10-Q 1 d10q.htm FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011 For the quarterly period ended June 30, 2011
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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 ID No.)

 

400 Rella Boulevard, Montebello, New York   10901
(Address of Principal Executive Office)   (Zip Code)

(845) 369-8040

(Registrant’s Telephone Number including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Classes of Common Stock

  

Shares Outstanding

as of August 1, 2011

$0.01 per share

   38,047,236

 

 

 


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

QUARTERLY PERIOD ENDED JUNE 30, 2011

 

PART I. FINANCIAL INFORMATION   
Item 1.  

Financial Statements

  
 

Consolidated Statements of Financial Condition (unaudited) at June 30, 2011 and September 30, 2010

     3   
 

Consolidated Statements of Income (unaudited) for the Three and Nine Months ending June 30, 2011 and 2010

     4   
 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended June 30, 2011

     5   
 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended June 30, 2011 and 2010

     6   
 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended June 30, 2011 and 2010

     8   
 

Notes to Consolidated Financial Statements (unaudited)

     9   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     43   
Item 4.  

Controls and Procedures

     45   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     45   
Item 1.A.  

Risk Factors

     45   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     45   
Item 3.  

Defaults Upon Senior Securities

     45   
Item 4.  

(Removed and reserved).

     45   
Item 5.  

Other Information

     45   
Item 6.  

Exhibits

     46   
 

Signatures

     47   


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(In thousands, except share data)

 

     June 30,
2011
    September 30,
2010
 
ASSETS     

Cash and due from banks

   $ 45,530      $ 90,872   

Securities (note 6) (including $556,994 and $719,172 pledged as collateral for borrowings and deposits at June 30, 2011 and September 30, 2010 respectively)

    

Available for Sale

     919,805        901,012   

Held to maturity, at amortized cost (fair value of $26,685 and $35,062 at June 30, 2011 and September 30, 2010, respectively)

     25,425        33,848   
  

 

 

   

 

 

 

Total securities

     945,230        934,860   
  

 

 

   

 

 

 

Loans held for sale

     —          5,890   

Loans (notes 3 and 4):

    

Gross loans

     1,685,272        1,701,541   

Allowance for loan losses

     (29,385     (30,843
  

 

 

   

 

 

 

Total loans, net

     1,655,887        1,670,698   

Federal Home Loan Bank (“FHLB”) stock, at cost

     18,807        19,572   

Accrued interest receivable

     10,212        11,069   

Premises and equipment, net

     42,249        43,598   

Goodwill

     160,861        160,861   

Core deposit and other intangible assets

     4,967        3,640   

Bank owned life insurance

     56,454        50,938   

Other assets

     35,860        29,027   
  

 

 

   

 

 

 

Total assets

   $ 2,976,057      $ 3,021,025   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

LIABILITIES

    

Deposits (note 7)

   $ 2,098,073      $ 2,142,702   

FHLB borrowings (including repurchase agreements of $211,427 and $222,500 at June 30, 2011 and September 30, 2010, respectively) (note 8)

     350,333        363,751   

Borrowings senior unsecured note (FDIC insured) (note 8)

     51,498        51,496   

Mortgage escrow funds

     26,310        8,198   

Other liabilities

     20,806        23,923   
  

 

 

   

 

 

 

Total liabilities

     2,547,020        2,590,070   
  

 

 

   

 

 

 

Commitments and contingent liabilities (note 13)

     —          —     

STOCKHOLDERS’ EQUITY :

    

Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)

     —          —     

Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 issued; 38,005,866 and 38,262,288 shares outstanding at June 30, 2011 and September 30, 2010, respectively)

     459        459   

Additional paid-in capital

     357,232        356,912   

Unallocated common stock held by employee stock ownership plan (“ESOP”)

     (6,262     (6,637

Treasury stock, at cost (7,923,686 and 7,667,264 shares at June 30, 2011 and September 30, 2010, respectively)

     (89,715     (87,336

Retained earnings

     168,097        162,433   

Accumulated other comprehensive income (loss), net of taxes

     (774     5,124   
  

 

 

   

 

 

 

Total stockholders’ equity

     429,037        430,955   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,976,057      $ 3,021,025   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

3


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollars in thousands, except share data)

 

     For the Three Months
Ended June 30,
    For the Nine Months
Ended June 30,
 
     2011     2010     2011     2010  

Interest and dividend income:

        

Loans

   $ 22,261      $ 23,393      $ 67,505      $ 69,448   

Taxable securities

     3,607        4,716        10,668        14,192   

Non-taxable securities

     1,829        2,037        5,655        5,833   

Other earning assets

     237        262        968        980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     27,934        30,408        84,796        90,453   

Interest expense:

        

Deposits

     1,493        1,849        4,720        6,840   

Borrowings

     3,637        4,361        11,578        13,595   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     5,130        6,210        16,298        20,435   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     22,804        24,198        68,498        70,018   

Provision for loan losses ( note 4)

     3,600        2,750        7,800        7,750   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     19,204        21,448        60,698        62,268   

Non-interest income:

        

Deposit fees and service charges

     2,674        2,796        8,085        8,533   

Net gain on sale of securities

     542        945        5,492        5,217   

Other than temporary impairment (credit loss)

     (27     —          (27     —     

Title insurance fees

     312        336        949        884   

Bank owned life insurance

     488        503        1,535        1,553   

Net gain on sale of loans

     9        45        861        445   

Investment management fees

     815        756        2,347        2,311   

Fair value loss on interest rate cap

     (259     (595     (27     (831

Other

     663        495        1,681        1,375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     5,217        5,281        20,896        19,487   

Non-interest expense:

        

Compensation and employee benefits (note 12)

     11,122        11,061        33,533        32,149   

CEO retirement expenses

     1,494        —          1,772        —     

Stock-based compensation plans

     284        172        859        1,205   

Occupancy and office operations

     3,423        3,168        10,815        10,031   

Advertising and promotion

     855        1,041        2,651        2,577   

Professional fees

     1,137        1,063        3,242        2,811   

Data and check processing

     712        571        2,045        1,698   

Amortization of intangible assets

     305        452        1,088        1,417   

FDIC insurance and regulatory assessments

     587        927        2,274        2,642   

ATM/debit card expense

     400        164        1,159        1,254   

Foreclosed property expense

     461        69        494        116   

Other

     1,889        2,053        5,797        5,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     22,669        20,741        65,729        61,808   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     1,752        5,988        15,865        19,947   

Income tax expense

     (187     1,232        3,633        4,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 1,939      $ 4,756      $ 12,232      $ 15,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares:

        

Basic

     37,368,391        38,086,535        37,472,548        38,284,965   

Diluted

     37,370,213        38,086,579        37,473,167        38,317,220   

Earnings per common share (note 10)

        

Basic

   $ 0.05      $ 0.12      $ 0.33      $ 0.39   

Diluted

   $ 0.05      $ 0.12      $ 0.33      $ 0.39   

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(In thousands, except share data)

 

     Number
of
Shares
    Common
Stock
     Additional
Paid-In
Capital
    Unallocated
ESOP
Shares
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (loss)
    Total
Stockholders’
Equity
 

Balance at September 30, 2010

     38,262,288      $ 459       $ 356,912      $ (6,637   $ (87,336   $ 162,433      $ 5,124      $ 430,955   

Net income

     —          —           —          —          —          12,232        —          12,232   

Other comprehensive loss

     —          —           —          —          —          —          (5,898     (5,898
                 

 

 

 

Total comprehensive loss

                    6,334   

Deferred compensation transactions

     —          —           19        —          —          —          —          19   

Stock option transactions, net

     —          —           409        —          —          —          —          409   

ESOP shares allocated or committed to be released for allocation (37,449 shares)

     —          —           (22     375        —          —          —          353   

RRP Awards

     19,000        —           (187     —          187        —          —       

Vesting of RRP Awards

     (968     —           101        —          —          —          —          101   

Purchase of treasury shares

     (274,454     —           —          —          (2,566     —          —          (2,566

Cash dividends paid ($0.18 per common share)

     —          —           —          —          —          (6,690     —          (6,690

Other

     —          —           —          —          —          122        —          122   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

     38,005,866      $ 459       $ 357,232      $ (6,262   $ (89,715   $ 168,097      $ (774   $ 429,037   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

5


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)

 

    

For the Nine Months

Ended June 30,

 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 12,232      $ 15,089   

Adjustments to reconcile net income to net cash provided by operating activities

    

Provision for loan losses

     7,800        7,750   

Write down of other real estate owned

     429        44   

Depreciation and amortization of premises and equipment

     3,971        3,666   

Amortization of intangibles

     1,088        1,417   

Net gain on sales of loans held for sale

     (861     (445

Net realized gain on sale of securities available for sale

     (5,492     (5,217

Other than temporary impairment (credit Loss)

     27        —     

Fair value (income) loss on interest rate cap

     27        831   

Loss on sales of fixed assets

     —          54   

Net amortization of premium on securities

     2,318        6,574   

Amortization of premiums on borrowings

     (31     (211

Amortization of prepaid penalties on restructured borrowings

     686        —     

ESOP and RRP expense

     453        1,162   

ESOP forfeitures

     (3     (2

Stock option compensation expense

     409        45   

Originations of loans held for sale

     (37,819     (27,198

Proceeds from sales of loans held for sale

     44,570        26,722   

Increase in cash surrender value of bank owned life insurance

     (1,536     (1,586

Deferred income tax expense

     (4,109     (5,900

Net changes in accrued interest receivable and payable

     747        (738

Other adjustments (principally net changes in other assets and other liabilities)

     (1,842     (319
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,064        21,738   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of available for sale securities

     (505,846     (555,031

Purchases of held to maturity securities

     (6,675     (18,314

Proceeds from maturities, calls and other principal payments on securities:

    

Available for sale

     185,343        232,625   

Held to maturity

     15,088        22,469   

Proceeds from sales of securities available for sale

     293,328        276,021   

Loan originations

     (409,980     (351,860

Loan principal payments

     415,994        342,601   

Purchase of interest rate derivative

     —          (1,368

Redemption (Purchase) of FHLB stock

     765        (1,419

Purchase of BOLI

     (3,980  

Purchases of premises and equipment

     (2,622     (6,059

Proceeds from the sale of premises

     —          48   
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,585     (60,287
  

 

 

   

 

 

 

Continued

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)

 

     For the Nine Months
Ended June 30,
 
     2011     2010  

Cash flows from financing activities:

    

Net decrease in transaction, savings and money market deposits

   $ (55,752   $ (54,044

Net increase (decrease) in time deposits

     11,123        (67,233

Net increase in short-term borrowings

     27,100        100,600   

Gross repayments of long-term borrowings

     (36,020     (55,599

Payments of pre-paid penalties on FHLBNY advances

     (5,151     —     

Net increase in mortgage escrow funds

     18,112        12,086   

Death benefit received from BOLI

     —          750   

Treasury shares purchased

     (2,566     (9,783

Stock option transactions

     4        857   

Other stock-based compensation transactions

     19        64   

Cash dividends paid

     (6,690     (6,897
  

 

 

   

 

 

 

Net cash used in financing activities

     (49,821     (79,199
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (45,342     (117,748

Cash and cash equivalents at beginning of period

     90,872        160,408   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 45,530      $ 42,660   
  

 

 

   

 

 

 

Supplemental information:

    

Interest payments

   $ 16,408      $ 20,968   

Income tax payments

     7,034        4,882   

Net change in net unrealized losses recorded on securities available for sale

     (11,540     752   

Change in deferred taxes on net unrealized losses on securities available for sale

     4,686        (308

Real estate acquired in settlement of loans

     985        1,628   

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands, except share data)

 

     For the Three Months
Ended June 30,
     For the Nine Months
Ended June 30,
 
     2011      2010      2011     2010  

Net Income:

   $ 1,939       $ 4,756       $ 12,232      $ 15,089   

Other Comprehensive income (loss) :

          

Net unrealized holding gains (losses) on securities available for sale net of related tax expense (benefit) of $6,316, $4,474, $(2,456) and $2,424

     9,236         6,543         (3,592     3,545   

Less:

          

Reclassification adjustment for net unrealized gains included in net income, net of related income tax expense of $220, $383, $2,230 and $2,116

     322         562         3,262        3,101   
  

 

 

    

 

 

    

 

 

   

 

 

 
     8,914         5,981         (6,854     444   

Change in funded status of defined benefit plans, net of related income tax expense of $272, $152, $652 and $453

     400         226         956        680   
  

 

 

    

 

 

    

 

 

   

 

 

 
     9,314         6,207         (5,898     1,124   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Comprehensive income

   $ 11,253       $ 10,963       $ 6,334      $ 16,213   
  

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

1. Basis of Presentation

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident Bancorp” or “the Company”), Hardenburgh Abstract Title Company, Inc., which provides title searches and insurance for residential and commercial real estate, Hudson Valley Investment Advisors, LLC (“HVIA”), a registered investment advisor, Provident Risk Management, (a captive insurance company), Provident Bank (“the Bank”), and the Bank’s wholly owned subsidiaries. These subsidiaries are (i) Provident Municipal Bank (“PMB”) which is a limited-purpose, New York State-chartered commercial bank formed to accept deposits from municipalities in the Company’s market area, (ii) Provident REIT, Inc. and WSB Funding, Inc. which are real estate investment trusts that hold a portion of the Company’s real estate loans, (iii) Provest Services Corp. I, which has invested in a low-income housing partnership, (iv) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers, and (v) companies which hold foreclosed properties acquired by the Bank. Intercompany transactions and balances are eliminated in consolidation.

The Company’s off-balance sheet activities are limited to loan origination commitments, loan commitments pending sale, lines of credit extended to customers and letters of credit on behalf of customers, which all are in the ordinary course of its lending activities. In addition, the Company purchased interest rate caps with a notional value of $50.0 million during the first quarter of fiscal 2010. The Company does not engage in off-balance sheet financing transactions or other activities involving the use of special-purpose or variable interest entities.

The consolidated financial statements have been prepared by management without audit, but, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented clear. The results of operations for the nine months ended June 30, 2011 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2011. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2010.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. A material estimate that is particularly susceptible to near-term change is the allowance for loan loss (see note 4), which reflects the application of a critical accounting policy.

Certain loans amounts from prior periods have been reclassified to conform to the current fiscal year presentation.

 

2. Recent Accounting Standards, Not Yet Adopted

Accounting Standards Update (ASU) 2011-02, Receivables (Topic 310)-A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring has been issued. The ASU clarifies which loan modifications constitute troubled debt restructurings and assists creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. This standard is effective for the Company July 1, 2011 and is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update (ASU) 2011-03, Transfers and Servicing(Topic 860)- Reconsideration of Effective Control for Repurchase Agreements has been issued, which is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This standard is effective for the Company January 1, 2012 and is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update (ASU) 2011-04, Fair Value Measurement(Topic 820)-Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS has been issued, which will conform the meaning and disclosure requirements of fair value measurement between U.S. GAAP and in IFRS. This standard is effective for the Company January 1, 2012 and is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update (ASU) 2011-05- Presentation of Comprehensive Income (Topic 220) has been issued. This standard was issued to conform U.S. GAAP and IFRS as well as to increase the prominence of items reported in other comprehensive income. This standard is effective for the Company January 1, 2012 and is not expected to have a material effect on the Company’s consolidated financial statements.

 

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

3. Loans

Major classifications of loans, excluding loans held for sale, are summarized below:

 

     June 30, 2011      September 30, 2010  

Real estate - residential mortgage

   $ 402,072       $ 434,900   

Real estate - commercial mortgage

     661,758         579,232   

Acquisition, development & construction loans

     193,312         231,258   

Commercial business loans

     201,612         217,927   

Consumer loans, including home equity loans

     226,518         238,224   
  

 

 

    

 

 

 

Total

   $ 1,685,272       $ 1,701,541   
  

 

 

    

 

 

 

 

4. Allowance for Loan Losses and Non-Performing Assets

The allowance for loan losses is established through provisions for losses charged to earnings. Loan losses are charged against the allowance when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized. The allowance for loan losses is the amount that management has determined to be necessary to absorb probable incurred loan losses inherent in the existing portfolio. Management’s evaluations, which are subject to periodic review by the Company’s regulators, are made using a consistently applied methodology that takes into consideration such factors as the Company’s past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions. Modifications to the methodology used in the allowance for loan losses evaluation may be necessary in the future based on economic and real estate market conditions, new information obtained regarding known problem loans, regulatory guidelines and examinations, the identification of additional problem loans, and other factors. Activity in the allowance for loan losses and the recorded investments in loans by portfolio segment based on impairment method for the periods indicated are summarized below:

 

     Three Months Ended June 30, 2011  
     Beginning
Allowance for
loan losses
     Charge-offs     Recoveries      Net
Charge-offs
    Provision
for losses
    Ending
Allowance for
Loan Losses
 

Loans by class:

              

Real estate - residential mortgage

   $ 3,539       $ (438   $ 13       $ (425   $ 162      $ 3,276   

Real estate - commercial mortgage

     5,213         (114     1         (113     439        5,539   

Real estate - commercial mortgage (CBL)1

     1,062         (279     —           (279     293        1,076   

Commercial business loans

     2,692         (185     2         (183     2        2,511   

Commercial business loans (CBL)1

     5,447         (599     103         (496     (200     4,751   

Acquisition Development & Construction

     8,728         (2,095     3         (2,092     2,316        8,952   

Consumer, including home equity

     3,449         (788     31         (757     588        3,280   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Loans

   $ 30,130       $ (4,498   $ 153       $ (4,345   $ 3,600      $ 29,385   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs to average loans outstanding (annualized)

  

              1.03

 

1

Community Business Loans

 

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

     Nine Months Ended June 30, 2011  
     Beginning
Allowance for
loan losses
     Charge-offs     Recoveries      Net
Charge-offs
    Provision
for losses
    Ending
Allowance for
Loan Losses
 

Loans by class:

              

Real estate - residential mortgage

   $ 2,587       $ (878   $ 14       $ (864   $ 1,553      $ 3,276   

Real estate - commercial mortgage

     5,068         (547     1         (546     1,017        5,539   

Real estate - commercial mortgage (CBL)

     845         (722     —           (722     953        1,076   

Commercial business loans

     3,172         (367     179         (188     (473     2,511   

Commercial business loans (CBL)

     5,505         (3,697     315         (3,382     2,628        4,751   

Acquisition Development & Construction

     10,231         (2,220     10         (2,210     931        8,952   

Consumer, including home equity

     3,435         (1,453     107         (1,346     1,191        3,280   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Loans

   $ 30,843       $ (9,884   $ 626       $ (9,258   $ 7,800      $ 29,385   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs to average loans outstanding (annualized)

  

              0.73

 

     June 30, 2011  
     Individually
evaluated for
impairment
     Collectively
evaluated for
impairment
     Total
ending loans
balance
 

Loans by class:

        

Real estate - residential mortgage

   $ 10,535       $ 391,537       $ 402,072   

Real estate - commercial mortgage

     8,770         557,626         566,396   

Real estate - commercial mortgage (CBL)

     4,768         90,594         95,362   

Commercial business loans

     520         123,824         124,344   

Commercial business loans (CBL)

     297         76,971         77,268   

Acquisition Development & Construction

     27,736         165,576         193,312   

Consumer, including home equity

     2,483         224,035         226,518   
  

 

 

    

 

 

    

 

 

 

Total Loans

   $ 55,109       $ 1,630,163       $ 1,685,272   
  

 

 

    

 

 

    

 

 

 
     June 30, 2011  
     Individually
evaluated for
impairment
     Collectively
evaluated for
impairment
     Total
allowance
balance
 

Ending allowance by class:

        

Real estate - residential mortgage

   $ 1,045       $ 2,231       $ 3,276   

Real estate - commercial mortgage

     541         4,998         5,539   

Real estate - commercial mortgage (CBL)

     352         724         1,076   

Commercial business loans

     90         2,421         2,511   

Commercial business loans (CBL)

     164         4,587         4,751   

Acquisition Development & Construction

     1,066         7,886         8,952   

Consumer, including home equity

     450         2,830         3,280   
  

 

 

    

 

 

    

 

 

 

Total Loans

   $ 3,708       $ 25,677       $ 29,385   
  

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

     Three months
ended
June 30, 2010
    Nine months
ended
June 30, 2010
 

Allowance for loan losses:

    

Beginning Balance

   $ 30,444      $ 30,050   

Charge-offs

     (2,427     (7,651

Recoveries

     254        872   
  

 

 

   

 

 

 

Net Charge-offs

     (2,173     (6,779

Provision for loan losses

     2,750        7,750   
  

 

 

   

 

 

 

Ending Balance

   $ 31,021      $ 31,021   
  

 

 

   

 

 

 

Net charge-offs to average loans outstanding (annualized)

     0.52     0.54

 

Loans as of June 30, 2010:

  

Individually evaluated for impairment

   $ 22,071   

Collectively evaluated for impairment

     1,683,666   
  

 

 

 

Total ending loans balance

   $ 1,705,737   
  

 

 

 

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 substantially consist of nonperforming loans and accruing and performing troubled debt restructured loans. The recorded investment of an impaired loan includes the unpaid principal balance, negative escrow and any tax in arrears.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     YTD
Average
Impaired
Loans
     Interest
Income
Recognized
     Cash-basis
Interest
Income
Recognized
 

With no related allowance recorded:

                 

Real estate - residential mortgage

   $ 4,699       $ 4,921       $ —         $ 4,904       $ 149       $ 48   

Real estate - commercial mortgage

     5,931         5,938         —           5,811         73         68   

Real estate - commercial mortgage (CBL)

     3,006         3,114         —           3,294         167         24   

Acquisition, development and construction

     20,496         20,893         —           22,426         788         766   

Commercial business loans

     383         383         —           589         —           33   

Commercial business loans (CBL)

     —           —           —           —           —           —     

Consumer loans, including home equity

     1,322         1,322         —           1,389         43         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     35,837         36,571         —           38,413         1,220         941   

With an allowance recorded:

                 

Real estate - residential mortgage

     5,560         5,614         1,045         5,877         25         48   

Real estate - commercial mortgage

     2,755         2,832         541         2,811         102         35   

Real estate - commercial mortgage (CBL)

     1,578         1,654         352         1,766         —           —     

Acquisition, development and construction

     6,830         6,843         1,066         6,710         24         34   

Commercial business loans

     137         137         90         333         —           —     

Commercial business loans (CBL)

     297         297         164         305         —           —     

Consumer loans, including home equity

     1,161         1,161         450         1,201         14         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     18,318         18,538         3,708         19,003         165         127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,155       $ 55,109       $ 3,708       $ 57,416       $ 1,385       $ 1,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

The following table presents loans individually evaluated for impairment by segment of loans as of September 30, 2010:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

With no related allowance recorded:

        

Real estate - residential mortgage

   $ 2,896       $ 2,930       $ —     

Real estate - commercial mortgage

     1,658         1,793         —     

Acquisition, development and construction

     4,732         4,760         —     

Commercial business loans

     458         458         —     

Consumer loans, including home equity

     378         378         —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     10,122         10,319         —     

With an allowance recorded:

        

Real estate - residential mortgage

     5,682         5,879         800   

Real estate - commercial mortgage

     6,974         7,203         399   

Acquisition, development and construction

     15,613         15,652         766   

Commercial business loans

     1,365         1,365         511   

Consumer loans, including home equity

     1,663         1,664         570   
  

 

 

    

 

 

    

 

 

 

Subtotal

     31,297         31,763         3,046   
  

 

 

    

 

 

    

 

 

 

Total

   $ 41,419       $ 42,082       $ 3,046   
  

 

 

    

 

 

    

 

 

 

Average impaired loans for the nine months ending June 30, 2011 were $67,371. Listed below are the interest income recognized during impairment and cash received for interest during impairment for the nine months ending June 30, 2011 and June 30, 2010, respectively.

 

     June 30,
2011
     June 30,
2010
 

Interest income recognized during impairment

   $ 1,385       $ 1,481   

Cash-basis interest income recognized

     1,068         868   

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

The following tables set forth the amounts and categories of the Company’s non-performing assets and troubled debt restructurings at June 30, 2011 and September 30, 2010.

 

     June 30, 2011  
     Current
Loans
     30-59
Days
Past Due
     60-89
Days
Past Due
     90+
Days
Past Due
     Non-
Accrual
    Total
Loans
 

Non-performing loans:

                

Real estate - residential mortgage

   $ 390,143       $ 1,301       $ 370       $ 2,064       $ 8,194      $ 402,072   

Real estate - commerical mortgage

     555,736         2,442         —           1,194         7,024        566,396   

Real estate - commerical mortgage (CBL)

     90,862         —           —           1,455         3,045        95,362   

Commercial business loans

     124,157         17         31         —           139        124,344   

Commercial business loans (CBL)

     76,972         —           —           —           296        77,268   

Acquisition, development and construction loans

     166,214         4,086         224         445         22,343        193,312   

Consumer, including home equity loans

     223,993         573         88         679         1,185        226,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-performing loans

   $ 1,628,077       $ 8,419       $ 713       $ 5,837       $ 42,226      $ 1,685,272   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans 90+ and still accruing

                 5,837     

Real estate owned:

                

Land

                 2,505     

Commercial real estate

                 2,325     

One- to four-family

                 353     
              

 

 

   

Total real estate owned

                 5,183     
              

 

 

   

Total non-performing assets

               $ 53,246     
              

 

 

   

Troubled Debt Restructurings still accruing and not included above

  

            $ 7,447     

Ratios:

                

Non-performing loans to total loans

                 2.85  

Non-performing assets to total assets

                 1.79  

Allowance for loan losses to total non-performing loans

  

              61  

Allowance for loan losses to average loans

                 1.74  

 

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

     September 30, 2010  
     Current
Loans
     30-59
Days
Past Due
     60-89
Days
Past Due
     90+
Days
Past Due
     Non-
Accrual
    Total
Loans
 

Non-performing loans:

                

Real estate - residential mortgage

   $ 426,754       $ 113       $ —         $ 1,953       $ 6,080      $ 434,900   

Real estate - commerical mortgage

     475,532         616         853         1,866         5,061        483,928   

Real estate - commerical mortgage (CBL)

     92,374         —           —           1,105         1,825        95,304   

Commercial business loans

     121,301         3,403         —           —           1,061        125,765   

Commercial business loans (CBL)

     91,847         —           —           —           315        92,162   

Acquisition, development and construction loans

     218,847         3,982         2,699         —           5,730        231,258   

Consumer, including home equity loans

     235,700         375         305         503         1,341        238,224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-performing loans

   $ 1,662,355       $ 8,489       $ 3,857       $ 5,427       $ 21,413      $ 1,701,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans 90+ and still accruing

                 5,427     

Real estate owned:

                

Land

                 2,029     

Commercial real estate

                 1,507     

One- to four-family

                 355     
              

 

 

   

Total real estate owned

                 3,891     
              

 

 

   

Total non-performing assets

               $ 30,731     
              

 

 

   

Troubled Debt Restructurings still accruing and not included above

  

            $ 16,047     

Ratios:

                

Non-performing loans to total loans

                 1.58  

Non-performing assets to total assets

                 1.02  

Allowance for loan losses to total non-performing loans

  

              115  

Allowance for loan losses to average loans

                 1.82  

Troubled Debt Restructurings:

Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty. Restructured loans are recorded in accrual status when the loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items. Total troubled debt restructurings were $20,864 and $21,504 at June 30, 2011 and September 30, 2010, respectively. There were $13,417 and $5,457 in troubled debt restructurings included in non- performing loans at June 30, 2011 and September 30, 2010, respectively. Troubled debt restructurings still accruing and considered to be performing were $7,447 and $16,047 at June 30, 2011 and September 30, 2010, respectively. The Company has allocated $331 and $673 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2011 and September 30, 2010 respectively.

The Company has committed to lend additional amounts totaling up to $4,063 and $3,957 as of June 30, 2011 and September 30, 2010 to customers with outstanding loans that are classified as troubled debt restructurings. 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.

 

15


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans. This analysis is performed on a monthly basis on all criticized classified loans. The Company uses the following definitions of risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected these potential weaknesses may result in the deterioration of the repayment prospects for the loan or the institution’s credit position at some current future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed as of June 30, 2011, the risk category of loans by class of gross loans is as follows:

 

     Special
Mention
     Substandard      Doubtful  

Real estate - residential mortgage

   $ 3,396       $ 10,108       $ —     

Real estate - commercial mortgage

     11,807         26,645      

Real estate - commercial mortgage (CBL)

     1,172         4,768         —     

Acquisition, development and construction

     5,072         54,399         —     

Commercial business loans

     1,540         4,717      

Commercial business loans (CBL)

     610         768         68   

Consumer loans, including home equity loans

     502         2,352         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 24,099       $ 103,757       $ 68   
  

 

 

    

 

 

    

 

 

 

 

5. Fair value measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values.

LEVEL 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.

LEVEL 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

LEVEL 3 – Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that the market participants would use to value the asset or liability.

When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.

 

16


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

The following is a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.

Investment securities available for sale

The majority of the Company’s available for sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments are actively traded and therefore have been classified as Level 1 valuations (U.S. Treasuries and certain government sponsored agencies).

The Company utilizes an outside vendor to obtain valuations for its traded securities as well as information received from a third party investment advisor. The majority of the Company’s available for sale investment securities (mortgage backed securities issued by US government corporations and government sponsored entities) have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable (Level 2). The Company utilizes prices from a leading provider of market data information and compares them to dealer indicative bids from the Company’s external investment advisor. For securities where there is limited trading activity (private label CMO’s) and less observable valuation inputs, the Company has classified such valuations as Level 3.

The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there has been a decline in the volume and level of activity in the market for its private label mortgage backed securities. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of privately issued residential mortgage backed securities as Level 3 as of April 1, 2009 with a fair value of $9,534. As of June 30, 2011, these securities have an amortized cost of $5,602 and a fair value of $5,314. In determining the fair value of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that market participants would use in pricing these securities in an orderly market. Present value estimated cash flow models were used discounted at a rate that was reflective of similarly structured securities in an orderly market. The resultant prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of June 30, 2011. These securities have a weighted average coupon rate of 2.96 percent, a weighted average life of 4.69 years, a weighted average 1 month prepayment history of 9.87 years and a weighted average twelve month default rate of 4.17 CDR. It was determined that one of these securities with a carrying amount of $1,878 and an amortized cost of $2,071 had an other than temporary loss which resulted in a $27 temporary impairment charge.

 

17


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

The investment grades of these securities are as follows:

 

     Amortized
Cost
     Fair
Value
 

Investment Grade:

     

Aa1

   $ 356       $ 357   

Ba1

     163         154   

B

     5,083         4,803   
  

 

 

    

 

 

 

Total private label CMOs

   $ 5,602       $ 5,314   
  

 

 

    

 

 

 

Derivatives

The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2). The Company’s derivatives consist of two interest rate caps and three interest rate swaps (see footnote 9).

Commitments to sell real estate loans

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments and, therefore are carried at estimated fair value on the consolidated balance sheets. The estimated fair values of these commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell to certain government sponsored agencies. The fair values of these commitments generally result in a Level 2 classification. The fair values of these commitments are not considered material.

A summary of assets and liabilities at June 30, 2011 measured at estimated fair value on a recurring basis were as follows:

 

     Fair Value
Measurements
at

June  30,
2011
     Level 1      Level 2      Level 3  

Investment securities available for sale:

           

Mortgage-backed securities-residential

           

Fannie Mae

   $ 121,433       $ —         $ 121,433       $ —     

Freddie Mac

     70,903         —           70,903         —     

Ginnie Mae

     5,130         —           5,130         —     

CMO/Other MBS

     85,918         —           85,918         —     

Privately issued collateralized mortgage obligations

     5,314         —           —           5,314   
  

 

 

    

 

 

    

 

 

    

 

 

 
     288,698         —           283,384         5,314   

Investment securities

           

U.S. Government securities

     56,182         56,182         —           —     

Federal agencies

     368,452         —           368,452         —     

Corporate debt securities

     17,086         —           17,086         —     

Obligations of states and political subdivisions

     188,217         —           188,217         —     

Equities

     1,170         —           1,170         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     631,107         56,182         574,925         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     919,805         56,182         858,309         5,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate caps and swaps

     375         —           375         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 920,180       $ 56,182       $ 858,684       $ 5,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Swaps

   $ 139       $ —         $ 139       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 139       $ —         $ 139       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

A summary of assets and liabilities at September 30, 2010 measured at estimated fair value on a recurring basis were as follows:

 

     Fair Value
Measurements

at
September 30,
2010
     Level 1      Level 2      Level 3  

Investment securities available for sale:

           

Mortgage-backed securities-residential

           

Fannie Mae

   $ 153,188       $ —         $ 153,188       $ —     

Freddie Mac

     58,452         —           58,452         —     

Ginnie Mae

     9,315         —           9,315         —     

CMO/Other MBS

     32,663         —           32,663         —     

Privately issued collateralized mortgage obligation

     5,996         —           —           5,996   
  

 

 

    

 

 

    

 

 

    

 

 

 
     259,614         —           253,618         5,996   

Investment securities

           

U.S. Government securities

     72,293         72,293         —           —     

Federal agencies

     346,019         346,019         —           —     

Corporate debt securities

     30,540         —           30,540         —     

Obligations of states and political subdivisions

     191,657         —           191,657         —     

Equities

     889         —           889         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     641,398         418,312         223,086         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     901,012         418,312         476,704         5,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate caps and swaps

     435         —           435         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 901,447       $ 418,312       $ 477,139       $ 5,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Swaps

   $ 173       $ —         $ 173       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 173       $ —         $ 173       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending June 30, 2011:

 

     Privately
issued
CMOS
 

Balance at September 30, 2009

   $ 10,411   

Pay downs

     (1,528

(Amortization) and accretion, net

     3   

Change in fair value

     124   
  

 

 

 

Balance at June 30, 2010

   $ 9,010   
  

 

 

 

Balance at September 30, 2010

   $ 5,996   

Pay downs

     (725

(Amortization) and accretion, net

     (1

Credit loss write down (OTTI)

     (27

Change in fair value

     71   
  

 

 

 

Balance at June 30, 2011

   $ 5,314   
  

 

 

 

 

19


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances:

Loans Held for Sale and Loans

Loans held for sale are recorded at the lower of cost or fair value in accordance with GAAP.

The Company may record nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependant loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based upon recent comparable sales of similar properties or assumptions generally observable by market participants. Any fair value adjustments for loans categorized here are classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurements were $51,401 and $28,717 which equals the carrying value less the allowance for loan losses allocated to these loans at June 30, 2011 and September 30, 2010, respectively. Loans subject to nonrecurring fair value measurements have been transferred from Level 2 to Level 3 as of September 30, 2010. Changes in fair value recognized on provisions on loans held by the Company were $662 and $1,913 nine months ended June 30, 2011 and 2010, respectively.

Mortgage servicing rights

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing asset. In accordance with FASB ASC Topic 860-Transfers and Servicing, the Company must record impairment charges on a nonrecurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights the Company utilizes a third party vendor, which considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights is considered a Level 3 valuation. Changes in fair value of mortgage servicing rights recognized for the nine months ended June 30, 2011 was $399. There was no valuation allowance recorded at June 30, 2011. A valuation allowance of $54 was recorded at September 30, 2010, reflecting fair market value.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place, and the related nonrecurring fair value measurements adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $5,184 and $3,891 at June 30, 2011 and September 30, 2010, respectively. There were $329 and $44 changes in fair value recognized through income for those foreclosed assets held by the Company during the nine months ending June 30, 2011 and 2010, respectively.

A summary of assets and liabilities at June 30, 2011 measured at estimated fair value on a nonrecurring basis were as follows:

 

     Fair Value
Measurements

at
June 30,
2011
     Level 1      Level 2      Level 3  

Real estate - residential mortgage

   $ 4,569       $ —         $ —         $ 4,569   

Real estate - commercial mortgage

     3,593         —           —           3,593   

Acquisition, development and construction

     5,777         —           —           5,777   

Commercial business loans

     180         —           —           180   

Consumer loans

     711         —           —           711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with specific allowance allocations

   $ 14,830       $ —         $ —         $ 14,830   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

Fair values of financial instruments

FASB Codification Topic 825: 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 for interim and annual periods. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

Quoted market prices are used to estimate fair values when those prices are available, although active markets do not exist for many types of financial instruments. Fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with FASB Topic 825 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):

 

     June 30,
2011
    September 30,
2010
 
     Carrying
amount
    Estimated
fair value
    Carrying
amount
    Estimated
fair value
 

Financial assets:

        

Cash and due from banks

   $ 45,530      $ 45,530      $ 90,872      $ 90,872   

Securities available for sale

     919,805        919,805        901,012        901,012   

Securities held to maturity

     25,425        26,685        33,848        35,062   

Loans

     1,655,887        1,701,770        1,670,698        1,680,939   

Loans held for sale

     —          —          5,890        5,934   

Accrued interest receivable

     10,212        10,212        11,069        11,069   

FHLB of New York stock

     18,807        18,807        19,572        19,572   

Financial liabilities:

        

Non-maturity deposits

     (1,709,377     (1,709,377     (1,765,129     (1,765,129

Certificates of Deposit

     (388,696     (380,898     (377,573     (380,744

FHLB and other borrowings

     (401,831     (457,865     (415,247     (473,785

Mortgage escrow funds

     (26,310     (26,306     (8,198     (8,198

Accrued interest payable

     (2,197     (2,197     (2,307     (2,307

The following paragraphs summarize the principal methods and assumptions used by management to estimate the fair value of the Company’s financial instruments.

(a) Cash and due from banks

The carrying value of cash and due from banks approximates their fair value

(b) Securities

The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, live trading levels, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other items. For certain securities, for which the inputs used by independent pricing services were derived from unobservable market information, the Company evaluated the appropriateness of each price. In accordance with adoption of FASB Codification Topic 820, the Company reviewed the volume and level of activity for its different classes of securities to determine whether transactions were not considered orderly. For these securities, the quoted prices received from independent pricing services may be adjusted, as necessary, to estimate fair value in accordance with FASB Codification Topic 820. If applicable, adjustments to fair value were based on averaging present value cash flow model projections with prices obtained from independent pricing services.

 

21


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

(c) Loans held for sale

Loans held for sale are recorded at the lower of cost or fair value in accordance with GAAP.

(d) Loans

Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into adjustable-rate and fixed-rate categories. Fixed-rate loans were further segmented by type, such as residential mortgage, commercial mortgage, commercial business and consumer loans. Loans were also segmented by maturity dates. Fair values were estimated by discounting scheduled future cash flows through estimated maturity using a discount rate equivalent to the current market rate on loans that are similar with regard to collateral, maturity and the type of borrower. The discounted value of the cash flows was reduced by a credit risk adjustment based on loan categories. Based on the current composition of the Company’s loan portfolio, as well as past experience and current economic conditions and trends, the future cash flows were adjusted by prepayment assumptions that shortened the estimated remaining time to maturity and therefore affected the fair value estimates.

(e) FHLB of New York Stock

The redeemable carrying amount of these securities with limited marketability approximates their fair value.

(f) Deposits and Mortgage Escrow Funds

In accordance with FASB Codification Topic 825, 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 and mortgage escrow funds 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.

(g) Borrowings

Fair values of FHLB and other 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 on borrowings of similar type and maturity.

(h) 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 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 June 30, 2011 and September 30, 2010, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.

 

22


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

6. Securities

The following is a summary of securities available for sale:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

June 30, 2011

          

Mortgage-backed securities-residential

          

Fannie Mae

   $ 120,501         1,446         (514     121,433   

Freddie Mac

     70,138         1,069         (304     70,903   

Ginnie Mae

     5,066         64         —          5,130   

CMO/Other MBS

     91,632         605         (1,005     91,232   
  

 

 

    

 

 

    

 

 

   

 

 

 
     287,337         3,184         (1,823     288,698   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities

          

U.S. Government securities

     55,802         380         —          56,182   

Federal agencies

     367,444         2,040         (1,032     368,452   

Corporate bonds

     16,918         178         (10     17,086   

State and municipal securities

     181,193         7,227         (203     188,217   

Equities

     1,396         —           (226     1,170   
  

 

 

    

 

 

    

 

 

   

 

 

 
     622,753         9,825         (1,471     631,107   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 910,090       $ 13,009       $ (3,294   $ 919,805   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2010

          

Mortgage-backed securities-residential

          

Fannie Mae

   $ 149,084       $ 4,105       $ (1   $ 153,188   

Freddie Mac

     56,632         1,820         —          58,452   

Ginnie Mae

     9,047         268         —          9,315   

CMO/Other MBS

     38,338         680         (359     38,659   
  

 

 

    

 

 

    

 

 

   

 

 

 
     253,101         6,873         (360     259,614   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities

          

U.S. Government securities

     71,071         1,222         —          72,293   

Federal agencies

     344,154         1,919         (54     346,019   

Corporate bonds

     29,406         1,134         —          30,540   

State and municipal securities

     180,879         10,798         (20     191,657   

Equities

     1,146         —           (257     889   
  

 

 

    

 

 

    

 

 

   

 

 

 
     626,656         15,073         (331     641,398   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 879,757       $ 21,946       $ (691   $ 901,012   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except 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.

 

     June 30, 2011  
     Amortized
Cost
     Fair
Value
 

Remaining period to contractual maturity

     

Less than one year

   $ 4,576         4,627   

One to five years

     405,912         408,366   

Five to ten years

     160,373         164,754   

Greater than ten years

     50,496         52,190   
  

 

 

    

 

 

 

Total

   $ 621,357       $ 629,937   
  

 

 

    

 

 

 

Proceeds from sales of securities available for sale totaled $293,328 and $276,021 during the nine months ending June 30, 2011 and 2010, respectively. These sales resulted in gross realized gains of $5,492 and $5,391 for the nine months ending June 30, 2011 and 2010 respectively, and gross realized losses of $0 and $174 for the nine months ending June 30, 2011 and 2010 respectively.

Proceeds from sales of securities available for sale totaled $22,977 and $45,003 during the three months ending June 30, 2011 and 2010, respectively. These sales resulted in gross realized gains of $542 and $983 for the three months ending June 30, 2011 and 2010 respectively, and gross realized losses of $0 and $38 for the three months ending June 30, 2011 and 2010 respectively.

Securities, including some held to maturity securities, with carrying amounts of $219,764 and $228,442 were pledged as collateral for borrowings at June 30, 2011 and September 30, 2010, respectively. Securities with carrying amounts of $337,230 and $490,730 were pledged as collateral for municipal deposits and other purposes at June 30, 2011 and September 30, 2010, 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  

As of June 30, 2011

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Fannie Mae mortgage

   $ 35,459       $ (513   $ 95       $ (1   $ 35,554       $ (514

Freddie Mac

     26,987         (304     —           —          26,987         (304

CMO / Other MBS

     52,481         (819     2,032         (186     54,513         (1,005
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Mortgage-backed securities-residential

     114,927         (1,636     2,127         (187     117,054         (1,823

U.S. Government and agency securities

     129,980         (1,032     —           —          129,980         (1,032

Corporate bonds

     2,081         (10     —           —          2,081         (10

State and municipal securities

     9,275         (203     —           —          9,275         (203

Equity securities

     103         (2     816         (224     919         (226
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 256,366       $ (2,883   $ 2,943       $ (411   $ 259,309       $ (3,294
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

24


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

     Continuous Unrealized Loss Position               
     Less Than 12 Months     12 Months or Longer     Total  

As of September 30, 2010

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Fannie Mae

   $ 124       $ (1   $ —         $ —        $ 124       $ (1

CMO’s

     486         (7     5,511         (352     5,997         (359
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Mortgage-backed securities-residential

     610         (8     5,511         (352     6,121         (360

U.S. Government and agency securities

     40,638         (54     —           —          40,638         (54

Corporate bonds

     —           —          —           —          —           —     

State and municipal securities

     1,541         (20     —           —          1,541         (20

Equity securities

     99         (6     790         (251     889         (257
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 42,888       $ (88   $ 6,301       $ (603   $ 49,189       $ (691
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company, as of June 30, 2009 adopted the provisions under FASB ASC Topic 320 – Investments- Debt and Equity Securities which requires a forecast of recovery of cost basis through cash flow collection on all debt securities with a fair value less than its amortized cost less any current period credit loss with an assertion on the lack of intent to sell (or requirement to sell prior to recovery of cost basis). Based on a review of each of the securities in the investment portfolio in accordance with FASB ASC 320 at June 30, 2011, the Company concluded that it expects to recover the amortized cost basis of its investments on all but one private label CMO security and therefore there was an impairment charge of $27. As of June 30, 2011 the Company does not intend to sell nor is it more than likely than not that it would be required to sell any of its securities with unrealized losses prior to recovery of its amortized cost basis less any current-period credit loss.

Substantially all of the unrealized losses at June 30, 2011 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at June 30, 2011. A total of 56 available for sale securities were in a continuous unrealized loss position for less than 12 months and 11 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.

Within the collateralized mortgage-backed securities (CMO’s) category of the available for sale portfolio there are four individual private label CMO’s that have an amortized cost of $5,602 and a fair value (carrying value) of $5,314 as of June 30, 2011. One of the four securities is considered to be impaired as noted above and is below investment grade. The impaired private label CMO has an amortized cost of $2,055 and a fair value of $1,878 at June 30, 2011. The remaining three securities are rated at or above B. The remaining three securities in this category are performing as of June 30, 2011 and are expected to perform based on current information.

In determining whether there existed other than temporary impairment on these securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit risk and liquidity risk, and determined that no losses are expected. The Company will continue to evaluate its portfolio in this manner on a quarterly basis.

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

Securities Held to Maturity

The following is a summary of securities held to maturity:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

June 30, 2011

          

Mortgage-backed securities-residential

          

Fannie Mae

   $ 1,550       $ 86       $ —        $ 1,636   

Freddie Mac

     2,031         109         —          2,140   

Ginnie Mae

     3         —           —          3   

CMO/Other MBS

     644         9         —          653   
  

 

 

    

 

 

    

 

 

   

 

 

 
     4,228         204         —          4,432   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities

          

State and municipal securities

     19,697         1,030         (14     20,713   

Other

     1,500         40         —          1,540   
  

 

 

    

 

 

    

 

 

   

 

 

 
     21,197         1,070         (14     22,253   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held to maturity

   $ 25,425       $ 1,274       $ (14   $ 26,685   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2010

          

Mortgage-backed securities-residential

          

Fannie Mae

   $ 1,835       $ 96       $ —        $ 1,931   

Freddie Mac

     2,389         124         —          2,513   

Ginnie Mae

     16         1         —          17   

CMO/Other MBS

     729         19         —          748   
  

 

 

    

 

 

    

 

 

   

 

 

 
     4,969         240         —          5,209   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities

          

State and municipal securities

     27,879         980         (44     28,815   

Other

     1,000         38         —          1,038   
  

 

 

    

 

 

    

 

 

   

 

 

 
     28,879         1,018         (44     29,853   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held to maturity

   $ 33,848       $ 1,258       $ (44   $ 35,062   
  

 

 

    

 

 

    

 

 

   

 

 

 

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.

 

     June 30, 2011  
     Amortized
Cost
     Fair
Value
 

Remaining period to contractual maturity

     

Less than one year

   $ 6,314       $ 6,350   

One to five years

     8,124         8,496   

Five to ten years

     3,109         3,456   

Greater than ten years

     3,650         3,951   
  

 

 

    

 

 

 

Total

   $ 21,197       $ 22,253   
  

 

 

    

 

 

 

 

26


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

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  

As of June 30, 2011

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

State and municipal securities

   $ —         $ —         $ 666       $ (14   $ 666       $ (14
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —         $ —         $ 666       $ (14   $ 666       $ (14
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     Continuous Unrealized Loss Position        
     Less Than 12 Months      12 Months or Longer     Total  

As of September 30, 2010

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

State and municipal securities

   $ —         $ —         $ 676       $ (44   $ 676       $ (44
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —         $ —         $ 676       $ (44   $ 676       $ (44
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

All of the unrealized losses on held to maturity securities at June 30, 2011 relate to local municipal general obligation bonds and are attributable to changes in market interest rates and credit risk spreads subsequent to purchase. There were no securities with unrealized losses that individually had significant dollar amounts at June 30, 2011. There was one held-to-maturity securities in a continuous unrealized loss position for more than 12 months, and no securities for less than 12 months. For securities with fixed maturities, there were no securities past due nor 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 June 30, 2011.

 

7. Deposits

Major classifications of deposits are summarized below:

 

     June 30,
2011
     September 30,
2010
 

Demand Deposits

     

Retail

   $ 174,652       $ 174,731   

Business

     279,659         277,217   

Municipal

     15,559         77,909   

NOW Deposits

     

Retail

     155,141         139,517   

Business

     29,892         34,105   

Municipal

     113,876         241,995   
  

 

 

    

 

 

 

Total transaction accounts

     768,779         945,474   

Savings

     428,120         392,321   

Money market

     512,478         427,334   

Certificates of deposit

     388,696         377,573   
  

 

 

    

 

 

 

Total deposits

   $ 2,098,073       $ 2,142,702   
  

 

 

    

 

 

 

 

27


Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

Municipal deposits of $367,941 and $513,760 were included in total deposits at June 30, 2011 and September 30, 2010, respectively. Deposits received for tax receipts were approximately $219,000 at September 30, 2010. Listed below are the Company’s brokered deposits:

 

     June 30,
2011
     September 30,
2010
 

Money market

   $ 26,363       $ —     

Reciprocal CDAR’s1

     7,997         7,889   

CDAR’s one way

     67,004         10,665   
  

 

 

    

 

 

 

Total brokered deposits

   $ 101,364       $ 18,554   
  

 

 

    

 

 

 

 

1

Certificate of deposit account registry service

 

8. Borrowings

The Company’s FHLB and other borrowings and weighted average interest rates are summarized as follows:

 

     June 30, 2011     September 30, 2010  
     Amount      Rate     Amount      Rate  

By type of borrowing:

          

FHLB advances

   $ 138,906         3.09   $ 141,251         4.16

FHLB Repurchase agreements

     211,427         3.52     222,500         3.98

Senior Debt (FDIC insured)

     51,498         2.74     51,496         2.75
  

 

 

      

 

 

    

Total borrowings

   $ 401,831         3.27   $ 415,247         3.88
  

 

 

      

 

 

    

By remaining period to maturity:

          

Less than one year

   $ 88,598         2.15   $ 44,873         3.82

One to two years

     5,000         4.04     73,996         3.14

Two to three years

     35,767         2.08     27,708         4.00

Three to four years

     49,068         1.93     25,125         4.14

Four to five years

     —           0.00     20,000         2.96

Greater than five years

     223,398         4.19     223,545         4.19
  

 

 

      

 

 

    

Total borrowings

   $ 401,831         3.27   $ 415,247         3.88
  

 

 

      

 

 

    

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 June 30, 2011 and September 30, 2010, the Bank had pledged mortgages totaling $355,966 and $313,587 respectively. The Bank had also pledged securities with carrying amounts of $219,764 and $228,442 as of June 30, 2011 and September 30, 2010, respectively, to secure borrowings. As of June 30, 2011, the Bank may increase its borrowing capacity by pledging securities and mortgages not required to be pledged for other purposes with a market value of $367,513. FHLB advances are subject to prepayment penalties, if repaid prior to maturity.

FHLB borrowings (includes advance and repurchase agreements) of $200,000 and $227,500 at June 30, 2011 and September 30, 2010, respectively are putable quarterly, at the discretion of the FHLB. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 5.81 years and 6.16 years and weighted average interest rates of 4.23 percent and 4.24 percent at June 30, 2011 and September 30, 2010, respectively. An additional $20,000 is putable on a one time basis after an initial lockout period beginning in February 2013 with an interest rate of 3.57 percent.

The Company had restructured $89,135 of its FHLBNY advances which had a weighted average rate of 3.69 percent and a duration of 2.2 years, into new borrowings with a weighted average rate of 2.63 percent, duration of 1.43 years and an annualized interest expense savings of approximately $945. Prepayment penalties of $5,151 associated with the modifications are being amortized over the new duration of 1.43 years on a level yield basis.

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

9. Derivatives

The Company purchased two interest rate caps in the first quarter of fiscal 2010 to assist in offsetting a portion of interest rate exposure should short term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.50 percent and 4.0 percent. These caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings, the amount for the nine months ended June 30, 2011 and June 30, 2010 was a fair value loss of $27 and $831, respectively. The fair value of the interest rate caps at June 30, 2011, is reflected in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.

The Company acts as an interest rate swap counterparty with certain commercial customers and manages this risk by entering into corresponding and offsetting interest rate risk agreements with third parties. The swaps are considered a derivative instrument and must be carried at fair value. As the swaps are not a designated qualifying hedge, the change in fair value is recognized in current earnings, with no offset from any other instrument. There was no net gain or loss recorded in earnings during the first nine months of 2011 and 2010. Interest rate swaps are recorded on our consolidated statements of financial condition as an other asset or other liability at estimated fair value.

At June 30, 2011, summary information regarding these derivatives is presented below:

 

     Notional
Amount
    Average
Maturity
     Weighted
Average
Rate
     Weighted
Average
Variable Rate
  Fair Value  

Interest Rate Caps

   $ 50,000        3.43         3.75       NA   $ 235   

3rd party interest rate swaps

     1,158        8.62         6.25       1 m Libor + 2.25%     139   

Customer interest rate swaps

     (1,158     8.62         6.25       1 m Libor + 2.25%     (139

At September 30, 2010, summary information regarding these derivatives is presented below:

 

     Notional
Amount
    Average
Maturity
     Weighted
Average
Rate
     Weighted
Average
Variable Rate
  Fair Value  

Interest Rate Caps

   $ 50,000        4.18         3.75       NA   $ 262   

3rd party interest rate swaps

     1,182        9.37         6.25       1 m Libor + 2.25%     173   

Customer interest rate swaps

     (1,182     9.37         6.25       1 m Libor + 2.25%     (173

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments and, therefore are carried at estimated fair value on the consolidated balance sheets. The fair values of these commitments are not considered material.

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

10. Earnings Per Common Share

The number of shares used in the computation of basic earnings per share excludes unallocated ESOP shares, shares held to fund deferred compensation plans, and unvested shares of restricted stock that have not been released to participants.

Common stock equivalent shares are incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options and unvested RRP shares were exercised or became vested during the periods.

Basic earnings per common share are computed as follows:

 

     For the Three Months
Ended June 30,
     For the Nine Months
Ended June 30,
 
     2011      2010      2011      2010  

Weighted average common shares outstanding (basic), in ’000s

     37,368         38,087         37,473         38,285   

Net Income

   $ 1,939       $ 4,756       $ 12,232       $ 15,089   

Basic earnings per common share

   $ 0.05       $ 0.12       $ 0.33       $ 0.39   

Diluted earnings per common share are computed as follows:

 

     For the Three Months
Ended June 30,
     For the Nine Months
Ended June 30,
 
     2011      2010      2011      2010  

Weighted average common shares outstanding (basic), in ’000s

     37,368         38,087         37,473         38,285   

Effect of common stock equivalents

     2         —           —           32   
  

 

 

    

 

 

    

 

 

    

 

 

 
     37,370         38,087         37,473         38,317   

Net Income

   $ 1,939       $ 4,756       $ 12,232       $ 15,089   

Diluted earnings per common share

   $ 0.05       $ 0.12       $ 0.33       $ 0.39   

As of June 30, 2011, 1,862,328 and 1,890,218 weighted average shares were anti-dilutive for the three month period and nine month period, respectively. As of June 30, 2010, 1,690,346 and 1,816,426 weighted average shares were anti-dilutive for the three month period and nine month period, respectively. Anti-dilutive shares are not included in the determination of diluted earnings per share.

 

11. Guarantor’s Obligations Under Guarantees

Most letters of credit issued by, or on behalf of the Company are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor’s completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

As of June 30, 2011, the Company had $20,010 in outstanding letters of credit, of which $5,361 are cash secured and $3,602 were secured by collateral. The carrying values of these obligations are considered immaterial.

 

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Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

 

12. Pension and Other Post Retirement Plans

Net post-retirement cost, which is recorded within salaries and employee benefits expense in the consolidated statements of income, is comprised of the following:

 

     Pension Plan     Other Post
Retirement Plans
 
     Three months Ended
June 30,
    Three months Ended
June 30,
 
     2011     2010     2011     2010  

Service Cost

   $ —        $ —        $ 7      $ 8   

Interest Cost

     375        389        27        27   

Expected return on plan assets

     (570     (487     —          —     

Amortization of net transition obligation

     —          —          6        6   

Amortization of prior service cost

     —          —          12        12   

Amortization of (gain) or loss

     447        377        (24     (23

Settlement Charge

     490          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 742      $ 279      $ 28      $ 30   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Pension Plan     Other Post
Retirement Plans
 
     Nine months Ended
June 30,
    Nine months Ended
June 30,
 
     2011     2010     2011     2010  

Service Cost

   $ —        $ —        $ 21      $ 24   

Interest Cost

     1,123        1,166        81        81   

Expected return on plan assets

     (1,711     (1,432     —          —     

Amortization of net transition obligation

     —          —          18        18   

Amortization of prior service cost

     —          —          36        36   

Amortization of (gain) or loss

     1,342        1,132        (71     (69

Settlement Charge

     490        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,244      $ 866      $ 85      $ 90   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2011, contributions totaling $4,400 have been deposited into the pension plan. The Company has determined no additional contributions will be made during the fiscal year 2011. During the third quarter of fiscal year 2011 the Company made a distribution under its qualified benefit pension plan of $490.

The Company has also established a non-qualified Supplemental Executive Retirement Plan (“SERP”) 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 $317 for the nine months ended June 30, 2011 (including a settlement charge of $278) and $66 for the nine months ended June 30, 2010. As of June 30, 2011 there were $1,109 in contributions to fund benefit payments on an in service withdrawal of $1,083 related to the SERP.

 

13. Contingencies

Certain premises and equipment are leased under operating leases with terms expiring through 2033. The Company has the option to renew certain of these leases for additional terms.

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.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

We make statements in this Report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses, cost savings, taxes, management’s plans, strategies and objectives for future operations, dividends, share repurchases and/or other matters regarding or affecting Provident New York Bancorp that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions or future or conditional verbs such as “will,” “should,” “would” and “could.” These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.

The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

 

   

Legislative and regulatory changes such as the Dodd-Frank Act and its pending and future implementing regulations that adversely affect our business including changes in regulators and regulatory policies and principles or the interpretation of regulatory capital or other rules;

 

   

A deterioration in general economic conditions, either nationally or in our market areas, including extended declines in the real estate market and constrained financial markets;

 

   

Our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;

 

   

Our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

 

   

Changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

 

   

Our success in implementing strategic, financial and operational initiatives;

 

   

Computer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs; and

 

   

Our business and operating results can be affected by widespread national disasters, terrorist activities or international hostilities, either as a result of the impact on the economy, and financial and capital markets generally, or on us, our customers, suppliers or counterparties.

Additional factors that may affect our results are discussed in our annual report on Form 10-K under “Item 1A, Risk Factors” and elsewhere in this Report or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

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Table of Contents

Overview and Management Strategy

We operate as an independent community 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, which is principally New York and New Jersey. Additionally, the Company offers investment management services through its subsidiary, HVIA. 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.

On July 6, 2011, Jack L. Kopnisky officially assumed the position of President and Chief Executive Officer succeeding George Strayton who retired after 25 years of service. The Company’s press release relating to the management transition is available in the Company’s investor relations section of its website www.providentbanking.com, as well as the Company’s Current Report on Form 8-K filed with the Commission on June 21, 2011.

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. We focus our efforts on core deposit generation, especially transaction accounts and quality loan growth with emphasis on growing commercial loan balances. 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. Going forward imperatives for the Company will be to grow revenue and earnings by expanding client acquisitions, continuing to improve credit metrics and to significantly improve efficiency levels. To achieve these goals we will focus on high value client segments, expand delivery channels and distribution to increase client acquisitions, execute effectively by creating a highly productive performance culture, reduce operating costs, and to proactively manage enterprise risk.

There are key factors that have affected our results during the last three months and fiscal 2011. The underlying national economic conditions continue, with issues regarding unemployment continuing to be a factor. While the economy in our footprint has not been affected to the extent that other areas in the country have, we still have seen the effects on our consumer, small business and commercial customers. As a result there has been limited opportunity to make loans that meet our credit standards and pricing.

The slow economic recovery has continued to result in some borrowers experiencing higher levels of stress, which has resulted in increased levels of charge-offs during this fiscal year and past quarter. However for the first nine months of the current fiscal year we are seeing some of our credit quality indicators reflect a positive trend. Total criticized and classified loans have decreased by $42.0 million over September 30, 2010 levels. Nonperforming loans increased $21.2 million from September 30, 2010 levels due mostly to the deterioration of one ADC relationship which had been classified as a substandard performing TDR (classified as non performing as of June 30, 2011) and net charge offs increased 36.6 percent compared to the nine months ended June 30, 2010. Management of the loan portfolio and improvement of credit metrics continues to be a top priority and we remain cautious in our credit outlook as fluctuations of charge offs and problem assets are still occurring.

We continue to experience pressure on net interest income as low rates continue to have the effect of causing many assets to prepay or to be called. As of June 30, 2011, equilibrium was reached in our investment portfolio as we were able to purchase investment securities at rates approximately equal to the overall investment portfolio yield. Many of our liabilities are at rates that are either fixed or already very low, so maintaining net interest margin is a function of loan growth, growth in non-interest bearing deposits and certain core deposits, and continuation of our deposit pricing discipline. Current market interest rates have declined, and may have an affect on our reinvestment opportunities. The low interest rate environment has also caused management to sell fixed rate conforming residential mortgages into the secondary market in order to reduce interest rate risk. This past quarter saw a slight uptick in the long term interest rates, which in turn were relayed to the residential mortgage market. A result was that management made a decision to retain a portion of 1-4 family originations this past quarter to improve margin as opposed to prior strategy of selling substantially all fixed rate conforming originations.

Comparison of Financial Condition at June 30, 2011 and September 30, 2010

Total assets as of June 30, 2011 remained relatively unchanged decreasing $45.0 million or 1.5 percent from September 30, 2010. The gross loan portfolio accounts for $16.3 million of this decrease, as residential mortgages decreased $32.8 million and acquisition, development and construction loans decreased $37.9 million due to strong repayments of $25.3 million and were only partially offset by commercial real estate loan increases of $82.5 million. Cash and due from banks decreased by $45.3 million as the fiscal year end historically has a large cash position.

Net loans as of June 30, 2011 were $1.7 billion, essentially unchanged from September 30, 2010. The composition of the portfolio changed as a result of our emphasis on commercial lending and sales of substantially all new residential mortgage production. Commercial real estate loans increased $82.5 million, and Acquisition, Development and Construction loans (ADC) decreased $37.9 million to $193.3 million compared to $231.3 million as of September, 2010, primarily due to the repayments. Consumer loans decreased by $11.7 million, and residential loans decreased by $32.8 million during the nine months ended June 30, 2011. Total loan originations, including loans originated for sale were $447.8 million for the nine months ending June 30, 2011, while repayments were $416.0 million and sales of residential mortgages were $44.6 million. There were decreases in the loan loss reserves of $1.4 million in commercial business loans and $1.3 million of ADC, with increases of $702,000 in commercial real estate and $689,000 in residential mortgages. The variances were driven by modifications in reserve factors as well as changes in loan balances.

 

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Total securities increased by $10.4 million, to $945.2 million at June 30, 2011 from $934.9 million at September 30, 2010. Securities purchases were $512.5 million, sales of securities were $293.3 million, and maturities, calls, and repayments were $200.4 million. Carrying values of securities were reduced by $11.5 million due to unrealized losses.

Core deposit and other intangible assets increased $1.3 million due to Provident Bank entering into a naming rights contract for Provident Bank Ball Park, net of amortization of $1.1 million.

Deposits as of June 30, 2011 were $2.1 billion, a decrease of $44.6 million, or 2.1 percent, from September 30, 2010. As of June 30, 2011 transaction accounts were 36.6 percent of deposits, or $768.8 million compared to $945.5 million or 44.1 percent of deposits at September 30, 2010. Deposits received from municipalities for tax payments were approximately $219 million at September 30, 2010. As of June 30, 2011 savings deposits were $428.1 million, an increase of $35.8 million or 9.1 percent. Money market accounts increased $85.1 million or 19.9 percent to $512.5 million at June 30, 2011. Certificate of deposit accounts increased by $11.1 million or 2.9 percent. As of June 30, 2011 the Company had $101.3 million in wholesale deposits with a weighted average rate of 0.29 percent included in total deposits.

Borrowings decreased by $13.4 million, or 3.2 percent, from September 2010, to $401.8 million. Borrowings decreased as $35 million in advances matured and seasonal municipal tax deposits were retained. The Company completed restructuring $89.1 million of FHLBNY advances during the second quarter of fiscal 2011 which had a weighted average rate of 3.69 percent and a duration of 2.2 years, into new borrowings with a weighted average rate of 2.63 percent, duration of 1.43 years and an annualized interest expense savings of approximately $945,000, assuming no increase in interest rates. Prepayment penalties of $5.2 million associated with the modifications are being amortized into interest expense over the modification period on a level yield basis.

Stockholders’ equity decreased $1.9 million from September 30, 2010 to $429.0 million at June 30, 2011. The decrease was due to a $2.6 million increase in treasury stock, and a $5.9 million decrease in accumulated other comprehensive income, after realizing year to date securities gains of $5.5 million. These items were offset in part by a $5.7 million increase in the Company’s retained earnings and an increase of $882,000 due to stock based compensation items. For the 2011 fiscal year to date, the Company repurchased 274,454 shares of its common stock in the open market at a cost of $2.6 million under the treasury repurchase program. Future share repurchases will depend on, among other factors, market conditions, earnings levels and alternative uses of capital.

As of June 30, 2011 the Company had authorization to purchase up to additional 959,713 shares of common stock. Bank Tier I capital to assets was 8.77 percent at June 30, 2011. Tangible capital as a percentage of tangible assets at the consolidated company level was 9.37 percent.

Credit Quality (Also see Note 4 to the consolidated financial statements)

The third quarter of fiscal 2011’s credit metrics were negatively impacted by the movement to non-performing loans of a $14 million ADC relationship previously classified (as of March 31, 2011) as a substandard performing TDR. This downgrade was due to a significant decline in sales activity in the project during the third quarter. This subsequently resulted in a charge-off of $2.0 million and an increase in loan loss provision of $1.5 million.

Net charge-offs for the nine months ended June 30, 2011 were $9.3 million (0.73 percent of average loans, on an annualized basis) compared to $6.8 million (0.54 percent of average loans, on an annualized basis) for the same period in the prior year.

Our year-to-date provision of $7.8 million resulted in a net decrease in the allowance for loan losses of $1.5 million, from $30.8 million at September 30, 2010 to $29.4 million at June 30, 2011.

Substandard loans at June 30, 2011 were $103.8 million compared to $132.1 million at September 30, 2010, while special mention loans went from $37.9 million at September 30, 2010 to $24.1 million at June 30, 2011. Net declines in ADC and commercial business loan portfolios were offset in part by net increases in commercial mortgages and residential loans.

Nonperforming loans at June 30, 2011 were $48.1 million compared to $26.8 million at September 30, 2010. The increase in non-performing loans was caused by $20.5 million in additions to non-performing ADC loans, net of a $2.0 million charge-off related to one borrower. Of loans classified as non-performing at September 30, 2010 we favorably resolved $8.2 million through upgrades or paydowns. Charge-offs were $2.8 million of those non-performing loans and $3.1 million was transferred to REO. In addition, a commercial construction loan of $6.7 million was classified as non-performing at December 31, 2010 and was subsequently refinanced, resulting in a $4.7 million performing loan and a $2.0 million loan paying as agreed but currently in non-performing status. At June 30, 2011, the allowance for loan losses was 61.1 percent of nonperforming loans and 1.7 percent of the average loan portfolio. At September 30, 2010, the allowance for loan losses was 115 percent of nonperforming loans and 1.81 percent of the average loan portfolio. The current weighted average loan to value of mortgage secured non performing loans before and after specific reserves was 80 percent and 77 percent, respectively.

 

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Comparison of Operating Results for the Three Months Ended June 30, 2011 and June 30, 2010

Net income for the three months ended June 30, 2011 was $1.9 million or $0.05 per diluted share, a decrease of $2.8 million compared to $4.8 million or $0.12 per diluted share, for the same period in fiscal 2010. Excluding the after tax effect of net securities gains, the fair value adjustment of interest rate caps , and a defined benefit settlement and change in CEO charge net income was $0.07 per diluted share for the three month period ending June 30, 2011 and compared to $0.12 per diluted share for the three month period ending June 30, 2010. The provision for loan losses for the three months ended June 30, 2011 was $3.6 million, an increase of $850,000, compared to $2.8 million for the same period in the prior year. Net interest margin on a tax equivalent basis for the three months ended June 30, 2011, decreased 21 basis points compared to the same period last year from 3.91 percent to 3.70 percent. Non-interest income for the three months ended June 30, 2011, remained relatively unchanged at $5.2 million. Non-interest expense increased $1.9 million, or 9.3 percent, to $22.7 million for the three months ended June 30, 2011, compared to $20.7 million for the same period in the prior year primarily due to the retirement benefit settlement charge and costs associated with the change in the Company’s CEO of $1.5 million.

Earnings excluding securities gains, retirement benefit settlement charge and the fair value adjustment of interest rate caps are presented below. The Company presents earnings excluding these factors so that investors can better understand the results of the Company’s core banking operations and to better align with the views of the investment community.

Non-GAAP disclosures

(In thousands, except share data)

 

     Three months ended
June 30,
 
     2011     2010  

Net Income

    

Net Income

   $ 1,939      $ 4,756   

Securities gains and credit losses1

     (306     (561

Retirement benefit settlement charge/change in CEO1

     887        —     

Fair value loss on interest rate caps1

     154        353   
  

 

 

   

 

 

 

Net adjusted income

   $ 2,674      $ 4,548   
  

 

 

   

 

 

 

Earnings per common share

    

Diluted Earnings per common share

   $ 0.05      $ 0.12   

Securities gains and credit losses1

     (0.01     (0.01

Retirement benefit settlement charge/change in CEO1

     0.02        —     

Fair value loss on interest rate caps1

     —          0.01   
  

 

 

   

 

 

 

Diluted adjusted earnings per common share

   $ 0.07   $ 0.12   
  

 

 

   

 

 

 

Non-interest income

    

Total non-interest income

   $ 5,217      $ 5,281   

Securities gains and credit losses

     (515     (945

Fair value loss on interest rate caps

     259        595   
  

 

 

   

 

 

 

Adjusted non interest-income

   $ 4,961      $ 4,931   
  

 

 

   

 

 

 

Non-interest expense

    

Total non-interest expense

   $ 22,669      $ 20,741   

Retirement benefit settlement charge/change in CEO

     (1,494     —     
  

 

 

   

 

 

 

Adjusted non interest-expense

   $ 21,175      $ 20,741   
  

 

 

   

 

 

 

 

1

After marginal tax effect 40.61%

* Rounding

Relevant operating results performance measures follow:

 

     Three Months Ended
June 30,
 
     2011     2010  

Per common share:

    

Basic earnings

   $ .05      $ 0.12   

Diluted earnings

     .05        0.12   

Dividends declared

     .06        0.06   

Return on average (annualized):

    

Assets

     0.27     0.65

Equity

     1.83     4.50

 

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The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).

 

     Three Months Ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest     Average
Yield
Rate
    Average
Outstanding
Balance
    Interest     Average
Yield
Rate
 

Interest earning assets:

            

Commercial and commercial mortgage loans

   $ 1,038,674      $ 14,429        5.57   $ 983,264      $ 14,572        5.94

Consumer loans

     231,018        2,585        4.49        244,341        2,736        4.49   

Residential mortgage loans

     382,060        5,247        5.51        425,419        6,085        5.74   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans 1

     1,651,752        22,261        5.41        1,653,024        23,393        5.68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities-taxable

     688,445        3,607        2.10        693,554        4,716        2.73   

Securities-tax exempt 2

     208,643        2,814        5.41        219,121        3,135        5.74   

Federal Reserve excess reserves

     11,957        11        0.37        4,029        3        0.30   

Other earning assets

     19,632        226        4.62        24,536        259        4.23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities and other earning assets

     928,677        6,658        2.88        941,240        8,113        3.46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     2,580,429        28,919        4.50        2,594,264        31,506        4.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest-earning assets

     335,559            334,362       
  

 

 

       

 

 

     

Total assets

   $ 2,915,988          $ 2,928,626       
  

 

 

       

 

 

     

Interest bearing liabilities:

            

NOW Checking

   $ 296,677        132        0.18   $ 263,709        123        0.19

Savings, clubs and escrow

     444,913        122        0.11        413,315        105        0.10   

Money market accounts

     529,286        445        0.34        428,612        345        0.32   

Certificate accounts

     346,903        794        0.92        467,360        1,276        1.10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     1,617,779        1,493        0.37        1,572,996        1,849        0.47   

Borrowings

     397,531        3,637        3.67        481,460        4,361        3.63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,015,310        5,130        1.02        2,054,456        6,210        1.21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non- interest bearing deposits

     464,197            430,387       

Other non-interest-bearing liabilities

     11,519            19,562       
  

 

 

       

 

 

     

Total liabilities

     2,491,026            2,504,405       

Stockholders’ equity

     424,961            424,221       
  

 

 

       

 

 

     

Total liabilities and equity

   $ 2,915,987          $ 2,928,626       
  

 

 

       

 

 

     

Net interest rate spread

         3.48         3.66
      

 

 

       

 

 

 

Net earning assets

   $ 565,119          $ 539,808       
  

 

 

       

 

 

     

Net interest margin

       23,789        3.70       25,296        3.91
    

 

 

   

 

 

     

 

 

   

 

 

 

Less tax equivalent adjustment 2

       (985         (1,098  
    

 

 

       

 

 

   

Net interest income

     $ 22,804          $ 24,198     
    

 

 

       

 

 

   

Ratio of average interest-earning assets to average interest bearing liabilities

     128.04         126.27    
  

 

 

       

 

 

     

 

1

Includes non-accrual loans

2 

Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate

 

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The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (dollars in thousands):

 

     Three Months Ended June 30,  
     2011 vs. 2010  
     Increase / (Decrease) Due to  
     Volume1     Rate1     Total  

Interest earning assets

      

Commercial and commercial mortgage loans

   $ 796      $ (939   $ (143

Consumer loans

     (151     —          (151

Residential mortgage loans

     (601     (237     (838

Securities-taxable

     (34     (1,075     (1,109

Securities-tax exempt2

     (145     (176     (321

Federal Reserve excess reserves

     7        1        8   

Other earning assets

     (49     16        (33
  

 

 

   

 

 

   

 

 

 

Total interest income

     (177     (2,410     (2,587
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

      

NOW checking

     16        (7     9   

Savings

     8        9        17   

Money market

     79        21        100   

Certificates of deposit

     (295     (187     (482

Borrowings

     (756     32        (724
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (948     (132     (1,080
  

 

 

   

 

 

   

 

 

 

Net interest margin

     771        (2,278     (1,507

Less tax equivalent adjustment2

     50        63        113   
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 821      $ (2,215   $ (1,394
  

 

 

   

 

 

   

 

 

 

 

1

Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.

2 

Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the three months ended June 30, 2011 decreased by $1.4 million, to $22.8 million, compared to $24.2 million for the quarter ended June 30, 2010. Gross interest income on a tax-equivalent basis decreased by $2.6 million, or 8.2 percent, to $28.9 million for the quarter ended June 30, 2011, compared to $31.5 million for the same three months in 2010. General market interest rates have declined from the prior period. As a result the general levels of yields in the asset and liability structure of the Company’s balance sheet have declined. Further, as the Company restructured a large portion of its investment portfolio, the reinvestment of proceeds from sales into generally lower yielding securities resulted in additional declines in investment income. Interest expense decreased by $1.1 million with the primary decrease in certificates of deposit of $482,000 and borrowings of $724,000. The average costs of borrowings increased as a result in the change in the mix of shorter and long term advances.

Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable incurred loan losses inherent in the existing portfolio. The Company recorded $3.6 million in loan loss provisions for the quarter ended June 30, 2011. Refer to the credit quality section for a discussion on net charge-offs and nonperforming loans. Net charge-offs for the quarter ended June 30, 2011 were $4.3 million, which included $1.0 million of specific reserves recorded in prior periods.

Non-interest income for the three months ended June 30, 2011 decreased by $64,000 to $5.2 million. The decrease was due mainly to net gains on sales of securities of $542,000 in third quarter fiscal 2011 compared to $945,000 in third quarter fiscal 2010. This decrease was offset in part by a lower fair value loss on interest rate caps and higher other income, as other categories of noninterest income were relatively stable.

Non-interest expense for the three months ended June 30, 2011 increased by 9.3 percent, to $22.7 million, primarily due to charges associated with the change in CEO and the related defined benefit settlement charges of $1.5 million, REO expenses and occupancy expense offset in part by lower advertising and promotion, regulatory fees from FDIC insurance and intangible amortization. In addition, the third quarter of 2010 benefited from a recovery of $300,000 related to servicing costs of our ATM and debit card programs.

 

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Income Tax The Company recorded an income tax credit for the third quarter of $187,000 compared to an effective tax rate of 20.6 percent for the same period in the prior year. The decline is due to tax exempt municipal securities and BOLI income being a larger portion of overall pretax income in the current period.

 

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Comparison of Operating Results for the Nine Months Ended June 30, 2011 and June 30, 2010

Net income for the nine months ended June 30, 2011 was $12.2 million or $0.33 per diluted share, a decrease of $2.9 million, compared to $15.1 million or $0.39 per diluted share for the same period in fiscal 2010. Excluding the after tax effect of net securities gains, the fair value adjustment of interest rate caps , and a defined benefit settlement charge and change in CEO, net income was $0.27 per diluted share and $0.33 per diluted share for the nine months ending June 30, 2011 and 2010, respectively. Net interest income before provision for loan losses for the nine months ended June 30, 2011, decreased by $1.5 million to $68.5 million, compared to $70.0 million for the same period in the prior year. The provision for loan losses was $7.8 million in both periods. Net interest margin on a tax equivalent basis for the nine months ended June 30, 2011, decreased 11 basis points compared to the same period last year from 3.79 percent to 3.68 percent. Non-interest income for the nine months ended June 30, 2011, was $20.9 million, an increase of $1.4 million, compared to $19.5 million for the same period last year. The increase was due to higher gains on sale of securities and loans, and a lower fair value loss on interest rate caps, offset in part by lower deposit fees and service charges. Non-interest expense increased $3.9 million or 6.3 percent, to $65.7 million for the nine months ended June 30, 2011, compared to $61.8 million for the same period in the prior year. The increase is primarily due to charges associated with the change in CEO and defined benefit settlement charge of $1.8 million, and staffing and occupancy expenses for new offices in Westchester and Nyack, and professional fees.

Earnings excluding securities gains, retirement benefit settlement and change in CEO charge, and the fair value adjustment of interest rate caps are presented below. The Company presents earnings excluding these factors so that investors can better understand the results of the Company’s core banking operations and to better align with the views of the investment community.

Non-GAAP disclosures

(In thousands, except share data)

 

    

Nine months ended

June 30,

 
     2011     2010  

Net Income

    

Net Income

   $ 12,232      $ 15,089   

Securities gains and credit losses1

     (3,246     (3,098

Retirement benefit settlement charge/change in CEO1

     1,052        —     

Fair value loss on interest rate caps1

     16        494   
  

 

 

   

 

 

 

Net adjusted income

   $ 10,054      $ 12,485   
  

 

 

   

 

 

 

Earnings per common share

    

Diluted Earnings per common share

   $ 0.33      $ 0.39   

Securities gains and credit losses1

     (0.09     (0.08

Retirement benefit settlement charge/change in CEO1

     0.03        —     

Fair value loss on interest rate caps1

     —          0.01   
  

 

 

   

 

 

 

Diluted adjusted earnings per common share

   $ 0.27  *    $ 0.33  * 
  

 

 

   

 

 

 

Non-interest income

    

Total non-interest income

   $ 20,896      $ 19,487   

Securities gains and credit losses

     (5,465     (5,217

Fair value loss on interest rate caps

     27        831   
  

 

 

   

 

 

 

Adjusted non interest-income

   $ 15,458      $ 15,101   
  

 

 

   

 

 

 

Non-interest expense

    

Total non-interest expense

   $ 65,729      $ 61,808   

Retirement benefit settlement charge/change in CEO

     (1,772     —     
  

 

 

   

 

 

 

Adjusted non interest-expense

   $ 63,957      $ 61,808   
  

 

 

   

 

 

 

 

1 

After marginal tax effect 40.61%

* Rounding

Relevant operating results performance measures follow:

 

     Nine Months Ended
June 30,
 
     2011     2010  

Per common share:

    

Basic earnings

   $ 0.33      $ 0.39   

Diluted earnings

     0.33        0.39   

Dividends declared

     0.18        0.18   

Return on average (annualized):

    

Assets

     0.56     0.69

Equity

     3.85     4.76

 

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Table of Contents

The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).

 

     Nine Months Ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest     Average
Yield
Rate
    Average
Outstanding
Balance
    Interest     Average
Yield
Rate
 

Interest earning assets:

            

Commercial and commercial mortgage loans

   $ 1,038,093      $ 43,372        5.59   $ 965,237      $ 42,087        5.83

Consumer loans

     234,569        7,828        4.46        248,504        8,409        4.52   

Residential mortgage loans

     390,353        16,305        5.58        437,175        18,952        5.80   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net loans 1

     1,663,015        67,505        5.43        1,650,916        69,448        5.62   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities-taxable

     688,570        10,668        2.07        671,451        14,192        2.83   

Securities-tax exempt 2

     215,052        8,700        5.41        207,988        8,973        5.77   

Federal Reserve excess reserves

     12,977        28        0.29        25,299        48        0.25   

Other earning assets

     21,637        940        5.81        25,091        932        4.97   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities and other earning assets

     938,236        20,336        2.90        929,829        24,145        3.47   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     2,601,251        87,841        4.51        2,580,745        93,593        4.85   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest-earning assets

     337,078            330,623       
  

 

 

       

 

 

     

Total assets

   $ 2,938,329          $ 2,911,368       
  

 

 

       

 

 

     

Interest bearing liabilities:

            

NOW Checking

   $ 317,610        476        0.20   $ 284,804        458        0.22

Savings, clubs and escrow

     422,247        344        0.11        388,914        295        0.10   

Money market accounts

     484,249        1,196        0.33        418,196        1,126        0.36   

Certificate accounts

     373,558        2,704        0.97        463,793        4,961        1.43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     1,597,664        4,720        0.39        1,555,707        6,840        0.59   

Borrowings

     433,406        11,578        3.57        489,095        13,595        3.72   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,031,070        16,298        1.07        2,044,802        20,435        1.34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non- interest bearing deposits

     467,711            422,911       

Other non-interest-bearing liabilities

     15,156            20,085       
  

 

 

       

 

 

     

Total liabilities

     2,513,937            2,487,798       

Stockholders’ equity

     424,392            423,570       
  

 

 

       

 

 

     

Total liabilities and equity

   $ 2,938,329          $ 2,911,368       
  

 

 

       

 

 

     

Net interest rate spread

         3.44         3.51
      

 

 

       

 

 

 

Net earning assets

   $ 570,181          $ 535,943       
  

 

 

       

 

 

     

Net interest margin

       71,543        3.68       73,158        3.79
    

 

 

   

 

 

     

 

 

   

 

 

 

Less tax equivalent adjustment 2

       (3,045         (3,140  
    

 

 

       

 

 

   

Net interest income

     $ 68,498          $ 70,018     
    

 

 

       

 

 

   

Ratio of average interest-earning assets to average interest bearing liabilities

     128.07         126.21    
  

 

 

       

 

 

     

 

1

Includes non-accrual loans

2

Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate

 

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The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (dollars in thousands):

 

     Nine Months Ended June 30,  
     2011 vs. 2010  
     Increase / (Decrease) Due to  
     Volume1     Rate1     Total  

Interest earning assets

      

Commercial and commercial mortgage loans

   $ 3,080      $ (1,795   $ 1,285   

Consumer loans

     (470     (111     (581

Residential mortgage loans

     (1,955     (692     (2,647

Securities-taxable

     358        (3,882     (3,524

Securities-tax exempt2

     300        (573     (273

Federal Reserve excess reserves

     (27     7        (20

Other earning assets

     (128     136        8   
  

 

 

   

 

 

   

 

 

 

Total interest income

     1,158        (6,910     (5,752
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

      

NOW checking

     58        (40     18   

Savings

     23        26        49   

Money market

     169        (99     70   

Certificates of deposit

     (851     (1,406     (2,257

Borrowings

     (1,475     (542     (2,017
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (2,076     (2,061     (4,137
  

 

 

   

 

 

   

 

 

 

Net interest margin

     3,234        (4,849     (1,615

Less tax equivalent adjustment2

     (107     202        95   
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 3,127      $ (4,647   $ (1,520
  

 

 

   

 

 

   

 

 

 

 

1

Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.

3 

Reflects tax equivalent adjustment for tax-exempt income based on a 35 percent federal rate.

Net interest income for the nine months ended June 30, 2011 decreased by $1.5 million to $68.5 million, compared to $70.0 million for the nine months ended June 30, 2010. Net interest income on a tax-equivalent basis decreased by $1.6 million to $71.5 million for the nine months ended June 30, 2011, compared to $73.2 million for the nine months ended June 30, 2010. As a result the general levels of yields in the asset and liability structure of the Company’s balance sheet have declined. Further, as the Company restructured a large portion of its investment portfolio, the reinvestment of proceeds from sales into generally lower yielding securities resulted in additional declines in investment income. Interest expense decreased by $4.1 million with the primary decrease in certificates of deposit of $2.3 million and borrowings of $2.0 million.

Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable incurred loan losses inherent in the existing portfolio. We recorded $7.8 million in loan loss provisions for nine months June 30, 2011, or $1.5 million less than net charge-offs. This compares to $7.8 million for the nine month period ended June 30, 2010 with net charge-offs for the period of $6.8 million. Refer to the credit quality section for a discussion on net charge-offs and nonperforming loans.

Non-interest income for the nine months ended June 30, 2011 increased $1.4 million to $20.9 million due to higher gains on sales of securities and loans, and a lower fair value loss on interest rate caps. Partially offsetting these increases in non interest income were lower deposit fees and service charges. The decline in fees is primarily related to changes in customer behavior regarding overdrafts.

Non-interest expense for the nine months ended June 30, 2011 increased $3.9 million to $65.7 million primarily due to increased retirement plan expense due to the retirement of the CEO, employee medical insurance, staffing for new offices in Westchester and Nyack, professional fees and occupancy costs for new locations. Offset in part by declines in stock based compensation expense and ATM service charge expense.

Income Tax The effective tax rate was 22.9 percent and 24.4 percent, for year to date fiscal 2011 and 2010 respectively. The decrease is mainly due to the elimination of the New York State Thrift bad debt deduction, but was offset by tax benefits generated by our captive insurance company as well as a larger proportion of tax exempt income related to pretax income.

 

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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 amortizations of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial real estate and residential one- to four-family loans, and the purchase of investment securities and mortgage-backed securities. During the nine months ended June 30, 2011 and 2010, our loan originations totaled $447.8 million and $379.1 million, respectively. Purchases of securities available for sale totaled $505.8 million and $555.0 million for the nine months ended June 30, 2011 and 2010, respectively. Purchases of securities held to maturity totaled $6.7 million and $18.3 million for the nine months ended June 30, 2011 and 2010, respectively. These activities were funded primarily by sales of securities, by borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $62.4 million at June 30, 2011, and consisted of $54.5 million at adjustable or variable rates and $7.9 million at fixed rates. Unused lines of credit granted to customers were $321.5 million at June 30, 2011. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit.

The Company’s investments in BOLI are considered 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. The recorded value of BOLI contracts totaled $56.5 million and $50.9 million at June 30, 2011 and September 30, 2010, 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 in total deposits was $44.6 million and $121.3 million for the nine months ended June 30, 2011 and 2010, respectively. Based upon prior experience and our current pricing strategy, management believes that a significant portion of deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment.

Credit markets continue to improve during fiscal 2011 when compared to fiscal 2010. Credit spreads narrowed steadily during the past year and many are very near historically low levels. Nevertheless, loan demand remains muted causing liquidity to remain high. Furthermore, the extremely low interest rate environment caused our deposits to remain at elevated levels which has also strengthened our liquidity position. Many banks are experiencing a situation similar to ours resulting in the industry liquidity to be at significantly elevated levels. However, much of this liquidity is held in the form of very short-term securities. The preference of depositors to stay short could portend potential liquidity reductions in the future and possibly put pressure on us to raise rates in the future to retain these funds.

We generally remain fully invested and utilize additional sources of funds through Federal Home Loan Bank of New York (“FHLB”) advances and other sources of which $401.8 million was outstanding at June 30, 2011. At June 30, 2011, we had the ability to borrow an additional $172.9 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow up to an additional $367.5 million by pledging securities not required to be pledged for other purposes as of June 30, 2011. Further, at June 30, 2011 we had $101.4 million in Brokered Deposits (including certificates of deposit accounts registry service (CDAR’s) reciprocal CD’s of $8.0 million) and have relationships with several brokers to utilize these low cost sources of funding should conditions warrant further sources of funds.

 

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The Bank provides supplemental reporting of Non-GAAP tangible equity ratios as management believes this information is useful to investors. As of June 30, 2011, the Company’s tangible capital as a percent of tangible assets increased to 9.37 percent, and its tangible book value decreased to $6.93 per share, compared to September 30, 2010. The following table shows the reconciliation of tangible equity and the tangible equity ratio:

 

     June 30,     September 30,  
     2011     2010  

Total assets

   $ 2,976,057      $ 3,021,025   

Goodwill and other amortizable intangibles

     (165,828     (164,501
  

 

 

   

 

 

 

Tangible assets

   $ 2,810,229      $ 2,856,524   
  

 

 

   

 

 

 

Stockholders’ equity

   $ 429,037      $ 430,955   

Goodwill and other amortizable intangibles

     (165,828     (164,501
  

 

 

   

 

 

 

Tangible stockholders’ equity

   $ 263,209      $ 266,454   
  

 

 

   

 

 

 

Outstanding Shares

     38,005,866        38,262,288   

Tangible capital as a % of tangible assets (consolidated)

     9.37     9.33

Tangible book value per share

   $ 6.93      $ 6.96   

The Company declared a dividend of $0.06 per share payable on August 18, 2011 to stockholders of record on August 8, 2011.

The following table sets forth the Bank’s regulatory capital position at June 30, 2011 and September 30, 2010, compared to OTS requirements:

 

                  OTS requirements  
     Bank actual     Minimum capital
adequacy
    Classification as well
capitalized
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

June 30, 2011:

               

Tangible capital

   $ 246,291        8.8 %   $ 42,128        1.5 %   $ —           —     

Tier 1 (core) capital

     246,291         8.8        112,342        4.0        140,427        5.0 %

Risk-based capital:

               

Tier 1

     246,291        12.2        —           —          120,894        6.0   

Total

     271,483        13.5        161,192        8.0 %     201,489        10.0   
  

 

 

      

 

 

      

 

 

    

September 30, 2010:

               

Tangible capital

   $ 240,230        8.4 %   $ 42,734        1.5 %   $ —           —     

Tier 1 (core) capital

     240,230         8.4        113,958        4.0        142,447        5.0 %

Risk-based capital:

               

Tier 1

     240,230        12.1        —           —          119,251        6.0   

Total

     265,148        13.3        159,002        8.0 %     198,752        10.0   
  

 

 

      

 

 

      

 

 

    

The levels are well above current regulatory capital requirements to be considered well capitalized. Management is currently studying the impact on capital resulting from the Basel III accords.

 

Item 3. Quantitative and Qualitative Disclosures about Market 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.

 

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Table of Contents

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, ADC 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 or securitize all, or a portion of such longer-term loans, generally on a servicing-retained basis. We also invest in shorter-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 may help us 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 (“NII”) 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. The model assumes 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 NII. The table below sets forth, as of June 30, 2011, the estimated changes in our (1) NPV that would result from the designated instantaneous changes in the forward rate curves, and (2) NII 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.

 

Change in             Estimated Increase (Decrease)            Increase (Decrease) in  
Interest Rates      Estimated      in NPV     Estimated      Estimated NII  

(basis points)

     NPV      Amount     Percent     NII      Amount     Percent  
(Dollars in thousands)  
  +300       $ 301,808       $ (37,466     -11.0   $ 91,661       $ 4,689        5.4
  +200         314,069         (25,205     -7.4     90,583         3,611        4.2
  +100         327,155         (12,119     -3.6     89,034         2,062        2.4
  0         339,274         0        0.0     86,972         0        0.0
  -100         344,381         5,107        1.5     80,839         (6,133     -7.1

The table set forth above indicates that at June 30, 2011, in the event of an immediate 200 basis point increase in interest rates, we would be expected to experience a 7.4 percent decrease in NPV and a 4.2 percent increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on NPV and NII beyond -100 basis points.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII 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 NII 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 re-pricing characteristics of specific assets and liabilities. Accordingly, although the NPV and NII 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 third quarter of fiscal year 2011, the federal funds target rate remained in a range of 0.00 – 0.25 percent as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities increased by 3 basis points from 0.42 percent to 0.45 percent during the first three quarters of fiscal year 2011 while the yield on U.S. Treasury 10 year notes increased 65 basis points from 2.53 percent to 3.18 percent over the same time period. The disproportionately greater rate of increase on longer term maturities has resulted in the 2-10 year treasury yield curve being steeper at the end of the third quarter of fiscal 2011 than it was when the year began. To fight the economic downturn the FOMC declared a willingness to keep the federal funds target low for an “extended period”. Should economic conditions improve, the FOMC could reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionably more than the longer end thereby resulting in margin compression. We hold $50 million in notional principal of interest rate caps to help mitigate this risk. Should rates not increase sufficiently to collect on such derivatives; the fair value of this derivative would decline and eventually mature. The net value at risk is $235.

 

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Table of Contents
Item 4. Controls and Procedures

The Company’s management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is properly recorded, processed, summarized and reported within the time frames specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings which, in the aggregate, management believes to be material to the consolidated financial condition and operations of the Company.

 

Item 1A. Risk Factors

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A of the Company’s most recent annual report on Form 10-K. See also Part I, Item 2 (Forward-Looking Statements) of this quarterly report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in the Company’s most recent annual report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Not applicable.

 

(b) Not applicable

 

(c) Issuer Purchases of Equity Securities

 

     Total Number
of shares

(or Units)
Purchased
     Average Price
Paid per Share
(or Unit)
     Total Number of
Shares (or Units)
Purchased as Part  of
Publicly Announced
Plans or Programs
     Maximum Number (or
Approximated Dollar
Value) of Shares (or
Units) that may yet be
Purchased Under the
Plans or Programs
 

April 1 - April 30

     37,908       $ 9.35         37,908         987,913   

May 1 - May 31

     28,200         9.32         28,200         959,713   

June 1 - June 30

     968         8.36         —           959,713   
  

 

 

    

 

 

    

 

 

    

Total

     67,076       $ 9.32         66,108      
  

 

 

    

 

 

    

 

 

    

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. (Removed and reserved).

 

Item 5. Other Information

None

 

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Table of Contents
Item 6. Exhibits

 

Exhibit
Number

 

Description

10.1   Employment Agreement among Provident New York bancorp, Provident Bank and Jack L. Kopnisky (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2011).
10.2   Letter agreement between Provident New York Bancorp and George L. Strayton (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on From 8-K filed with the Commission on June 21, 2011).
10.3   Form of Stock Option Agreement between Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011)+
10.4   Form of Restricted Stock Award Notice between Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011)+
10.5   Form of Performance-based Restricted Stock Award Notice between Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011)+
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

+ 

Management compensatory plan or agreement

 

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Table of Contents

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:  

August 9, 2011

    By:  

/s/ Jack Kopnisky

        Jack Kopnisky
        President, Chief Executive Officer and Director
        (Principal Executive Officer)
Date:  

August 9, 2011

    By:  

/s/ Paul A. Maisch

        Paul A. Maisch
        Executive Vice President
        Chief Financial Officer
        Principal Accounting Officer
        (Principal Financial Officer)

 

47