 6. Selected Financial Data
- -------------------------------
The following financial condition data and operating data are derived from
the audited consolidated financial statements of Provident Bancorp. Additional
information is provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included as Item 7 and Item 8 of this report, respectively.
At September 30,
---------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(In thousands)
Selected Financial Condition Data:
Total assets $ 2,841,337 $ 2,598,323 $ 1,826,856 $ 1,174,305 $ 1,027,701
Loans, net (1) 1,453,185 1,341,026 980,986 703,555 661,012
Securities available for sale 951,729 822,952 534,297 300,715 206,146
Securities held to maturities 60,987 70,949 69,078 73,544 86,791
Deposits 1,729,659 1,726,401 1,239,532 869,553 799,626
Borrowings 682,739 442,203 214,909 164,757 102,968
Equity 405,286 395,157 349,512 117,857 110,867
Years Ended At September 30,
---------------------------------------------------------------------
2006 2005(10) 2004(8) 2003 2002(9)
----------- ----------- ----------- ----------- -----------
(In thousands)
Selected Operating Data:
Interest and dividend income $ 135,616 $ 116,171 $ 74,946 $ 58,382 $ 60,289
Interest expense 50,859 29,400 12,982 12,060 17,201
----------- ----------- ----------- ----------- -----------
Net interest income 84,757 86,771 61,964 46,322 43,088
Provision for loan losses 1,200 750 800 900 900
----------- ----------- ----------- ----------- -----------
Net interest income after
provission for loan losses 83,557 86,021 61,164 45,422 42,188
Non-interest income 17,152 17,007 11,135 8,963 5,063
Non-interest expense 71,256 70,582 56,146 36,790 32,161
----------- ----------- ----------- ----------- -----------
Income before income tax expense 29,453 32,446 16,153 17,595 15,090
Income tax expense 9,258 11,204 5,136 6,344 5,563
----------- ----------- ----------- ----------- -----------
Net income $ 20,195 $ 21,242 $ 11,017 $ 11,251 $ 9,527
=========== =========== =========== =========== ===========
(footnotes on following pages)
36
At or For the Years Ended September 30,
-------------------------------------------------------------
2006 2005(10) 2004(8) 2003 2002(9)
--------- --------- --------- --------- ---------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets) 0.75% 0.84% 0.69% 1.04% 0.99%
Return on equity (ratio of net income to average
equity) 5.15 5.16 3.94 9.92 8.92
Average interest rate spread (2) 3.19 3.63 4.02 4.35 4.37
Net interest margin (3) 3.68 3.98 4.34 4.61 4.75
Efficiency ratio(4) 69.92 68.01 76.81 66.55 66.79
Non-interest expense to average total assets 2.63 2.79 3.49 3.40 3.36
Ratio of average interest-earning assets to
average interest-bearing liabilities 122.48 126.07 135.27 121.33 120.03
Per Share Related Data:
Basic earnings per share (7) $ 0.49 $ 0.49 $ 0.30 $ 0.33 $ 0.28
Diluted earnings per share(7) 0.49 0.49 0.29 0.32 0.27
Dividends per share 0.20 0.17 0.15 0.13 0.09
Book value per share (6) 9.49 9.08 8.82 3.35 3.13
Dividend payout ratio (5) 40.82% 34.69% 50.00% 39.39% 32.14%
Asset Quality Ratios:
Non-performing assets to total assets 0.18% 0.07% 0.15% 0.40% 0.49%
Non-performing loans to total loans 0.34 0.12 0.27 0.66 0.74
Allowance for loan losses to non-performing
loans 405.51 1,282.57 608.26 227.76 205.63
Allowance for loan losses to total loans 1.38 1.55 1.67 1.50 1.52
Capital Ratios:
Equity to total assets at end of year 14.26% 15.21% 19.14% 10.04% 10.79%
Average equity to average assets 14.49 16.26 17.41 10.47 11.15
Tier 1 leverage ratio (bank only) 7.82 8.20 11.28 8.14 8.45
Other Data:
Number of full service offices 33 35 27 18 17
- --------------------------------------------------------------------------------
(1) Excludes loans held for sale.
(2) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) The dividend payout ratio represents dividends per share divided by basic
earnings per share.
(6) Book value per share is based on total stockholders' equity and
42,699,046, 43,505,659, 39,618,373, 35,221,365 and 35,447,372 outstanding
common shares at September 30, 2006, 2005, 2004, 2003 and 2002,
respectively. For this purpose, common shares include unallocated employee
stock ownership plan shares but exclude treasury shares.
(7) Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the Company's second step
conversion in January 2004.
(8) Includes $5.0 million ($3.0 million after tax) and $773,000 ($464,000
after tax) for the establishment of the charitable foundation and merger
integration costs, respectively.
(9) Includes $531,000 ($319,000 after tax) in merger integration costs.
(10) Includes $1.124 million ($674,000 after tax) of merger integration costs.
37
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Overview
Our results of operations depend primarily on our net interest income,
which is the difference between the interest income on our earning assets, such
as loans and securities, and the interest expense paid on our deposits and
borrowings. Results of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense. Non-interest
income consists primarily of banking fees and service charges, and net increases
in the cash surrender value of bank-owned life insurance ("BOLI") contracts,
title insurance fees and investment management fees. Our non-interest expense
consists primarily of salaries and employee benefits, stock-based compensation,
occupancy and office expenses, advertising and promotion expense, professional
fees, intangible assets amortization and data processing expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities. 2006 has been particularly challenging as
short-term interest rates have risen faster than intermediate and longer term
interest rates, leading to a flattening and slightly inverted yield curve.
Therefore, cost of funds has risen faster than our yield on assets, negatively
impacting net interest income. The financial condition and results of operations
of Provident New York Bancorp are discussed herein on a consolidated basis with
the Bank. Reference to Provident New York Bancorp or the Company may signify the
Bank, depending on the context.
The Company provides financial services to individuals and businesses in
New York and New Jersey. The Company's business is primarily accepting deposits
from customers through its banking centers and investing those deposits,
together with funds generated from operations and borrowings, in residential
mortgages, commercial real estate loans, commercial business loans and leases,
consumer loans, and investment securities. Additionally, the Company offers
wealth management services.
The following is an analysis of the financial condition and results of the
Company's operations. This item should be read in conjunction with the
consolidated financial statements and related notes filed herewith in Part II,
Item 8, "Financial Statements and Supplementary Data" and the description of the
Company's business filed here within Part I, Item 1, "Business."
Total assets increased to $2.8 billion at September 30, 2006 from $2.6
billion at September 30, 2005. As the Company furthered its commercial lending
and banking initiatives, loans increased by 8.2%, investment securities
increased by 13.3% compared to the year ended September 30, 2005.
Net income for the year ended September 30, 2006, decreased 4.9% to $20.2
million, or $0.49 per diluted share from $21.2 million, or $0.49 per diluted
share for the year ended September 30, 2005. Net income for the year ended
September 30, 2004 was $11.0 million, or $0.29 per diluted share. Net income for
fiscal 2004 included a $3.0 million after-tax charge ($0.08 per diluted share)
for the formation of the Charitable Foundation. The decrease in net income in
2006 is primarily due to the decrease in net interest income in 2006 as compared
to 2005. During 2005, the Company additionally benefited for a full year from
the investment of funds raised in the 2004 offering, the acquisitions of ENB in
January 2004, WSB in October 2004, and increased commercial real estate and
business lending activity. These benefits were partially offset by the impact of
the rising short-term interest rate environment on its investment and loan
portfolio yields, and higher costs of deposits and borrowings, which reduced the
Company's net interest margin.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. Accounting policies
considered critical to our financial results include the allowance for loan
losses, accounting for goodwill and other intangible assets, accounting for
deferred income taxes and the recognition of interest income.
The methodology for determining the allowance for loan losses is
considered by management to be a critical accounting policy due to the high
degree of judgment involved, the subjectivity of the assumptions utilized and
the potential for changes in the economic environment that could result in
changes to the amount of the allowance for loan losses considered necessary. We
evaluate our assets at least quarterly, and review their risk components as a
part of that evaluation. See Note 3, "Summary of Significant Accounting Policies
- - Allowance for Loan Losses" in our "Notes to Consolidated Financial Statements"
for a discussion of the risk components. We consistently review the risk
components to identify any changes in trends.
38
Accounting for goodwill is considered to be a critical policy because
goodwill must be tested for impairment at least annually using a "two-step"
approach that involves the identification of reporting units and the estimation
of fair values. The estimation of fair values involves a high degree of judgment
and subjectivity in the assumptions utilized. If goodwill is determined to be
impaired, it would be expensed in the period in which it became impaired.
We also use judgment in the valuation of other intangible assets. A core
deposit base intangible asset has been recorded for core deposits (defined as
checking, money market and savings deposits) that were acquired in an
acquisition that was accounted as a purchase business combination. The core
deposit base intangible asset has been recorded using the assumption that the
acquired deposits provide a more favorable source of funding than more expensive
wholesale borrowings. An intangible asset has been recorded for the present
value of the difference between the expected interest to be incurred on these
deposits and interest expense that would be expected if these deposits were
replaced by wholesale borrowings, over the expected lives of the core deposits.
If we find these deposits have a shorter life than was estimated, we will write
down the asset by expensing the amount that is impaired. In 2006 we also
recorded other intangible assets related to non-competition agreements and
customer lists acquired. Such intangibles will also be reviewed annually for
impairment.
We use the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable income. These
judgments and estimates are reviewed on a continual basis as regulatory and
business factors change.
Interest income on loans, securities and other interest-earning assets is
accrued monthly unless management considers the collection of interest to be
doubtful. Loans are placed on non-accrual status when payments are contractually
past due 90 days or more, or when management has determined that the borrower is
unlikely to meet contractual principal or interest obligations, unless the
assets are well secured and in the process of collection. At such time, unpaid
interest is reversed by charging interest income for interest in the current
fiscal year or the allowance for loan losses with respect to prior year income.
Interest payments received on non accrual loans (including impaired loans) are
not recognized as income unless future collections are reasonably assured. Loans
are returned to accrual status when collectibility is no longer considered
doubtful.
Management Strategy
We operate as an independent community bank that offers a broad range of
customer-focused financial services as an alternative to money center banks in
our market area. Management has invested in the infrastructure and staffing to
support our strategy of serving the financial needs of individuals, businesses
and municipalities in our market area focusing on core deposit generation and
quality loan growth. This has resulted in a change in our business mix,
providing a favorable platform for long-term sustainable growth. Highlights of
management's business strategy are as follows:
Operating as a Community Bank. As an independent community bank, we
emphasize the local nature of our decision-making to respond more effectively to
the needs of our customers while providing a full range of financial services to
the individuals, corporations and municipalities in our market area. We offer a
broad range of financial products to meet the changing needs of the marketplace,
including internet banking, cash management services and, on a selective basis,
sweep accounts. In addition, we offer asset management and trust services to
meet the investing needs of individuals, corporations and not-for-profit
entities. As a result, we are able to provide, at the local level, the financial
services required to meet the needs of the majority of existing and potential
customers in our market.
Enhancing Customer Service. We are committed to providing superior
customer service as a way to differentiate us from our competition. As part of
our commitment to service, we have established Sunday banking (since 1995) and
extended service hours (since 1987). In addition, we offer multiple access
channels to our customers, including our branch and ATM network, internet
banking, our Customer Care Telephone Center and our Automated Voice Response
system. We reinforce in our employees a commitment to customer service through
extensive training, recognition programs and measurement of service standards.
In 2006 we launched our Service Excellence Program designed to maintain the
highest level of service to our customer base.
39
Growing and Diversifying our Loan Portfolio. We offer a broad range of
loan products to commercial businesses, real estate owners, developers and
individuals. To support this activity, we maintain commercial, consumer and
residential loan departments staffed with experienced professionals to promote
the continued growth and prudent management of loan assets. We have experienced
consistent and significant growth in our commercial loan portfolio while
continuing to grow our residential mortgage and consumer lending businesses. As
a result, we believe that we have developed a high quality diversified loan
portfolio with a favorable mix of loan types, maturities and yields.
Expanding our Retail Banking Franchise. Management intends to continue the
expansion of the retail banking franchise and to increase the number of
households served and products used by customers and businesses in our market
area. Our strategy is to deliver exceptional customer service, which depends on
up-to-date technology and multiple access channels, as well as courteous
personal contact from a trained and motivated workforce. This approach has
resulted in a relatively high level of core deposits, which improves our overall
cost of funds. Management intends to maintain this strategy, which will require
ongoing investment in retail banking locations and technology to support
exceptional service levels for Provident Bank's customers.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
40
The following table sets forth average balance sheets, average yields and
costs, and certain other information for the years indicated. Tax-exempt
securities are reported on a tax-equivalent basis, using a 35% federal tax rate.
All average balances are daily average balances. Non-accrual loans were included
in the computation of average balances, but have been reflected in the table as
loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.
Years Ended September 30,
--------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------ -------------------------------- ------------------------------
Average Average Average
Outstanding Yield/ Outstanding Yield/ Outstanding Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(Dollars in Thousands)
Interest Earning Assets:
Loans(1) $1,391,562 $ 95,531 6.87% $1,288,829 $ 81,674 6.34% $ 886,749 $ 54,531 6.15%
Securities taxable 836,265 34,378 4.11 835,754 31,360 3.75 508,123 18,865 3.71
Securities-tax exempt 108,925 6,441 5.91 63,598 3,546 5.57 38,505 2,102 5.46
Other 30,852 1,520 4.93 25,420 832 3.27 12,626 184 1.46
---------- -------- ---------- -------- ---------- --------
Total Interest-earnings
assets 2,367,604 137,870 5.82 2,213,601 117,412 5.30 1,446,003 75,682 5.23
-------- -------- --------
Non-interest earning assets 337,815 317,945 161,591
---------- ---------- ----------
Total assets $2,705,419 $2,531,546 $1,607,594
========== ========== ==========
Interest Bearing Liabilities:
NOW deposits $ 154,708 511 0.33 $ 153,058 509 0.33 $ 88,677 189 0.21
Savings deposits(2) 445,419 2,258 0.51 545,829 3,070 0.56 356,998 1,570 0.44
Money market deposits 230,933 4,178 1.81 228,197 2,646 1.16 150,866 859 0.57
Certificates of deposit 538,045 19,855 3.69 434,644 9,851 2.27 311,197 5,283 1.70
Borrowings 564,006 24,057 4.27 394,079 13,324 3.38 161,272 5,081 3.15
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 1,933,111 50,859 2.63 1,755,807 29,400 1.67 1,069,010 12,982 1.21
Non-interest bearing deposits 356,869 349,507 229,530
Other non-interest bearing
liabilities 23,510 14,587 29,166
---------- ---------- ----------
Total liabilities 2,313,490 2,119,901 1,327,706
Stockholders' equity 391,929 411,645 279,888
---------- ---------- ----------
Total liabilities and
Stockholders' equity $2,705,419 $2,531,546 $1,607,594
Net interest rate spread(3) 3.19% 3.63% 4.02%
Net Interest-earning assets(4) $ 434,493 $ 457,794 $ 376,993
========== ========== ==========
Net interest margin(5) 87,011 3.68% 88,012 3.98% 62,700 4.34%
Less tax equivalent
adjustment (2,254) (1,241) (736)
Net Interest income $84,757 86,771 $61,964
======= ====== =======
Ratio of interest-earning
assets to interest bearing
liabilities 122.48% 126.07% 135.27%
======= ======= =======
- --------------------------------------------------------------------------------
(1) Balances include the effect of net deferred loan origination fees
and costs, and the allowance for the loan losses. Includes
prepayment fees and late charges.
(2) Includes club accounts and interest-bearing mortgage escrow
balances.
(3) Net interest rate spread represents the difference between the tax
equivalent yield on average interest-earning assets and the cost of
average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets
less total interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent)
divided by average total interest-earning assets.
41
The following table presents the dollar amount of changes in interest
income (on a fully tax-equivalent basis) and interest expense for the major
categories of our interest-earning assets and interest-bearing liabilities.
Information is provided for each category of interest-earning assets and
interest-bearing liabilities with respect to (i) changes attributable to changes
in volume (i.e., changes in average balances multiplied by the prior-period
average rate) and (ii) changes attributable to rate (i.e., changes in average
rate multiplied by prior-period average balances). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due to
rate.
--------------------------------------------------------------------------------
2006 vs. 2005 2005 vs. 2004
-------------------------------------- --------------------------------------
Increase (Decrease) Due Total Increase (Decrease) Due Total
to Increase to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Interest-earning assets:
Loans $ 6,583 $ 7,274 $ 13,857 $ 26,177 $ 965 $ 27,142
Securities taxable 19 2,999 3,018 12,291 205 12,496
Securities tax exempt 2,667 228 2,895 1,397 47 1,444
Other earning assets 204 484 688 291 357 648
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning
assets 9,473 10,985 20,458 40,156 1,574 41,730
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing
liabilities:
NOW deposits 2 -- 2 179 141 320
Savings deposits (546) (266) (812) 990 510 1,500
Money market deposits 32 1,500 1,532 592 1,195 1,787
Certificates of deposit 2,756 7,248 10,004 2,475 2,093 4,568
Borrowings 6,664 4,069 10,733 7,845 397 8,242
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities 8,908 12,551 21,459 12,081 4,336 16,417
---------- ---------- ---------- ---------- ---------- ----------
Less tax equivalent
adjustment (933) (80) (1,013) (490) (16) (506)
---------- ---------- ---------- ---------- ---------- ----------
Change in net interest
income $ (368) $ (1,646) $ (2,014) $ 27,585 $ (2,778) $ 24,807
========== ========== ========== ========== ========== ==========
Comparison of Financial Condition at September 30, 2006 and September 30, 2005
Total assets as of September 30, 2006 were $2.8 billion, an increase of
$243.0 million, or 9.4%, from September 30, 2005. The increase from September
30, 2005 was primarily due to an increase in securities and loans. Securities
increased $118.8 million, or 13.3%, and loans increased $111.5 million, or 8.2%.
Net deferred income taxes decreased from $10.6 million at September 30, 2005 to
$8.5 million at September 30, 2006, a decrease of $2.1 million, or 19.5%. The
change in deferred income taxes is primarily attributable to the tax effects on
utilization of the contribution carryforward for tax purposes and the net tax
effects of purchase accounting adjustments. Core deposit and other intangibles
decreased by $0.4 million in net, of the HVIA acquisition, amortization from
September 30, 2005. Goodwill increased by $2.2 million as a result of the
acquisition of HVIA. Loans held for sale totaled $7.5 million at September 30,
2006. The Company had no loans held for sale as of September 30, 2005.
Net loans as of September 30, 2006 were $1.5 billion, an increase of
$112.2 million, or 8.4%, over net loan balances of $1.3 billion at September 30,
2005. Commercial loans, primarily commercial mortgage loans, increased by $73.6
million, or 10.3%, over balances at September 30, 2005. Consumer loans increased
by $31.7 million, or 16.5%, during the fiscal year ended September 30, 2006,
while residential loans increased by $6.2 million, or 1.4%. Total loan
originations, excluding loans originated for sale, were $624.5 million for the
fiscal year ended September 30, 2006. However, repayments were $511.7 million
for the fiscal year ended September 30, 2006. Non-performing loans increased
$3.4 million from September 30, 2005, in addition to net charge-offs of $1.5
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
42
acquisition.) Net charge-offs to average loans, outstanding, however, on an
annualized basis, was only 0.11% for the fiscal year ended September 30, 2006.
Loan quality continues to be strong. At $5.0 million, non-performing loans as a
percentage of total loans was 0.34%, as compared to 0.12% at September 30, 2005.
Total securities increased by $118.8 million, or 13.3%, to $1.0 billion at
September 30, 2006 from $893.9 million at September 30, 2005. Investments were
made primarily in government and federal agency securities and municipal
securities, which increased by $28.6 million, or 11.1% and $43.2 million, or
46.2%, respectively. Mortgage-backed securities also increased, by $47.2
million, or 8.7%.
Deposits as of September 30, 2006 were $1.7 billion, a growth of $3.3
million, or 0.2%, from September 30, 2005. As of September 30, 2006 retail and
commercial transaction accounts were 30.1% of deposits compared to 31.9% at
September 30, 2005. The decrease of $30.4 million, or 5.5%, in transaction
accounts and the decrease in savings deposits of $103.3 million, or 21.5%, was
largely due to the migration of the lower-yielding accounts to our certificate
of deposit and money market deposit products or, in some cases, to other
institutions offering higher yields (see "Liquidity and Capital Resources").
These decreases were offset by increase of $120.2 million, or 25.5%, in
certificates of deposit and $16.9 million, or 7.6%, in money market deposit
accounts. The Company has been offering certain new products that offer higher,
market-competitive interest rates and others that offer transaction account
incentives.
Borrowings increased by $240.5 million, or 54.4%, from September 2005, to
$682.7 million. Much of the increase is related to the borrowings used to fund
the increases in securities and loans and, to a lesser extent, for repurchases
of shares of the Company's common stock.
Stockholders' equity increased by $10.1 million, or 2.6%, to $405.3
million at September 30, 2006 compared to $395.2 million at September 30, 2005.
The increase is largely attributable to $20.2 million in current earnings for
the 2006 fiscal year and a $0.8 million reduction in other accumulated
comprehensive loss, $8.1 million in stock-based and deferred compensation and
$2.7 million issued for the HVIA acquisition. These increases were partially
offset by decreases attributable to the repurchase of 1.2 million shares of
common stock at a cost of $13.3 million as well as dividend payments of $8.4
million.
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 during the fiscal year totaled 1.16 million
shares at a purchase price of $13.3 million. As of September 30, 2006 the
Company had authorization to purchase up to an additional 2.3 million shares of
common stock. Also during fiscal 2006, 24,000 shares of restricted stock were
granted from treasury shares. Bank Tier I capital to assets was at 7.8% at
September 30, 2006. Tangible capital at the holding company level was 8.7%.
Comparison of Operating Results for the Years Ended September 30, 2006 and
- --------------------------------------------------------------------------------
September 30, 2005
- ------------------
Net income for the year ended September 30, 2006, was $20.2 million. This
compares to $21.2 million for the year ended September 30, 2005. Diluted
earnings per share were $0.49 for the year ended September 30, 2006 compared to
$0.49 for the prior fiscal year.
Interest Income. Interest income for the year ended September 30, 2006
increased to $135.6 million, an increase of $19.4 million, or 16.7%, compared to
the prior year. The increase was primarily due to higher average balances of
loans and securities, along with higher yields in both asset classes. Average
interest-earning assets for the year ended September 30, 2006 were $2.4 billion,
an increase of $154.0 million, or 7.0%, over average interest-earning assets for
the year ended September 30, 2005 of $2.2 billion. Average loan balances grew by
$102.7 million and average balances of securities and other earning assets
increased by $51.3 million. On a tax-equivalent basis, average yields on
interest earning assets increased by 52 basis points to 5.82% for the year ended
September 30, 2006, from 5.30% for the year ended September 30, 2005. New
security purchases and loan originations at higher market interest rates, as
well as the repricing of floating rate assets were the primary reason for the
increase in asset yields.
Interest income on loans for the year ended September 30, 2006, grew 17.0%
to $95.5 million from $81.7 million for the prior fiscal year. Interest income
on commercial loans for the year ended September 30, 2006 increased to $55.0
million, up 16.7% from commercial loan interest income of $47.1 million for the
prior fiscal year. Average balances of commercial loans grew $43.1 million to
$727.9 million, with a 67 basis point increase in the average yield. Interest
income on consumer loans increased by $4.7 million, or 52.4%. Our fixed-rate
consumer loans have shorter average maturities, and our adjustable-rate consumer
loans float with the prime rate. Income earned on residential mortgage loans was
$27.0 million for the year ended September 30, 2006, up $1.3 million, or
43
5.1%, from the prior year.
Interest income on securities and other earning assets increased to $42.3
million for the year ended September 30, 2006, compared to $35.7 million for the
prior year. This was due to a tax-equivalent increase of 47 basis points in
yields along with the $51.3 million increase in the average balances of
securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2006,
increased by $21.5 to $50.9 million, an increase of 73.0% compared to interest
expense of $29.4 million for the prior fiscal year. This increase was net of the
recognition of accretion of $1.5 million in premiums recorded on called Federal
Home Loan Bank borrowings that were assumed in acquisitions. The increase in
interest expense was primarily due to an increase in the average balance of
interest-bearing liabilities of $177.3 million, or 10.1%. In addition, average
rates paid on interest-bearing liabilities for the year ended September 30, 2006
increased by 96 basis points to 2.63% from 1.67% in fiscal 2005. The average
interest rate paid on certificates of deposit increased by 142 basis points to
3.69% for the year ended September 30, 2006, from 2.27% for the prior year. For
the year ended September 30, 2006, average balances of lower cost savings
decreased by $100.4 million, or 18.4%, while average balances of certificates of
deposit increased by $103.4 million compared to the year ended September 30,
2005. The average interest rate paid on savings decreased by 5 points to 0.51%
for the year ended September 30, 2006, while money market rates increased 65
basis points to 1.81% for the year ended September 30, 2006. The migration of
account balances from non-interest bearing accounts and low yielding deposit
accounts to certificates of deposit and market rate money market accounts is
expected to continue, if short-term rates remain at the current levels or
continue to increase.
Net Interest Income for the fiscal year ended September 30, 2006 was $84.8
million, compared to $86.8 million for the year ended September 30, 2005, a
decrease of $2.0 million or 2.3%. The net interest margin declined by 30 basis
points to 3.68%, while the net interest spread declined by 44 basis points to
3.19%. This change in short-term rates, which affected funding costs to a larger
degree than existing earning assets (which are primarily fixed-rate until
maturity) was disproportionately large as compared to the change in longer term
market interest rates, and thus has decreased net interest margin. The Federal
Reserve has increased short-term rates six times since September 2005,
increasing the target federal funds rate from 3.75% to 5.25%. The 10-year
treasury rate has increased from an average of 4.20% for the fiscal year ended
September 30, 2005 to 4.75% for the year ended September 30, 2006. The Bank's
average cost of interest-bearing liabilities has increased and, although the
average asset yields increased during this period, they did so at a slower pace
due to continued market pressure. This has been offset somewhat by a greater
increase of interest earning assets compared to interest bearing liabilities.
Should the yield curve continue to "flatten" or invert, a continued decline in
net interest margin may occur, offsetting a portion of gains in net interest
income generated from an increasing volume of assets. However, the bank has $272
million in securities, which will mature or reprice in the next fiscal year, in
addition to mortgage-backed securities amortization, at a current yield of 3.6%.
The cash flows from such securities will be reinvested at current rates or used
to fund reduction in borrowed funds or higher cost deposits, depending on the
interest rate environment and other corporate requirements at the time the cash
is received.
Provision for Loan Losses. We recorded $1.2 million and $750,000 in loan
loss provisions for the year ended September 30, 2006 and September 30, 2005,
respectively. At September 30, 2006 the allowance for loan losses totaled $20.4
million, or 1.4% of the loan portfolio, compared to $21.0 million, or 1.6% of
the loan portfolio at September 30, 2005. Net charge-offs for the years ended
September 30, 2006 and 2005 were $1.5 million and $975,000, respectively (an
annual rate of 0.11% and 0.08%, respectively, of the average loan portfolio).
The $504,000 increase occurred primarily due to the increase in volume.
The provision for loan losses was primarily attributable to growth in the
loan portfolio of $111.5 million, representing an increase of 8.2%. Higher risk
loan categories, primarily commercial real estate loans and commercial business
loans, provided most of this increase. Non-performing loans increased $3.4
million from September 30, 2005, to $5.0 million at September 30, 2006.
We view the economy in our market area as stable with a positive outlook.
We expect modest business expansion primarily driven by small businesses. In our
market area, we have benefited by growth in healthcare, education and
professional services; healthcare and education, in particular, help insulate us
from economic downturns as demand is less sensitive to a recession than other
segments of the economy generally. The employment picture remains positive with
unemployment rates in our market area below the national average. However,
housing activity is vulnerable to the current slowdown. We expect the primary
impact to be felt in new housing sales, and therefore in the value of
residential building lots as well. Existing home sales are slowing as well.
As a result of this outlook, we increased the percentage allowance
requirements in the retail loan portfolio to reflect the potential impact of
declining values in residential real estate. We also increased the percentage
allowance
44
requirements for construction and land loans in the commercial loan portfolio.
These loans are also potentially impacted by declining values and demand for
residential real estate. We decreased percentage allowance requirements on
commercial mortgage loans due to consideration for initial underwriting and
commercial and industrial loans, due to strong economic performance in our
market area.
Non-interest income was $17.2 million for the fiscal year ended September
30, 2006 compared to $17.0 million for the prior fiscal year. Deposit fees and
service charges increased by $338,000, or 3.2% to $10.7 million. Income derived
from the Company's BOLI investments decreased by $149 thousand, or 8.3%, due to
death benefit proceeds received in 2005. Title insurance fee income derived from
the Hardenburgh Abstract Company, Inc. increased $140,000 and investment
management fees increased $662,000 of which $594,000 related to HVIA acquired on
June 1, 2006. There are no gains on the sale of securities for the 2006 fiscal
year compared to $369,000 for the prior fiscal year. During the year ended
September 30, 2006, the Company also recorded gains on sales of loans totaling
$117,000 compared to $206,000 for the prior year. For the year ending September
30, 2005, there was $681,000 in income pertaining to our investment as a limited
partner in a low-income housing partnership.
Non-interest expense for the fiscal year ended September 30, 2006
increased by $674 thousand, or 1.0% to $71.3 million, compared to $70.6 million
for the same period in 2005. Compensation and employee benefits increased by
$609 million, or 1.9%, to $32.2 million for the year ended September 30, 2006.
The increase was primarily attributable to increased support staff and bringing
data processing in-house. These increases were partially offset by a decrease of
$748,000 in pension and post-retirement health insurance expense. Stock-based
compensation increased due to $1.1 million in stock option expense under SFAS
No. 123R which was implemented in 2006, $368,000 was for the acceleration of
certain restricted stock awards and $604,000 was for an increase in ESOP
expense, which reflected the release of the same number of shares for the 2005
ESOP plan year as in past years. Stock-based compensation also reflects a full
year's expense of $2.2 million related to restricted stock awards that were
granted in March 2005, compared to $1.0 million for the prior year. Occupancy
and office operations increased by $1.8 million, or 19.3%, for the year ended
September 30, 2006. Advertising and promotion decreased $657,000 or 21.2%,
primarily as a result of the Company's new brand identity and the additional
promotions in the Orange County market that occurred in 2005. Data and check
processing expense decreased $1.7 million, or 35%, due to the transfer of our
data processing operations in-house, November 2005, which was offset by related
increases in compensation and occupancy costs. Other expenses decreased by $1.3
million, or 13.9%. ATM and debit card expense increased $208,000, or 15.3%,
primarily as a result of the increase in volume of transactions processed. The
year ended September 30, 2005 included $1.1 million in merger integration costs.
Income Taxes. Income tax expense was $9.3 million for the fiscal year
ended September 30, 2006 compared to $11.2 million for fiscal 2005, representing
effective tax rates of 31.4% and 34.5%, respectively. The lower tax rate in 2006
was primarily due to the shift to tax-exempt securities, which represented 11.5%
of the average securities portfolio in 2006, compared to 7.1% of the average
securities portfolio for 2005. The effective tax rate was also positively
impacted by a land donation during 2006, which resulted in a federal tax benefit
of $212,000.
Comparison of Operating Results for the Years Ended September 30, 2005 and
- --------------------------------------------------------------------------------
September 30, 2004
- ------------------
Net income for the year ended September 30, 2005, was $21.2 million. This
compares to $11.1 million for the year ended September 30, 2004. Diluted
earnings per share were $0.49 for the year ended September 30, 2005, compared to
$0.29 for the prior fiscal year. Fiscal 2004 includes a $5 million charge (3.0
million after tax for the formation of the charitable foundation in connection
with the second step conversion or $0.08 per diluted share.) Earnings per share
results for the prior year have been restated to reflect the 4.4323-to-one
exchange ratio as a result of the Company's second-step conversion in 2004.
Interest Income. Interest income for the year ended September 30, 2005
increased to $116.2 million, an increase of $41.2 million, or 55.0%, compared to
the prior year. The increase was primarily due to higher average balances of
loans and securities, along with higher yields in both asset classes. Average
interest-earning assets for the year ended September 30, 2005 were $2.2 billion,
an increase of $767.6 million, or 53.1%, over average interest-earning assets of
$1.4 billion for the year ended September 30, 2004. Average loan balances grew
by $402.1 million and average balances of securities and other earning assets
increased by $365.5 million. On a tax-equivalent basis, average yields on
interest earning assets increased by seven basis points to 5.30% for the year
ended September 30, 2005, from 5.23% for the year ended September 30, 2004.
Higher market interest rates were the primary reason for the increase in asset
yields.
Interest income on loans and fees for the year ended September 30, 2005
grew 49.8% to $81.7 million from $54.5 million for the prior fiscal year.
Interest income on commercial loans for the year ended September 30, 2005
increased to $47.1 million, up 78.5% from commercial loan interest income of
$26.4 million for the prior fiscal year.
45
Average balances of commercial loans grew $299.1 million to $684.8 million, with
four basis point increase in the average yield. Interest income on consumer
loans increased by $3.6 million, or 69.5%. Our fixed-rate consumer loans have
short average maturities, and our adjustable-rate consumer loans float with the
prime rate. Income earned on residential mortgage loans was $25.7 million for
the year ended September 30, 2005, up $2.8 million, or 12.2%, from the prior
year. Loan prepayment fees and late charges, previously reported under
non-interest income, are now included in interest income and they totaled
$901,000 and $438,000 for the years ended September 30, 2005 and September 30,
2004, respectively.
Interest income on securities and other earning assets increased to $35.7
million for the year ended September 30, 2005, compared to $21.2 million for the
prior year. This was due to a tax-equivalent increase of eight basis points in
yields along with the $365.5 million increase in the average balances of
securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2005
increased by $16.4 to $29.4 million, an increase of 126.5% compared to interest
expense of $13.0 million for the prior fiscal year. The increase was primarily
due to an increase in the average balance of interest-bearing liabilities of
$686.8 million, or 64.3%, which resulted primarily from the Warwick and HSBC
South Fallsburg branch acquisitions, which were acquired in 2005. In addition,
average rates paid on interest-bearing liabilities for the year ended September
30, 2005 increased by 46 basis points to 1.67% from 1.21% in fiscal 2004. The
average interest rate paid on certificates of deposit increased by 57 basis
points to 2.27% for the year ended September 30, 2005, from 1.70% for the prior
year. For the year ended September 30, 2005, average balances of lower cost
savings and money market accounts increased by $188.8 million and $77.3 million,
respectively, while average balances of certificates of deposit increased by
$123.4 million compared to the year ended September 30, 2004. The average
interest rate paid on savings and money market accounts increased by 12 and 59
basis points to 0.56% and 1.16%, respectively, for the year ended September 30,
2005, from 0.44% and 0.57% for the prior year.
Net Interest Income for the fiscal year ended September 30, 2005 was $86.8
million, compared to $62.0 million for the year ended September 30, 2004, an
increase of $24.8 million or 40.0%. Interest income increased $41.2 million to
$116.2 million for the fiscal year ending September 30, 2005, compared to $74.9
million for the prior year. The increase in interest income was largely due to a
$767.6 million increase in average interest-earning assets to $2.2 billion
during the year ended September 30, 2005, as compared to $1.4 billion for the
prior fiscal year. The increase is primarily due to the Warwick acquisition and
continued internal growth. Loan prepayment fees and late charges, previously
reported under non-interest income, are now included in interest income and
totaled $901,000 and $438,000 for the years ended September 30, 2005 and
September 30, 2004, respectively. An increase in average yield on earning assets
of seven basis points, from 5.23% to 5.30%, on a fully taxable equivalent basis,
also contributed to the increase in net interest income. Average yields
increased in both the loan and securities and other earning assets portfolios,
of 19 basis points and eight basis points, respectively, with the overall yield
on total interest-earning assets increasing in every category. Interest expense
increased by $16.4 million for the fiscal year ended September 30, 2005 from
$13.0 million for the year ended September 30, 2004, to $29.4 million, as
average interest-bearing liabilities increased by $686.8 million and the average
cost of interest-bearing liabilities increased 46 basis points. The net interest
margin declined by 36 basis points to 3.98%, while the net interest spread
declined by 39 basis points to 3.63%, due to the assets acquired in the Warwick
acquisition being recorded at then-current market interest rates and the
increase in short-term interest rates. This change in short-term rates, which
affected funding costs to a larger degree than existing earning assets (which
are primarily fixed-rate until maturity) was disproportionately large as
compared to the change in longer term market interest rates, and thus has
decreased net interest margin. The Federal Reserve increased short-term rates 11
times since May 2004 to September 2005, increasing the target federal funds rate
from 1% to 3.75%. Conversely, the 10-year treasury rate decreased from an
average of 4.29% for the fiscal year ended September 30, 2004 to 4.20% for the
year ended September 30, 2005. The Bank's average cost of interest-bearing
liabilities has increased and, although the average asset yields increased
during this period, they did so at a slower pace due to continued market
pressure. This has been offset somewhat by a greater increase of interest
earning assets compared to interest bearing liabilities
Provision for Loan Losses. We recorded $750,000 and $800,000 in loan loss
provisions for the year ended September 30, 2005 and September 30, 2004,
respectively. At September 30, 2005 the allowance for loan losses totaled $21.0
million, or 1.55% of the loan portfolio, compared to $16.6 million, or 1.67% of
the loan portfolio at September 30, 2004. Net charge-offs for the years ended
September 30, 2005 and 2004 were $975,000 and $266,000, respectively (an annual
rate of 0.08% and 0.03%, respectively, of the average loan portfolio). The
$709,000 increase occurred primarily due to the increase in volume and loans
acquired through our acquisitions.
The provision for loan losses was primarily attributable to growth in the
loan portfolio of $364.4 million, representing an increase of 36.5%, which
included $288.2 million of loans acquired, along with $4.9 million in acquired
allowance for loan losses, as part of our acquisition of WSB. In addition,
higher risk loan categories,
46
primarily commercial real estate loans and commercial business loans, provided
most of this increase. However, non-performing loans decreased $1.1 million from
September 30, 2004, to $1.6 million at September 30, 2005.
We increased the percentage allowance requirements in the retail loan
portfolio to reflect the increase in home equity lines of credit, as they are
considered somewhat more risky than first mortgage loans, because they are
secured by second mortgages, and are tied to a recently increasing prime rate.
We also increased the percentage allowance in the commercial loan portfolio to
reflect the potential impact of loan growth in new adjacent markets, and
continued growth in larger, more complex loans. There has also been a slight
increase in the risk ratings of the performing loan portfolio.
Non-interest income was $17.0 million for the fiscal year ended September
30, 2005 compared to $11.1 million for the prior fiscal year. Deposit fees and
service charges increased by $3.8 million, or 57.5% to $10.4 million, of which
$1.8 million was generated from the acquired Warwick branches, while $2.0
million was primarily due to volume-driven increases in overdraft,
non-sufficient funds, and ATM and debit card fees. Income derived from the
Company's BOLI investments increased by $1.2 million, or 224.3%, due to the
additional BOLI investment of $24.1 million ($13.3 million of which were added
from the WSB acquisition), and the receipt of death benefit proceeds. Title
insurance fee income derived from the new Hardenburgh Abstract Company, Inc. was
$1.6 million. Gains on the sale of securities were $369,000 for the 2005 fiscal
year compared to $2.5 million for the prior fiscal year. For the year ending
September 30, 2005, there was of $681,000 in income pertaining to our investment
as a limited partner in a low-income housing partnership. The investment had
been amortized quarterly since 1996 in excess of our interest in the
partnership. There was no material impact on any quarter in the affected
periods.
Non-interest expense for the fiscal year ended September 30, 2005
increased by $14.4 million, or 25.7%. Excluding the 2004 charge of $5.0 million,
pre-tax, for the Charitable Foundation, non-interest expenses for the year ended
September 30, 2005 increased by $19.4 million, or 38.0%, to $70.6 million,
compared to $51.1 million for the same period in 2004. The acquisitions of ENB
in January 2004 and Warwick in October 2004, played a major role in the
increases in most categories. Compensation and employee benefits increased by
$8.6 million, or 37.3%, to $31.6 million for the year ended September 30, 2005.
The increase was primarily attributable to the acquisitions. Occupancy and
office operations increased by $2.8 million, or 42.2%, for the year ended
September 30, 2005, almost all of which was attributable to the acquisitions.
Advertising and promotion increased $1.1 million or 51.3%, primarily as a result
of the Company's new brand identity and the additional promotions in the Orange
County market. Amortization of core deposit intangible increased by $1.9 million
as a result of acquired deposits. Data and check processing expense increased
$1.1 million, or 31.2%, primarily due to the higher level of services related to
the accounts acquired in the mergers and in the acquisition of the new HSBC
South Fallsburg branch. Other expenses increased by $2.6 million, or 39.7%,
primarily due to increases in correspondent bank expense, postage, telephone
expense, loan servicing and credit report expenses, and insurance premium
expense, all of which directly related to the increased size of Provident Bank
following the mergers. ATM and debit card expense increased $550,000, or 68.2%,
primarily as a result of the increase in volume processed.
Income Taxes. Income tax expense was $11.2 million for the fiscal year
ended September 30, 2005 compared to $5.1 million for fiscal 2004, representing
effective tax rates of 34.5% and 31.8%, respectively. The higher effective rate
in fiscal 2005 was primarily attributable to the lower proportion of non-taxable
securities to taxable, an increase in state taxes, and the release of tax
contingency reserves in 2004 that did not occur in 2005. These increases were
partially offset by a relative decrease in nondeductible stock-based
compensation expense.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the financial statements, or are recorded in
amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by the Company for general corporate purposes or for
customer needs. Corporate purpose transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include
lending commitments, are described below. At September 30, 2006 and 2005, the
Company had no interests in non-consolidated special purpose entities.
Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused credit lines. These instruments are not recorded in
the consolidated balance sheet until funds are advanced under the commitments.
The Company provides these lending commitments to customers in the normal course
of business.
47
For commercial customers, loan commitments generally take the form of
revolving credit arrangements to finance customers' working capital
requirements, or for development and construction in the case of real estate
businesses. For retail customers, loan commitments are generally lines of credit
secured by residential property. At September 30, 2006, commercial and retail
loan commitments totaled $62.1million. Approved closed undrawn lines of credit
totaled $211.9 and $150.6 for commercial and retail accounts. Standby letters of
credit totaled $20.9 million. 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. Standby letters of credit are
conditional commitments to guarantee performance, typically of a contract or the
financial integrity, of a customer to a third party.
Provident Bank applies essentially the same credit policies and standards
as it does in the lending process when making these commitments. See Note 16 to
"Consolidated Financial Statements" in Item 8 hereof for additional information
regarding lending commitments.
Contractual Obligations. In the ordinary course of our operations, we
enter into certain contractual obligations. Such obligations include operating
leases for premises and equipment.
Payments Due by Period. The following table summarizes our significant
fixed and determinable contractual obligations and other funding needs by
payment date at September 30, 2006. The payment amounts represent those amounts
due to the recipient and do not include any unamortized premiums or discounts or
other similar carrying amount adjustments.
Payments Due by Period
--------------------------------------------------------------------------------------------
Less than One to Three Three to Five More Than
Contractual Obligations One Year Years Years Five Years Total
- --------------------------------- ----------------- ----------------- ---------------- ----------------- -----------------
FHLB and other borrowings $ 565,555 $ 70,446 $ 42,897 $ 3,841 $ 682,739
Letters of credits 15,848 2,894 33 2,109 20,884
Operating leases 1,954 3,901 3,210 13,438 22,503
----------------- ----------------- ---------------- ----------------- -----------------
Total $ 583,357 $ 77,241 $ 46,140 $ 19,388 $ 726,126
================= ================= ================ ================= =================
Commitments to extend credit $ 197,168 $ 22,449 $ 5,980 $ 136,988 $ 362,585
================= ================= ================ ================= =================
Impact of Inflation and Changing Prices
The financial statements and related notes of Provident Bancorp have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP"). U.S. GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and
liabilities are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than the effects of
inflation.
Liquidity and Capital Resources
The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments
on loans and securities, wholesale borrowings, the proceeds from maturing
securities and short-term investments, and the proceeds from the sales of loans
and securities. The scheduled amortization of loans and securities, as well as
proceeds from borrowings, is predictable sources of funds. Other funding
sources, however, such as deposit inflows, mortgage prepayments and
48
mortgage loan sales are greatly influenced by market interest rates, economic
conditions and competition.
Our cash flows are derived from operating activities, investing activities
and financing activities as reported in the Consolidated Statements of Cash
Flows in our consolidated financial statements. Our primary investing activities
are the origination of commercial real estate and residential one- to
four-family loans, and the purchase of investment securities and mortgage-backed
securities. During the years ended September 30, 2006, 2005 and 2004, our loan
originations, including origination of loans held for sale, totaled $640.5
million, $515.4 million and $357.1 million, respectively. Purchases of
securities available for sale totaled $259.0 million, $385.3 million and $468.4
million for the years ended September 30, 2006, 2005 and 2004, respectively.
Purchases of securities held to maturity totaled $22.6 million, $23.7 million
and $12.2 million for the years ended September 30, 2006, 2005 and 2004,
respectively. These activities were funded primarily by deposit growth,
borrowings, and by principal repayments on loans and securities. Loan
origination commitments totaled $62.1 million at September 30, 2006, and
consisted of $48.8 million at adjustable or variable rates and $13.3 million at
fixed rates. Unused lines of credit granted to customers were $362.6 million at
September 30, 2006. We anticipate that we will have sufficient funds available
to meet current loan commitments and lines of credit.
In December 2002 we invested $12.0 million in BOLI contracts and an
additional $10.0 million in April 2005. An additional $13.3 million was acquired
in acquisitions. These investments are illiquid and are therefore classified as
other assets. Earnings from BOLI are derived from the net increase in cash
surrender value of the BOLI contracts and the proceeds from the payment on the
insurance policies, if any. BOLI contracts totaled $39.3 million and $37.7
million at September 30, 2006 and September 30, 2005, respectively.
Deposit flows are generally affected by the level of market interest
rates, the interest rates and other conditions on deposit products offered by
our banking competitors, and other factors. The net (decrease)/increase in total
deposits (excluding deposits acquired during 2005 and 2004 as part of
acquisitions) was $3.4 million, $(11.7) million and $43.1 million for the years
ended September 30, 2006, 2005 and 2004, respectively. Certificates of deposit
that are scheduled to mature in one year or less from September 30, 2006 totaled
$552.6 million. Based upon prior experience and our current pricing strategy,
management believes that a significant portion of such deposits will remain with
us, although we may be required to compete for many of the maturing certificates
in a highly competitive environment.
We generally remain fully invested and utilize additional sources of funds
through Federal Home Loan Bank of New York advances and other sources of which
$682.7 million was outstanding at September 30, 2006. At September 30, 2006, we
had the ability to borrow an additional $102.6 million under our credit
facilities with the Federal Home Loan Bank. The Bank may borrow an additional
$406.1 million by pledging securities not required to be pledged for other
purposes as of September 30, 2006.
Recent Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Post-retirement Plans," an
amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158"). For
defined benefit post-retirement plans, SFAS 158 requires that the funded status
be recognized in the statement of financial position, that assets and
obligations that determine funded status be measured as of the end of the
employer's fiscal year, and that changes in funded status be recognized in
comprehensive income in the year the changes occur. SFAS 158 does not change the
amount of net periodic benefit cost included in net income or address
measurement issues related to defined benefit post-retirement plans. The
requirement to recognize funded status is effective for fiscal years ending
after December 15, 2006. The requirement to measure assets and obligations as of
the end of the employer's fiscal year is effective for fiscal years ending after
December 15, 2008. The unrecognized components of defined benefit pension plans
and retiree medical plans will be recorded on the balance sheet at September 30,
2007. If such amounts were recorded as of September 30, 2006, accumulated other
comprehensive loss would be increased by $605. The adoption of SFAS 158 is not
expected to have a material impact on the consolidated earnings or financial
position of the Company.
In September 2006, the FASB issued Statement of Financial Accounting
Standard No. 157, "Fair Value Measurements" ("SFAS 157"). This statement defines
fair value, establishes a framework for measuring fair value under generally
accepted accounting principles ("GAAP"), and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2006. The adoption of SFAS 157 is not
expected to have a material impact on the consolidated earnings or financial
position of the Company.
49
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 108 to require quantification of financial
statement misstatements under both the "rollover approach" and the "iron curtain
approach." The "rollover approach" quantifies a misstatement based on the amount
of the error originating in the current year income statement, but ignores the
effects of correcting the portion of the current year balance sheet misstatement
that originated in prior years. The "iron curtain approach" quantifies a
misstatement based on the effects of correcting the misstatement existing in the
balance sheet at the end of the current year, irrespective of the misstatement's
year(s) of origination. The provisions of SAB No. 108 must be applied to
financial statements for fiscal years ending after November 15, 2006. The
Company does not anticipate that the quantification of financial statement
misstatements pursuant to the provisions of SAB No. 108 will result in any
material impact to the Company's financial statements for fiscal 2007.
At its September 2006 meeting, the Emerging Issues Task Force ("EITF")
reached a final consensus on Issue 06-04, "Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer to
share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106 or "Accounting Principles Board
Opinion" ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that
the purchase of a split-dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan or under APB No. 12 if it is not part of
a plan. Issue 06-04 is effective for annual or interim reporting periods
beginning after December 15, 2007. The provisions of Issue 06-04 should be
applied through either a cumulative effect adjustment to retained earnings as of
the beginning of the year of adoption or retrospective application. The Company
has endorsement split-dollar life insurance policies that it inherited through
certain acquisitions that are associated with employees who are no longer
active, which it is currently in the process of evaluating to determine the
impact of adoption of Issue 06-04, which is not expected to be material.
In July 2006, the FASB issued FIN 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"), which attempts to set out a consistent framework for
preparers to use to determine the appropriate level of tax reserves to maintain
for "uncertain tax positions." This interpretation of FASB Statement No. 109
uses a two-step approach wherein a tax benefit is recognized if a position is
more likely than not to be sustained. The amount of the benefit is then measured
to be the highest tax benefit which is greater than fifty percent likely to be
realized. FIN 48 also sets out disclosure requirements to enhance transparency
of a Company's tax reserves. FIN 48 is effective January 1, 2007. We are
currently assessing the financial statement impact of implementing FIN 48.
In July 2006, the FASB adopted FASB Staff Position No. 13-2, "Accounting
for a Change or Projected Change in the Timing of Cash Flows Relating to Income
Taxes Generated by a Leveraged Lease Transaction" ("FSP 13-2"). FSP 13-2
requires that a change or projected change in the timing of cash flows relating
to income taxes generated by a leveraged lease shall be accounted for in
accordance with the guidance in paragraph 46 of SFAS No. 13, "Accounting for
Leases." That is, the projected timing of income tax cash flows generated by a
leveraged lease transaction shall be reviewed annually or more frequently, if
events or changes in circumstances indicate that a change in timing has occurred
or is projected to occur. If, during the lease term, the projected timing of
income tax cash flows generated by a leveraged lease is revised, the rate of
return and the allocation of income to positive investment years shall be
recalculated from inception of the lease following the method described in
paragraph 44 of SFAS No. 13. The guidance in FSP 13-2 shall be applied to fiscal
years beginning after December 15, 2006. The cumulative effect of applying the
provisions of FSP 13-2 shall be reported as an adjustment to the opening balance
of retained earnings as of the beginning of the period of adoption. The Company
does not expect that the adoption of FSP 13-2 will have a material effect on its
financial position or results of operations.
In March 2006, the FASB issued Statement of Financial Accounting Standards
No. 156 ("SFAS 156"), "Accounting for Servicing of Financial Assets", an
amendment of FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS 156 requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable, and permits for subsequent measurement
using either fair value measurement with changes in fair value reflected in
earnings or the amortization and impairment requirements of Statement No. 140.
The subsequent measurement of separately recognized servicing assets and
servicing liabilities at fair value eliminates the necessity for entities that
manage the risks inherent in servicing assets and servicing liabilities with
derivatives to qualify for hedge accounting treatment and eliminates the
characterization of declines in fair value as impairments or direct write-downs.
SFAS 156 is effective for the fiscal year beginning after September 15, 2006. We
are currently assessing the financial statement impact of implementing SFAS156.
In February 2006, the FASB issued Statement of Financial Accounting
Standard No. 155, "Accounting for Certain Hybrid Financial Instruments," an
amendment of FASB Statements No. 133 and 140, ("SFAS 155"). SFAS
50
155 amends FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, ("SFAS 133") and SFAS 140. SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement 133
to Beneficial Interests in Securitized Financial Assets." SFAS 155 permits fair
value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which
interest-only and principal-only strips are not subject to the requirements of
SFAS 133, establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation, clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives, and amends SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140") to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006. The
adoption of SFAS 155 is not expected to have a material impact on the
consolidated earnings or financial position of the Company.
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 2004, the FASB Issued Statement of Financial Accounting
Standards No. 123R (Statement 123R), "Share-Based Payments," the provisions of
which became effective for the corporation in fiscal 2006. This Statement
eliminates the alternative to use APB No. 25's intrinsic value method of
accounting that was provided in Statement 123 as originally issued. Statement
123R requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. While the fair-value-based method prescribed by Statement 123R is
similar to the fair-value-based method disclosed under the provisions of
Statement 123 in most respects, there are some differences. The Company began
using the Black Scholes option pricing method beginning in fiscal 2006 and
recorded an expense of $1.1 million or $0.7 million after tax and the diluted
earnings per share impact was $0.02. This impact includes the effect of reload
options or forfeitures or options accelerations due to termination or retirement
of personnel, the effect of which could not be previously estimated with any
degree of certainty.
Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1") was issued. EITF 03-1 provides guidance for
determining the meaning of "other-than-temporarily impaired" and its application
to certain debt and equity securities within the scope of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and investments accounted for under the cost
method. The guidance requires that investments which have declined in value due
to credit concerns or solely due to changes in interest rates ("other than
temporary impairment"), must be recorded for as are loans under the AICPA's
Statement of Position 03-3 ("SOP 03-3") on purchased loans, which provides
guidance on the treatment of potential credit losses (unrecoverable principal)
and decreased, or lower then expected yields.
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles
to Loan Commitments." SAB No. 105 requires that when a company is recognizing
and valuing a loan commitment at fair value, only differences between the
guaranteed interest rate in the loan commitment and a market interest rate
should be included. Any expected future cash flows related to the customer
relationships or loan servicing should be excluded from the fair value
measurement. The expected future cash flows that are excluded from the
fair-value determination include anticipated fees for servicing the funded loan,
late-payment charges, other ancillary fees, or other cash flows from servicing
rights. The guidance in SAB No. 105 is effective for mortgage-loan commitments
that are accounted for as derivatives and are entered into after March 31, 2004.
The adoption of the provisions of this standard did not have a material impact
on the results of operations.
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.
51
Management does not believe the provision of this standard will have a material
impact on the results of future operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results. The
provisions of this statement did not have a material impact on the consolidated
financial statements.
52
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Management of Interest Rate Risk
Management believes that our most significant form of market risk is
interest rate risk. The general objective of our interest rate risk management
is to determine the appropriate level of risk given our business strategy, and
then manage that risk in a manner that is consistent with our policy to limit
the exposure of our net interest income to changes in market interest rates.
Provident Bank's Asset/Liability Management Committee ("ALCO"), which consists
of certain members of senior management, evaluates the interest rate risk
inherent in certain assets and liabilities, our operating environment, and
capital and liquidity requirements, and modifies our lending, investing and
deposit gathering strategies accordingly. A committee of the Board of Directors
reviews the ALCO's activities and strategies, the effect of those strategies on
our net interest margin, and the effect that changes in market interest rates
would have on the economic value of our loan and securities portfolios as well
as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending,
investing, and deposit activities. We emphasize the origination of commercial
mortgage loans, commercial business loans and residential fixed-rate mortgage
loans that are repaid monthly and bi-weekly, fixed-rate commercial mortgage
loans, adjustable-rate residential and consumer loans. Depending on market
interest rates and our capital and liquidity position, we may retain all of the
fixed-rate, fixed-term residential mortgage loans that we originate or we may
sell all, or a portion of such longer-term loans, generally on a
servicing-retained basis. We also invest in short-term securities, which
generally have lower yields compared to longer-term investments. Shortening the
average maturity of our interest-earning assets by increasing our investments in
shorter-term loans and securities helps to better match the maturities and
interest rates of our assets and liabilities, thereby reducing the exposure of
our net interest income to changes in market interest rates. These strategies
may adversely affect net interest income due to lower initial yields on these
investments in comparison to longer-term, fixed-rate loans and investments.
Management monitors interest rate sensitivity primarily through the use of
a model that simulates net interest income ("NIM") under varying interest rate
assumptions. Management also evaluates this sensitivity using a model that
estimates the change in the Company and the Bank's net portfolio value ("NPV")
over a range of interest rate scenarios. NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. Both models
assume estimated loan prepayment rates, reinvestment rates and deposit decay
rates that seem reasonable, based on historical experience during prior interest
rate changes.
Estimated Changes in NPV and NIM. The table below sets forth, as of
September 30, 2006, the estimated changes in our NPV and our net interest income
that would result from the designated instantaneous changes in the U.S. Treasury
yield curve. Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results.
------------------------------------------------------ -----------------------------------------------------
Estimated Increase (Decrease) Increase (Decrease) in
Change in in NPV Estimated Estimated Net Interest Income
Interest Rates Estimated ----------------------------------- Net Interest ---------------------------------
(basis points) NPV Amount Percent Income Amount Percent
- ------------------ --------------- --------------- ---------------- ---------------- --------------- --------------
(Dollars in thousands)
+300 $ 377,249 $ (87,366) -18.8% $ 83,196 $ (7,987) -8.8%
+200 415,342 (49,273) -10.6% 86,023 (5,160) -5.7%
+100 441,645 (22,970) -4.9% 88,710 (2,473) -2.7%
0 464,615 - 0.0% 91,183 - 0.0%
-100 478,105 13,490 2.9% 93,010 1,827 2.0%
-200 478,151 13,536 2.9% 93,717 2,534 2.8%
The table set forth above indicates that at September 30, 2006, in the
event of an immediate 200 basis point decrease in interest rates, we would be
expected to experience a 2.9% increase in NPV and a 2.8% 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 10.6% decrease in NPV and a
5.7% decrease in net interest income.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest
53
income table presented above assumes that the composition of our interest-rate
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and, accordingly, the data does not
reflect any actions management may undertake in response to changes in interest
rates. The table also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or the repricing characteristics of specific assets and liabilities.
Accordingly, although the NPV and net interest income table provides an
indication of our sensitivity to interest rate changes at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on our net interest
income and will differ from actual results.
During the past fiscal year, the federal funds rate has increased 150
basis points from 3.75% to 5.25% while U.S. Treasury rates in the five year
maturities have risen 38 basis points increased from 4.20% to 4.58%. U.S.
Treasury 10 year notes have increased by 55 basis points from 4.20% to 4.75%.
The disproportional lower rate of increase on longer term maturities has
completely flattened the yield curve which has in fact, become inverted at
various times this past year. The flat-to-inverted yield curve effectively
increased the rate paid on interest-bearing deposits at a faster pace than the
rate earned on term investments and fixed rate loans in the Bank's portfolio.
The continued existence of a flat or inverted yield curve could cause further
disintermediation of deposits into higher yielding liabilities and further
increase the rate paid for short term borrowings while receiving little benefit
on the yield earned on assets that are invested in periods beyond the period of
short term interest rates. In addition, continued flattening could cause a
further decline in the market value of available sale securities without a
commensurate change in the notional market value of liabilities used in the
calculation of "NPV".
ITEM 8. Financial Statements and Supplementary Data
- ------------------------------------------------------
The following are included in this item:
(A) Report of Management on Internal Control Over Financial Reporting
(B) Report of Independent Registered Public Accounting Firm - Financial
Statements
(C) Report of Independent Registered Public Accounting Firm - Internal Control
Over Financial Reporting
(D) Consolidated Statements of Financial Condition as of September 30, 2006
and 2005
(E) Consolidated Statements of Income for the years ended September 30, 2006,
2005 and 2004
(F) Consolidated Statements of Changes in Stockholders' Equity for the years
ended September 30, 2006, 2005 and 2004
(G) Consolidated Statements of Cash Flows for the years ended September 30,
2006, 2005 and 2004
(H) Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial
data) is provided in Note 21 of the Notes to Consolidated Financial Statements.
54
Report of Management on Internal Control Over Financial Reporting
-----------------------------------------------------------------
The Board of Directors and Stockholders
Provident New York Bancorp:
The management of Provident New York Bancorp ("the Company") is
responsible for establishing and maintaining effective internal control over
financial reporting. The Company's system of internal controls is designed to
provide reasonable assurance to the Company's management and board of directors
regarding the preparation and fair presentation of published financial
statements in accordance with U.S. generally accepted accounting principles.
All internal control systems have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the Company's internal control over financial
reporting as of September 30, 2006. This assessment was based on criteria for
effective internal control over financial reporting established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, we
have concluded that, as of September 30, 2006, the Company's disclosure controls
and procedures and internal control over financial reporting are effective.
The Company's independent registered public accounting firm has issued an
audit report on our assessment of, and the effective operation of, the Company's
internal control over financial reporting as of September 30, 2006. This report
appears on the following page.
/s/ George Strayton
----------------------------------
By: George Strayton
President and Chief Executive Officer
(Principal Executive Officer)
December 11, 2006
/s/ Paul Maisch
----------------------------------
By: Paul Maisch
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 11, 2006
55
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Provident New York Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Provident New York Bancorp and subsidiaries as of September 30,
2006 and 2005 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of September 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2006, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of September 30, 2006, based on the
criteria established in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated December 11, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
- ------------------
New York, New York
December 11, 2006
56
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Provident New York Bancorp:
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control Over Financial Reporting, that
Provident New York Bancorp and subsidiaries (the Company) maintained effective
internal control over financial reporting as of September 30, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of September 30, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company and subsidiaries as of September 30, 2006 and 2005, and
the related consolidated statements of income, changes in stockholders' equity,
cash flows for each of the years in the three-year period ended September 30,
2006, and our report dated December 11, 2006 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
New York, New York
December 11, 2006
57
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2006 and 2005
(Dollars in thousands, except per share data)
Assets 2006 2005
----------- -----------
Cash and due from banks $ 57,293 $ 64,117
Securities (including $608,383 and $297,359 pledged as collateral
for borrowings and deposits in 2006 and 2005, respectively):
Available for sale, at fair value (note 4) 951,729 822,952
Held to maturity, at amortized cost (fair value of $ 60,876
and $71,151 in 2006 and 2005, respectively) (note 5) 60,987 70,949
----------- -----------
Total securities 1,012,716 893,901
----------- -----------
Loans held for sale 7,473 --
Loans (note 6):
One- to four-family residential mortgage loans 462,996 456,794
Commercial real estate, commercial business and construction loans 787,086 713,471
Consumer loans 223,476 191,808
Allowance for loan losses (20,373) (21,047)
----------- -----------
Total loans, net 1,453,185 1,341,026
----------- -----------
Federal Home Loan Bank ("FHLB") stock, at cost 33,518 21,333
Accrued interest receivable (note 7) 13,228 10,594
Premises and equipment, net (note 8) 31,739 32,101
Goodwill (note 3) 159,817 157,656
Core deposit and other intangible assets (note 3) 14,189 14,607
Bank owned life insurance 39,308 37,667
Deferred income taxes, net (note 11) 8,526 10,596
Other assets (notes 6, 11 and 12) 10,345 14,725
----------- -----------
Total assets $ 2,841,337 $ 2,598,323
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 1,729,659 $ 1,726,401
FHLB and other borrowings (including repurchase agreements of
$332,576 and $145,567 at September 30, 2006 and 2005,
respectively) (note 10) 682,739 442,203
Mortgage escrow funds (note 6) 4,612 4,122
Other (note 11) 19,041 30,440
----------- -----------
Total liabilities 2,436,051 2,203,166
----------- -----------
Commitments and contingencies (notes 16 and 17) Stockholders' equity (notes 1
and 15):
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized;
none issued or outstanding) -- --
Common stock (par value $0.01 per share; 75,000,000 shares authorized;
45,929,552 shares issued; 42,699,046 shares
and 43,505,659 shares outstanding in 2006 and 2005, respectively) 459 459
Additional paid-in capital 343,574 345,631
Unallocated common stock held by employee stock ownership
plan ("ESOP") (note 12) (9,099) (10,045)
Treasury stock, at cost (3,230,506 shares in 2006 and 2,423,893 shares
in 2005) (note 15) (36,973) (28,195)
Common stock awards under recognition and retention plan
("RRP") (note 12) -- (8,810)
Retained earnings 114,927 104,484
Accumulated other comprehensive loss, net of taxes (note 13) (7,602) (8,367)
----------- -----------
Total stockholders' equity 405,286 395,157
----------- -----------
Total liabilities and stockholders' equity $ 2,841,337 $ 2,598,323
=========== ===========
See accompanying notes to consolidated financial statements
58
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended September 30, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
2006 2005 2004
-------- -------- --------
Interest and dividend income:
Loans, including fees $ 95,531 $ 81,674 $ 54,531
Securities 38,565 33,665 20,231
Other earning assets 1,520 832 184
-------- -------- --------
Total interest and dividend income 135,616 116,171 74,946
-------- -------- --------
Interest expense:
Deposits (note 9) 26,802 16,076 7,901
Borrowings (note 10) 24,057 13,324 5,081
-------- -------- --------
Total interest expense 50,859 29,400 12,982
-------- -------- --------
Net interest income 84,757 86,771 61,964
Provision for loan losses (note 6) 1,200 750 800
-------- -------- --------
Net interest income after provision for loan losses 83,557 86,021 61,164
-------- -------- --------
Non-interest income:
Deposit fees and service charges 10,689 10,351 6,570
Net gain on sales of securities available for sale (note 4) -- 369 2,455
Title insurance fees 1,700 1,560 --
Bank owned life insurance 1,641 1,790 552
Investment management fees 1,490 828 525
Previously unrecognized low income housing
partnership investment -- 681 --
Other (note 6) 1,632 1,428 1,033
-------- -------- --------
Total non-interest income 17,152 17,007 11,135
-------- -------- --------
Non-interest expense:
Compensation and employee benefits (note 12) 32,182 31,573 23,001
Stock-based compensation plans (note 12) 5,826 2,960 2,790
Occupancy and office operations (note 17) 11,435 9,587 6,741
Advertising and promotion 2,445 3,102 2,050
Professional fees 3,450 2,908 2,655
Data and check processing 3,088 4,767 3,634
Merger integration costs (note 3) -- 1,124 773
Amortization of intangible assets (note 3) 3,288 3,939 2,063
ATM/debit card expense 1,565 1,357 807
Other 7,977 9,265 6,632
-------- -------- --------
Subtotal 71,256 70,582 51,146
Establishment of charitable foundation -- -- 5,000
-------- -------- --------
Total non-interest expense 71,256 70,582 56,146
-------- -------- --------
Income before income tax expense 29,453 32,446 16,153
Income tax expense (note 11) 9,258 11,204 5,136
-------- -------- --------
Net income $ 20,195 $ 21,242 $ 11,017
======== ======== ========
Earnings per common share (note 14):
Basic $ 0.49 $ 0.49 $ 0.30
Diluted 0.49 0.49 0.29
See accompanying notes to consolidated financial statements
59
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity Y
ears Ended September 30, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
Accumulated
Other Total
Additional Unallocated Common Compre- Stock-
Common Paid-in ESOP Stock Awards Treasury Retained hensive holders'
Stock Capital Shares Under RRP Stock Earnings Loss Equity
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at October 1, 2003 82 $ 38,032 $ (1,597) $ (506) $ (7,780) $ 85,398 $ 3,482 $ 117,857
Net income -- -- -- -- -- 11,017 -- 11,017
Other comprehensive loss (note 13) -- -- -- -- -- -- (3,779) (3,779)
---------
Total comprehensive income 7,238
Reorganization and common stock
offering (476) 185,254 -- -- 7,680 -- -- 192,458
Purchase of ENB Holding Co., Inc.
(3,969,671 shares) 40 39,657 -- -- -- -- -- 39,697
Establishment of ESOP Plan (998,650
shares) -- -- (9,987) -- -- -- -- (9,987)
Formation of Charitable Foundation 4 3,996 -- -- -- -- -- 4,000
Cash dividends paid ($0.15 per
common share) -- -- -- -- -- (5,008) -- (5,008)
Purchases of treasury stock (36,794
shares) -- -- -- -- (432) -- -- (432)
ESOP shares allocated or committed
to be released for allocation
(145,850 shares) -- 1,166 730 -- -- -- -- 1,896
Vesting of RRP shares -- -- -- 506 -- -- -- 506
Stock option transactions, net 1 1,220 -- -- 100 (34) -- 1,287
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2004 397 269,325 (10,854) -- (432) 91,373 (297) 349,512
Net income -- 21,242 21,242
Other comprehensive loss (note 13) -- (8,070) (8,070)
---------
Total comprehensive income 13,172
Purchase of Warwick Community
Bancorp, Inc. ("WCBI")
(6,257,896 shares) 62 74,531 -- -- -- -- -- 74,593
Tax benefits:
Elimination of WCBI RRP Plan -- 276 -- -- -- -- -- 276
Stock-based compensation plans -- 265 -- -- -- -- -- 265
RRP awards -- -- -- (9,789) 9,803 (14) -- --
Stock option transactions, net -- 58 -- -- 695 (650) -- 103
ESOP shares allocated or committed
to be released for allocation
(161,250 shares) -- 1,176 809 -- -- -- -- 1,985
Vesting of RRP shares -- -- -- 979 -- -- -- 979
Purchase of treasury stock
(3,206,318 shares) (38,261) (38,261)
Cash dividends paid ($0.17 per
common share) -- -- -- -- -- (7,467) -- (7,467)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2005 459 345,631 (10,045) (8,810) (28,195) 104,484 (8,367) 395,157
Net income 20,195 20,195
Other comprehensive (loss)/income
(note 13) 765 765
---------
Total comprehensive income 20,960
Reclassification in accordance with
SFAS No.123R -- (8,810) -- 8,810 -- -- -- --
Purchase of Hudson Valley Investment
Advisors, Inc. (208,331 shares) -- 57 -- -- 2,683 -- -- 2,740
Deferred compensation transactions -- 1,220 -- -- -- -- -- 1,220
Stock option transactions, net -- 1,510 -- -- 2,130 (1,393) -- 2,247
ESOP shares allocated or committed
to be released for allocation
(212,622 shares) -- 1,651 946 -- -- -- -- 2,597
RRP awards -- (311) -- -- 307 4 -- --
Vesting of RRP shares -- 1,822 -- -- -- -- -- 1,822
Other RRP transactions -- 804 -- -- (562) -- -- 242
Purchase of treasury stock
(1,161,894 shares) -- -- -- -- (13,336) -- -- (13,336)
Cash dividends paid ($0.20 per
common share) -- -- -- -- -- (8,363) -- (8,363)
---------
Balance at September 30, 2006 459 $ 343,574 $ (9,099) $ -- $ (36,973) $ 114,927 $ (7,602) $ 405,286
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
60
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 2006, 2005 and 2004
(Dollars in thousands)
2006 2005 2004
--------- --------- ---------
Cash flows from operating activities:
Net income $ 20,195 $ 21,242 $ 11,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,200 750 800
Depreciation and amortization of premises
and equipment 4,049 3,227 2,381
Amortization of intangibles 3,288 3,939 2,063
Gain on sales of securities available for sale -- (369) (2,455)
Gain on sales of loans held for sale (117) (206) (320)
Gain on sales of fixed assets -- -- (73)
Net amortization of premiums and discounts
on securities 2,957 4,398 2,661
ESOP and RRP expense 4,771 2,964 2,402
Stock option compensation expense 1,129 -- --
Originations of loans held for sale (16,022) (19,255) (14,638)
Proceeds from sales of loans held for sale 8,666 20,316 16,467
Increase in cash surrender value of bank owned life insurance (1,641) (1,418) (552)
Deferred income tax (benefit) expense 1,886 3,261 (1,076)
Net changes in accrued interest receivable
and payable (523) (786) 208
Other adjustments (principally net changes in other
assets and other liabilities) (6,011) (3,573) (3,239)
--------- --------- ---------
Net cash provided by operating activities 23,827 34,490 15,646
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (258,996) (385,270) (468,417)
Held to maturity (22,610) (23,673) (12,245)
Proceeds from maturities, calls and other principal payments on
securities:
Available for sale 128,413 146,597 91,256
Held to maturity 32,486 23,872 19,634
Proceeds from sales of securities available for sale -- 61,522 163,263
Cash paid for securities purchased, not yet settled (7,392) -- --
Loan originations (624,524) (496,117) (342,456)
Loan principal payments 511,680 421,991 278,011
Purchase of FHLB stock, net (12,185) (3,481) (2,027)
Purchase of Warwick Community Bancorp, Inc. -- 164,486 --
Purchase of ENB Holding Co., Inc. -- -- 60,355
Purchase of HSBC South Fallsburg Branch -- 18,938 --
Purchase of Hudson Valley Investment Advisors, Inc., net of cash
and cash equivalents acquired (2,622) -- --
Increase in bank owned life insurance -- (9,684) --
Purchases of premises and equipment (3,883) (6,096) (3,631)
Proceeds from sales of fixed assets 196 -- 434
Proceeds from sales of other real estate owned -- -- 135
Other investing activities 331 -- (55)
--------- --------- ---------
Net cash used in investing activities (259,106) (86,915) (215,743)
--------- --------- ---------
61
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
Years Ended September 30, 2006, 2005 and 2004
(Dollars in thousands)
2006 2005 2004
--------- --------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits $ 3,366 $ (11,671) $ 43,121
Net increase in borrowings 243,459 68,636 50,152
Net (decrease) increase in mortgage escrow funds 490 (2,910) (1,423)
Common stock offering proceeds, net -- -- 192,363
Treasury shares purchased (13,336) (38,261) (432)
Stock option transactions 737 103 125
Shares purchased for ESOP plan -- -- (9,987)
Formation of charitable foundation -- -- 4,000
Recapitalization related to second-step stock conversion -- -- 95
Tax benefits generated from equity transactions 640 541 1,162
Other stock-based compensation transactions 1,462 -- --
Cash dividends paid (8,363) (7,467) (5,008)
--------- --------- ---------
Net cash provided by financing activities 228,455 8,971 274,168
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents $ (6,824) $ (43,454) $ 74,071
Cash and cash equivalents at beginning of year 64,117 107,571 33,500
--------- --------- ---------
Cash and cash equivalents at end of year $ 57,293 $ 64,117 $ 107,571
Supplemental information:
Interest payments $ 48,748 $ 28,361 $ 8,948
Income tax payments 2,530 8,511 4,461
Acquisition of Hudson Valley Investment Advisors, Inc. (2006),
Warwick Community Bancorp, Inc. (2005) and
ENB Holding Co., Inc. (2004), accounted for
using the purchase method:
Fair value of assets acquired (incl. intangible assets) $ 5,240 $ 806,114 $ 406,267
Fair value of liabilities assumed -- 658,919 329,797
--------- --------- ---------
Net fair value $ 5,240 $ 147,195 $ 76,470
--------- --------- ---------
Cash portion of purchase transaction $ 2,500 $ 72,601 $ 36,773
Stock portion of purchase transaction 2,740 74,594 39,697
--------- --------- ---------
Total consideration paid for acquisitions $ 5,240 $ 147,195 $ 76,470
========= ========= =========
Cash received from HSBC branch purchase $ -- $ 18,938 $ --
Loans transferred to real estate owned -- -- 112
Net change in unrealized gains recorded on securities
available for sale 1,118 13,494 (6,130)
Change in deferred taxes on unrealized gains on securities
available for sale (466) 5,375 2,447
Issuance of RRP shares 311 9,789 --
See accompanying notes to consolidated financial statements
62
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Reorganization and Stock Offerings
Initial Public Offering
On January 7, 1999, Provident Bank (the Bank) completed its reorganization
into a mutual holding company structure (the Reorganization). As part of
the Reorganization, the Bank converted from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank (the Conversion).
The Bank became the wholly owned subsidiary of Provident Bancorp, Inc., a
federal corporation ("Provident Federal"), which became the majority-owned
subsidiary of Provident Bancorp, MHC ("the Mutual Holding Company").
Provident Bancorp, Inc. issued a total of 8,280,000 common shares on
January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the
public (the Offering) and 4,416,000 shares (or 53.33%) issued to the
Mutual Holding Company. The net proceeds from the sale of shares to the
public amounted to $37,113. Provident Bancorp, Inc. utilized net proceeds
of $24,000 to make a capital contribution to the Bank. The Company's
employee stock ownership plan (ESOP) purchased 309,120 shares (or 8% of
the number of shares sold in the Offering) in open market transactions,
during January and February 1999, at a total cost of $3,760.
Second Step Conversion
On January 14, 2004 Provident Bancorp, Inc. completed its stock offering
in connection with the second-step conversion from a mutual holding
company, a federal corporation, to a publicly held stock holding company,
incorporated in the State of Delaware. In anticipation of the second-step
conversion the Board of Directors of the MHC formed a Delaware corporation
known as "Provident Bancorp, Inc." Concurrent with the public stock
offering of shares, representing the former ownership interest of the MHC,
the MHC ceased to exist and Provident Federal was replaced by the new
Provident Bancorp. Inc.
As a result of the stock offering and conversion, the Bank was a wholly
owned subsidiary of Provident Bancorp, Inc. (Parent), which changed its
name as described below, to a publicly held bank holding company.
Collectively, the Bank and Parent company are referred to herein as the
"Company." In addition, the Company simultaneously completed its
acquisition of E.N.B. Holding Company, Inc., ("ENB") located in
Ellenville, New York (see Note 3 "Acquisitions").
Provident Bancorp, Inc. sold 19,573,000 shares of common stock at $10.00
per share to depositors of the Bank as of June 30, 2002 and September 30,
2003. The new holding company also issued 400,000 shares of common stock
and contributed $1.0 million in cash to the Provident Bank Charitable
Foundation. In addition, each outstanding share of common stock of
Provident Federal, as of January 14, 2004 was exchanged for 4.4323 new
shares of the Company's common stock.
Cash was paid in lieu of the issuance of fractional shares. In connection
with the Conversion, the number of shares of authorized but un-issued
preferred stock was unchanged and the amount of common stock authorized
was increased to 75,000,000 shares par value $0.01. The Conversion was
accounted for as reorganization in corporate form, with no change in the
historical basis of the Company's assets and liabilities. Outstanding
shares for purposes of calculating prior year per share amounts have been
adjusted to reflect to the exchange ratio applied in the Conversion.
63
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Prior year share data within the consolidated statements of condition have
not been restated for the exchange ratio.
Costs related to the Offering, primarily marketing fees paid to the
Company's investment banking firm, professional fees, registration fees,
and printing and mailing costs, were $3.5 million and accordingly, net
offering proceeds were $192.2 million.
On June 29, 2005, Provident Bancorp, Inc. changed its name to Provident
New York Bancorp in order to differentiate itself from the numerous bank
holding companies with similar names. It began trading on the NASDAQ under
the stock symbol "PBNY" on that date. Prior to that date its common stock
traded under the stock symbol "PBCP."
(2) Nature of Business and Summary of Significant Accounting Policies
The Bank is a community bank offering financial services to individuals
and businesses primarily in Rockland and Orange Counties, New York and the
contiguous Sullivan, Ulster and Putnam Counties, New York and Bergen
County, New Jersey. The Bank's principal business is accepting deposits
and, together with funds generated from operations and borrowings,
investing in various types of loans and securities. The Bank is a
federally-chartered savings association and its deposits are insured up to
applicable limits by the Deposit Insurance Fund of the Federal Deposit
Insurance Corporation (FDIC) as a result of the merger of the Savings
Insurance Fund and the Bank Insurance Funds of the FDIC effective March
31, 2006. The Office of Thrift Supervision (OTS) is the primary regulator
for the Bank and for Provident New York Bancorp. 83% of the Bank's loans
are collateralized or dependent on real estate.
(a) Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of
Provident New York Bancorp, Hardenburgh Abstract Title Company, which
provides title searches and insurance for residential and commercial
real estate, the Bank, Hudson Valley Investment Advisors, LLC, a
registered investment advisor, and the Bank's wholly owned
subsidiaries. These subsidiaries are (i) Provident Municipal Bank
(PMB) which is a limited-purpose, New York State-chartered commercial
bank formed to accept deposits from municipalities in the Company's
market area, (ii) Provident REIT, Inc. and WSB Funding, Inc. which
are real estate investment trusts that hold a portion of the
Company's real estate loans, (iii) Provest Services Corp. I, which
has invested in a low-income housing partnership, and (iv) Provest
Services Corp. II, which has engaged a third-party provider to sell
mutual funds and annuities to the Bank's customers. Intercompany
transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and
expense. Actual results could differ significantly from these
estimates. An estimate that is particularly susceptible to
significant near-term change is the allowance for loan losses, which
is discussed below.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation. Effective September 30, 2003, $371 was
reclassified from the allowance for loan losses to a reserve for
contingent loan commitments. On September 30, 2004, 2005 and 2006,
respectively, an
64
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
additional $334, $256 and $395 were reclassified. All previous
information has been adjusted to reflect this reclassification. For
purposes of reporting cash flows, cash equivalents (if any) include
highly liquid, short-term investments such as overnight federal
funds.
(b) Securities
Securities include US Treasury, US Government Agency, municipal and
corporate bonds, mortgage backed securities, collateralized mortgage
obligations, marketable and equity securities.
The Company can classify its securities among three categories: held
to maturity, trading, and available for sale. Management determines
the appropriate classification of the Company's securities at the
time of purchase.
Held-to-maturity securities are limited to debt securities for which
management has the intent and the Company has the ability to hold to
maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities held principally
for the purpose of selling them in the near term. These securities
are reported at fair value, with unrealized gains and losses included
in earnings. The Company does not engage in security trading
activities.
All other debt and marketable equity securities are classified as
available for sale. These securities are reported at fair value, with
unrealized gains and losses (net of the related deferred income tax
effect) excluded from earnings and reported in a separate component
of stockholders' equity (accumulated other comprehensive income or
loss). Available-for-sale securities include securities that
management intends to hold for an indefinite period of time, such as
securities to be used as part of the Company's asset/liability
management strategy or securities that may be sold in response to
changes in interest rates, changes in prepayment risks, the need to
increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest
income on a level-yield basis over the period to maturity or call
date. The cost of securities sold is determined using the specific
identification method. Unrealized losses are charged to earnings when
management determines that the decline in fair value of a security is
other than temporary.
Securities deemed to be other-than-temporarily impaired are
permanently written down from their original cost basis to reflect
the adjusted fair value subsequent to a measurement for impairment.
The impairment is deemed other-than-temporary if there are serious
credit concerns regarding a particular debt issuer, or severe
fluctuation in interest rates. The other-than-temporary adjustment is
charged to current earnings in the period of measurement. The method
employed to determine the loss in value is covered in Statement of
Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer", which covers the requisite
treatment for purchased loans with potential credit loss and/or those
which return a lower than expected yield.
(c) Loans
Loans (other than loans held for sale) are reported at amortized cost
less the allowance for loan losses. Mortgage loans originated and
held for sale in the secondary market (if any) are reported at the
lower of aggregate cost or estimated fair value. Fair value is
estimated based on outstanding investor commitments or, in the
absence of such commitments, based on current investor yield
65
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
requirements. Net unrealized losses, if any, are recognized in a
valuation allowance by a charge to earnings. Interest income on loans
is accrued on a level yield method.
A loan is placed on non-accrual status when management has determined
that the borrower may be unable to meet contractual principal or
interest obligations, or when payments are 90 days or more past due,
unless well secured and in the process of collection. Accrual of
interest ceases and, in general, uncollected past due interest is
reversed and charged against current interest income, related to the
current year and interest, recorded in the prior year, is charged to
the allowance for loan losses. Interest payments received on
non-accrual loans, including impaired loans, are not recognized as
income unless warranted based on the borrower's financial condition
and payment record.
The Company defers nonrefundable loan origination and commitment
fees, and certain direct loan origination costs, and amortizes the
net amount as an adjustment of the yield over the estimated life of
the loan. If a loan is prepaid or sold, the net deferred amount is
recognized in the statement of income at that time. Interest and fees
on loans include prepayment fees and late charges collected. Such
accounts include $959 for 2006 and $901 and $438 reclassified from
non-interest income in 2005 and 2004 to interest income,
respectively.
(d) Allowance for Loan Losses
The allowance for loan losses is established through provisions for
losses charged to earnings. Losses on loans (including impaired
loans) are charged to the allowance for loan losses when management
believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when
realized.
The allowance for loan losses is an amount that management believes
is necessary to absorb probable losses on existing loans that may
become uncollectible, based on evaluations of the collectability of
the loans. Management's evaluations, which are subject to periodic
review by the OTS, take into consideration factors such as the
Company's past loan loss experience, changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific
problem loans and collateral values, and current economic conditions
that may affect the borrowers' ability to pay. Future adjustments to
the allowance for loan losses may be necessary, based on changes in
economic and real estate market conditions, further information
obtained regarding known problem loans, results of regulatory
examinations, the identification of additional problem loans, and
other factors.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that it will be unable to
collect all principal and interest contractually due. Certain loans
are individually evaluated for collectability in accordance with the
Company's ongoing loan review procedures (principally commercial real
estate, commercial business and construction loans). Smaller-balance
homogeneous loans are collectively evaluated for impairment, such as
residential mortgage loans and consumer loans. Impaired loans are
based on one of three measures -- the present value of expected
future cash flows discounted at the loan's effective interest rate,
the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of an
impaired loan is less than its recorded investment, an impairment
loss is recognized as a charge to the allowance for loan losses.
66
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(e) Mortgage Servicing Assets
The cost of an originated mortgage loan that is sold with servicing
retained is allocated between the loan and the servicing right. The
cost allocated to the retained servicing right is capitalized as a
separate asset and amortized thereafter in proportion to, and over
the period of, estimated net servicing income. Capitalized mortgage
servicing rights are included in other assets and are assessed for
impairment based on the fair value of those rights, and impairment
losses are recognized in a valuation allowance by charges to income.
(f) Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) of New York, the
Bank is required to hold a certain amount of FHLB stock. This stock
is a non-marketable equity security and, accordingly, is reported at
cost.
(g) Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets, which range from three to 40 years. Leasehold improvements
are amortized on a straight-line basis over the terms of the
respective leases, including renewal options, or the estimated useful
lives of the improvements, whichever is shorter. Routine holding
costs are charged to expense as incurred, while significant
improvements are capitalized.
(h) Goodwill and Other Intangible Assets
Goodwill recorded in the acquisitions is not amortized to expense,
but instead, is evaluated for impairment at least annually. The core
deposit intangibles recorded in acquisitions are amortized to expense
using an accelerated method over their estimated lives of
approximately eight years, and are evaluated for impairment at least
annually. Impairment losses on intangible assets are charged to
expense, if and when they occur.
(i) Real Estate Owned
Real estate properties acquired through loan foreclosures are
recorded initially at estimated fair value, less expected sales
costs, with any resulting write-down charged to the allowance for
loan losses. Subsequent valuations are performed by management, and
the carrying amount of a property is adjusted by a charge to expense
to reflect any subsequent declines in estimated fair value. Fair
value estimates are based on recent appraisals and other available
information. Routine holding costs are charged to expense as
incurred, while significant improvements are capitalized. Gains and
losses on sales of real estate owned are recognized upon disposition.
Real estate owned is included in other assets.
67
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(j) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities
to a counterparty under an agreement to repurchase the identical
securities at a fixed price on a future date. These agreements are
accounted for as secured financing transactions since the Company
maintains effective control over the transferred securities and the
transfer meets other specified criteria. Accordingly, the transaction
proceeds are recorded as borrowings and the underlying securities
continue to be carried in the Company's securities portfolio.
Disclosure of the pledged securities is made in the consolidated
statements of financial condition if the counterparty has the right
by contract to sell or repledge such collateral.
(k) Income Taxes
Net deferred taxes are recognized for the estimated future tax
effects attributable to "temporary differences" between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax laws or rates is recognized in income tax expense in
the period that includes the enactment date of the change.
A deferred tax liability is recognized for all temporary differences
that will result in future taxable income. A deferred tax asset is
recognized for all temporary differences that will result in future
tax deductions, subject to reduction of the asset by a valuation
allowance in certain circumstances. This valuation allowance is
recognized if, based on an analysis of available evidence, management
determines that it is more likely than not that some portion, or all
of the deferred tax asset will not be realized. The valuation
allowance is subject to ongoing adjustment based on changes in
circumstances that affect management's judgment about the
realizability of the deferred tax asset. Adjustments to increase or
decrease the valuation allowance are charged or credited,
respectively, to income tax expense.
(l) Stock-Based Compensation Plans
Compensation expense is recognized for the ESOP equal to the fair
value of shares that have been allocated or committed to be released
for allocation to participants. Any difference between the fair value
at that time and the ESOP's original acquisition cost is charged or
credited to stockholders' equity (additional paid-in capital). The
cost of ESOP shares that have not yet been allocated or committed to
be released for allocation is deducted from stockholders' equity.
The Company 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 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 June
15, 2005. As of October 1, 2005, the Company began 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
68
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 such as restricted stock
grants (RRPs).
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, vested or modified after the date
of adoption. During 2006 the Company issued 141,000 new stock-based
option awards and recognized total non-cash stock-based compensation
cost of $1,129 primarily for shares awarded during the transition
period, along with the fair value of these new grants. As of
September 30, 2006, the total remaining unrecognized compensation
cost related to non-vested stock options was $3.7 million. In
addition to the recording requirements, the Company has disclosure
requirements under SFAS No. 123R.
The Company's stock-based compensation plans allow for accelerated
vesting when employees retire under circumstance in accordance with
the terms of the plans. Under SFAS No. 123R, grants issued subsequent
to adoption of SFAS 123R, which are subject to such accelerated
vesting, are expensed over the shorter of the time to retirement age
or the vesting schedule in accordance with the grant. Thus the
vesting period can be far less than the plan's five-year vesting
period depending upon the age of the grantee. As of September 30,
2006, 400,860 restricted stock shares and 383,824 stock options were
potentially subject to accelerated vesting, but will not be expensed
over a shorter time period, unless acceleration is deemed to have
occurred. During 2006, the Company recognized expense associated with
the acceleration of 30,100 restricted stock shares. The Company
granted 5,000 stock options which will be expensed over a shorter
period, reflecting the potential for acceleration.
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 years ended September 30, 2005 and 2004:
-----------------------
2005 2004
---------- ----------
Net income, as reported $ 21,242 $ 11,017
Add: total stock-based compensation expense
included in net income as reported,
net of related tax effects 641 345
Deduct: stock option
expense determined under
the fair-value-based method,
net of related tax effects (2,125) (539)
---------- ----------
Pro forma net income $ 19,758 $ 10,823
========== ==========
Earnings per share:(1)
Basic, as reported $ 0.49 $ 0.30
========== ==========
Basic, pro forma 0.46 0.29
========== ==========
Diluted, as reported 0.49 0.29
========== ==========
Diluted, pro forma 0.45 0.29
========== ==========
(1) Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the Company's
second-step conversion in January 2004.
69
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The estimated per-share fair value of stock options granted in
fiscal 2006, 2005 and 2004 was $3.68, $3.07, and $2.71, respectively,
using the Black-Scholes option-pricing model with assumptions as
follows for the respective years: dividend yields of 1.6%, 1.4%, and
1.4%; expected volatility rates of 25%, 19%, and 20%; risk-free
interest rates of 4.9%, 4.5%, and 2.7%; and expected option lives of
approximately 8.6 years, 7.9 years, and 4.0 years.
(m) Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding during the period.
Diluted EPS is computed in a similar manner, except that the weighted
average number of common shares is increased to include incremental
shares (computed using the treasury stock method) that would have
been outstanding if all potentially dilutive stock options were
exercised and unvested RRP shares became vested during the periods.
For purposes of computing both basic and diluted EPS, outstanding
shares include all shares issued to the Mutual Holding Company (for
the period outstanding during the year ending September 30, 2004),
but exclude unallocated ESOP shares.
(n) Segment Information
Public companies are required to report certain financial information
about significant revenue- producing segments of the business for
which such information is available and utilized by the chief
operating decision maker. As a community-oriented financial
institution, substantially all of the Company's operations involve
the delivery of loan and deposit products to customers. Management
makes operating decisions and assesses performance based on an
ongoing review of the community banking operation, which constitutes
the Company's only operating segment for financial reporting
purposes.
(3) Acquisitions
The Company has been active in acquisitions over the past several
years. All acquisitions were accounted for using 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 June 1, 2006 the Company acquired the net assets of Hudson Valley
Investment Advisors, Inc. for $2.5 million in cash and 208,331 shares of its
common stock, for total consideration of $5.2 million. In connection with this
acquisition, the Company formed Hudson Valley Investment Advisors, LLC ("HVIA")
as a subsidiary of the Company. In connection with the acquisition, the Company
recorded $2.8 million in amortizable intangible assets and $2.5 million in
goodwill. The amortizable intangible assets consist of $2.3 million of the value
of the non-competition rights and $0.5 million of the value of a customer list.
Such intangible assets are being amortized over 10 years, equal to the term of
the exclusive management contract established with the principal manager of
HVIA. The manager receives a fee, payable quarterly, equal to 50% of the net
revenues, as defined, and is eligible to receive an additional $1.0 million
earnout over a five year period, if certain revenues are achieved. The Company
has an option to purchase the management contract under certain circumstances.
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
70
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Savings Bank, headquartered in Warwick, New York, the Towne Center Bank,
headquartered in Lodi, New Jersey and Hardenburgh Abstract Company of Orange
County, Inc. in Goshen, New York.
On January 14, 2004, the Company completed its acquisition of ENB, located
in Ellenville, New York. ENB was the holding company for Ellenville National
Bank.
On April 23, 2002, the Company completed its acquisition of the National Bank of
Florida ("NBF"), located in Florida, New York.
Summary of Financial Transactions. Below is the summary of the financial
transactions, including a branch purchase in 2005 of an HSBC Bank USA, National
Association ("HSBC") branch office.
HVIA HSBC WSB ENB NBF Total
----------------------------------------------------------------------------------
At Acquisition Date
- -------------------------------------------
Number of shares issued 208,331 -- 6,257,896 3,969,676 -- 10,435,903
Loans acquired $ -- $ 2,045 $ 284,522 $ 213,730 $ 23,112 $ 523,409
Deposits assumed -- 23,319 475,150 327,284 88,182 913,935
Cash paid/(received) 2,500 (18,938) 72,601 36,773 28,100 121,036
Goodwill 2,531 -- 91,576 51,794 13,063 158,964
Core deposit/other intangibles 2,830 1,690 10,395 6,624 1,787 23,326
At September 30, 2006
- -------------------------------------------
Goodwill $ 2,533 $ -- $ 91,671 $ 52,277 $ 13,336 $ 159,817
Accumulated core deposit/other amortization 94 487 3,604 4,419 1,409 10,013
Net core deposit/other intangible 2,736 1,203 6,791 2,205 378 13,313
- ----------------------------------------------
* In addition to the above, the Company also carries $877 in mortgage sericing
rights.
The changes to goodwill, reflected above, are due to tax related items in
connection with acquisitions.
Future Amortization of Core Deposit and Other Intangible Assets. The following
table sets forth the future amortization of core deposit and other intangible
assets:
At September 30, 2006 Amortization
--------------------------- --------------
Less than one year $ 3,039
One to two years 2,599
Two to three years 2,192
Three to four years 1,848
Four to five years 1,358
Beyond five years 2,277
--------------
Total $13,313
==============
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.
71
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Purchase Price Allocation. The following table summarizes the purchase price
allocation relating to the acquisitions of WSB, ENB and HVIA. This allocation is
based on the estimated fair values of assets acquired and liabilities assumed at
the acquisition date.
HVIA WSB ENB
June 1, October 1, January 14,
2006 2004 2004
---------- ---------- ----------
Cash and cash equivalents $ -- $ 83,458 $ 29,218
Securities available for sale -- 302,159 96,960
Loans, net -- 286,511 213,730
Goodwill 2,531 91,576 51,794
Core deposit and other intangible assets 2,830 10,395 6,624
Other assets -- 32,388 8,005
---------- ---------- ----------
Total assets 5,361 806,487 406,331
Deposits -- 480,054 327,284
Other liabilities 121 179,238 2,577
---------- ---------- ----------
Total liabilities assumed -- 659,292 329,861
---------- ---------- ----------
Net assets acquired $ 5,240 $ 147,195 $ 76,470
========== ========== ==========
Consideration paid for acquisitions $ 5,240 $ 147,195 $ 76,470
========== ========== ==========
The Company incurred $1,124 and $773 in costs associated with the integration of
acquisitions into the Company. These costs are included in non- interest expense
for the year ended September 30, 2005 and 2004, respectively.
72
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(4) Securities Available for Sale
The following is a summary of securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
September 30, 2006
- ------------------
Mortgage-backed securities
Fannie Mae $ 404,168 $ 270 $ (7,954) $ 396,484
Freddie Mac 132,921 212 (2,014) 131,119
Other 41,466 139 (508) 41,097
--------- --------- --------- ---------
578,555 621 (10,476) 568,700
--------- --------- --------- ---------
Investment securities
U.S. Government securities 17,012 -- (294) 16,718
Federal agencies 272,494 29 (3,061) 269,462
State and municipal securities 95,405 799 (234) 95,970
Equities 947 7 (75) 879
--------- --------- --------- ---------
385,858 835 (3,664) 383,029
--------- --------- --------- ---------
Total available for sale $ 964,413 $ 1,456 $ (14,140) $ 951,729
========= ========= ========= =========
September 30, 2005
- ------------------
Mortgage-backed securities
Fannie Mae $ 422,867 $ 99 $ (6,356) $ 416,610
Freddie Mac 71,733 9 (1,511) 70,231
Other 28,209 -- (272) 27,937
--------- --------- --------- ---------
522,809 108 (8,139) 514,778
--------- --------- --------- ---------
Investment securities
U.S. Government securities 19,006 -- (398) 18,608
Federal agencies 243,763 -- (4,746) 239,017
State and municipal securities 50,176 87 (572) 49,691
Equities 947 5 (94) 858
--------- --------- --------- ---------
313,892 92 (5,810) 308,174
--------- --------- --------- ---------
Total available for sale $ 836,701 $ 200 $ (13,949) $ 822,952
========= ========= ========= =========
Equity securities principally consist of Freddie Mac and Fannie Mae common and
preferred stock.
73
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of investment
securities available for sale (other than equity securities), by remaining
period to contractual maturity. Actual maturities may differ because certain
issuers have the right to call or prepay their obligations.
September 30, 2006
---------------------------------
Amortized cost Fair Value
--------------- ---------------
Remaining period to contractual maturity
Less than one year $ 183,341 $ 181,521
One to five years 114,678 113,097
Five to ten years 10,861 10,814
Greater than ten years 76,031 76,718
--------------- ---------------
Total $ 384,911 $ 382,150
=============== ===============
Proceeds from sales of securities available for sale during the years ended
September 30, 2005 and 2004 totaled $61,522 and $163,263, respectively. These
sales resulted in gross realized gains of $916, and $2,556 for the years ended
September 30, 2005 and 2004, respectively, and gross realized losses of $547,
and $101 in fiscal 2005 and 2004, respectively. There were no sales of
securities for the year ended September 30, 2006.
Securities, including held to maturity securities, with carrying amounts of
$427,905 and $162,580 were pledged as collateral for borrowings at September 30,
2006 and September 30, 2005, respectively. U.S. Government and municipal
securities with carrying amounts of $180,478 and $134,779 were pledged as
collateral for municipal deposits and other purposes at September 30, 2006 and
September 30, 2005, respectively.
Securities Available for Sale with Unrealized Losses. The following table
summarizes those securities available for sale with unrealized losses,
segregated by the length of time in a continuous unrealized loss position:
Continuous Unrealized Loss Position
----------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2006 Value Losses Value Losses Value Losses
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 71,092 $ (627) $ 392,338 $ (9,849) $ 463,430 $ (10,476)
U.S. Government and agency securities 34,655 (282) 231,584 (3,073) 266,239 (3,355)
State and municipal securities 9,281 (31) 14,409 (203) 23,690 (234)
Equity securities 105 -- 767 (75) 872 (75)
------------------------------------------------------------------------------------------
Total $ 115,133 $ (940) $ 639,098 $ (13,200) $ 754,231 $ (14,140)
==========================================================================================
74
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Continuous Unrealized Loss Position
----------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2005 Value Losses Value Losses Value Losses
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 318,663 $ (4,193) $ 178,500 $ (3,946) $ 497,163 $ (8,139)
U.S. Government and agency securities 162,731 (2,644) 94,895 (2,500) 257,626 (5,144)
State and municipal securities 37,665 (457) 5,546 (115) 43,211 (572)
Equity securities 105 -- 748 (94) 853 (94)
------------------------------------------------------------------------------------------
Total $ 519,164 $ (7,294) $ 279,689 $ (6,655) $ 798,853 $ (13,949)
==========================================================================================
Substantially all of the unrealized losses at September 30, 2006 relate to
investment grade securities and are attributable to changes in market interest
rates subsequent to purchase. There were no securities with unrealized losses
that were individually significant dollar amounts at September 30, 2006. A total
of 55 available for sale securities were in a continuous unrealized loss
position for less than 12 months, and 272 securities for 12 months or longer.
For securities with fixed maturities, there are no securities past due or
securities for which the Company currently believes it is not probable that it
will collect all amounts due according to the contractual terms of the
investment. Because the Company has the ability and intent to hold securities
with unrealized losses until a market price recovery (which, for fixed
maturities, may be until maturity) the Company did not consider these
investments to be other-than-temporarily impaired at September 30, 2006 except
for an investment in Freddie Mac perpetual preferred stock, for which it has
been determined that an impairment loss (in 2005) of $94 existed on a recorded
basis of $935. (See Recent Accounting Standards for discussion of a new
accounting pronouncement that will provide additional guidance with respect to
impairment evaluations).
75
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Securities Held to Maturity
The following is a summary of securities held to maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
September 30, 2006
Mortgage-backed securities
Fannie Mae $ 9,102 $ 56 $ (176) $ 8,982
Freddie Mac 9,138 38 (118) 9,058
Ginnie Mae & other 1,699 50 -- 1,749
---------- ---------- ---------- ----------
19,939 144 (294) 19,789
Investment securities
State and municipal 40,892 323 (288) 40,927
Other 156 5 (1) 160
---------- ---------- ---------- ----------
Subtotal 41,048 328 (289) 41,087
---------- ---------- ---------- ----------
Total held to maturity $ 60,987 $ 472 $ (583) $ 60,876
========== ========== ========== ==========
September 30, 2005
Mortgage-backed securities
Fannie Mae $ 11,504 $ 152 $ (160) $ 11,496
Freddie Mac 12,838 122 (135) 12,825
Ginnie Mae & other 2,369 59 -- 2,428
---------- ---------- ---------- ----------
26,711 333 (295) 26,749
Investment securities
State and municipal 43,931 482 (321) 44,092
Other 307 7 (4) 310
---------- ---------- ---------- ----------
Subtotal 44,238 489 (325) 44,402
---------- ---------- ---------- ----------
Total held to maturity $ 70,949 $ 822 $ (620) $ 71,151
========== ========== ========== ==========
76
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of the amortized cost and fair value of investment
securities held to maturity, by remaining period to contractual maturity. Actual
maturities may differ because certain issuers have the right to call or repay
their obligations.
September 30, 2006
-----------------------
Amortized
cost Fair value
---------- ----------
Remaining period to contractual
maturity:
Less than one year $ 22,593 $ 22,570
One to five years 7,843 7,891
Five to ten years 6,148 6,133
Greater than ten years 4,464 4,493
---------- ----------
Total $ 41,048 $ 41,087
========== ==========
There were no sales of securities held to maturity during the years ended
September 30, 2006, 2005 and 2004.
The following table summarizes those securities held to maturity with unrealized
losses, segregated by the length of time in a continuous unrealized loss
position:
Continuous Unrealized Loss Position
----------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
-----------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2006 Value Losses Value Losses Value Losses
- --------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 1,121 $ (3) $ 10,090 $ (291) $ 11,211 $ (294)
State and municipal securities 18,998 (89) 4,424 (199) 23,422 (288)
Other securities 100 (1) 100 (1)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 20,119 $ (92) $ 14,614 $ (491) $ 34,733 $ (583)
============ ============ ============ ============ ============ ============
77
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Continuous Unrealized Loss Position
----------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
-----------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
As of September 30, 2005 Value Losses Value Losses Value Losses
- --------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 7,336 $ (175) $ 5,595 $ (120) $ 12,931 $ (295)
State and municipal securities 24,504 (161) 3,037 (160) 27,541 (321)
Other securities -- -- 100 (4) 100 (4)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 31,840 $ (336) $ 8,732 $ (284) $ 40,572 $ (620)
============ ============ ============ ============ ============ ============
Substantially all of the unrealized losses on held to maturity securities
at September 30, 2006 relate to investment grade securities or local municipal
general obligation bonds and are attributable to changes in market interest
rates subsequent to purchase. There were no securities with unrealized losses
that were individually significant dollar amounts at September 30, 2006. A total
of 58 held-to-maturity securities were in a continuous unrealized loss position
for less than 12 months, and 32 securities for 12 months or longer. For
securities with fixed maturities, there are no securities past due or securities
for which the Company currently believes it is not probable that it will collect
all amounts due according to the contractual terms of the investment. Because
the Company has the ability and intent to hold securities with unrealized losses
until maturity, the Company did not consider these investments to be
other-than-temporarily impaired at September 30, 2006. (See Recent Accounting
Standards for discussion of a new accounting pronouncement that will provide
additional guidance with respect to impairment evaluations).
78
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(6) Loans
The components of the loan portfolio, excluding loans held for sale, were
as follows:
September 30,
--------------------------
2006 2005
----------- -----------
One- to four-family residential mortgage loans:
Fixed rate $ 406,139 $ 395,463
Adjustable rate 56,857 61,331
----------- -----------
462,996 456,794
----------- -----------
Commercial real estate loans 529,607 497,936
Commercial business loans 160,823 148,825
Construction loans 96,656 66,710
----------- -----------
787,086 713,471
----------- -----------
Consumer loans:
Home equity lines of credit 149,862 134,997
Homeowner loans 55,968 40,221
Other consumer loans 17,646 16,590
----------- -----------
223,476 191,808
----------- -----------
Total loans 1,473,558 1,362,073
Allowance for loan losses (20,373) (21,047)
----------- -----------
Total loans, net $ 1,453,185 $ 1,341,026
=========== ===========
Total loans include net deferred loan origination costs of $2,853 and
$2,110 at September 30, 2006 and September 30, 2005, respectively.
A substantial portion of the Company's loan portfolio is secured by
residential and commercial real estate located in Rockland and Orange
Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam
Counties of New York and Bergen County, New Jersey. The ability of the
Company's borrowers to make principal and interest payments is dependent
upon, among other things, the level of overall economic activity and the
real estate market conditions prevailing within the Company's concentrated
lending area. Commercial real estate and construction loans are considered
by management to be of somewhat greater credit risk than loans to fund the
purchase of a primary residence due to the generally larger loan amounts
and dependency on income production or sale of the real estate.
Substantially all of these loans are collateralized by real estate located
in the Company's primary market area.
79
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The principal balances of non-performing loans were as follows:
2006 2005
------------------------------------------- -------------------------------------------
90 days past due 90 days past due
and still accruing Non-Accrual and still accruing Non-Accrual
-------------------- -------------------- -------------------- --------------------
One- to four-family residential
mortgage loans $ 629 $ 472 $ 1,337 $ 65
Commercial real estate loans 613 2,367 92 --
Commercial business loans 30 459 -- 120
Consumer loans 310 144 -- 27
-------------------- -------------------- -------------------- --------------------
Total non-performing loans 1,582 3,442 $ 1,429 $ 212
==================== ==================== ==================== ====================
Gross interest income that would have been recorded if the foregoing non-accrual
loans had remained current in accordance with their contractual terms totaled
$372, $8, and $163, for the years ended September 30, 2006, 2005 and 2004,
respectively, compared to interest income actually recognized (including income
recognized on a cash basis) of $127, $7, and $119, respectively.
The Company had no recorded investment in impaired loans, as defined by SFAS No.
114, at September 30, 2006 or September 30, 2005. Substantially all of these
loans were collateral-dependent loans measured based on the fair value of the
collateral. The Company determines the need for an allowance for loan impairment
under SFAS No. 114 on a loan-by-loan basis. An impairment allowance was not
required at September 30, 2006 and 2005 due to the adequacy of collateral
values. The Company's average recorded investment in impaired loans was $0 and
$116 during the years ended September 30, 2006 and 2005, respectively.
Activity in the allowance for loan losses is summarized as follows:
Year ended September 30,
--------------------------------
2006 2005 2004
-------- -------- --------
Balance at beginning of year $ 21,047 $ 16,648 $ 10,698
Transfer to reserve for contingent
loan commitments (395) (256) (334)
Provision for loan losses 1,200 750 800
Charge-offs (1,836) (1,153) (484)
Recoveries 357 178 218
Allowance recorded in acquisitions -- 4,880 5,750
-------- -------- --------
Balance at end of year $ 20,373 $ 21,047 $ 16,648
======== ======== ========
80
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Provisions for losses and other activity in the allowance for losses on
real estate owned were insignificant during the years ended September 30,
2006, 2005 and 2004.
Certain residential mortgage loans originated by the Company are sold in
the secondary market. Other non-interest income includes net gains on such
sales of $115 in fiscal 2006, $206 in fiscal 2005, and $320 in fiscal
2004. At September 30, 2006 and 2005 there was $7,473 (student loans) and
$0 in loans held for sale, respectively. Other intangible assets at
September 30, 2006 and 2005 include capitalized mortgage servicing rights
with an amortized cost of $877 and $836, respectively, which are recorded
at the lower of cost or fair market value.
The Company generally retains the servicing rights on mortgage loans sold.
Servicing loans for others involves collecting payments, maintaining
escrow accounts, making remittances to investors and, if necessary,
processing foreclosures. Mortgage loans serviced for others, including
loan participations, totaled approximately $131,291, $131,825 and $128,794
at September 30, 2006, 2005 and 2004, respectively. Mortgage escrow funds
include balances of $507 and $554 at September 30, 2006 and 2005,
respectively, related to loans serviced for others.
(7) Accrued Interest Receivable
The components of accrued interest receivable were as follows:
September 30,
-----------------
2006 2005
------- -------
Loans $ 5,803 $ 4,908
Securities 7,425 5,686
------- -------
Total accrued interest receivable $13,228 $10,594
======= =======
(8) Premises and Equipment, Net
Premises and equipment are summarized as follows:
September 30,
--------------------
2006 2005
-------- --------
Land and land improvements $ 3,986 $ 3,867
Buildings 20,012 21,146
Leasehold improvements 8,733 7,784
Furniture, fixtures, and equipment 22,848 19,328
-------- --------
55,579 52,125
Accumulated depreciation and amortization (23,840) (20,024)
-------- --------
Total premises and equipment, net $ 31,739 $ 32,101
======== ========
81
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(9) Deposits
Deposit balances and weighted average interest rates are summarized as
follows:
September 30,
-------------------------------------
2006 2005
----------------- ----------------
Amount Rate Amount Rate
---------- ---- ---------- ----
Demand deposits:
Retail $ 163,582 --% $ 170,434 --%
Commercial 203,265 -- 214,647 --
Business NOW deposits 50,546 0.50 60,214 0.44
Personal NOW deposits 103,186 0.22 105,730 0.29
Savings deposits 378,337 0.52 481,674 0.53
Money market deposits 238,977 2.24 222,091 1.27
Certificates of deposit 591,766 4.36 471,611 2.94
---------- ----------
Total deposits $1,729,659 1.93% $1,726,401 1.15%
========== ==========
Municipal deposits held by PMB totaled $147.6 million and $116.9 million
at September 30, 2006 and September 30, 2005, respectively. See Note 4,
"Securities Available for Sale," for the amount of securities that are
pledged as collateral for municipal deposits and other purposes.
Certificates of deposit had remaining periods to contractual maturity as
follows:
September 30,
-------------------
2006 2005
-------- --------
Remaining period to contractual maturity:
Less than one year $552,598 $406,181
One to two years 21,353 40,947
Two to three years 12,816 10,131
Greater than three years 4,999 14,352
-------- --------
Total certificates of deposit $591,766 $471,611
======== ========
Certificate of deposit accounts with a denomination of $100 or more
totaled $202,683 and $131,687 at September 30, 2006 and 2005,
respectively. The FDIC generally insures depositor accounts up to $100 as
defined in the applicable regulations.
82
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Interest expense on deposits is summarized as follows:
Years ended September 30,
---------------------------
2006 2005 2004
------- ------- -------
Savings deposits $ 2,258 $ 3,070 $ 1,570
Money market and NOW deposits 4,689 3,155 1,048
Certificates of deposit 19,855 9,851 5,283
------- ------- -------
Total interest expense $26,802 $16,076 $ 7,901
======= ======= =======
(10) FHLB and Other Borrowings
The Company's FHLB and other borrowings and weighted average interest
rates are summarized as follows:
September 30,
------------------------------------------
2006 2005
------------------- -------------------
Amount Rate Amount Rate
-------- -------- -------- --------
By type of borrowing:
Advances $350,163 5.18% $296,636 3.86%
Repurchase agreements 332,576 5.04% 145,567 3.62%
Total borrowings $682,739 5.11% $442,203 3.78%
======== ========
By remaining period to maturity:
Less than one year$ 565,555 5.40% $235,212 3.84%
One to two years 32,180 3.28% 18,115 3.62%
Two to three years 38,266 3.80% 51,719 3.62%
Three to four years 21,337 3.84% 52,450 3.73%
Four to five years 21,560 3.82% 16,313 3.78%
Greater than five years 3,841 4.89% 68,394 3.73%
-------- --------
Total borrowings $682,739 5.11% $442,203 3.78%
======== ========
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 and
securities that have been pledged as collateral under a blanket security
agreement. As of September 30, 2006 and September 30, 2005, the Bank had
pledged mortgages totaling $354,720 and $301,154, respectively. The Bank
had also pledged securities with carrying amounts of $427,905 and $162,580
as of September 30, 2006 and September 30, 2005, respectively, to secure
borrowings. Based on total outstanding borrowings with the FHLB which
totaled $670,091 and $426,656 as of September 30, 2006 and September 30,
2005, the bank had unused borrowing capacity under the FHLB of New York
Line of Credit of $102,592 and $31,625, respectively. The Bank may borrow
an additional amount by pledging securities not required to be pledged for
other purposes with a market value of $406,143 as of September 30, 2006.
83
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Securities repurchase agreements had weighted average remaining terms to
maturity of approximately 0.6 years and 3.4 years at September 30, 2006
and 2005, respectively. Average borrowings under securities repurchase
agreements were $180,744 and $164,541 during the years ended September 30,
2006 and 2005, respectively, and the maximum outstanding month-end balance
was $321,200 and $167,062, respectively.
FHLB borrowings of $85.7 million and $122.1 at September 30, 2006 and 2005
respectively are callable quarterly, at the discretion of the FHLB. These
borrowings have a weighted average remaining term to the contractual
maturity dates of approximately 0.6 years and 3.3 years and weighted
average interest rates of 5.15% and 4.71% at September 30, 2006 and 2005,
respectively. For the year ended September 30, 2006 FHLB called $51.4
million in borrowings assumed in acquisitions and wrote off $1.5 million
in associated premiums reducing interest expense on borrowings by $3.7
million on an annualized basis. No borrowings with associated premiums
were called in prior years. The remaining premium on assumed callable
borrowings is $3.1 million at September 30, 2006.
Interest expense on borrowings consists principally of overnight and
short-term advances, repurchase agreements from FHLB, and was $26.9
million, $15.7 million, and $5.1 million for years ending September 30,
2006, 2005, and 2004, respectively.
(11) Income Taxes
Income tax expense consists of the following:
Years ended September 30,
-----------------------------
2006 2005 2004
-------- -------- --------
Current tax expense:
Federal $ 6,647 $ 7,340 $ 5,556
State 725 603 656
-------- -------- --------
7,372 7,943 6,212
-------- -------- --------
Deferred tax expense (benefit):
Federal 1,526 2,634 (789)
State 360 627 (287)
-------- -------- --------
1,886 3,261 (1,076)
-------- -------- --------
Total income tax expense $ 9,258 $ 11,204 $ 5,136
======== ======== ========
84
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Actual income tax expense differs from the tax computed based on pre-tax income
and the applicable statutory Federal tax rate, for the following reasons:
Years ended September 30,
----------------------------------
2006 2005 2004
-------- -------- --------
Tax at Federal statutory rate $ 10,309 $ 11,356 $ 5,654
State income taxes, net of Federal
tax benefit 705 800 240
Tax-exempt interest (1,372) (653) (460)
Nondeductible portion of ESOP
expense 578 416 408
BOLI income (574) (627) (193)
Low-income housing tax credits (72) (72) (72)
Other, net (316) (16) (441)
-------- -------- --------
Actual income tax expense $ 9,258 $ 11,204 $ 5,136
======== ======== ========
Effective income tax rate 31.4% 34.5% 31.8%
======== ======== ========
85
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are summarized below. The net amount is reported in other assets
or other liabilities in the consolidated statements of financial condition.
September 30,
-----------------------
2006 2005
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 8,326 $ 8,601
Deferred compensation 3,952 3,194
Purchase accounting adjustments 1,509 2,663
Contribution carryforward 388 1,343
Net unrealized loss on securities available for sale 5,096 5,483
Goodwill 764 893
Accrued post retirement expense 990 1,072
LOC reserve 554 393
Other 983 984
---------- ----------
Total deferred tax assets 22,562 24,626
---------- ----------
Deferred tax liabilities:
Undistributed earnings of subsidiary not
consolidated for tax returns purposes (REIT income) 6,909 6,455
Prepaid pension costs 1,564 1,222
Core deposit intangibles 2,766 3,821
Purchase accounting fair value adjustments 639 883
Depreciation of premises and equipment 491 406
Other 1,667 1,243
---------- ----------
Total deferred tax liabilities 14,036 14,030
---------- ----------
Net deferred tax asset $ 8,526 $ 10,596
========== ==========
86
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Based on management's consideration of historical and anticipated future
pre-tax income, as well as the reversal period for the items giving rise
to the deferred tax assets and liabilities, a valuation allowance for
deferred tax assets was not considered necessary at September 30, 2006 and
2005.
The Bank is subject to special provisions in the Federal and New York
State tax laws regarding its allowable tax bad debt deductions and related
tax bad debt reserves. Tax bad debt reserves consist of a defined
"base-year" amount, plus additional amounts accumulated after the base
year. Deferred tax liabilities are recognized with respect to reserves
accumulated after the base year, as well as any portion of the base-year
amount that is expected to become taxable (or recaptured) in the
foreseeable future. The Bank's base-year tax bad debt reserves for Federal
tax purposes were $9,313 at both September 30, 2006 and 2005. The Bank's
tax bad debt reserves for NY State purposes were $44,509 and $46,478 at
September 30, 2006 and 2005, respectively. Associated deferred tax
liabilities of $5,872 and $5,988 have not been recognized at those dates
since the Company does not expect that the Federal base-year reserves
($3,260) and New York State bad debt reserves ($2,612, net of federal
benefit) will become taxable in the foreseeable future. Under the tax
laws, events that would result in taxation of certain of these reserves
include (i) redemptions of the Bank's stock or certain excess
distributions by the Bank to Provident New York Bancorp and (ii) failure
of the Bank to maintain a specified qualifying-assets ratio or meet other
thrift definition tests for New York State tax purposes.
(12) Employee Benefit Plans and Stock-Based Compensation Plans
(a) Pension Plan
The Company has a noncontributory defined benefit pension plan
covering substantially all of its employees. Employees who are
twenty-one years of age or older and have worked for the Company for
one year are eligible to participate in the plan. The Company's
funding policy is to contribute annually an amount sufficient to
meet statutory minimum funding requirements, but not in excess of
the maximum amount deductible for Federal income tax purposes.
Contributions are intended to provide not only for benefits
attributed to service to date, but also for benefits expected to be
earned in the future. As part of the acquisitions of ENB and WSB the
Company assumed the ENB and WSB Pension Plans, both of which were
defined benefit plans. The ENB plan was frozen in connection with
the merger of ENB into the Company. The WSB Pension Plan, which was
already frozen at the time of acquisition, has also been assumed by
the Company.
In April, 2006 the Company approved merging both the ENB and WSB
pension plans into the Provident Bank Pension Plan, effective April
30, 2006. As a result, the discount rate to determine the
accumulated pension obligation was increased from 5.75% to 6.25%.
This reduced unrecognized loss on plan assets from $3.8 million to
$1.8 million. As the unrecognized loss fell to below 10% of the
projected benefit obligation or plan assets, amortization of the
unrecognized loss was discontinued as of April 30, 2006.
In July, 2006 the Board of Directors of the Company approved a
curtailment to the Provident Bank Defined Benefit Pension Plan ("the
Plan") as of September 30, 2006. At that time all benefit accruals
for future service ceased and no new participants may enter the
plan. The purpose of the Plan curtailment was to afford flexibility
in the retirement benefits the Company provides, while preserving
all retirement plan participants' earned and vested benefits, and to
manage the increasing costs associated with the defined benefit
pension plan. The Company recorded a curtailment gain, which reduced
the unrecognized net losses in the Plan by $1.6 million with no gain
or loss recognized in the financial statements of the Company.
87
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In addition, the Board approved amending the Provident Bank 401(k)
and Profit Sharing Plan, a 401(k) plan available to all employees
who are age 21 or older. The amendment to the 401(k) plan will add a
profit sharing contribution for employees, which is expected to be
3% of eligible compensation for fiscal 2007.
The following is a summary of changes in the projected benefit obligation and
fair value of plan assets, together with a reconciliation of the funded status
to the amount of prepaid pension costs reported in other assets in the
consolidated statements of financial condition:
Changes in projected benefit obligation:
Beginning of year $ 30,263 $ 20,904
Service cost 1,232 1,291
Interest cost 1,716 1,606
Actuarial (gain)loss (259) 492
Acquisition of WSB plan -- 6,902
Curtailments (1,642) --
Benefits paid (3,046) (932)
---------- ----------
End of year 28,264 30,263
---------- ----------
Changes in fair value of plan assets:
Beginning of year 29,738 19,644
Actual gain on plan assets 1,794 2,444
Employer contributions 1,631 2,774
Acquisition of WSB plan -- 5,843
Benefits and distributions paid (3,047) (967)
---------- ----------
End of year 30,116 29,738
---------- ----------
Funded status at end of year 1,852 (525)
Unrecognized net actuarial loss 2,076 3,690
Unrecognized prior service cost -- (32)
---------- ----------
Prepaid pension costs $ 3,928 $ 3,133
========== ==========
2006 2005
------- -------
Amounts recognized in the consolidated balance sheet were:
Prepaid benefit cost (asset) $ 3,928 $ 4,964
Accrued benefit cost (liability) -- (1,911)
Pre-tax charge to accumulated other comprehensive income -- 80
------- -------
$ 3,928 $ 3,133
======= =======
88
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A discount rate of 6.0% and a rate of increase in future compensation levels of
0% were used in determining the actuarial present value of the projected benefit
obligation at September 30, 2006 (5.75% and 4.0%, respectively, at September 30,
2005). The weighted average long-term rate of return on plan assets was 7.75%
for fiscal 2006 and 7.21% for fiscal 2005. The discount rate, long-term rate of
return on plan assets and future compensation increase assumptions for the WSB
and ENB Plan at the dates of acquisition were 6.0%, 7.0% and 0.0%, respectively,
for the year ended September 30, 2005.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
2007 $1,221
2008 1,335
2009 1,507
2010 1,711
2011 1,826
2012-2016 11,548
The components of the net periodic pension expense were as follows:
Years ended September 30,
2006 2005 2004
------- ------- -------
Service cost $ 1,232 $ 1,291 $ 787
Interest cost 1,716 1,606 990
Expected return on plan assets (2,209) (1,789) (1,068)
Amortization of prior service cost (11) (11) (13)
Amortization of net transition obligation -- 10 26
Recognized net actuarial loss 129 283 194
------- ------- -------
Net periodic pension expense $ 857 $ 1,390 $ 916
======= ======= =======
Weighted-average pension plan asset allocations based on the fair value of such
assets at September 30, 2006, and target allocations for 2007, by asset
category, are as follows:
Target
September 30, 2006 Allocation 2007
------------------ ---------------
Equity securities 55% 40-60%
Fixed income 42 20-40
Cash 3 0-20
Real Estate 0 0
89
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The expected long-term rate of return assumption as of each
measurement date was determined by taking into consideration asset
allocations as of each such date, historical returns on the types of
assets held, and current economic factors. The Company's investment
policy for determining the asset allocation targets was developed
based on the desire to maximize total return while placing a strong
emphasis on preservation of capital. In general, it is hoped that,
in the aggregate, changes in the fair value of plan assets will be
less volatile than similar changes in appropriate market indices.
Returns on invested assets are periodically compared with target
market indices for each asset type to aid management in evaluating
such returns.
There were no pension plan assets consisting of Provident New
York Bancorp equity securities (common stock) at September 30, 2006
and at September 30, 2005.
The Company makes contributions to its funded qualified
pension plans as required by government regulation or as deemed
appropriate by management after considering the fair value of plan
assets, expected returns on such assets, and the present value of
benefit obligations of the plans. At this time, the Company cannot
reasonably estimate the contributions it will make in 2007.
The Company has also established a non-qualified Supplemental
Executive Retirement Plan to provide certain executives with
supplemental retirement benefits in addition to the benefits
provided by the pension plan, due to amounts limited by the Internal
Revenue Code of 1986, as amended ("IRS Code"). The periodic pension
expense for the supplemental plan amounted to $181,172, and $113 for
the years ended September 30, 2006, 2005 and 2004, respectively. The
actuarial present value of the projected benefit obligation was
$1,376 and $1,373 at September 30, 2006 and 2005, respectively, and
the vested benefit obligation was $1,376 and $1,338 for the same
periods, respectively, all of which is unfunded.
(b) Other Postretirement Benefits Plan
The Company's postretirement health care plan, which is unfunded,
provides optional medical, dental and life insurance benefits to
retirees. In accordance with SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," the cost of
postretirement benefits is accrued over the years in which employees
provide services to the date of their full eligibility for such
benefits. As permitted by SFAS No. 106, the Company has elected to
amortize the transition obligation for accumulated benefits as an
expense over a 20-year period.
90
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Data relating to the postretirement benefit plan follows:
September 30,
------------------
2006 2005
------- -------
Change in accumulated postretirement benefit obligation:
Beginning of year $ 1,363 $ 377
Service cost 26 74
Interest cost 60 116
Actuarial (gain) (378) (1,263)
Plan participants' contributions 27 --
Business combinations -- 2,158
Amendments 38
Benefits paid (73) (99)
------- -------
End of year 1,063 1,363
------- -------
Changes in fair value of plan assets:
Beginning of year -- --
Employer contributions 47 99
Plan participants' contributions 27 --
Benefits paid (74) (99)
------- -------
End of year -- --
------- -------
Funded status 1,063 1,330
Unrecognized net actuarial gain (1,491) (1,296)
Unrecognized service cost 39 11
Unrecognized transition obligation 91 101
------- -------
Accrued benefit obligation $ 2,424 $ 2,514
======= =======
The components of the net postretirement benefit expense were as follows:
For years ended September 30,
2006 2005 2004
------- ------- -------
Service cost $ 26 $ 74 $ 8
Interest cost $ 60 $ 116 $ 23
Amortization of transition obligation $ 10 $ 10 $ 10
Amortization of prior service cost $ 10 $ 5 $ 5
Amortization of actuarial gain $ (143) $ (48) $ (3)
------- ------- -------
Total $ (37) $ 157 $ 43
======= ======= =======
Estimated Future Benefit Payments
The following benefit payments are expected to be paid in future years:
2006 $ 67
2007 64
2008 67
2009 70
2010 72
2011-2015 459
91
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Assumptions used for plan 2006 2005
--------------------------------------------------- ---- ----
Medical trend rate next year 4.50% 4.50%
Ultimate trend rate 4.50% 4.50%
Discount rate 6.00% 6.00%
Discount rate used to value periodic cost 5.75% 6.00%
There is no impact of a 1% increase or decrease in health care trend rate due to
the Company's cap on cost.
(c) Employee Savings Plan
The Company also sponsors a defined contribution plan established
under Section 401(k) of the Internal Revenue Code. Eligible employees
may elect to contribute up to 50% of their compensation to the plan.
The Company currently makes matching contributions equal to 50% of a
participant's contributions up to a maximum matching contribution of
3% of eligible compensation. Voluntary and matching contributions are
invested, in accordance with the participant's direction, in one or a
number of investment options. Savings plan expense was $458, $493,
and $294 for the years ended September 30, 2006, 2005 and 2004,
respectively. Effective after September 30, 2006 the Bank amended the
plan to include a profit sharing component expected to be an
additional 3% of eligible compensation, in addition to the matching
contributions.
(d) Employee Stock Ownership Plan
In connection with the Reorganization and Offering in 1999, Provident
Federal established an ESOP for eligible employees who meet certain
age and service requirements. The ESOP borrowed $3,760 from Provident
Federal and used the funds to purchase 1,370,112 shares of common
stock in the open market subsequent to the Offering. The Bank makes
periodic contributions to the ESOP sufficient to satisfy the debt
service requirements of the loan which will effectively mature
December 31, 2007 and bears interest at the prime rate. The ESOP uses
these contributions, and any dividends received by the ESOP on
unallocated shares, to make principal and interest payments on the
loan.
In connection with the Second-Step Stock Conversion and Offering in
January 2004, the Company established an additional ESOP loan for
eligible employees. The ESOP borrowed $9,987 from Provident New York
Bancorp and used the funds to purchase 998,650 shares of common stock
in the offering. The term of the second ESOP loan is twenty years.
ESOP shares are held by the plan trustee in a suspense account until
allocated to participant accounts. Shares released from the suspense
account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested in
the allocated shares over a period not to exceed five years. Any
forfeited shares are allocated to other participants in the same
proportion as contributions.
ESOP expense was $2,595, $1,993, and $1,896 for the years ended
September 30, 2006, 2005 and 2004, respectively. Through September
30, 2006 and 2005, a cumulative total of 1,332,958 shares and
1,120,336 shares, respectively, have been allocated to participants
or committed to be released for allocation, respectively. The cost of
ESOP shares that have not yet been allocated to participants or
92
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
committed to be released for allocation is deducted from
stockholders' equity (1,035,810 shares with a cost of $9,099 and a
fair value of approximately $14,170 at September 30, 2006 and
1,248,427 shares with a cost of $10,045 and a fair value of
approximately $14,569 at September 30, 2005, respectively).
The Company's ESOP is funded by two loans, in which 186,943 shares
are released each year. The first loan, initiated in connection with
the first public offering, will be paid off in December 2007 and is
expected to result in the release of 137,011 shares annually. The
second loan, initiated in connection with the second step public
offering, matures in December 2023 and is expected to result in the
release of 49,932 shares annually. For the year ended September 30,
2006, the ESOP expense for the shares released under the first and
second loans totaled $1.7 million and $0.9 million, respectively.
Therefore, the Company expects a substantial decrease in ESOP expense
once the first ESOP loan is paid off, and the related shares are
fully released, in December 2007.
A supplemental savings plan has also been established for certain
senior officers to compensate executives for benefits provided under
the Bank's tax qualified plans (employees savings plan and ESOP) that
are limited by the IRS Code. Expense recognized for this plan was
$270, $157, and $198 for the years ended September 30, 2006, 2005 and
2004, respectively. Amounts accrued and recorded in other liabilities
at September 30, 2006 and 2005 were $2.2 million and $2.1 million
respectively.
(e) Recognition and Retention Plan
In February 2000, the Company's stockholders approved the Provident
Bank 2000 Recognition and Retention Plan (the RRP). The principal
purpose of the RRP is to provide executive officers and directors a
proprietary interest in the Company in a manner designed to encourage
their continued performance and service. A total of 856,320 shares
were awarded under the RRP in February 2000, and the grant-date fair
value of these shares of $2,995 was charged to stockholders' equity.
The awards vest at a rate of 20% on each of five annual vesting
dates, the first of which was September 30, 2000. In 2003, 27,413
shares were forfeited and returned to the plan as available for
future grant. In January 2005, the Company's stockholders approved
the Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the
terms of which the Company is authorized to issue up to 798,920
shares of common stock as restricted stock awards. On March 10, 2005
a total of 762,400 shares were awarded under the RRP, and the
grant-date fair value $12.84 per share of the shares of $(9,789) was
charged to stockholders' equity. The awards vested 10% on September
30, 2005. The remainder will vest 20% on each of four annual vesting
dates beginning on September 30, 2006 and 10% on March 10, 2010.
Employees who retire under circumstances in accordance with the terms
of the Plan may be entitled to accelerate the vesting of individual
awards. Such acceleration would require a charge to earnings for the
award shares that would then vest. As of September 30, 2006 400,860
shares were potentially subject to accelerated vesting. The Company
granted an additional 24,000 shares in 2006 at an average grant date
fair value of $12.98, vesting 20% each year.
Under the restricted stock plan, 74,357 shares of authorized but
un-issued shares were reserved for issuance as of September 30, 2006.
The Company also can fund the restricted stock plan with treasury
stock. The fair market value of the shares awarded under the
restricted stock plan is being
93
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
amortized to expense on a straight-line basis over the five year
vesting period of the underlying shares. Compensation expense related
to the restricted stock plan was $2.2 million, $1.0 million and $0.5
million for the year ended September 30, 2006, 2005 and 2004,
respectively. The remaining unearned compensation cost is $6.5
million as of September 30, 2006. On grant date, shares awarded under
the restricted stock plan were transferred from treasury stock at
cost with the difference between the fair market value on the grant
and the cost basis of the shares recorded as a reduction to retained
earnings or an increase to additional paid-in capital, as applicable.
Upon adoption of SFAS No.123R the balance of unearned compensation as
of October 1, 2006 was transferred to additional paid-in capital. The
fair value of the shares awarded, measured as of the grant date
continues to be recognized and amortized on a straight-line basis to
compensation expense over the vesting period of the awards.
A summary of restricted stock award activity under the plan for the
years ended September 30, 2006, 2005 and 2004 is presented below:
Weighted
Average
Number Grant-Date
of Shares Fair Value
------------ ------------
Nonvested shares at October 1, 2003 35,548 $ 15.51
Additional shares from 4.43 stock split January 2004 122,007 3.50
Granted -- --
Vested (157,555) 3.50
Forfeited -- --
------------ ------------
Nonvested shares at September 30, 2004 -- --
Granted 762,400 12.84
Vested (76,240) 12.84
Forfeited -- --
------------ ------------
Nonvested shares at September 30, 2005 686,160 $ 12.84
Granted 24,000 12.98
Vested (169,980) 12.84
Forfeited (34,700) 12.84
------------ ------------
Nonvested shares at September 30, 2006 505,480 $ 12.85
============ ============
The total value of restricted stock vested for fiscal year ended
September 30, 2006, 2005 and 2004 was $2.2 million, $1.0 million and
$0.5 million, respectively.
94
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(f) Stock Option Plan
The Company's stockholders approved the Provident Bank 2000 Stock
Option Plan (the Stock Option Plan) in February 2000. A total of
1,712,640 shares of authorized but unissued common stock was reserved
for issuance under the Stock Option Plan, although the Company may
also fund option exercises using treasury shares. The Company's
stockholders also approved the Provident Bancorp, Inc. 2004 Stock
Incentive Plan. In February 2005 under terms of the plan, a total of
1,997,300 shares of authorized but un-issued common stock was
reserved for issuance under the Stock Option Plan. In March, 2005,
1,718,300 options were granted. Under both plans, options have a
ten-year term and may be either non-qualified stock options or
incentive stock options. Reload options may be granted under the
terms of the 2000 Stock Option Plan and provide for the automatic
grant of a new option at the then-current market price in exchange
for each previously owned share tendered by an employee in a
stock-for-stock exercise. The 2004 Plan options do not contain reload
options. Each option entitles the holder to purchase one share of
common stock at an exercise price equal to the fair market value of
the stock on the grant date. Employees who retire under circumstance,
in accordance with the terms of the Plan, may be entitled to
accelerate the vesting of individual awards. As of September 30, 2006
383,824 shares were potentially subject to accelerated vesting.
The following is a summary of activity in the Stock Option Plan:
Weighted
Shares subject average
to option exercise price
------------ ------------
Outstanding at October 1, 2003 1,213,504 $ 3.92
Granted 191,418 11.77
Exercised (82,059) 3.70
Forfeited -- --
------------ ------------
Outstanding at September 30, 2004 1,322,863 5.05
------------ ------------
Granted 1,741,341 12.84
Exercised (96,521) 4.13
Forfeited (45,377) 12.24
------------ ------------
Outstanding at September 30, 2005 2,922,306 9.61
------------ ------------
Granted 178,629 12.06
Exercised (181,457) 4.67
Forfeited (239,515) 12.73
------------ ------------
Outstanding at September 30, 2006 2,679,963 $ 9.86
============ ============
At September 30, 2006 and 2005, respectively, there were 411,358 and
312,843 shares available for future grant. The aggregate intrinsic value of
options outstanding as of September 30, 2006 was $10.2 million. The
aggregate intrinsic value represents the total pre-tax intrinsic value (the
difference between the Company's closing stock price on the last trading
date of the year ended September 30, 2006 and the exercise price,
multiplied by the number of in the money options).
95
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of stock options at September 30, 2006 follows:
Outstanding Exercisable
--------------------------------------------- ---------------------------------------------
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 $5.59 804,019 $ 3.65 3.4 804,019 $ 3.65 3.4
$6.09 to $11.85 248,806 10.29 7.3 173,806 9.74 7.1
$12.42 to $13.40 1,627,128 12.87 8.6 616,258 12.84 8.5
------------- ------------- ------------- ------------- ------------- -------------
2,679,963 $ 9.86 6.9 1,594,083 $ 7.86 5.8
============= =============
The aggregate intrinsic value of options currently exercisable as of
September 30, 2006 was $9.3 million.
The Company used an option pricing model to estimate the grant date
present value of stock options granted. The weighted-average estimated value per
option granted was $4.08 in 2006, $3.07 in 2005 and $2.71 in 2004. The values
were calculated using the following weighted-average assumptions: an option term
of 10 years (representing the estimated period between grant date and exercise
date based on historical data); a risk-free interest rate of 4.9% in 2006, 5.0%
in 2005 and 2.7% in 2004 (representing the yield on a U.S. Treasury security
with a remaining term equal to the expected option term); expected volatility of
25% in 2006, 19% in 2005 and 20% in 2004 and estimated dividend yields of 1.6%
in 2006, 1.4% in 2005 and 1.4% in 2004 (representing the approximate annualized
cash dividend rate paid with respect to a share of common stock at or near the
grant date).
(13) Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss that are reported directly in stockholders'
equity, such as the change during the period in the after-tax net
unrealized gain or loss on securities available for sale. The Company has
reported its comprehensive income in the consolidated statements of
changes in stockholders' equity.
96
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The components of other comprehensive income (loss) are summarized as
follows:
Year ended September 30,
-----------------------------
2006 2005 2004
------- ------- -------
Net unrealized holding gain (loss)
rising during the year on securities
available for sale, net of related
income taxes of $466, $5,185 and
$1,463, respectively $ 652 $(7,777) $(2,195)
Reclassification adjustment for net
realized gains included in net
income, net of related income
taxes of $0 , $148 and $982 ,
respectively -- (221) (1,473)
------- ------- -------
652 (7,998) (3,668)
Minimum liability on retirement plans, net of
related income taxes of $75, $48 and $76 113 (72) (111)
------- ------- -------
$ 765 $(8,070) $(3,779)
======= ======= =======
The Company's accumulated other comprehensive loss included in
stockholders' equity at September 30, 2006 and 2005 consists of the
after-tax net unrealized loss of $7,532 and $8,184 respectively and
minimum liability for retirement plans of $70 and $183 at September 30,
2006, and 2005, respectively.
97
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(14) Earnings Per Common Share
The following is a summary of the calculation of earnings per share (EPS):
Years ended September 30,
------------------------------------
2006 2005 2004
---------- ---------- ----------
Net income $ 20,195 $ 21,242 $ 11,017
========== ========== ==========
Weighted average common shares
outstanding for computation of
basic EPS(1) (2) 40,953 43,033 36,809
Common-equivalent shares due to
the dilutive effect of stock
options and RRP awards(2) (3) 489 670 635
---------- ---------- ----------
Weighted average common shares
for computation of diluted EPS 41,442 43,703 37,444
========== ========== ==========
Earnings per common share:(2)
Basic $ 0.49 $ 0.49 $ 0.30
========== ========== ==========
Diluted 0.49 0.49 0.29
========== ========== =========
(1) Includes all shares issued to the Mutual Holding Company (2004, up
until January 14, 2004), but excludes unallocated ESOP shares.
(2) Prior period share information has been adjusted to reflect the
4.4323-to-one exchange ratio in connection with the Company's
second-step conversion in January 2004.
(3) Represents incremental shares computed using the treasury stock
method.
As of September 30, 2006 and 2005 there were 1,657,080 and 966,325 stock
options, respectively, that were considered anti-dilutive for these
periods.
(15) Stockholders' Equity
(a) Regulatory Capital Requirements
OTS regulations require banks to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%, a minimum ratio
of Tier 1 (core) capital to total adjusted assets of 4.0%, and a
minimum ratio of total (core and supplementary) capital to
risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required
to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized
institution. Such actions could have a direct material effect on the
institution's financial statements.
98
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The regulations establish a framework for the classification of
banks into five categories: well capitalized; adequately
capitalized; undercapitalized; significantly undercapitalized; and
critically undercapitalized. Generally, an institution is considered
well-capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a
total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based, in part, on specific
quantitative measures of assets, liabilities and certain
off-balance-sheet items, as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the OTS about capital components, risk
weightings and other factors. These capital requirements apply only
to the Bank, and do not consider additional capital retained by
Provident New York Bancorp.
Management believes that, as of September 30, 2006 and 2005 the Bank
met all capital adequacy requirements to which it was subject.
Further, the most recent OTS notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's actual regulatory capital amounts
and ratios at September 30, 2006 and 2005, compared to the OTS
requirements for minimum capital adequacy and for classification as a
well-capitalized institution. PMB is also subject to certain regulatory
capital requirements, which it satisfied as of September 30, 2006 and
2005.
OTS requirements
--------------------------------------------------
Minimum capital Classification as well
Bank actual adequacy capitalized
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
September 30, 2006:
Tangible capital $ 208,820 7.8% $ 40,080 1.5% $ -- --
Tier 1 (core) capital 208,820 7.8 106,879 4.0 133,599 5.0%
Risk-based capital:
Tier 1 208,820 11.6 -- 107,947 6.0
Total 229,193 12.7 143,929 8.0 179,912 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
========== ========== ==========
Tangible and Tier 1 capital amounts represent the stockholder's equity of
the Bank, less intangible assets and after-tax net unrealized gains
(losses) on securities available for sale and any other disallowed assets,
such as deferred income taxes. Total capital represents Tier 1 capital
plus the allowance for loan losses up to a maximum amount equal to 1.25%
of risk-weighted assets.
99
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a reconciliation of the Bank's total stockholder's equity
under accounting principles generally accepted in the United States of
America ("GAAP") and its regulatory capital:
September 30,
----------------------
2006 2005
--------- ---------
Total GAAP stockholder's equity (Provident Bank) $ 373,530 $ 367,230
Goodwill and certain intangible assets (167,035) (169,704)
Other disallowed assets (deferred income taxes) (5,207) (6,882)
Unrealized losses on securities available for sale
included in other comprehensive losses 7,532 8,184
--------- ---------
Tangible, tier 1 core and
Tier 1 risk-based capital 208,820 198,828
Allowance for loan losses 20,373 21,294
--------- ---------
Total risk-based capital $ 229,193 $ 220,122
========= =========
(b) Dividend Payments
Under OTS regulations, savings associations such as the Bank generally may
declare annual cash dividends up to an amount equal to the sum of net
income for the current year and net income retained for the two preceding
years. Dividend payments in excess of this amount require OTS approval.
After September 30, 2006 the amount that can be paid to Provident New York
Bancorp by Provident Bank is $22,939 plus net income in fiscal 2007 for
Provident Bank. The Bank paid $20 million dividends to Provident New York
Bancorp during the year ended September 30, 2006 ($0 during the year ended
September 30, 2005 and $15 million during the year ended September 30,
2004).
Unlike the Bank, Provident New York Bancorp is not subject to OTS
regulatory limitations on the payment of dividends to its stockholders.
(c) Stock Repurchase Programs
The Company announced its second stock repurchase program in the second
quarter of 2005, which authorized the repurchase up to of 2,200,000
shares, of which 177,129 shares remain to be repurchased. The total number
of shares repurchased under repurchase programs during the fiscal year
ended September 30, 2006, was 1,161,894 at a total cost of $13.3 million.
In February 2006, the Company announced its third stock repurchase
program, authorizing the purchase of 2,100,000 shares. As of September 30,
2006 the Company had authorization to repurchase 2.3 million shares of
common stock.
100
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(d) Liquidation Rights
Upon completion of the second-step conversion in January 2004, the Bank
established a special "liquidation account" in accordance with OTS
regulations. The account was established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders (as defined in
the plan of conversion) in an amount equal to the greater of (i) the
Mutual Holding Company's ownership interest in the retained earnings of
Provident Federal as of the date of its latest balance sheet contained in
the prospectus, or (ii) the retained earnings of the Bank at the time that
the Bank reorganized into the Mutual Holding Company in 1999. Each
Eligible Account Holder and Supplemental Eligible Account Holder that
continues to maintain his or her deposit account at the Bank would be
entitled, in the event of a complete liquidation of the Bank, to a pro
rata interest in the liquidation account prior to any payment to the
stockholders of the Holding Company. The liquidation account is reduced
annually on December 31 to the extent that Eligible Account Holders and
Supplemental Eligible Account Holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases in deposits do
not restore such account holder's interest in the liquidation account. The
Bank may not pay cash dividends or make other capital distributions if the
effect thereof would be to reduce its stockholder's equity below the
amount of the liquidation account.
(16) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to
off-balance-sheet financial instruments that involve, to varying degrees,
elements of credit risk and interest rate risk in addition to the amounts
recognized in the consolidated financial statements. The contractual or
notional amounts of these instruments, which reflect the extent of the
Company's involvement in particular classes of off-balance-sheet financial
instruments, are summarized as follows:
September 30,
-----------------
2006 2005
------- -------
Lending-related instruments:
Loan origination commitments 62,147 26,150
Unused lines of credit 362,584 229,957
Letters of credit 20,884 17,141
The contractual amounts of loan origination commitments, unused lines of
credit and standby letters of credit represent the Company's maximum
potential exposure to credit loss, assuming (i) the instruments are fully
funded at a later date, (ii) the borrowers do not meet the contractual
payment obligations, and (iii) any collateral or other security proves to
be worthless. The contractual amounts of these instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. Substantially all of these lending-related instruments have
been entered into with customers located in the Company's primary market
area described in Note 6 ("Loans".)
101
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loan origination commitments are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments have fixed expiration dates (generally ranging
up to 60 days) or other termination clauses, and may require payment of a
fee by the customer. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if any,
obtained by the Company upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral varies but may include
mortgages on residential and commercial real estate, deposit accounts with
the Company, and other property. The Company's loan origination
commitments at September 30, 2006 provide for interest rates ranging
principally from 5.63% to 9.00%.
Unused lines of credit are legally-binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Lines of credit generally have fixed expiration dates or
other termination clauses. The amount of collateral obtained, if deemed
necessary by the Company, is based on management's credit evaluation of
the borrower.
Standby letters of credit are commitments issued by the Company on behalf
of its customer in favor of a beneficiary that specify an amount the
Company can be called upon to pay upon the beneficiary's compliance with
the terms of the letter of credit. These commitments are primarily issued
in favor of local municipalities to support the obligor's completion of
real estate development projects. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending
loan facilities to customers.
As of September 30, 2006, the Company had $20,884 in outstanding letters
of credit, of which $8,221 were secured by cash collateral.
(17) Commitments and Contingencies
Certain premises and equipment are leased under operating leases with
terms expiring through 2025. The Company has the option to renew certain
of these leases for terms of up to five years. Future minimum rental
payments due under non-cancelable operating leases with initial or
remaining terms of more than one year at September 30, 2006 are $1,954 for
fiscal 2007, $1,986 for fiscal 2008, $1,915 for fiscal 2009, $1,632 for
fiscal 2010, $1,578 for fiscal 2011 and a total of $13,438 for later
years. Occupancy and office operations expense includes net rent expense
of $1,892, $1,666, and $1,435, for the years ended September 30, 2006,
2005 and 2004, respectively.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management, after consultation with legal
counsel, does not anticipate losses on any of these claims or actions that
would have a material adverse effect on the consolidated financial
statements.
(18) Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information for those financial
instruments for which it is practicable to estimate fair value, whether or
not such financial instruments are recognized in the consolidated
statements of financial condition. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
102
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Quoted market prices are used to estimate fair values when those prices
are available, although active markets do not exist for many types of
financial instruments. Fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. These estimates are highly subjective
and require judgments regarding significant matters, such as the amount
and timing of future cash flows and the selection of discount rates that
appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. Since these
estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values disclosed in accordance with SFAS
No. 107 do not reflect any premium or discount that could result from the
sale of a large volume of a particular financial instrument, nor do they
reflect possible tax ramifications or estimated transaction costs.
The following is a summary of the carrying amounts and estimated fair values of
financial assets and liabilities (none of which were held for trading purposes):
September 30,
--------------------------------------------------------
2006 2005
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 57,293 $ 57,293 $ 64,117 $ 64,117
Securities available for sale 951,729 951,729 822,952 822,952
Securities held to maturity 60,987 60,876 70,949 71,151
Loans 1,460,658 1,462,463 1,340,065 1,333,200
Accrued interest receivable 13,228 13,183 10,954 10,954
FHLB stock 33,518 33,518 21,333 21,333
Financial liabilities:
Deposits 1,729,659 1,727,403 1,726,401 1,722,712
FHLB borrowings 682,739 681,972 442,203 441,750
Mortgage escrow funds 4,612 4,603 4,122 4,115
The following paragraphs summarize the principal methods and assumptions used by
management to estimate the fair value of the Company's financial instruments.
(a) Securities
The estimated fair values of securities were based on quoted market
prices.
(b) Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. For valuation purposes, the total loan portfolio was
segregated into adjustable-rate and fixed-rate categories. Fixed-rate
loans were further segmented by type, such as residential mortgage,
commercial mortgage, commercial business and consumer loans. Loans were
also segmented by maturity dates.
103
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Fair values were estimated by discounting scheduled future cash flows
through estimated maturity using a discount rate equivalent to the current
market rate on loans that are similar with regard to collateral, maturity
and the type of borrower. The discounted value of the cash flows was
reduced by a credit risk adjustment based on loan categories. Based on the
current composition of the Company' s loan portfolio, as well as past
experience and current economic conditions and trends, the future cash
flows were adjusted by prepayment assumptions that shortened the estimated
remaining time to maturity and therefore affected the fair value
estimates.
(c) Deposits
In accordance with SFAS No. 107, deposits with no stated maturity
(such as savings, demand and money market deposits) were assigned
fair values equal to the carrying amounts payable on demand.
Certificates of deposit were segregated by account type and original
term, and fair values were estimated by discounting the contractual
cash flows. The discount rate for each account grouping was
equivalent to the current market rates for deposits of similar type
and maturity.
These fair values do not include the value of core deposit
relationships that comprise a significant portion of the Company's
deposit base. Management believes that the Company's core deposit
relationships provide a relatively stable, low-cost funding source
that has a substantial value separate from the deposit balances.
(d) FHLB Borrowings
Fair values of FHLB borrowings were estimated by discounting the
contractual cash flows. A discount rate was utilized for each
outstanding borrowing equivalent to the then-current rate offered by
the FHLB on borrowings of similar type and maturity.
(e) Other Financial Instruments
The other financial assets and liabilities listed in the preceding
table have estimated fair values that approximate the respective
carrying amounts because the instruments are payable on demand or
have short-term maturities and present relatively low credit risk and
interest rate risk.
The fair values of the Company's off-balance-sheet financial
instruments described in Note 16 ("Off Balance Sheet Financial
Instruments") were estimated based on current market terms (including
interest rates and fees), considering the remaining terms of the
agreements and the credit worthiness of the counterparties. At
September 30, 2006 and 2005, the estimated fair values of these
instruments approximated the related carrying amounts, which were
insignificant.
(19) Recent Accounting Standards and Interpretations
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 158, Employers' Accounting for
Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) ("SFAS 158"). For defined benefit
post-retirement plans, SFAS 158 requires that the funded status be recognized in
the statement of financial position, that assets and obligations that determine
funded status be measured as of the end of the employer's fiscal year, and that
changes in funded status be recognized in comprehensive income in the year the
changes
104
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
occur. SFAS 158 does not change the amount of net periodic benefit cost included
in net income or address measurement issues related to defined benefit
post-retirement plans. The requirement to recognize funded status is effective
for fiscal years ending after December 15, 2006. The requirement to measure
assets and obligations as of the end of the employer's fiscal year is effective
for fiscal years ending after December 15, 2008. The unrecognized components of
defined benefit pension plans and retiree medical plans will be recorded on the
balance sheet at September 30, 2007. If such amounts were recorded as of
September 30, 2006, accumulated other comprehensive loss would be increased by
$605. The adoption of SFAS 158 is not expected to have a material impact on the
consolidated earnings or financial position of the Company.
In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157, Fair Value Measurements ("SFAS 157"). This statement defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles ("GAAP"), and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2006. The adoption of SFAS 157 is not
expected to have a material impact on the consolidated earnings or financial
position of the Company.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 108 to require quantification of financial
statement misstatements under both the "rollover approach" and the "iron curtain
approach". The "rollover approach" quantifies a misstatement based on the amount
of the error originating in the current year income statement, but ignores the
effects of correcting the portion of the current year balance sheet misstatement
that originated in prior years. The "iron curtain approach" quantifies a
misstatement based on the effects of correcting the misstatement existing in the
balance sheet at the end of the current year, irrespective of the misstatement's
year(s) of origination. The provisions of SAB No. 108 must be applied to
financial statements for fiscal years ending after November 15, 2006. The
Company does not anticipate that the quantification of financial statement
misstatements pursuant to the provisions of SAB No. 108 will result in any
material impact to the Company's financial statements at December 31, 2006.
At its September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a
final consensus on Issue 06-04, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer to
share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106 or Accounting Principles Board
Opinion ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that
the purchase of a split-dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan or under APB No. 12 if it is not part of
a plan. Issue 06-04 is effective for annual or interim reporting periods
beginning after December 15, 2007. The provisions of Issue 06-04 should be
applied through either a cumulative effect adjustment to retained earnings as of
the beginning of the year of adoption or retrospective application. The Company
has endorsement split-dollar life insurance policies that it inherited through
certain acquisitions that are associated with employees who are no longer
active, which it is currently in the process of evaluating to determine the
impact of adoption of Issue 06-04. The Company is currently assessing the
financial statement impact of implementing EITF 06-04.
In July 2006, the FASB issued FIN 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48") which attempts to set out a consistent framework for preparers
to use to determine the appropriate level of tax
105
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
reserves to maintain for "uncertain tax positions." This interpretation of FASB
Statement No. 109 uses a two-step approach wherein a tax benefit is recognized
if a position is more likely than not to be sustained. The amount of the benefit
is then measured to be the highest tax benefit which is greater than fifty
percent likely to be realized. FIN 48 also sets out disclosure requirements to
enhance transparency of a Company's tax reserves. FIN 48 is effective January 1,
2007. We are currently assessing the financial statement impact of implementing
FIN 48.
In July 2006, the FASB adopted FASB Staff Position No. 13-2, "Accounting for a
Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction" ("FSP 13-2"). FSP 13-2 requires that
a change or projected change in the timing of cash flows relating to income
taxes generated by a leveraged lease shall be accounted for in accordance with
the guidance in paragraph 46 of SFAS No. 13, "Accounting for Leases." That is,
the projected timing of income tax cash flows generated by a leveraged lease
transaction shall be reviewed annually or more frequently if events or changes
in circumstances indicate that a change in timing has occurred or is projected
to occur. If, during the lease term, the projected timing of income tax cash
flows generated by a leveraged lease is revised, the rate of return and the
allocation of income to positive investment years shall be recalculated from
inception of the lease following the method described in paragraph 44 of SFAS
No. 13. The guidance in FSP 13-2 shall be applied to fiscal years beginning
after December 15, 2006. The cumulative effect of applying the provisions of FSP
13-2 shall be reported as an adjustment to the opening balance of retained
earnings as of the beginning of the period of adoption. The Company does not
expect that the adoption of FSP 13-2 will have a material effect on its
financial position or results of operations.
In March 2006, the FASB issued Statement of Financial Accounting Standards No.
156 ("SFAS 156"), "Accounting for Servicing of Financial Assets," an amendment
of FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS 156 requires all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable, and permits for subsequent measurement using either
fair value measurement with changes in fair value reflected in earnings or the
amortization and impairment requirements of Statement No. 140. The subsequent
measurement of separately recognized servicing assets and servicing liabilities
at fair value eliminates the necessity for entities that manage the risks
inherent in servicing assets and servicing liabilities with derivatives to
qualify for hedge accounting treatment and eliminates the characterization of
declines in fair value as impairments or direct write-downs. SFAS 156 is
effective for the fiscal year beginning after September 15, 2006. We are
currently assessing the financial statement impact of implementing SFAS156.
In February 2006, the FASB issued Statement of Financial Accounting Standard No.
155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB
Statements No. 133 and 140, ("SFAS 155"). SFAS 155 amends FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and SFAS 140. SFAS 155 resolves issues addressed in SFAS 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets." SFAS 155 permits fair value
re-measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which
interest-only and principal-only strips are not subject to the requirements of
SFAS 133, establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives, or
that are hybrid financial instruments that contain an embedded derivative
requiring bifurcation, clarifies that concentrations of credit risk in the form
of subordination are not embedded derivatives, and amends SFAS 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 140") to eliminate the prohibition securities available for
sale with unrealized losses securities available for sale with unrealized losses
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial
106
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
interest other than another derivative financial instrument. SFAS 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006. The
adoption of SFAS 155 is not expected to have a material impact on the
consolidated earnings or financial position of the Company.
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 2004, the FASB Issued Statement of Financial Accounting Standards
No. 123R (Statement 123R), "Share-Based Payments," the provisions of which
become effective for the corporation in fiscal 2006. This Statement eliminates
the alternative to use APB No. 25's intrinsic value method of accounting that
was provided in Statement 123 as originally issued. Statement 123R requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
While the fair-value-based method prescribed by Statement 123R is similar to the
fair-value-based method disclosed under the provisions of Statement 123 in most
respects, there some differences. The Company began using the Black-Scholes
method beginning in fiscal 2006 and recorded an expense of $1.1 million or $0.7
million after tax and the diluted earnings per share impact was $0.02. This
impact includes the effect of reload options or forfeitures or options
accelerations due to termination or retirement of personnel, the effect of which
could not be previously estimated with any degree of certainty.
Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1") was issued. EITF 03-1 provides guidance for determining the
meaning of "other-than-temporarily impaired" and its application to certain debt
and equity securities within the scope of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") and investments accounted for under the cost method.
The guidance requires that investments which have declined in value due to
credit concerns or solely due to changes in interest rates ("other than
temporary impairment") must be recorded for as are loans under the AICPA's
Statement of Position 03-3 ("SOP 03-3") on purchased loans, which provides
guidance on the treatment of potential credit losses (unrecoverable principle)
and decreased, or lower then expected yields.
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to
Loan Commitments." SAB No. 105 requires that when a company is recognizing and
valuing a loan commitment at fair value, only differences between the guaranteed
interest rate in the loan commitment and a market interest rate should be
included. Any expected future cash flows related to the customer relationships
or loan servicing should be excluded from the fair value measurement. The
expected future cash flows that are excluded from the fair-value determination
include anticipated fees for servicing the funded loan, late-payment charges,
other ancillary fees, or other cash flows from servicing rights. The guidance in
SAB No. 105 is effective for mortgage-loan commitments that are accounted for as
derivatives and are entered into after March 31, 2004. The adoption of the
provisions of this standard did not have a material impact on the results of
operations.
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
107
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
effective for loans acquired in fiscal years beginning after December 15, 2004.
The SOP addresses accountingfor 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effects of the method used on reported results. The
provisions of this statement did not have a material impact on the consolidated
financial statements.
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of
Provident New York Bancorp and the related condensed statements of income
and cash flows:
-------------------
2006 2005
-------- --------
Assets:
Cash $ 13,077 $ 10,544
Loan receivable from ESOP 10,054 10,779
Investment in Provident Bank 373,734 366,836
Non-bank subsidiaries 6,747 1,408
Other assets 2,932 6,473
-------- --------
Total assets $406,544 $396,040
======== ========
Liabilities $ 1,258 $ 883
Stockholders' equity 405,286 395,157
-------- --------
Total liabilities and
stockholders' equity $406,544 $396,040
======== ========
108
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Year ended September 30,
--------------------------------
2006 2005 2004
-------- -------- --------
Condensed statements of income
Interest income 847 $ 777 $ 919
Dividends from Provident Bank 20,000 -- 15,000
Dividends from non-bank subsidiaries 600 -- --
Gain on sale of securities available for sale -- -- 471
Non-interest expense (3,724) (1,485) (5,207)
Income tax expense 924 232 1,311
-------- -------- --------
Income before equity in undistributed
earnings of subsidiaries 18,647 (476) 12,494
Equity in undistributed earnings of:
Provident Bank 1,598 21,341 (1,477)
Non-bank subsidiaries (50) 377 --
-------- -------- --------
Net income $ 20,195 $ 21,242 $ 11,017
======== ======== ========
109
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Year ended September 30,
-----------------------------------
2006 2005 2004
--------- --------- ---------
Condensed statements of cash flows Cash flows from operating activities:
Net income $ 20,195 $ 21,242 $ 11,017
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of
Provident Bank (1,598) (21,341) 1,477
Non-bank subsidiaries 50 (377) --
Net gain on sales of securities -- -- 471
Other adjustments, net 5,324 (1,377) 4,295
--------- --------- ---------
Net cash provided by (used in)
operating activities 23,971 (1,853) 17,260
--------- --------- ---------
Cash flows from investing activities:
Acquisitions 2,740 74,593 39,697
Purchases of securities available for sale -- -- (41,021)
Proceeds from sales of securities available for sale -- -- 42,847
Origination of ESOP loan -- -- (9,987)
ESOP loan principal repayments 725 711 376
--------- --------- ---------
Net cash provided by investing activities 3,465 75,304 31,912
--------- --------- ---------
Cash flows from financing activities:
Common stock offering proceeds net -- -- 192,363
Capital contribution to subsidiaries (5,390) (92,549) (160,404)
Treasury shares purchased (13,336) (38,261) (432)
Cash dividends paid (8,363) (7,467) (5,008)
Stock option transactions including RRP 2,247 103 125
Shares purchased for ESOP plan -- -- (9,987)
Formation of Charitable Foundation -- -- 4,000
Other equity transactions (61) 541 1,257
--------- --------- ---------
Net cash (used in) provided by financing activities (24,903) (137,633) 21,914
--------- --------- ---------
Net increase (decrease) in cash 2,533 (64,182) 71,086
Cash at beginning of year 10,544 74,726 3,640
--------- --------- ---------
Cash at end of year $ 13,077 $ 10,544 $ 74,726
========= ========= =========
110
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations
for the years ended September 30, 2006 and 2005:
First Second Third Fourth
quarter quarter quarter quarter
---------- ---------- ---------- ----------
Year ended September 30, 2006
Interest and dividend income $ 31,404 32,742 $ 34,946 $ 36,524
Interest expense 10,054 11,739 13,262 15,804
---------- ---------- ---------- ----------
Net interest income 21,350 21,003 21,684 20,720
Provision for loan losses 300 300 300 300
Non-interest income 4,071 3,964 4,361 4,756
Non-interest expense 17,417 18,144 18,041 17,654
---------- ---------- ---------- ----------
Income before income
tax expense 7,704 6,523 7,704 7,522
Income tax expense 2,545 2,118 2,143 2,452
---------- ---------- ---------- ----------
Net income $ 5,159 $ 4,405 $ 5,561 $ 5,070
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.13 $ 0.11 $ 0.14 $ 0.12
Diluted 0.12 0.11 0.13 0.12
========== ========== ========== ==========
Year ended September 30, 2005
Interest and dividend income $ 28,214 28,420 $ 29,166 $ 30,369
Interest expense 6,310 6,863 7,643 8,584
---------- ---------- ---------- ----------
Net interest income 21,904 21,557 21,523 21,785
Provision for loan losses 150 150 225 225
Non-interest income 3,823 3,705 5,178 4,303
Non-interest expense 17,709 17,068 18,141 17,665
---------- ---------- ---------- ----------
Income before income
tax expense 7,868 8,044 8,335 8,198
Income tax expense 2,853 2,864 2,676 2,810
---------- ---------- ---------- ----------
Net income $ 5,015 $ 5,180 $ 5,659 $ 5,388
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.11 $ 0.12 $ 0.13 $ 0.13
Diluted 0.11 0.12 0.13 0.13
========== ========== ========== ==========
111
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
ITEM 9A. Controls and Procedures.
- ---------------------------------
Under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule l3a-15(e) and l5d-l5(e) under the
Exchange Act) as of the end of the period covered by this annual report. Based
upon that evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that, as of the end of the period covered by this annual
report, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
There were no changes in our internal control over financial reporting
during fourth fiscal quarter or, to our knowledge, in other factors, that have
materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.
ITEM 9B. Other Information
- ---------------------------
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The "Proposal I -- Election of Directors" section of Provident Bancorp's
Proxy Statement for the Annual Meeting of Stockholders to be held in February
2007 (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- --------------------------------
The "Proposal I -- Election of Directors" section of the Proxy Statement
is incorporated herein by reference.
112
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
- --------------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
Provident Bancorp does not have any equity compensation programs that were
not approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2006, regarding
equity compensation that has been approved by stockholders.
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans Number of securities to be Number of securities remaining
approved by issued upon exercise of Weighted average available for issuance
stockholders outstanding options and rights Exercise price under plan
--------------------------------------------------------------------------------------------------------------------
Stock Option Plans 2,679,963 $ 9.86 411,358
--------------------------------------------------------------------------------------------------------------------
Recognition and Retention Plan (1) 505,480 N/A 74,357
--------------------------------------------------------------------------------------------------------------------
Total (2) 3,177,043 $ 9.86 507,096
--------------------------------------------------------------------------------------------------------------------
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only, since
RRP shares have no exercise price.
The "Proposal I -- Election of Directors" section of the Proxy Statement
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Proxy
Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
- -----------------------------------------------
The "Independent Registered Public Accounting Firm" section of the proxy
statement is incorporated herein by reference.
113
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(1) Financial Statements
--------------------
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Statements of Financial Condition as of September 30, 2006
and 2005
(C) Consolidated Statements of Income for the years ended September 30, 2006,
2005 and 2004
(D) Consolidated Statements of Changes in Stockholders' Equity for the years
ended September 30, 2006, 2005, and 2004
(E) Consolidated Statements of Cash Flows for the years ended September 30,
2006, 2005 and 2004
(F) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Notes to Consolidated Financial
Statements.
114
3) Exhibits
--------
3.1 Certificate of Incorporation of Provident New York
Bancorp(1)
3.2 Bylaws of Provident New York Bancorp(1)
4 Form of Common Stock Certificate of Provident New York
Bancorp(1)
10.1 Employee Stock Ownership Plan(2)
10.2 Employment Agreement with George Strayton
10.3 Employment Agreement with Daniel Rothstein
10.4 Deferred Compensation Agreement, as amended and
restated(1)
10.5 Supplemental Executive Retirement Plan, as amended(2)
10.6 Management Incentive Program(2)
10.7 1996 Long-Term Incentive Plan for Officers and Directors,
as amended(2)
10.8 Provident Bank 2000 Stock Option Plan(3)
10.9 Provident Bank 2000 Recognition and Retention Plan(3)
10.10 Employment Agreement with Paul A. Maisch
10.11 Provident Bancorp, Inc. 2004 Stock Incentive Plan(5)
10.12 Provident Bank Executive Officer Incentive Plan(6)
10.13 Employment Agreement with Stephen Dormer
10.14 Employment Agreement with Richard Jones
14 Code of Ethics(4)
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as
amended by Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the Registration Statement on Form S-1
(File No. 333-108795), originally filed with the Commission on
September 15, 2003 and amended on October 31, 2003 and November 10,
2003.
(2) Incorporated by reference to the Registration Statement on Form S-1
of Provident Bancorp, Inc., a federal corporation (File No.
333-63593), originally filed with the Commission on September 17,
1998 and amended on November 6, 1998 and November 12, 1998.
(3) Incorporated by reference from the Proxy Statement for the 2000
Annual Meeting of Stockholders of Provident Bancorp, Inc., a federal
corporation (File No. 0-25233), filed with the Commission on January
18, 2000.
(4) The Code of Ethics is available on Provident bank's website at
www.providentbanking.com
------------------------
(5) Incorporated by reference to Appendix A to the proxy statement for
the Company's 2005 Annual Meeting of Stockholders (File No.
0-25233), filed with the Commission on January 19, 2005.
(6) Incorporated by reference to Exhibit 10 to the Current Report on
Form 8-K (Commission File No. 0- 25233), filed with the Commission
on December 5, 2005.
115
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Provident New York Bancorp has duly caused this report to be signed on
its behalf by the undersigned, there unto duly authorized.
Provident New York Bancorp
Date: December 11, 2006 By: /s/ George Strayton
-------------------
George Strayton
President, Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ George Strayton By: /s/ Paul A. Maisch
------------------- ------------------
George Strayton Paul A. Maisch
President, Executive Vice President,
Chief Executive Officer and Director Chief Financial Officer
(Principal Executive Officer) Principal Accounting Officer
Date: December 11, 2006 (and Principal Financial Officer)
Date: December 11, 2006
By: /s/ William F. Helmer By: /s/ Dennis L. Coyle
--------------------- -------------------
William F. Helmer Dennis L. Coyle
Chairman of the Board Vice Chairman
Date: December 11, 2006 Date: December 11, 2006
By: /s/ Judith Hershaft By: /s/ Thomas F. Jauntig, Jr. By: /s/ Thomas G. Kahn
------------------- -------------------------- ------------------
Judith Hershaft, Thomas F. Jauntig, Jr. Thomas G. Kahn,
Director Director Director
Date: December 11, 2006 Date: December 11, 2006 Date: December 11, 2006
By: /s/ R. Michael Kennedy By: /s/ Victoria Kossover By: /s/ Donald T. McNelis
---------------------- --------------------- ---------------------
R. Michael Kennedy, Victoria Kossover, Donald T. McNelis,
Director Director Director
Date: December 11, 2006 Date: December 11, 2006 Date: December 11, 2006
By: /s/ Richard A. Nozell By: /s/ Carl Rosenstock By: /s/ William Sichol, Jr.
--------------------- ------------------- -----------------------
Richard A. Nozell, Carl Rosenstock, William Sichol Jr.,
Director Director Director
Date: December 11, 2006 Date: December 11, 2006 Date: December 11, 2006
By: /s/ Burt Steinberg
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Burt Steinberg,
Director
Date: December 11, 2006
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