10-K 1 pbny-2012x930xmaster10k1.htm 10-K PBNY-2012-9.30- Master 10K (1)
 
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, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 0-25233
________________________
PROVIDENT NEW YORK BANCORP
(Exact name of Registrant as Specified in its Charter)
Delaware

80-0091851
(State or Other Jurisdiction of
Incorporation or Organization)

(IRS Employer
Identification Number)
 
 
 
400 Rella Blvd., Montebello, New York

10901
(Address of Principal Executive Office)

(Zip Code)
(845) 369-8040
(Registrant’s Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class

Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share

New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
____________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    YES  ¨    NO  ý
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  ý
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  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files)   YES  ý     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.    ¨
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
o


Accelerated Filer

x
Non-Accelerated Filer
o
 

Smaller Reporting Company

o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES  ¨     NO  ý
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, 2012 was $283,477,866
As of December 5, 2012 there were outstanding 44,346,087 shares of the Registrant’s common stock.
___________________________________
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s fiscal year ended September 30, 2012.
 



PROVIDENT NEW YORK BANCORP
FORM 10-K TABLE OF CONTENTS
September 30, 2012
 
PART I
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
 
 
ITEM 15.
SIGNATURES
 



PART I
ITEM 1.
Business
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, 2012, Provident Bancorp had, on a consolidated basis, assets of $4.0 billion, deposits of $3.1 billion and stockholders’ equity of $491.1 million. As of September 30, 2012, Provident Bancorp had 44,173,470 shares of common stock outstanding.

Provident Bank
Provident Bank, an independent, full-service bank founded in 1888, is headquartered in Montebello, New York and is the principal bank subsidiary of Provident Bancorp. With $4.0 billion in assets and 493 full-time equivalent employees, Provident Bank accounts for substantially all of Provident Bancorp’s consolidated assets and net income. We operate 35 financial centers which serve the greater New York metropolitan area . There are 13 offices located in Rockland County, New York, 12 offices in Orange County, New York, 8 offices in contiguous Sullivan, Ulster, Westchester and Putnam Counties in New York, 1 office in New York City, and 1 office in Bergen County, New Jersey which operate under the name PBNY Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, business banking (small business), wealth management, and consumer banking products and services.

We also offer deposit services to municipalities located in the State of New York through Provident Bank’s wholly-owned subsidiary, Provident Municipal Bank.

Provest Services Corporation I 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. The activities of these subsidiaries have had an insignificant effect on our consolidated financial condition and results of operations to date. Provident REIT, Inc. and WSB Funding are subsidiaries in the form of real estate investment trusts and hold commercial real estate loans. Also, the Bank maintains several corporations which hold foreclosed properties acquired by Provident Bank.

Provident Bank’s website (www.providentbanking.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission ("SEC"), including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings, as well as ownership reports on Forms 3, 4 and 5 filed by the Company’s directors and executive officers. Copies may also be obtained, without charge, by written request to Provident New York Bancorp Investor Relations, 400 Rella Boulevard, Montebello, New York 10901, Attention: Donna Peterson, Provident Bank’s website is not part of this Annual Report on Form 10-K.

Non-Bank Subsidiaries
In addition to Provident Bank, the Company owns Hardenburgh Abstract Company, Inc. (“Hardenburgh”) that was acquired in connection with the acquisition of Warwick Community Bancorp (“WSB”) and Hudson Valley Investment Advisors, LLC ("HVIA"), an investment advisory firm that generates investment management fees. Hardenburgh had gross revenue from title insurance policies and abstracts of $1.1 million and net income of $202,000 for the fiscal year ending September 30, 2012. Hardenburgh and Madison Title Holding, LLC entered into a joint venture under Provident Bank, creating PB Madison Title Agency, LP, a title insurance agency that will significantly increase our capacity and market coverage.

On November 16, 2012, the Company sold Hudson Valley Investment Advisors, LLC ("HVIA"), an investment advisory firm that generated $2.4 million in fee income and net income of $372,000 in 2012. The Company has launched an enhanced program to deliver a wide range of superior wealth management products that were previously offered by HVIA.

Provident Risk Management, Inc., a captive insurance company, generated $1.2 million in intercompany revenues and $1.0 million in net income for the fiscal year ending September 30, 2012.

Provident Municipal Bank
Provident Municipal Bank, a wholly-owned subsidiary of Provident Bank, is a New York State-chartered commercial bank which 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.


1


Acquisition of Gotham Bank of New York
On August 10, 2012, the Company acquired Gotham Bank of New York (“Gotham”), a New York state-chartered banking corporation with approximately $431.4 million in assets, $205.5 million in loans, and $368.9 million in deposits and one branch location in midtown Manhattan as of the acquisition date. At the closing, Gotham was merged with and into Provident Bank, with Provident Bank as the surviving entity. The shareholders of Gotham received cash equal to 125% of adjusted tangible net worth, subject to fair value adjustments. The aggregate cash consideration to Gotham shareholders and option holders was approximately $41 million. We believe that Gotham provides us with an established platform in New York City which is additive to our growth strategy and will support the expansion of our franchise in this attractive market.

Common Equity Capital Raise
On August 7, 2012, the Company sold directly to several institutional investors (the “Investors”) an aggregate of 6,258,504 shares of its common stock at a price of $7.35 per share. The Company received net proceeds of approximately $46 million, which were used to fund the acquisition of Gotham and for general corporate purposes

Forward-Looking Statements
From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A. and our Cautionary Statement Regarding Forward-Looking Information included in Item 7.

Market Area
Provident Bank specializes in the delivery of service and solutions to business owners, their families, and the consumers in communities within the greater New York City marketplace through teams of dedicated and experienced relationship managers and offers a complete line of commercial, business, and consumer banking products and services. Collectively, we now operate 35 full service financial centers which serve the greater New York metropolitan area. There are 13 offices located in Rockland County, New York, 12 offices in Orange County, New York, 8 offices in contiguous Sullivan, Ulster, Westchester and Putnam Counties in New York, 1 office in New York City, and 1 office in Bergen County, New Jersey which operates under the name PBNY Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, business banking (small business) and consumer banking products and services.

Management Strategy
We operate as an regional bank that offers a broad range of customer-focused financial services as an alternative to large regional, multi-state, and international banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area focusing on core deposit generation, and quality loan growth with emphasis on growing commercial loan balances. We believe this provides a favorable platform for long-term sustainable growth. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs. Imperatives for the Company will be to grow revenue and earnings by expanding client acquisitions, continuing to improve credit metrics and significantly improving operating efficiency levels. To achieve these goals we will focus on high value client segments, the expansion of delivery channels and distribution to increase client acquisitions, execute effectively by creating a highly productive performance culture, reduce operating costs, and to proactivly manage enterprise risk. Highlights of management’s business strategy are as follows:

Operating within a defined market. As an regional bank, we emphasize the centralized nature of our decision-making to respond more effectively to the needs of our customers while providing a full range of financial services to the businesses, individuals, and municipalities in our market area. We offer a broad range of financial products to meet the changing needs of the marketplace, including Internet banking, cash management services and, on a selective basis, sweep accounts. In addition, we offer wealth management services to meet the investing needs of individuals, corporations and not-for-profit entities. As a result, we are able to provide, at the local level, the financial services required to meet the needs of the majority of existing and potential customers in our market.

Enhancing Customer Service. We are committed to providing superior customer service as a way to differentiate us from our competition. Our team based approach provides a level of distinctive service across our franchise. Clients are served by a focused group of professionals that provide commercial and consumer solutions to their clients. Additionally as part of our commitment to service, we have been engaged in Sunday banking since 1995. In addition, we offer multiple access channels to our customers, including our branch and ATM network, Internet banking, our Customer Care Telephone Center and our Automated Voice Response

2


system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards.

Growing and maintaining a Diversified 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 provide our residential mortgage and consumer lending services. As a result, we believe that we have developed a high quality diversified loan portfolio with a favorable mix of loan types, maturities and yields. We have currently deemphasized acquisition and development lending for residential housing development of single family homes, as this area has been the most affected by the economy of the region.

Expanding our Banking Franchise. Management intends to continue the expansion of the banking franchise and to increase the number of customers served and products used by businesses and consumers 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 drives a lower overall cost of funds. Management intends to maintain this strategy, which will require ongoing investment in banking locations and technology to support exceptional service levels for Provident Bank’s customers. Recent expansion efforts have been focused on the greater NYC metro area through the addition of commercial teams. We intend to concentrate on certain segments of the market, in particular focusing on business with revenues up to $100 million, small business with revenues of up to $5 million and financially secure families.

Lending Activities
General. We primarily originate commercial real estate loans, multifamily real estate and commercial business loans. We are de-emphasizing acquisition, development and construction loans. We also originate residential mortgage loans in our market area on a fixed-rate and adjustable-rate (“ARM”) basis collateralized by residential real estate, and consumer loans such as home equity lines of credit, homeowner loans and personal loans. We may sell longer-term one- to four-family residential loans and participations in some commercial loans for portfolio management purposes.

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 office buildings, shopping centers, retail strip centers, industrial and warehouse properties and, to a lesser extent, more specialized properties such as assisted living and nursing homes, churches, mobile home parks, restaurants and motel/hotels. We may, from time to time, purchase commercial real estate loan participations. We also originate multifamily properties to diversify the portfolio. We target commercial real estate loans with initial principal balances between $1.0 million and $15.0 million. At September 30, 2012, loans secured by commercial real estate totaled $1.1 billion, or 50.6% of our total loan portfolio and consisted of 1,124 loans outstanding. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

The majority of our commercial real estate loans are written as five-year adjustable-rate or ten-year fixed-rate mortgages and typically have ten year balloon maturities up to ten years. Amortization on these loans is typically based on 25-year payout schedules. Margins generally range from 200 basis points to 300 basis points above a reference index.

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 minimum 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, except for loans secured by multi-family properties. We require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property.

Commercial real estate loans typically involve significant loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to adverse conditions in the real estate market and in the general economy. For commercial real estate loans in which the borrower is a significant tenant, 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

3


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, 2012, we had 1,994 commercial business loans outstanding with an aggregate balance of $343.3 million, or 16.2% of our total loan portfolio. As of September 30, 2012, the average commercial business loan balance was approximately $172,000. 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 may also 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 $250,000, we use a modified credit scoring system that enables us to process the loan requests more quickly and efficiently.

Residential Mortgage 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 $4.0 million that are fully amortizing with monthly or bi-weekly loan payments. This portfolio totaled $350.0 million, or 16.5% of our total loan portfolio at September 30, 2012.

Residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as acceptable for purchase. Loans that conform to such guidelines are referred to as “conforming loans.” We generally originate fixed-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently $417,000 for single-family homes or higher in certain areas as determined by the Federal Housing Finance Agency. Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. In order to reduce exposure to rising interest rates, we sold or securitized a portion of our conforming fixed rate real estate- residential loans originated, totaling $79.1 million and $52.5 million in proceeds for the fiscal years ending September 30, 2012 and 2011, respectively.

We also originate loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to substantially the same credit standards as conforming loans. These loans are generally intended to be held in our loan portfolio. 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 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. 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, 2012, loans serviced for others, excluding loan participations, totaled $207.4 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 generally resets every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default.

We require title insurance on all of our residential 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. Residential first mortgage loans generally are required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance.

Acquisition, Development and Construction Loans. Historically, we originated acquisition, development and construction (“ADC”) loans to builders in our market area. The Company has deemphasized this lending due to the economic slow down and declines in the real estate market. Effective August 2011, our policy is to consider ADC loans only on an exception basis. ADC loans totaled $144.1 million, or 6.8% of our total loan portfolio at September 30, 2012, a decline of $31.9 million, compared to September 30, 2011. ADC loans help finance the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income properties. In some cases, we may make an acquisition loan before the

4


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, although higher loan-to-value ratios may be allowed for certain borrowers we deem to be lower risk. We also make development loans to builders in our market area to finance improvements to real estate, consisting mainly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum loan amount is generally limited to the cost of the improvements plus limited approval of soft costs. In general, we do not originate loans with interest reserves. A portion of our ADC loans acquired through the purchase of participations do carry interest reserves. The total of these ADC participation loans with interest reserves at September 30, 2012 were $7.6 million. Advances are made in accordance with a schedule reflecting the cost of the improvements.

We also make construction loans to area builders which are not affected by our new policy. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers except in cases of owner occupied construction loans. Owner occupied commercial construction loans totaled $10.1 million at September 30, 2012. 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. Collateral coverage and risk profile is maintained by restricting the number of model or speculative units in each project.

ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans 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. In recent years as a result of the economic downturn, most projects have performed behind schedule, requiring the borrowers to carry these projects for a longer period than was originally contemplated when we approved the credit facilities. As a result many of the borrowers have been utilizing other sources to maintain debt service or have been unable to maintain debt service requirements. As of September 30, 2012 $22.6 million of acquisition and development loans are being amortized from outside sources of cash flow.

Consumer Loans. We originate a variety of consumer and other loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. As of September 30, 2012, consumer loans totaled $209.6 million, or 9.9% of the total loan portfolio. We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit secured by junior liens on residential properties. As of September 30, 2012, homeowner loans totaled $35.0 million or 1.7% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $165.2 million, or 7.8% of our total loan portfolio at September 30, 2012, with $110.4 million remaining undisbursed.

Other consumer loans include personal loans including overdraft lines of credit and loans secured by new or used automobiles.

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,
 
2012
 
2011
 
2010
 
2009
 
2008
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real-estate residential mortgage loans
$
350,022

 
16.5
%
 
$
389,765

 
22.9
%
 
$
434,900

 
25.5
%
 
$
460,728

 
27.0
%
 
$
513,381

 
29.6
%
Commercial real estate loans
1,072,504

 
50.6

 
703,356

 
41.4

 
579,232

 
34.0

 
546,767

 
32.1

 
554,811

 
32.0

Commercial business loans
343,307

 
16.2

 
209,923

 
12.3

 
217,927

 
12.8

 
242,629

 
14.2

 
243,642

 
14.1

Acquisition, development & construction
144,061

 
6.8

 
175,931

 
10.3

 
231,258

 
13.6

 
201,611

 
11.9

 
170,979

 
9.9

Total commercial loans
1,559,872

 
73.6

 
1,089,210

 
64.0

 
1,028,417

 
60.4

 
991,007

 
58.2

 
969,432

 
56.0

Home equity lines of credit
165,200

 
7.8

 
174,521

 
10.2

 
176,134

 
10.4

 
180,205

 
10.6

 
166,491

 
9.6

Homeowner loans
34,999

 
1.7

 
40,969

 
2.4

 
48,941

 
2.9

 
54,941

 
3.2

 
58,569

 
3.4

Other consumer loans
9,379

 
0.4

 
9,334

 
0.5

 
13,149

 
0.8

 
16,376

 
1.0

 
23,680

 
1.4

Total consumer loans
209,578

 
9.9

 
224,824

 
13.1

 
238,224

 
14.1

 
251,522

 
14.8

 
248,740

 
14.4

Total loans
2,119,472

 
100.0
%
 
1,703,799

 
100.0
%
 
1,701,541

 
100.0
%
 
1,703,257

 
100.0
%
 
1,731,553

 
100.0
%
Allowance for loan losses
(28,282
)
 
 
 
(27,917
)
 
 
 
(30,843
)
 
 
 
(30,050
)
 
 
 
(23,101
)
 
 
Total loans, net
$
2,091,190

 
 
 
$
1,675,882

 
 
 
$
1,670,698

 
 
 
$
1,673,207

 
 
 
$
1,708,452

 
 

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2012. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Weighted average rates are computed based on the rate of the loan at September 30, 2012.
 
 
Residential Mortgage
 
Commercial Real Estate
 
Commercial Business
 
ADC
 
Consumer
 
Total
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
 
(Dollars in thousands)
Due During the Years
Ending September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
2013
$
6,362

 
5.17
%
 
$
64,491

 
5.38
%
 
$
93,987

 
4.14
%
 
$
89,831

 
4.50
%
 
$
4,817

 
13.67
%
 
$
259,488

 
4.77
%
2014 to 2017
26,142

 
4.78

 
439,009

 
4.93

 
116,924

 
4.41

 
44,961

 
5.05

 
11,557

 
7.28

 
638,593

 
4.88

2017 and beyond
317,518

 
5.26

 
569,004

 
5.01

 
132,396

 
4.27

 
9,269

 
3.34

 
193,204

 
4.29

 
1,221,391

 
4.87

Total
$
350,022

 
5.22
%
 
$
1,072,504

 
5.00
%
 
$
343,307

 
4.29
%
 
$
144,061

 
4.60
%
 
$
209,578

 
4.67
%
 
$
2,119,472

 
4.86
%

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2012 that are contractually due after September 30, 2013.
 
 
Fixed
 
Adjustable
 
Total
 
(Dollars in thousands)
Residential mortgage loans
$
271,716

 
$
71,944

 
$
343,660

Commercial real estate loans
482,201

 
525,812

 
1,008,013

Commercial business loans
110,891

 
138,429

 
249,320

Acquisition, development & construction
13,309

 
40,921

 
54,230

Total commercial loans
606,401

 
705,162

 
1,311,563

Consumer loans
41,765

 
162,996

 
204,761

Total loans
$
919,882

 
$
940,102

 
$
1,859,984


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,

6


savings banks, credit unions, mortgage banking companies, life insurance companies and similar financial services firms. Loan originations are derived from a number of sources, including branch office personnel, commercial banking officers, existing customers, borrowers, builders, attorneys, real estate broker referrals and walk-in customers.

Our loan origination and sales activity may be adversely affected by a rising interest rate environment or period of falling house prices, which typically result in decreased loan demand, while declining interest rates may stimulate increased loan demand. Accordingly, the volume of loan origination, the mix of fixed and adjustable-rate loans, and the profitability of this activity can vary from period to period.

During fiscal year 2012, we did not sell any loans through securitzations. However, we sold $79.1 million as whole loans to Freddie Mac. We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our policy generally has been to retain the servicing rights for all conforming loans sold. We therefore continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings, if necessary. We retain a portion of the interest paid by the borrower on the loans as consideration for our servicing activities.

Loan Approval/Authority and Underwriting. The Board of Directors has established the Credit Risk Committee (the “CRC”) to oversee the lending functions of the Bank. The CRC reviews loans approved by the Bank’s Management Credit Committee, oversees the performance of the Bank’s loan portfolio and its various components, assists in the development of strategic initiatives to enhance portfolio performance, and considers matters for approval and recommendation to the Board of Directors.

The Management Credit Committee (the “MCC”) consists of the President and Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, and other senior lending personnel. The MCC is authorized to approve loans within the existing policy limits established by the Board. For loans that are not within policy guidelines but are nonetheless deemed desirable, the MCC may recommend approval to the CRC, which in turn may recommend approval to the Board.

The MCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. Other than overdrafts, the only single initial lending authorities are for credit secured small business loans up to $250,000. and up to $500,000 if secured by residential property. Two loan officers with sufficient authority acting together may approve loans up to $2 million.

We have established a risk rating system for our commercial business loans, commercial and multi-family real estate loans, and ADC loans to builders. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are performed by commercial credit personnel who do not have responsibility for loan originations. We determine our maximum loan-to-one-borrower limits based upon the rating of the loan. The large majority of loans fall into four categories. The maximum for the best-rated borrowers is $20 million, $15 million for the next group of borrowers, $12 million for the third group and $6 million for the last group. Sub-limits apply based on reliance on any single property, and for commercial business loans. On occasion, the Board of Directors may approve higher exposure limits for loans to one borrower in an amount not to exceed the legal lending limit of the Bank. The Board may also authorize the Chief Risk Officer, or Management Credit Committee to approve loans for specific borrowers up to a designated Board approved limit in excess of the policy limit, for that borrower.

In connection with our residential and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas. Under certain conditions, appraisals may not be required for loans under $250,000 or in other limited circumstances. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in connection with certain residential mortgage refinances.

Loan Origination Fees and Costs. In addition to interest earned on loans, we receive loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. We defer loan origination fees and costs, and amortize such amounts as an adjustment to yield over the term of the loan by use of the level yield method. Deferred loan origination fees (net of deferred costs) were $310,000 at September 30, 2012.

To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale. The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid. Originated mortgage servicing rights with an amortized cost of $1.6 million are included in other assets at September 30, 2012.

7



Loans to One Borrower. At September 30, 2012, 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 $24.4 million, $22.1 million, $19.9 million, $18.9 million and $18.8 million. In addition, we have 35 relationships with an amount loaned of $10 million or more, with an aggregate exposure of $503.1 million. See “Regulation — Regulation of Provident Bank — Loans to One Borrower” for a discussion of applicable regulatory limitations.

Delinquent Loans, Troubled Debt Restructure, Impaired Loans, Other Real Estate Owned and Classified Assets

Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans. A late notice is automatically generated after the 16th day of loan payment due date requesting the payment due plus any late charge that was assessed. Legal action, notwithstanding ongoing collection efforts are put in place after 90 days of the original due date for failure to make payment. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending upon individual circumstances.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due, unless well secured and in the process of collection. In addition, loans are placed on non-accrual status when, in the opinion of management, there is sufficient reason to question the borrower’s ability to continue to meet principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income related to current year income and charged to the allowance for loan losses with respect to income that was recorded in the prior fiscal year. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower’s financial condition and payment record. Appraisals are performed at least annually on criticized/classifieds loans. At September 30, 2012, we had non-accrual loans of $35.4 million and $4.4 million of loans 90 days past due and still accruing interest, which were well secured and in the process of collection. At September 30, 2011, we had non-accrual loans of $36.5 million and $4.1 million of loans 90 days past due and still accruing interest.

Impaired Loans. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are based on one of three measures — the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at its measured value. Impaired loans substantially consist of non-performing loans and accruing and performing troubled debt restructured loans. At September 30, 2012, we had $53.3 million in impaired loans with $3.2 million in specific allowances.

Other Real Estate Owned. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned (“REO”) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of book value or fair value less cost to sell. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2012, we had 24 foreclosed properties with a recorded balance of $6.4 million.

Troubled Debt Restructure. The Company may modify loans to certain borrowers who are experiencing financial difficulty. If the terms of the modification include a concession, as defined by US GAAP guidance, the loan as modified is considered a trouble debt restructure (“TDR”). Nearly all of these loans are secured by real estate. Total TDRs were $24.9 million at September 30, 2012, of which $10.9 million were classified as nonaccrual and $14.1 million were performing according to terms and still accruing interest income. TDRs still accruing interest income were modified for a troubled borrower, who was still performing in accordance with the terms of their loan. The majority of TDRs consisted of four relationships totaling $8.7 million, $4.8 million, $3.5 million and $812,000 respectively. Included in the total of $17.8 million of these four relationships are $8.7 million of non performing loans. The loan modifications included actions such as extension of maturity date or the lowering of interest rates and monthly payments. The amount of commitments to lend borrowers with loans that have been modified is $4.2 million at September 30, 2012. The commitments to lend on the restructured debt is contingent on clear title and a third party inspection to verify completion of work and is associated with loans that are considered to be performing.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values,

8


highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are charged off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, designated as “special mention”. As of September 30, 2012, we had $42.4 million of assets designated as “special mention”.

Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2012, classified assets consisted of substandard and doubtful loans of $88.7 million.

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
 
 
 
 
 
30-89 Days
 
90 Days & over still
accruing & non-
accrual
 
Total
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
At September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
10

 
$
1,352

 
56

 
$
11,314

 
66

 
$
12,666

Real estate — commercial mortgage
7

 
1,875

 
30

 
10,453

 
37

 
12,328

Commercial business loans
7

 
237

 
2

 
344

 
9

 
581

Acquisition, development & construction
9

 
7,067

 
29

 
15,404

 
38

 
22,471

Consumer, including home equity loans
22

 
1,816

 
21

 
2,299

 
43

 
4,115

Total
55

 
$
12,347

 
138

 
$
39,814

 
193

 
$
52,161

At September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
8

 
$
1,212

 
40

 
$
7,976

 
48

 
$
9,188

Real estate — commercial mortgage
4

 
1,105

 
34

 
13,214

 
38

 
14,319

Commercial business loans
2

 
490

 
3

 
243

 
5

 
733

Acquisition, development & construction
4

 
4,265

 
24

 
16,984

 
28

 
21,249

Consumer, including home equity loans
20

 
794

 
26

 
2,150

 
46

 
2,944

Total
38

 
$
7,866

 
127

 
$
40,567

 
165

 
$
48,433

At September 30, 2010
 
 
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
1

 
$
113

 
36

 
$
8,033

 
37

 
$
8,146

Real estate — commercial mortgage
4

 
1,469

 
26

 
9,857

 
30

 
11,326

Commercial business loans
2

 
3,403

 
6

 
1,376

 
8

 
4,779

Acquisition, development & construction
2

 
6,681

 
11

 
5,730

 
13

 
12,411

Consumer, including home equity loans
27

 
681

 
22

 
1,844

 
49

 
2,525

Total
36

 
$
12,347

 
101

 
$
26,840

 
137

 
$
39,187

At September 30, 2009
 
 
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
2

 
$
390

 
32

 
$
7,357

 
34

 
$
7,747

Real estate — commercial mortgage
2

 
398

 
24

 
6,803

 
26

 
7,201

Commercial business loans
18

 
999

 
8

 
457

 
26

 
1,456

Acquisition, development & construction
1

 
366

 
20

 
11,270

 
21

 
11,636

Consumer, including home equity loans
22

 
494

 
13

 
582

 
35

 
1,076

Total
45

 
$
2,647

 
97

 
$
26,469

 
142

 
$
29,116

At September 30, 2008
 
 
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
19

 
$
4,106

 
19

 
$
4,218

 
38

 
$
8,324

Real estate — commercial mortgage
8

 
1,666

 
12

 
3,832

 
20

 
5,498

Commercial business loans
29

 
1,318

 
35

 
2,811

 
64

 
4,129

Acquisition, development & construction loans

 

 
9

 
5,596

 
9

 
5,596

Consumer, including home equity
43

 
435

 
41

 
421

 
84

 
856

Total
99

 
$
7,525

 
116

 
$
16,878

 
215

 
$
24,403



10


Risk elements. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
 
 
September 30,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(Dollars in thousands)
Non-performing loans:
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
$
9,051

 
$
7,485

 
$
6,080

 
$
4,425

 
$
1,731

Real estate — commercial mortgage
8,815

 
11,225

 
6,886

 
5,826

 
3,100

Commercial business loans
344

 
243

 
1,376

 
457

 
2,811

Acquisition, development & construction
15,404

 
16,538

 
5,730

 
10,830

 
5,596

Consumer, including home equity loans
1,830

 
986

 
1,341

 
371

 
351

Accruing loans past due 90 days or more
4,370

 
4,090

 
5,427

 
4,560

 
3,289

Total non-performing loans
$
39,814

 
$
40,567

 
$
26,840

 
$
26,469

 
$
16,878

Foreclosed properties
6,403

 
5,391

 
3,891

 
1,712

 
84

Total non-performing assets
$
46,217

 
$
45,958

 
$
30,731

 
$
28,181

 
$
16,962

Troubled Debt Restructures still accruing and not included above
$
14,077

 
$
8,470

 
$
16,047

 
$
674

 
$

Ratios:
 
 
 
 
 
 
 
 
 
Non-performing loans to total loans
1.87
%
 
2.38
%
 
1.58
%
 
1.55
%
 
0.97
%
Non-performing assets to total assets
1.15
%
 
1.46
%
 
1.02
%
 
0.93
%
 
0.57
%
For the year ended September 30, 2012, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to $1.7 million. Interest income actually recognized on such loans totaled $470,000.

Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management’s judgment, deserve current recognition in estimating probable incurred losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and other criticized or classified loans (if any), as well as allowances determined for each major loan category. After we establish a provision for loans that are known to be non-performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred losses inherent in that portion of the portfolio. These percentages are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:

levels of, and trends in, delinquencies and non-accruals;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
experience, ability, and depth of lending management and staff;
national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
for commercial loans, trends in risk ratings.

The Company analyzes loans by two broad segments or classes: real estate secured loans and loans that are either unsecured or secured by other collateral. The segments or classes considered real estate secured are: residential mortgage loans; commercial mortgage loans; commercial mortgage community business loans; ADC loans; homeowner loans, and equity lines of credit. The segments or classes considered unsecured or secured by other than real estate collateral are: commercial business loans, commercial community business loans, and consumer loans. In all segments or classes, loans are reviewed for impairment once they are past due 90 days or more past due, or are classified substandard or doubtful. If a loan is deemed to be impaired in one of the real estate secured segments, it is generally considered collateral dependent. If the value of the collateral securing a collateral dependent impaired loan is less than the loan's carrying value, a charge-off is recognized equal to the difference between the appraised value and the book value of the loan. Additionally impairment reserves are recognized for estimated costs to hold and to liquidate and a 10% discount of the appraisal value. The ranges for the costs to hold and liquidate are 12-22% for the following segments: commercial mortgage loans, commercial mortgage community business mortgage loans and ADC loans and 7-13 % for homeowner loans, equity lines of credit, and residential mortgage loans. Impaired loans in the real estate secured segments are re-appraised using a summary or drive-by appraisal report every six to nine months.

11


For loans in the commercial community business loans segment we charge off the full amount of the loan when it becomes 90 days or more past due, or earlier in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan.  For loans in the commercial business loan segment, we conduct a cash flow projection, and charge off the difference between the net present value of the cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize a 10% impairment reserve to account for the imprecision of our estimates.  However, most of these cases receipt of future cash flows is too unreliable to be considered probable, resulting in the charge off of the entire balance of the loan.  For unsecured consumer loans, charge offs are recognized once the loan is 90 days or more past due or the borrower files for bankruptcy protection.   

ADC lending is considered higher risk and exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. ADC loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and pricing of the loan. We have deemphasized this type of loan.

Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or the borrower may use the cash flow for other purposes. In addition, the foreclosure process, if necessary may be slow and properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.
Commercial business lending is also higher risk because repayment depends on the successful operation of the business which is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before foreclosing which we cannot be assured of doing, and the value in a foreclosure sale or other means of liquidation is subject to downward pressure.

When we evaluate residential mortgage loans and equity loans we weigh both the credit capacity of the borrower and the collateral value of the home. As unemployment and underemployment increases, and liquidity reserves if any, diminish, the credit capacity of the borrower decreases, which increases our risk. Also, after a period of years of stable or increasing home values in our market, home prices have declined from a high in 2005 and 2006. We are exposed to risk in both our first mortgage and equity lending programs due to declines in values in recent years. We are also exposed to risk because the time to foreclose is significant and has become longer under current conditions.

The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral 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.
 
 
September 30,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(Dollars in thousands)
Balance at beginning of period
$
27,917

 
$
30,843

 
$
30,050

 
$
23,101

 
$
20,389

Charge-offs:
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
(2,551
)
 
(2,140
)
 
(749
)
 
(461
)
 
(97
)
Real estate — commercial mortgage
(2,707
)
 
(1,802
)
 
(987
)
 
(902
)
 
(627
)
Commercial business loans
(1,526
)
 
(5,400
)
 
(6,578
)
 
(7,271
)
 
(3,596
)
Acquisition, development & construction
(4,124
)
 
(8,939
)
 
(848
)
 
(1,515
)
 

Consumer, including home equity loans
(1,901
)
 
(1,989
)
 
(1,168
)
 
(1,140
)
 
(609
)
 
(12,809
)
 
(20,270
)
 
(10,330
)
 
(11,289
)
 
(4,929
)
Recoveries:
 
 
 
 
 
 
 
 
 
Real estate — residential mortgage
356

 
15

 
3

 
2

 

Real estate — commercial mortgage
528

 
2

 
23

 

 

Commercial business loans
1,116

 
605

 
670

 
249

 
291

Acquisition, development & construction
299

 
10

 
261

 
200

 

Consumer, including home equity loans
263

 
128

 
166

 
187

 
150

 
2,562

 
760

 
1,123

 
638

 
441

Net charge-offs
(10,247
)
 
(19,510
)
 
(9,207
)
 
(10,651
)
 
(4,488
)
Provision for loan losses
10,612

 
16,584

 
10,000

 
17,600

 
7,200

Balance at end of period
$
28,282

 
$
27,917

 
$
30,843

 
$
30,050

 
$
23,101

Ratios:
 
 
 
 
 
 
 
 
 
Net charge-offs to average loans outstanding
0.56
%
 
1.17
%
 
0.56
%
 
0.62
%
 
0.28
%
Allowance for loan losses to non-performing loans
71
%
 
69
%
 
115
%
 
114
%
 
137
%
Allowance for loan losses to total loans
1.48
%
 
1.64
%
 
1.81
%
 
1.76
%
 
1.33
%

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,
 
2012
 
2011
 
2010
 
Allowance
for Loan
Losses
 
Loan
Balances by
Category
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Allowance
for Loan
Losses
 
Loan
Balances by
Category
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Allowance
for Loan
Losses
 
Loan
Balances by
Category
 
Percent
of Loans
in Each
Category
to Total
Loans
 
(Dollars in thousands)
Real estate — residential mortgage
$
4,359

 
$
349,382

 
16.48
%
 
$
3,498

 
$
389,765

 
22.88
%
 
$
2,641

 
$
434,900

 
25.56
%
Real estate — commercial mortgage
7,230

 
968,703

 
45.70
%
 
5,568

 
703,356

 
41.28
%
 
5,915

 
579,231

 
34.04
%
Commercial business loans
4,603

 
242,242

 
11.43
%
 
5,945

 
209,923

 
12.31
%
 
8,970

 
217,928

 
12.81
%
Acquisition, development & construction
8,526

 
144,061

 
6.80
%
 
9,895

 
175,931

 
10.33
%
 
9,752

 
231,258

 
13.59
%
Consumer, including home equity loans
3,564

 
209,320

 
9.88
%
 
3,011

 
224,824

 
13.20
%
 
3,565

 
238,224

 
14.00
%
Loans acquired in Gotham acquisition

 
205,764

 
9.71
%
 

 

 
%
 

 

 
%
Total
$
28,282

 
$
2,119,472

 
100.00
%
 
$
27,917

 
$
1,703,799

 
100.00
%
 
$
30,843

 
$
1,701,541

 
100.00
%
 

13


 
September 30,
 
2009
 
2008
 
Allowance
for Loan
Losses
 
Loan
Balances by
Category
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Allowance
for Loan
Losses
 
Loan
Balances by
Category
 
Percent
of Loans
in Each
Category
to Total
Loans
 
(Dollars in thousands)
Real estate — residential mortgage
$
3,106

 
$
460,728

 
27.04
%
 
$
1,494

 
$
513,381

 
29.60
%
Real estate — commercial mortgage
4,824

 
460,649

 
27.05
%
 
5,793

 
554,811

 
32.00
%
Real estate — commercial mortgage (CBL)
2,871

 
86,118

 
5.06
%
 
 
 
 
 
 
Commercial business loans
3,917

 
142,908

 
8.39
%
 
7,051

 
243,642

 
14.10
%
Commercial business loans (CBL)
5,011

 
99,721

 
5.85
%
 
 
 
 
 
 
Acquisition, development & construction
7,680

 
201,611

 
11.84
%
 
6,841

 
170,979

 
9.90
%
Consumer, including home equity loans
2,641

 
251,522

 
14.77
%
 
1,922

 
248,740

 
14.40
%
Total
$
30,050

 
$
1,703,257

 
100.00
%
 
$
23,101

 
$
1,731,553

 
100.00
%

Investment Securities
Our investment securities 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 Enterprise Risk Committee oversees our investment program and evaluates on an ongoing basis our investment policy and objectives. Our chief financial officer, chief executive officer, treasurer and certain other senior officers have the authority to purchase and sell securities within specific guidelines established by the investment policy. In addition, a summary of all transactions are reviewed by the Enterprise Risk 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 notes, 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 CMOs, 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 securities investment yields while managing interest rate and credit risk.

FASB ASC Topic 320, Investments - Debt and Equity Securities, requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability to hold the security and our 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. Excluding mortgage-backed securities and CMO’s, management sold $253.3 million in investment securities at amortized cost and realized net gains of $8.4 million for the fiscal year ended September 30, 2012

Government and Agency Securities. At September 30, 2012, we held government and agency securities as available for sale with a fair value of $408.8 million, consisting primarily of agency obligations with maturities of more than one year through ten years. In addition, we held $22.2 million in government and agency securities as held to maturity at amortized cost. 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 and as collateral for borrowings and municipal deposits.

Corporate Notes. At September 30, 2012, we did not have any corporate debt securities. Corporate bonds have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this risk, our policy limits investments in corporate bonds to securities with maturities of ten years or less and rated “A” or better by at least one nationally recognized rating agency at time of purchase, and to a total investment of no more than $2.0 million per issuer and a total corporate bond portfolio limit of 5% of assets.


14


Municipal Bonds. At September 30, 2012, we held $175.9 million at carrying value in bonds issued by states and political subdivisions, $19.4 million of which were classified as held to maturity at amortized cost and are mainly unrated and $156.5 million of which were classified as available for sale at fair value. The policy limits investments in municipal bonds to securities with maturities of 20 years or less and rated as investment grade by at least one nationally recognized rating agency at the time of purchase, and favors issues that are insured, however we also purchase securities that are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy generally imposes an investment limitation of $5.0 million per municipal issuer and a total municipal bond portfolio limit of 10% of assets. At September 30, 2012, we did not hold any obligations that were rated less than “A-” as available for sale.

Equity Securities. At September 30, 2012, we held equity securities as available for sale had a fair value of $1.1 million. We also held $19.2 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 during the year ended September 30, 2012 amounted to $849,000. We did not hold preferred shares of Freddie Mac or Fannie Mae, auction rate securities, or pooled trust securities, for the year ended September 30, 2012. We held approximately $809,000 in fair value of equity securities in a local bank.

Mortgage-Backed Securities. We purchase mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower credit risk as a result of the guarantees provided by Freddie Mac and Fannie Mae; a (iii) increase liquidity, and (iv) maintain our status as a thrift for charter and income tax purposes. We invest primarily in mortgage-backed securities issued or sponsored by Freddie Mac, and Fannie Mae or private issuers for CMOs. To a lesser extent, we also invest in securities backed by agencies of the U.S. Government, such as Ginnie Mae. At September 30, 2012, our mortgage-backed securities portfolio totaled $543.8 million, consisting of $444.5 million available for sale securities at fair value and $99.3 million held to maturity securities at amortized cost. The total mortgage-backed securities portfolio includes CMOs of $221.0 million, consisting of $193.1 million available for sale securities at fair value and $27.9 million held to maturity at amortized cost. The CMO portfolio contains securities issued by private issuers totaling $4.7 million at amortized cost and $4.6 million fair value, of which $4.4 million at amortized cost are below investment grade, to which we have recorded $47,000 in other than temporary impairment as of September 30, 2012.

Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as us, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk in addition to the guarantee of repayment of principal outstanding that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We review prepayment estimates for our mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. As a result of our reviews, we anticipated an acceleration of prepayments. Management sold $89.1 million in mortgage-backed securities at amortized cost, including CMO’s, at amortized cost and realized $2.1 million in net gains on the sales. These proceeds were reinvested in securities with yields which were lower than the recorded yields of the securities sold and which had a more diversified risk profile.

A portion of our mortgage-backed securities portfolio is invested in CMOs, including Real Estate Mortgage Investment Conduits (“REMICs”), backed by Fannie Mae and Freddie Mac and certain private issuers. CMOs and REMICs are types of debt securities issued by special-purpose entities that aggregate pools of mortgages and mortgage-backed securities and create 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.


15


Available for Sale Portfolio. The following table sets forth the composition of our available for sale portfolio at the dates indicated.
 
 
September 30,
 
2012
 
2011
 
2010
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government securities
$

 
$

 
$

 
$

 
$
71,071

 
$
72,293

Federal agency obligations
404,820

 
408,823

 
199,741

 
204,648

 
344,154

 
346,019

Corporate Bonds

 

 
16,984

 
17,062

 
29,406

 
30,540

State and municipal securities
146,136

 
156,481

 
177,666

 
188,684

 
180,879

 
191,657

Equity securities
1,087

 
1,059

 
1,192

 
1,192

 
1,146

 
889

Total investment securities available for sale
552,043

 
566,363

 
395,583

 
411,586

 
626,656

 
641,398

Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Pass-through securities:
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
155,601

 
161,407

 
136,699

 
139,991

 
149,084

 
153,188

Freddie Mac
81,509

 
85,260

 
98,511

 
100,675

 
56,632

 
58,452

Ginnie Mae
4,488

 
4,778

 
4,973

 
5,180

 
9,047

 
9,315

CMOs and REMICs
191,867

 
193,064

 
81,170

 
82,412

 
38,338

 
38,659

Total mortgage-backed securities available for sale
433,465

 
444,509

 
321,353

 
328,258

 
253,101

 
259,614

Total securities available for sale
$
985,508

 
$
1,010,872

 
$
716,936

 
$
739,844

 
$
879,757

 
$
901,012

At September 30, 2012, our available for sale federal agency securities portfolio, at fair value, totaled $408.8 million, or 10.20% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of one year or less, and $404.8 million had maturities of between one and ten years and a weighted average yield of 1.56%. The agency securities portfolio currently includes both callable debentures and non callable debentures.

At September 30, 2012, our available for sale state and municipal notes securities portfolio, at fair value totaled $156.5 million or 3.9% of total assets. Of the state and municipal note securities portfolio, based on amortized cost, had $2.4 million in securities with a final maturity of one year or less and a weighted average yield of 2.58%; $19.9 million maturing in one to five years with a weighted average yield of 3.44%; $86.4 million maturing in five to ten years with a weighted average yield of 3.54% and $37.5 million maturing in greater than ten years with a weighted average yield of 3.97%. Equity securities available for sale at September 30, 2012 had a fair value of $1.1 million.

At September 30, 2012, $444.5 million of our available for sale mortgage-backed securities, at fair value, consisted of pass-through securities, which totaled 11.0% of total assets and $193.1 million of CMO securities, at fair value. The total amortized cost of these pass- through securities was $241.6 million and consisted of $155.6 million, $81.5 million and $4.5 million of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, respectively, with respective weighted average yields of 2.47%, 2.70% and 2.63%. At the same date, the fair value of our available for sale CMO portfolio totaled $193.1 million, or 4.8% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae, Freddie Mac and $4.6 million sold by private party issuers. The amortized cost of these CMOs result in a weighted average yield of 2.06%. We own both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our portfolio of CMOs available for sale at September 30, 2012 had contractual maturities of over five years. However, as with mortgage-backed pass-through securities, the actual maturity of a CMO may be less than its stated contractual maturity due to prepayments of the underlying mortgages and the terms of the CMO tranche owned.


16


Held to Maturity Portfolio. The following table sets forth the composition of our held to maturity portfolio at the dates indicated.
 
 
September 30,
 
2012
 
2011
 
2010
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
22,236

 
$
22,342

 
$
29,973

 
$
29,857

 
$

 
$

State and municipal securities
19,376

 
20,435

 
18,583

 
19,691

 
27,879

 
28,815

Other
1,500

 
1,526

 
1,500

 
1,539

 
1,000

 
1,038

Total investment securities held to maturity
43,112

 
44,303

 
50,056

 
51,087

 
28,879

 
29,853

Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Pass-through securities:
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
28,637

 
29,849

 
1,298

 
1,361

 
1,835

 
1,931

Freddie Mac
42,706

 
44,053

 
32,858

 
32,841

 
2,389

 
2,513

Ginnie Mae

 

 

 

 
16

 
17

CMOs and REMICs
27,921

 
28,119

 
25,828

 
25,983

 
729

 
748

Total mortgage-backed securities held to maturity
99,264

 
102,021

 
59,984

 
60,185

 
4,969

 
5,209

Total securities held to maturity
$
142,376

 
$
146,324

 
$
110,040

 
$
111,272

 
$
33,848

 
$
35,062


At September 30, 2012, our held to maturity federal agency securities portfolio, at amortized cost, totaled $22.2 million, or 0.6% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of five years or less, and $22.2 million had maturities of between five and ten years and a weighted average yield of 2.11%. The agency securities portfolio currently includes only callable debentures.

State and municipal securities totaled $19.4 million at amortized cost (primarily unrated obligations) and consisted of $9.9 million, with a final maturity of one year or less and a weighted average yield of 2.38%; $1.9 million maturing in one to five years, with a weighted average yield of 3.77%; $3.4 million maturing in five to ten years, with a weighted average yield of 4.18% and $4.2 million maturing in greater than ten years, with a weighted average yield of 4.24%.

At September 30, 2012, our held to maturity mortgage-backed securities portfolio totaled $99.3 million at amortized cost, consisting of: none with contractual maturities of one year or less, $282,000 with a weighted average yield of 5.63% and contractual maturities within five years, and $99.0 million with a weighted average yield of 2.58% with contractual maturities of greater than ten years; CMOs of $27.9 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.


17


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, 2012. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis. ($ in thousands)
 
 
One Year or Less
 
More than One Year
through Five Years
 
More than Five Years
through Ten Years
 
More than Ten Years
 
Total Securities
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Fair
Value
 
Weighted
Average
Yield
 
(Dollars in thousands)
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Fannie Mae
$
108

 
4.14
%
 
$
5,688

 
2.13
%
 
$
33,201

 
2.27
%
 
$
116,604

 
2.54
%
 
$
155,601

 
$
161,407

 
2.47
%
Freddie Mac
168

 
3.71

 
393

 
3.80

 

 

 
80,948

 
2.69

 
81,509

 
85,260

 
2.70

Ginnie Mae

 

 

 

 

 

 
4,488

 
2.63

 
4,488

 
4,778

 
2.63

CMOs and REMICs

 

 

 

 
9,628

 
1.99

 
182,239

 
2.06

 
191,867

 
193,064

 
2.06

Total
276

 
3.88

 
6,081

 
2.24

 
42,829

 
2.21

 
384,279

 
2.35

 
433,465

 
444,509

 
2.33

Investment Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
U.S. Government and agency securities

 

 
107,391

 
1.33

 
297,429

 
1.64

 

 

 
404,820

 
408,823

 
1.56

State and municipal
2,365

 
2.58

 
19,850

 
3.44

 
86,439

 
3.54

 
37,482

 
3.97

 
146,136

 
156,481

 
3.62

Total
2,365

 
2.58

 
127,241

 
1.66

 
383,868

 
2.07

 
37,482

 
3.97

 
550,956

 
565,304

 
2.10
%
Total debt securities available for sale
$
2,641

 
2.72
%
 
$
133,322

 
1.68
%
 
$
426,697

 
2.08
%
 
$
421,761

 
2.49
%
 
$
984,421

 
$
1,009,813

 
2.20
%
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$

 
%
 
$
76

 
4.81
%
 
$

 
%
 
$
28,561

 
2.93
%
 
$
28,637

 
$
29,849

 
2.93
%
Freddie Mac

 

 
206

 
5.93

 

 

 
42,500

 
2.59

 
42,706

 
44,053

 
2.61
%
CMOs and REMICs

 

 

 

 

 

 
27,921

 
2.18

 
27,921

 
28,119

 
2.18
%
Total

 

 
282

 
5.63

 

 

 
98,982

 
2.57

 
99,264

 
102,021

 
2.58
%
Investment Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities

 
%
 

 

 
22,236

 
2.11

 

 

 
22,236

 
22,342

 
2.11
%
State and municipal
9,867

 
2.38

 
1,930

 
3.77

 
3,375

 
4.18

 
4,204

 
4.24

 
19,376

 
20,435

 
3.24
%
Other
250

 
1.51

 
1,250

 
2.53

 

 

 

 

 
1,500

 
1,526

 
2.36
%
Total
10,117

 
2.36

 
3,180

 
3.28

 
25,611

 
2.38

 
4,204

 
4.24

 
43,112

 
44,303

 
5.42
%
Total debt securities held to maturity
$
10,117

 
2.36
%
 
$
3,462

 
3.47
%
 
$
25,611

 
2.38
%
 
$
103,186

 
2.64
%
 
$
142,376

 
$
146,324

 
3.07
%

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 corporate purposes.

Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, NOW accounts, checking accounts, money market accounts, club accounts, certificates of deposit and IRAs and other qualified plan accounts. We provide a variety of commercial checking accounts and other products for businesses.

At September 30, 2012, our deposits totaled $3.1 billion. Interest-bearing deposits totaled $2.2 billion, and non-interest-bearing demand deposits totaled $947.3 million. NOW, savings and money market deposits totaled $1.8 billion at September 30, 2012. Also at that date, we had a total of $387.5 million in certificates of deposit, of which $344.0 million had maturities of one year or

18


less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, we monitor 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.

We utilize brokered deposits on a limited basis as a diversification of wholesale funding on a secured basis. We maintain limits for the use of wholesale deposit and other short term funding in general less than 10% of total assets. Most of the brokered deposit funding maintained by the bank has a maturity to coincide with the anticipated inflows of deposits through municipal tax collections.

Listed below are the Company’s brokered deposits:
 
 
September 30,
2012

 
September 30,
2011

 
(Dollars in thousands)
Savings
$
13,344

 
$

Money market
46,566

 
5,725

Reciprocal CDAR’s 1
1,354

 
2,746

CDAR’s one way
764

 
3,366

Total brokered deposits
$
62,028

 
$
11,837

1 
Certificate of deposit account registry service

Distribution of Deposit Accounts by Type. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.
 
 
For the year ended September 30,
 
2012
 
2011
 
2010
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Demand deposits:
 
 
 
 
 
 
 
 
 
 
 
Retail
$
167,050

 
5.4
%
 
$
194,299

 
8.5
%
 
$
174,731

 
8.2
%
Commercial & municipal
780,254

 
25.0

 
456,927

 
19.8

 
355,126

 
16.6

Total demand deposits
947,304

 
30.4

 
651,226

 
28.3

 
529,857

 
24.8

Business & municipal NOW deposits
234,368

 
7.5

 
237,865

 
10.4

 
276,100

 
12.9

Personal NOW deposits
213,755

 
6.9

 
164,637

 
7.2

 
139,517

 
6.5

Savings deposits
506,538

 
16.3

 
429,825

 
18.7

 
392,321

 
18.3

Money market deposits
821,704

 
26.4

 
509,483

 
22.2

 
427,334

 
19.9

Subtotal
2,723,669

 
87.5

 
1,993,036

 
86.8

 
1,765,129

 
82.4

Certificates of deposit
387,482