ITEM 1. Business
Provident New York Bancorp
Provident New York Bancorp (“Provident Bancorp” or the “Company”) is a Delaware corporation that owns all of the outstanding shares of common stock of Provident Bank (the “Bank”). At September 30, 2008, Provident Bancorp had consolidated assets of $3.0 billion, deposits of $2.0 billion and stockholders’ equity of $399.2 million. As of September 30, 2008, Provident Bancorp had 39,815,213 shares of common stock outstanding.
Provident Bank
Provident Bank, an independent, full-service community bank founded in 1888, is headquartered in Montebello, New York and is the principal bank subsidiary of Provident Bancorp. With $3.0 billion in assets and 547 full-time equivalent employees, Provident Bank accounts for substantially all of Provident Bancorp’s consolidated assets and net income. We operate 33 branches which serve the Hudson Valley region, including 32 branches located in Rockland, Orange, Sullivan, Ulster, Westchester and Putnam Counties in New York, and one branch in Bergen County, New Jersey which operates under the name Towncenter Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, community business (small business) and retail banking products and services.
We also offer deposit services to municipalities located in the State of New York through Provident Bank’s wholly-owned subsidiary, Provident Municipal Bank.
Provest Services Corp. I is a wholly-owned subsidiary of Provident Bank, holding an investment in a limited partnership that operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident Bank that has engaged a third-party provider to sell annuities, life and health insurance products to Provident Bank’s customers. Through September 30, 2008, the activities of these subsidiaries have had an insignificant effect on our consolidated financial condition and results of operations. Provident REIT, Inc. and WSB Funding are wholly-owned subsidiaries in the form of a real estate investment trusts and hold both residential and commercial real estate loans.
Provident Bank’s website (www.providentbanking.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings, as well as ownership reports on Forms 3, 4 and 5 filed by the Company’s directors and executive officers. Copies may also be obtained, without charge, by written request to Provident New York Bancorp Investor Relations, Attention: Miranda Grimm, 400 Rella Boulevard, Montebello, New York 10901.
Non-Bank Subsidiaries
In addition to Provident Bank, the Company owns Hardenburgh Abstract Company of Orange County, Inc. (“Hardenburgh’) that was acquired in connection with the acquisition of Warwick Community Bancorp (“WSB”) and Hudson Valley Investment Advisors, LLC (“HVIA), an investment advisory firm that generates investment management fees. Hardenburgh had gross revenue from title insurance policies and abstracts of $0.9 million and net income of $101,067 in 2008, and HVIA generated $2.2 million in fee income in 2008 and net income of $378,073.
Provident Municipal Bank
Provident Municipal Bank, a wholly-owned subsidiary of Provident Bank, is a New York State-chartered commercial bank which is engaged in the business of accepting deposits from municipalities in our market area. New York State law requires municipalities located in the State of New York to deposit funds with commercial banks, effectively forbidding these municipalities from depositing funds with savings banks, including federally chartered savings associations, such as Provident Bank.
Forward-Looking Statements
From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A.
ITEM 1A. Risk Factors
Recent Legislation in Response to Market and Economic Conditions May Significantly Affect Our Operations, Financial Condition, and Earnings.
Instability and volatility in the credit markets has led to the adoption of legislation and regulatory actions which have the potential to significantly affect financial institutions and holding companies, including us. Under the Emergency Economic Stabilization Act of 2008 (“EESA”), the U.S. Department of the Treasury has the authority to expend up to $700 billion to assist in stabilizing and providing liquidity to the U.S. financial system. Although it was originally contemplated that these funds would be used primarily to purchase troubled assets under TARP on October 14, 2008, the Treasury announced the CPP under which it will purchase up to $250 billion of non-voting senior preferred shares of certain qualified financial institutions in an attempt to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. In addition, Congress has temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. The FDIC has also announced the creation of the TLGP which is intended to strengthen confidence and encourage liquidity in the U.S. financial institutions by temporarily guaranteeing newly issued senior unsecured debt of participating organizations and providing full coverage for noninterest-bearing transaction deposit accounts (such as business checking accounts, interest-bearing transaction accounts paying 50 basis points or less and IOLTA accounts), regardless of dollar amount until December 31, 2009.
We can provide no assurances that these actions will have the beneficial effects that are intended, particularly with respect to the extreme levels of volatility and limited credit availability currently being experienced. These new laws, regulations, and changes will increase our FDIC insurance premiums and may also increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. At this time, we cannot fully determine the extent of these effects, or any other effects, on us caused by these and future laws and regulations. However, they may significantly affect the markets in which we do business, the markets for and value of our investments, and our ongoing operations, costs and profitability.
Participants in the CPP Are Subject to Certain Restrictions on Dividends, Repurchases of Common Stock, and Executive Compensation.
Treasury has agreed to purchase up to $58.4 million of Provident Bancorp non-voting cumulative senior preferred stock. The transaction is subject to proper documentation and approval by the Company’s Board of Directors. If we elect to participate, we will be subject to restrictions on dividends, repurchases of common stock, and executive compensation. Compliance with these restrictions and other restrictions may increase our costs and limit our ability to pursue business opportunities. Additionally, any reduction of, or the elimination of, our common stock dividend in the future could adversely affect the market price of our common stock. Unless leveraged and introducing additional interest rate risk our earnings and earnings per share would be adversely impacted by participation in the CPP.
Difficult Market Conditions Have Adversely Affected Our Industry.
Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosure, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets may adversely affect our business, financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry. In particular, we may face the following risks in connection with these events:
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We expect to face increased regulation of our industry, including as a result of the EESA. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
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Our ability to assess the creditworthiness of our customers or to estimate the values of our assets may be impaired if the models and approaches we use become less predictive of future behaviors, valuations,
assumptions or estimates. The process we use to estimate losses inherent in our credit exposure or estimate the value of certain assets requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans or impact the value of assets, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process.
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Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.
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We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.
Lack of Consumer Confidence in Financial Institutions May Decrease Our Level of Deposits
Our level of deposits may be affected by lack of consumer confidence in financial institutions, which have caused fewer depositors to be willing to maintain deposits that are not FDIC-insured accounts. That may cause depositors to withdraw deposits and place them in other institutions or to invest uninsured funds in investments perceived as being more secure, such as securities issued by the United States Treasury. These consumer preferences may cause us to be forced to pay higher interest rates to retain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.
Market Volatility and Returns May Lead to Reductions in Investment Management Revenues
Our investment management revenues depend in large part on the level of assets under management. Market volatility that lead customers to liquidate investments as well as lower asset values caused by poor investment returns can reduce our level of assets under management and thereby decrease our investment management revenues.
Future Legislative or Regulatory Actions Responding to Perceived Financial and Market Problems Could Impair Our Rights Against Borrowers.
In particular, there have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
An Inadequate Allowance for Loan Losses Would Negatively Impact Our Results of Operations.
We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and borrower defaults result in losses exceeding our allowance for loan losses, our results of operations could be significantly and adversely affected. We cannot assure you that our allowance will be adequate to cover probable loan losses inherent in our portfolio.
The Need to Account for Assets at Market Prices May Adversely Affect Our Results of Operations.
We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the asset in question presents minimal credit risk. Given the continued disruption in the capital markets, we may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.
Our Commercial Real Estate, Commercial Business and Construction Loans Expose Us to Increased Credit Risks.
At September 30, 2008, our portfolio of commercial real estate loans totaled $554.8 million, or 32.0% of total loans, our commercial business loan portfolio totaled $243.6 million, or 14.1% of total loans, and our portfolio of construction loans totaled $171.0 million, or 10.0% of total loans. We plan to continue to emphasize the origination of these types of loans. Commercial real estate, commercial business and construction loans generally have greater credit risk than one- to four-family residential mortgage loans because repayment of these loans often depends on the successful business operations of the borrowers. These loans typically have larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Many of our borrowers also have more than one commercial real estate, commercial business or construction loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss, compared to an adverse development with respect to a one- to four-family residential mortgage loan.
Changes in the Value of Goodwill and Intangible Assets Could Reduce Our Earnings.
We are required by U.S. generally accepted accounting principles to test goodwill and other intangible assets for impairment at least annually. Testing for impairment of goodwill and intangible assets involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2008, if our goodwill and intangible assets were fully impaired and we were required to charge-off all of our goodwill, the pro forma reduction to our stockholders’ equity would be approximately $4.04 per share.
Our Continuing Concentration of Loans in Our Primary Market Area May Increase Our Risk.
Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the New York metropolitan area in general. Unlike large banks that are more geographically diversified, we provide banking and financial services to customers primarily in Rockland and Orange Counties, New York. We also have a branch presence in Ulster, Sullivan and Putnam Counties in New York and in Bergen County, New Jersey. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would affect the local economic conditions and could adversely affect our financial condition and results of operations. Additionally, because we have a significant amount of commercial real estate loans, decreases in tenant occupancy also may have a negative effect on the ability of many of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.
Changes in Market Interest Rates Could Adversely Affect Our Financial Condition and Results of Operations.
Our financial condition and result of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. Our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets. If rates increase rapidly as a result of an improving economy, we may have to increase the rates paid on our deposits and borrowed funds more quickly than loans and investments reprice, resulting in a negative impact on interest spreads and net interest income. In addition, the impact of rising rates could be compounded if deposit customers move funds from savings accounts back to higher rate certificate of deposit accounts. Conversely, should market interest rates continue to fall below current levels, our net interest margin could also be negatively affected, as competitive pressures could keep us from further reducing rates on our deposits, and prepayments and curtailments on assets may continue. Such movements may cause a decrease in our interest rate spread and net interest margin. Since 2005, after the completion of the second step conversion and the ENB and WSB acquisitions shifts in short term market rates led to an inverted yield curve and consequently fierce competition for deposits. The overall increase in interest bearing deposits due to this competition and eventual migration of deposits to higher rate products increased interest bearing funding costs from 2.6% in 2006 to 3.3% in 2007. Subsequent to this funding costs have declined in 2008 to 2.6% in response to Federal Reserve Bank interest rate cuts. Average wholesale funding costs, as measured by the cost of borrowings, decreased from 4.3% in 2006 to 3.9% in 2008. These decreases outpaced the tax equivalent average yield on earning assets, which increased from 5.8% in 2006 to 6.1%
in 2008. The overall result was that tax equivalent net interest income has increased from $87.0 million in 2006, $87.9 million in 2007 and $99.0 million in 2008. A decline in net interest margin may occur, offsetting a portion, or all gains in net interest income generated from an increasing volume of assets, if competitive market pressures limit our ability to reduce liability costs as the level of short-term interest rates decrease, or liability costs increase in response to increasing short-term rates. In this regard, we have $302.5 million in structured/callable advances with FHLB. The advances have interest rates that are below the level of comparable fixed term borrowings at the time of issue. If interest rates rise the borrowings may be called whereby the funds would need to be replaced at higher levels.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans.
Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At September 30, 2008, our investment and mortgage-backed securities available for sale totaled $791.7 million. Unrealized losses on securities available for sale, net of tax, amounted to $5.9 million and are reported as a separate component of stockholders’ equity. Further, decreases in the fair value of securities available for sale, therefore, could have an adverse effect on stockholders’ equity.
A Breach of Information Security Could Negatively Affect Our Earnings.
Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. We cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Disruptions to our vendors’ systems may arise from events that are wholly or partially beyond our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). If information security is breached, despite the controls we have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings.
We Are Subject to Extensive Regulatory Oversight
We and our subsidiaries are subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place are flawless. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Our failure to comply with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions, and legal proceedings. In addition, recently enacted, proposed and future legislation and regulations have had, will continue to have or may have significant impact on the financial services industry. Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, and could cause us to change or limit some of our products and services, or the way we operate our business.
We Are Subject to Competition from Both Banks and Non-Banking Companies.
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks, other savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, real estate investment trusts (REITs), private issuers of debt obligations, venture capital firms, and suppliers of other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and have advantages over us in providing certain services. Many of our competitors
are significantly larger than we are and have greater access to capital and other resources. Also, our ability to compete effectively is dependent on our ability to adapt successfully to technological changes within the banking and financial services industry.
Various Factors May Make Takeover Attempts More Difficult to Achieve.
Our Board of Directors has no current intention to sell control of Provident Bancorp. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of Provident Bancorp without the consent of our Board of Directors. One may want a take over attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:
Certificate of Incorporation and Statutory Provisions. Provisions of the certificate of incorporation and bylaws of Provident Bancorp and Delaware law may make it more difficult and expensive to pursue a takeover attempt that management opposes. These provisions also would make it more difficult to remove our current Board of Directors or management, or to elect new directors. These provisions also include limitations on voting rights of beneficial owners of more than 10% of our common stock, supermajority voting requirements for certain business combinations and the election of directors to staggered terms of three years. Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the Board of Directors.
Required Change in Control Payments and Issuance of Stock Options and Recognition and Retention Plan Shares. We have entered into employment agreements with executive officers, that require payments to be made to them in the event their employment is terminated following a change in control of Provident Bancorp or Provident Bank. We have issued stock grants and stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan. The majority of grants under the plan were made in 2005 and generally vest over five years. In the event of a change in control, the vesting of stock and option grants accelerate. In 2006 we adopted the Provident Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of the Company. These payments and the acceleration of grants would increase the cost of acquiring Provident Bancorp, thereby discouraging future takeover attempts.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
ITEM 2.
ITEM 2. Properties
We maintain our executive offices, commercial lending division and investment management and trust department at a leased facility located at 400 Rella Boulevard, Montebello, NY consisting of 40,923 square feet. At September 30, 2008, we conducted our business through 33 full-service branches. Of our 33 branches 15 are located in Orange County, NY, 11 in Rockland County, NY, 2 in Ulster County, NY, 2 in Sullivan County, NY, 1 in Putnam County, NY, 1 in Westchester County and 1 in Bergen County, NJ. Additionally, 17 of our branches are owned and 16 are leased. The square footage of our branches range from 300 to 16,000 square feet.
In addition to our branch network and corporate headquarters we lease 6 and own 5 additional properties which are held for general corporate purposes. The total square footage of these properties is 31,278 square feet and they are located in Orange, Rockland, Sullivan and Ulster counties. See note 7 of the “Notes to Consolidated Financial Statements” filed herewith in Item 8, “Financial Statements and Supplementary Data” for further detail on our premises and equipment
ITEM 3.
ITEM 3. Legal Proceedings
Provident Bancorp is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts that are believed by management to be immaterial to Provident Bancorp’s financial condition and results of operations.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the quarter ended September 30, 2008.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(A)
The shares of common stock of Provident New York Bancorp are quoted on the NASDAQ Global Select (“NASDAQ”) under the symbol “PBNY.” As of September 30, 2008, Provident New York Bancorp had 11 registered market makers, 5,919 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 39,815,213 shares outstanding.
Market Price and Dividends. The following table sets forth market price and dividend information for the common stock for the past two fiscal years.
Payment of dividends on Provident New York Bancorp’s common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. Additionally, participation in the CPP would limit our ability to pay and increase dividends, as discussed above under “Recent Regulatory Initiatives.” Repurchases of the Company’s shares of common stock during the fourth quarter of the fiscal year ended September 30, 2008 are detailed in (C) below. There were no sales of unregistered securities during the quarter ended September 30, 2008.
Set forth below is a stock performance graph comparing the yearly total return on our shares of common stock, commencing with the closing price on September 30, 2002, with (a) the cumulative total return on stocks included in the NASDAQ Composite Index, and (b) the cumulative total return on stocks included in the SNL Mid-Atlantic Thrift Index.
There can be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance.
PROVIDENT NEW YORK BANCORP
source: SNL Financial
This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that Provident New York Bancorp specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
(B)
Not Applicable
(C)
Issuer Purchases of Equity Securities
The total number of shares purchased during the periods includes shares deemed to have been received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes (34,122), as is permitted under the Company’s stock benefit plans and shares repurchased as part of a previously authorized repurchase program.
The Company announced its fourth repurchase program on August 24, 2007 authorizing the repurchase of 2,000,000 shares. Participation in the CPP would limit the Company’s ability to repurchase shares of common stock, as discussed above under “Recent Regulatory Initiatives.”
ITEM 6.
ITEM 6. Selected Financial Data
The following financial condition data and operating data are derived from the audited consolidated financial statements of Provident New York Bancorp. Additional information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included as Item 7
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company provides financial services to individuals and businesses in New York and New Jersey. The Company’s business is primarily accepting deposits from customers through its banking offices and investing those deposits, together with funds generated from operations and borrowings, commercial real estate loans, commercial business loans, residential mortgages, consumer loans, and investment securities. Additionally, the Company offers investment management services. 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.
Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities. The Federal Reserve Board, through a series of reductions to the federal funds target rate, has acted to increase liquidity in the credit markets. These rate reductions significantly lowered yields on the short end of the treasury yield curve rather than the long end of the curve, resulting in a steeper yield curve than existed at the prior fiscal year-end.
Net income for the year ended September 30, 2008, increased 21.2% to $23.8 million, or $0.61 per diluted share from $19.6 million, or $0.48 per diluted share for the year ended September 30, 2007. Net income for the year ended September 30, 2006 was $20.2 million, or $0.49 per diluted share. Net interest income on a tax equivalent basis increased $10.6 million or 12.5% for the year ended September 30, 2008 as compared to the year ended 2007, but was relatively unchanged between fiscal 2006 and fiscal 2007. Net interest margin increased from 3.57% for fiscal 2007 to 3.96% for fiscal 2008. Average loans have grown from $1.4 billion in 2006 to $1.5 billion in 2007 and to $1.6 billion in 2008, the provision for loan losses increased from $1.2 million in 2006, to $1.8 million in 2007 and to $7.2 million in 2008 primarily due to an increase in charge-offs from $1.8 million in 2007, to $2.5 million in 2007 to $4.5 million in 2008 due to a softer economy in addition to the growth of the portfolio. Charge-offs increased due to the slow down in economic activity in 2008.
Non interest income was $17.2 million in 2006 increasing $3.9 million (resulting from banking fees as well as investment management fees and gains on sales of investment securities) to $ 19.8 million in 2007 and $21.0 million in 2008. Non interest expense was $71.3 million in 2006 increasing to $74.6 million in 2007 and $75.5 million in 2008.
Total assets increased to $3.0 billion at September 30, 2008 as compared to $2.8 billion at September 30, 2007. As the Company furthered its commercial lending and banking initiatives, loans increased by 5.7% and investment securities remained relatively unchanged compared to the year ended September 30, 2007.
The following is an analysis of the financial condition and results of the Company’s operations. This item should be read in conjunction with the consolidated financial statements and related notes filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of the Company’s business filed here within Part I, Item 1, “Business.”
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income.
The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, and review their risk components as a part of that evaluation. See Note 1, “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in our “Notes to Consolidated Financial Statements” for a discussion of the risk components. We consistently review the risk components to identify any changes in trends.
Accounting for goodwill is considered to be a critical policy because goodwill must be tested for impairment at least annually using a “two-step” approach that involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions utilized. If goodwill is determined to be impaired, it would be expensed in the period in which it became impaired.
We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired. Other intangible assets have been recorded in connection with the acquisition of HVIA for non-competition and customer intangibles. As of September 30, 2008, the Company had $7.7 million recorded in core deposit and other intangibles.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when management has determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful.
Management Strategy
We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional, multi-state and international banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area focusing on core deposit generation and quality loan growth. This has resulted in a change in our business mix, providing a favorable platform for long-term sustainable growth. Highlights of management’s business strategy are as follows:
Operating as a Community Bank. As an independent community bank, we emphasize the local nature of our decision-making to respond more effectively to the needs of our customers while providing a full range of financial services to the businesses, individuals, and municipalities in our market area. We offer a broad range of financial products to meet the changing needs of the marketplace, including internet banking, cash management services and, on a selective basis, sweep accounts. In addition, we offer asset management services to meet the investing needs of individuals, corporations and not-for-profit entities. As a result, we are able to provide, at the local level, the financial services required to meet the needs of the majority of existing and potential customers in our market.
Enhancing Customer Service. We are committed to providing superior customer service as a way to differentiate us from our competition. As part of our commitment to service, we have been engaged in Sunday banking since 1995 and extended service hours, since 1987. In addition, we offer multiple access channels to our customers, including our branch and ATM network, internet banking, our Customer Care Telephone Center and our Automated Voice Response system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards. In 2006 we launched our Service Excellence Program designed to maintain the highest level of service to our customer base.
Growing and maintaining a Diversified Loan Portfolio. We offer a broad range of loan products to commercial businesses, real estate owners, developers and individuals. To support this activity, we maintain commercial, consumer and residential loan departments staffed with experienced professionals to promote the continued growth and prudent management of loan assets. We have experienced consistent and significant growth in our commercial loan portfolio while continuing to grow our residential mortgage and consumer lending businesses. As a result, we believe that we have developed a high quality diversified loan portfolio with a favorable mix of loan types, maturities and yields.
Expanding our Banking Franchise. Management intends to continue the expansion of the banking franchise and to increase the number of customers served and products used by businesses and consumers in our market area. Our strategy is to deliver exceptional customer service, which depends on up-to-date technology and multiple access channels, as well as courteous personal contact from a trained and motivated workforce. This approach has resulted in a relatively high level of core deposits, which improves our overall cost of funds. Management intends to maintain this strategy, which will require ongoing investment in banking locations and technology to support exceptional service levels for Provident Bank’s customers.
Comparison of Financial Condition at September 30, 2008 and September 30, 2007
Total assets as of September 30, 2008 were $3.0 billion, an increase of $182.3 million, or 6.5%, from September 30, 2007. The increase from September 30, 2007 was due to increases seen in the loan portfolio of $93.5 million, or 5.7%, and an increase in cash and due from banks of $78.5 million, due to a large deferred cash letter received on September 30, 2008. Core deposit and other intangibles decreased by $2.6 million. Goodwill decreased by $293,000 due to expiration of merger related tax items. The Company had $189,000 in loans held for sale as of September 30, 2008 and none at September 30, 2007.
Net loans as of September 30, 2008 were $1.7 billion, an increase of $90.8 million, or 5.6%, over net loan balances of $1.6 billion at September 30, 2007. Commercial loans, primarily commercial business loans, increased by $74.2 million, or 8.3%, over balances at September 30, 2007. Consumer loans increased by $6.7 million, or 2.8%, during the fiscal year ended September 30, 2008, while residential loans increased by $12.6 million, or 2.5%. Total loan originations, excluding loans originated for sale were $596.6 million for the fiscal year ended September 30, 2008, while repayments were $498.6 million for the fiscal year ended September 30, 2008.
Total securities increased by $2.3 million, to $834.7 million at September 30, 2008 from $832.4 million at September 30, 2007, primarily due to local municipal investments classified as held to maturity.
Deposits as of September 30, 2008 were $2.0 billion, an increase of $275.5 million, or 16.1%, from September 30, 2007. Included in the figures for September 30, 2008 were approximately $242.3 million in short-term seasonal municipal deposits. As of September 30, 2008 retail and commercial transaction accounts were 41.3% of deposits compared to 30.7% at September 30, 2007. The decrease in savings deposits of $10.4 million, or 3.0%, was largely due to the migration of the lower-yielding accounts to our certificate of deposit and money market deposit products or, in some cases, to other institutions offering higher yields (see “Liquidity and Capital Resources”). Certificates of deposit decreased $37.3 million or 6.6% as the Company, while maintaining competitive rate structures, did not compete with the highest pricing in the market place. These decreases were offset by an increase of $28.7 million, or 10.3%, in money market deposit accounts. Transaction accounts increased $294.5 million or 56.0%, primarily due to the aforementioned seasonal municipal deposits.
Borrowings decreased by $95.2 million, or 14.4%, from September 2007, to $566.0 million. The decrease is related to the borrowings being paid down by maturing investment securities and seasonal municipal deposits paying down short-term borrowings.
Stockholders’ equity decreased $5.9 million from September 30, 2007 to $399.2 million at September 30, 2008, due to purchases of treasury stock. Treasury stock repurchases were minimal during the fourth quarter of fiscal 2008 and totaled 1.6 million shares for the 2008 fiscal year, at a cost of $20.2 million. These purchases were partially offset by increases in the Company’s retained earnings of $14.3 million and stock based compensation vesting of $5.1 million. A decline in other comprehensive income (loss) of $5.4 million, added to the overall decrease in capital.
As of September 30, 2008 the Company had authorization to purchase up to an additional 1,165,901 shares of common stock (see item I Business: “Recent Regulatory Initiatives’). Bank Tier I capital to assets was 8.0% at September 30, 2008. Tangible capital at the holding company level was 8.48%.
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. Tax-exempt securities are reported on a tax-equivalent basis, using a 35% federal tax rate. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
(1)
Balances include the effect of net deferred loan origination fees and costs, and the allowance for the loan losses. Includes prepayment fees and late charges.
(2)
Includes club accounts and interest-bearing mortgage escrow balances.
(3)
Net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5)
Net interest margin represents net interest income (tax equivalent) divided by average total interest-earning assets.
The following table presents the dollar amount of changes in interest income (on a fully tax-equivalent basis) and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Analysis of Net Interest Income
Net interest income is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.
Comparison of Operating Results for the Years Ended September 30, 2008 and September 30, 2007
Net income for the year ended September 30, 2008 was $23.8 million. This compares to $19.6 million for the year ended September 30, 2007. Diluted earnings per share were $0.61 for the year ended September 30, 2008 compared to $0.48 for the prior fiscal year.
Interest Income. Interest income for the year ended September 30, 2008 decreased to $149.0 million, a decrease of $2.6 million, or 1.7%, compared to the prior year. The decrease was primarily due to declines in general market interest rates on variable rate loans, as well as a decline in the average balances of taxable securities. Average interest-earning assets for the year ended September 30, 2008 were $2.5 billion, an increase of $41.9 million, or 1.7%, over average interest-earning assets for the year ended September 30, 2007 of $2.5 billion. Average loan balances grew by $103.1 million and average balances of securities and other earning assets decreased by $61.3 million. On a tax-equivalent basis, average yields on interest earning assets decreased by 18 basis points to 6.11% for the year ended September 30, 2008, from 6.29% for the year ended September 30, 2007. The repricing of floating rate assets was the primary reason for the decrease in asset yields.
Interest income on loans for the year ended September 30, 2008, decreased 2.1% to $107.6 million from $109.9 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2008 decreased to $63.5 million, from commercial loan interest income of $64.9 million for the prior fiscal year. Average balances of commercial loans grew $71.9 million to $901.6 million, with a 79 basis point decrease in the average yield. The decrease in yield relates to the decline in the prime rate of 2.75% during fiscal 2008. Commercial loans adjustable with the prime rate totaled $298.2 million at September 30, 2008. Interest income on consumer loans decreased by $2.5 million, or 14.7% and $154.5 million of consumer loans adjust with the prime rate. Income earned on residential mortgage loans was $29.9 million for the year ended September 30, 2008, up $1.6 million, or 5.7%, from the prior year.
Tax-equivalent interest income on securities and other earning assets increased to $45.0 million for the year ended September 30, 2008, compared to $44.8 million for the prior year. This was due to a tax-equivalent increase of 37 basis points in yields offset in part by a $62.3 million decline in the average balances of securities and other earning assets. During fiscal 2008 $92.5 million matured and were reinvested at current market rates.
Interest Expense. Interest expense for the year ended September 30, 2008 decreased by $13.2 million to $53.6 million, a decrease of 19.8% compared to interest expense of $66.9 million for the prior fiscal year. The decrease in interest expense was primarily due to a decrease in the average rates paid on interest-bearing liabilities for the year ended September 30, 2008 of 2.62% compared to 3.33% in fiscal 2007. The average interest rate paid on certificates of deposit decreased by 80 basis points to 3.73% for the year ended September 30, 2008, from 4.53% for the prior year. The average interest rate paid on savings decreased to 0.35% for the year ended September 30, 2008 from 0.51% paid during fiscal 2007. The average rate paid on money market rates also declined, 78 basis points to 1.86% for the year ended September 30, 2008. Due to increases in municipal deposits the rates paid on NOW accounts increased 14 basis points for fiscal 2008 as compared to fiscal 2007. Furthermore, this average cost of borrowings decreased 102 basis points which reflect the general market conditions during fiscal 2008.
Net Interest Income for the fiscal year ended September 30, 2008 was $95.3 million, compared to $84.7 million for the year ended September 30, 2007. The net interest margin increased by 39 basis points to 3.96%, while the net interest spread increased by 52 basis points to 3.49%. The 10-year US treasury rate was an average of 4.72% for the fiscal year ended September 30, 2007 compared to 3.90% for the year ended September 30, 2008 The Bank’s average cost of interest-bearing liabilities has decreased and, although the average asset yields also decreased during this period, they did so at a slower pace due to the asset/liability mix of the Company’s balance sheet. Further, the greater increase of interest earning assets compared to interest bearing liabilities improved net interest income.
Provision for Loan Losses. We recorded $7.2 million and $1.8 million in loan loss provisions for the year ended September 30, 2008 and September 30, 2007, respectively. At September 30, 2008, the allowance for loan losses totaled $23.1 million, or 1.33% of the loan portfolio, compared to $20.4 million, or 1.24% of the loan portfolio at September 30, 2007. Net charge-offs for the years ended September 30, 2008 and 2007 were $4.5 million and $1.8 million, respectively (an annual rate of 0.28% and 0.12%, respectively, of the average loan portfolio). Our credit-scored small business loan portfolio continued to account for the large majority of our charge-offs. During the year we recorded Net charge-offs of $3.5 million in this portfolio, on average outstanding balances of $99.9 million. While we respond promptly to any loans that are delinquent, we also monitor the portfolio to identify loans that are showing signs of weakness other than delinquencies. During the year we also moderately tightened credit standards in our underwriting process, in particular with applicants in industries we have identified as particularly vulnerable in this economy.
Our non-performing loans increased to $16.9 million at September 30, 2008 from $7.3 million at September 30, 2007. The majority of the increase came from the commercial sector and was centered in three real estate relationships. Negotiations are currently underway with the principals to restructure two of the obligations. Subsequent to year end, the Company received a deed in lieu of foreclosure on the third relationship. The remainder of the increase is attributed to other commercial loans and residential mortgages.
We increased the provision for loan losses to reflect the increase in charge-offs and non-performing loans. We also increased the provision for loan losses due to data showing slowing sales and declining values in one-to-four family homes in our market area, increasing unemployment, and credit and liquidity concerns in the financial markets, leading to an overall downturn in the economy. Based on our experience in integrating the loan portfolios acquired in the Ellenville and Warwick acquisitions in 2004, and further analysis of delinquency trends in our commercial
mortgage portfolio, we decreased the percentage estimate of losses for the overall commercial mortgage and noncredit-scored commercial and industrial portfolios. Overall growth in the portfolio, particularly in the commercial mortgage and noncredit-scored commercial and industrial portfolios resulted in an increase in our estimate of the required allowance for loan losses as well.
Non-interest income consists primarily of banking fees and service charges, and net increases in the cash surrender value of bank-owned life insurance (“BOLI”) contracts, title insurance fees and investment management fees. Non-interest income was $21.0 million for the fiscal year ended September 30, 2008 compared to $19.8 million for the prior fiscal year. Deposit fees and service charges increased by $995,000, or 8.7%. Income derived from the Company’s BOLI investments decreased by $212,000, or 10.4%, due to $403,000 in death benefit proceeds received in 2007. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. decreased $262,000 due to the continued slow down in the real estate markets. Investment management fees increased $191,000 which is related to increased balances under management. During the year ended September 30, 2008, the Company also recorded gains on sales of investment securities totaling $983,000 compared to a $8,000 loss for the prior year.
Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization and data processing expenses. Non-interest expense for the fiscal year ended September 30, 2008 increased by $910,000, or 1.2% to $75.5 million, compared to $74.6 million for the same period in 2007. Compensation and employee benefits increased by $3.6 million, or 10.6%, to $37.0 million for the year ended September 30, 2008. The increase was primarily attributable to increases in employee benefits, and additional employees hired in 2008, as the Company experienced increases in its health insurance programs, 401K matching and profit sharing expenses and added resources to its municipal bank business and opened a new branch location. Occupancy and office operations increased $998,000, or 8.7%, as the Company invested in branch relocations in 2008. Stock-based compensation decreased by $1.9 million due to lower acceleration of vesting of restricted stock awards and its first step ESOP loan maturing in December 2007 requiring less share allocations going forward. Marketing expenses decreased $899,000 to $3.3 million at September 30, 2008 as compared to $4.2 million at September 30, 2007 due primarily to the production costs associated with our 2007 media campaigns.
Income Taxes. Income tax expense was $9.9 million for the fiscal year ended September 30, 2008 compared to $8.6 million for fiscal 2007, representing effective tax rates of 29.4% and 30.4%, respectively. The lower tax rate in 2008 was primarily due to the continued shift to tax-exempt securities, as well as the maturity of the first-step ESOP loan, which was primarily non-deductible expense.
Comparison of Operating Results for the Years Ended September 30, 2007 and September 30, 2006
Net income for the year ended September 30, 2007 was $19.6 million. This compares to $20.2 million for the year ended September 30, 2006. Diluted earnings per share were $0.48 for the year ended September 30, 2007 compared to $0.49 for the prior fiscal year.
Interest Income. Interest income for the year ended September 30, 2007 increased to $151.6 million, an increase of $16.0 million, or 11.8%, compared to the prior year. The increase was primarily due to higher average balances of loans offset by declines in average securities, along with higher yields in both asset classes. Average interest-earning assets for the year ended September 30, 2007 were $2.5 billion, an increase of $90.7 million, or 3.8%, over average interest-earning assets for the year ended September 30, 2006 of $2.4 billion. Average loan balances grew by $149.7 million and average balances of securities and other earning assets decreased by $59.0 million. On a tax-equivalent basis, average yields on interest earning assets increased by 47 basis points to 6.29% for the year ended September 30, 2007, from 5.82% for the year ended September 30, 2006. New security purchases and loan originations at higher market interest rates, as well as the repricing of floating rate assets were the primary reasons for the increase in asset yields.
Interest income on loans for the year ended September 30, 2007, grew 15.1% to $109.9 million from $95.5 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2007 increased to $64.9 million, up 18.1% from commercial loan interest income of $55.0 million for the prior fiscal year. Average balances of commercial loans grew $101.7 million to $829.7 million, with a 28 basis point increase in the average yield. Interest income on consumer loans increased by $3.1 million, or 23.2%. Our fixed-rate consumer loans have shorter average maturities, and our adjustable-rate consumer loans float with the prime rate. Income earned on residential mortgage loans was $28.3 million for the year ended September 30, 2007, up $1.3 million, or 4.8%, from the prior year.
Interest income on securities and other earning assets increased to $44.8 million for the year ended September 30, 2007, compared to $42.3 million for the prior year. This was due to a tax-equivalent increase of 55 basis points in yields offset in part by a $59.0 million decline in the average balances of securities and other earning assets.
Interest Expense. Interest expense for the year ended September 30, 2007 increased by $16.0 million to $66.9 million, an increase of 31.5% compared to interest expense of $50.9 million for the prior fiscal year. This increase was net of the recognition of accretion of $0.5 million in premiums recorded on called Federal Home Loan Bank borrowings that were assumed in acquisitions compared to $1.5 million in similar premium accretion in the prior year. The increase in interest expense was primarily due to an increase in the average balance of interest-bearing liabilities of $76.3 million, or 3.9%. In addition, average rates paid on interest-bearing liabilities for the year ended September 30, 2007 increased by 70 basis points to 3.33% from 2.63% in fiscal 2006. The average interest rate paid on certificates of deposit increased by 84 basis points to 4.53% for the year ended September 30, 2007, from 3.69% for the prior year. For the year ended September 30, 2007, average balances of lower cost savings decreased by $68.3 million, or 15.3%, while average balances of certificates of deposit increased by $62.4 million compared to the year ended September 30, 2006. The average interest rate paid on savings remained unchanged at 0.51% for the year ended September 30, 2007, while money market rates increased 83 basis points to 2.64% for the year ended September 30, 2007.
Net Interest Income for the fiscal year ended September 30, 2007 was $84.7 million, comparable to levels for the year ended September 30, 2006. The net interest margin declined by 11 basis points to 3.57%, while the net interest spread declined by 22 basis points to 2.97%. The change in short-term rates, which affected funding costs to a larger degree than existing earning assets (which are primarily fixed-rate until maturity) was disproportionately large as compared to the change in longer term market interest rates, and has decreased net interest margin. The 10-year US treasury rate was an average of 4.75% for the fiscal year ended September 30, 2006 compared to 4.72% for the year ended September 30, 2007. The Bank’s average cost of interest-bearing liabilities increased and, although the average asset yields increased during this period, they did so at a slower pace due to continued market pressure. This was offset somewhat by a greater increase of interest earning assets compared to interest bearing liabilities.
Provision for Loan Losses. We recorded $1.8 million and $1.2 million in loan loss provisions for the year ended September 30, 2007 and September 30, 2006, respectively. At September 30, 2007 the allowance for loan losses totaled $20.4 million, or 1.24% of the loan portfolio, compared to $20.4 million, or 1.38% of the loan portfolio at September 30, 2006. Net charge-offs for the years ended September 30, 2007 and 2006 were $1.8 million and $1.5 million, respectively (an annual rate of 0.12% and 0.11%, respectively, of the average loan portfolio).
The increase in the provision for loan losses was primarily attributable to growth in the loan portfolio of $164.5 million, representing an increase of 11.2%. Higher risk loan categories, primarily commercial real estate loans and commercial business loans, provided most of this increase. Non-performing loans increased $2.2 million from September 30, 2006, to $7.3 million at September 30, 2007 and represent 0.44% of loans compared to $5.0 million or 0.34% of loans as of September 30, 2006.
Non-interest income was $19.8 million for the fiscal year ended September 30, 2007 compared to $17.2 million for the prior fiscal year. Deposit fees and service charges increased by $745,000, or 7.0% to $11.4 million. Income derived from the Company’s BOLI investments increased by $403,000, or 24.6%, due to death benefit proceeds received in 2007. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. decreased $519,000 due to a slow down in the real estate markets. Investment management fees increased $1.3 million which is related to HVIA acquired on June 1, 2006. During the year ended September 30, 2007, the Company also recorded gains on sales of loans totaling $155,000 compared to $116,000 for the prior year.
Non-interest expense for the fiscal year ended September 30, 2007 increased by $3.3 million, or 4.7% to $74.6 million, compared to $71.3 million for the same period in 2006. Compensation and employee benefits increased by $1.3 million, or 4.1%, to $33.5 million for the year ended September 30, 2007. The increase was primarily attributable to savings from retirement plan changes implemented the prior year, a decrease of $1.3 million in pension expense, offset by a $910,000 increase in 401-K expense as the Company increased its contribution percentage, and by scheduled salary increases, severance expense and higher incentive compensation. Marketing expenses increased $1.8 million to $4.2 million at September 30, 2007 as compared to $2.4 million at September 30, 2006, as the Company invested in marketing and development to improve market share and strengthen the franchise. Stock-based compensation decreased by $120,000 due to lower acceleration of vesting of restricted stock awards and ESOP forfeitures partially offset by a $177,000 increase in stock option expense. Occupancy and office operations remained unchanged at $11.4 million at both September 30, 2007 and 2006. Data and check processing expense decreased $467,000, or 15.1%, due to the transfer of our data processing operations in-house in November 2005. Other expenses increased by $370,000, or 4.6%. ATM and debit card expense increased $316,000, or 20.2%, primarily as a result of the increase in volume of transactions processed.
Income Taxes. Income tax expense was $8.6 million for the fiscal year ended September 30, 2007 compared to $9.3 million for fiscal 2006, representing effective tax rates of 30.4% and 31.4%, respectively. The lower tax rate in 2007 was primarily due to the shift to tax-exempt securities, which represented 16.6% of the average securities portfolio in 2007, compared to 11.5% of the average securities portfolio for 2006, as well as non-taxable BOLI death benefit proceeds received in 2007 more than offsetting a tax benefit from a land donation in 2006 resulting in a 2006 federal benefit of $212,000.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs.
The Company’s off-balance sheet arrangements, which principally include lending commitments, are described below. At September 30, 2008 and 2007, the Company had no interests in non-consolidated special purpose entities.
Lending Commitments. Lending commitments include loan commitments, letters of credit and unused credit lines. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the normal course of business.
For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements, or for development and construction in the case of real estate businesses. For retail customers, loan commitments are generally lines of credit secured by residential property. At September 30, 2008, commercial and retail loan commitments totaled $121.4 million. Approved closed undrawn lines of credit totaled $166.4 million, $159.5 million and $15.2 million for commercial, retail accounts, and overdraft protection lines, respectively. Letters of credit totaled $27.9 million. Letters of credit issued by the Company are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor’s completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Standby letters of credit are conditional commitments to support performance, typically of a contract or the financial integrity, of a customer to a third party, and represent an independent undertaking by the Company to the third party.
Provident Bank applies essentially the same credit policies and standards as it does in the lending process when making these commitments. See Note 15 to “Consolidated Financial Statements” in Item 8 hereof for additional information regarding lending commitments.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.
Payments Due by Period. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2008. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
Impact of Inflation and Changing Prices
The financial statements and related notes of Provident New York Bancorp have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Liquidity and Capital Resources
The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled 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 years ended September 30, 2008, 2007 and 2006, our loan originations, including origination of loans held for sale, totaled $596.6 million, $626.7 million and $624.5 million, respectively. Purchases of securities available for sale totaled $263.9 million, $179.0 million and $259.0 million for the years ended September 30, 2008, 2007 and 2006, respectively. Purchases of securities held to maturity totaled $19.2 million, $7.8 million and $22.6 million for the years ended September 30, 2008, 2007 and 2006, respectively. These activities were funded primarily by borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $121.4 million at September 30, 2008, and consisted of $115.2 million at adjustable or variable rates and $6.2 million at fixed rates. Unused lines of credit granted to customers were $341.1 million at September 30, 2008. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit.
The Company invested an additional $5.0 million in BOLI during fiscal 2008. These investments are illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. The recorded value of BOLI contracts totaled $47.6 million and $40.8 million at September 30, 2008 and September 30, 2007, respectively.
Deposit flows are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, and other factors. The net (decrease)/increase in total deposits was $275.5 million, $(15.9) million and $3.4 million for the years ended September 30, 2008, 2007 and 2006, respectively. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2008 totaled $487.4 million. Based upon prior experience and our current pricing strategy, management believes that a significant portion of such deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment.
In September 2008, the credit markets virtually collapsed causing the interest rate spreads for all credit except U.S. Treasury securities to widen. Further, due to the market uncertainty, there is a lack of demand for many credit products causing the market price obtained to have less than normal price stability. The result is that the volatility in price has become more pronounced. In addition, recent downgrades on insurers of many of the state and local government bonds we hold has negatively impacted our ability to borrow against or liquidate these securities should a need to raise additional funds arise from our banking operations. Due to the market disruptions, many banks have been seeking deposit funding. At present the historical relationships of deposit pricing in the market place have been dislocated and we may have to increase our deposit pricing in order to compete for deposits.
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 $566.0 million was outstanding at September 30, 2008. At September 30, 2008, we had the ability to borrow an additional $142.5 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow an additional $32.9 million by pledging securities not required to be pledged for other purposes as of September 30, 2008. Further, at September 30, 2008 we had only $16.6 million in Brokered Certificates of Deposit and have relationships with several brokers to utilize this sources of funding should conditions warrant further sources of funds. Provident Bank is subject to regulatory capital requirements that are discussed in “Capital Requirements” under “Regulation”.
Overall liquidity is represented by the following sources of funds (in thousands) as of September 30, 2008:
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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 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.
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.
Our forward-looking statements are subject to the following principal risks and uncertainties. We provide greater detail regarding some of these factors elsewhere in this Report, including in the Risk Factors and Risk Management sections. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.
•
Our business and operating results are affected by business and economic conditions generally or specifically in the principal markets in which we do business. We are affected by changes in our customers’ and counterparties’ financial performance, as well as changes in customer preferences and behavior, including as a result of changing business and economic conditions.
•
The values of our assets and liabilities, as well as our overall financial performance, are also affected by changes in interest rates or in valuations in the debt and equity markets. Actions by the Federal Reserve and other government agencies, including those that impact money supply and market interest rates, can affect our activities and financial results.
•
Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues.
•
Our ability to implement our business initiatives and strategies could affect our financial performance over the next several years.
•
Our ability to grow successfully through acquisitions is impacted by a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses into our Company after closing.
•
Legal and regulatory developments could have an impact on our ability to operate our businesses or our financial condition or results of operations or our competitive position or reputation. Reputational impacts, in turn, could affect matters such as business generation and retention, our ability to attract and retain management, liquidity and funding. These legal and regulatory developments could include: (a) the unfavorable resolution of legal proceedings or regulatory and other governmental inquiries; (b) increased litigation risk from recent regulatory and other governmental developments; (c) the results of the regulatory examination process, our failure to satisfy the requirements of agreements with governmental agencies, and regulators’ future use of supervisory and enforcement tools; (d) legislative and regulatory reforms, including changes to laws and regulations involving tax, pension, and the protection of confidential customer information; and (e) changes in accounting policies and principles.
•
Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through the effective use of third-party insurance and capital management techniques.
•
Our ability to anticipate and respond to technological changes can have an impact on our ability to respond to customer needs and to meet competitive demands.
•
Our business and operating results can be affected by widespread natural 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 or on our customers, suppliers or other counterparties specifically.
•
Recent and future legislation and regulatory actions responding to instability and volatility in the credit market may significantly affect our operations, financial condition and earnings. Future legislative or regulatory actions could impair our rights against borrowers, result in increased credit losses, and significantly increase our operating expenses.
•
The current levels of volatility in the market are unprecedented and have adversely affected us and the financial services industry as a whole. The market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets affect our business, financial condition and results of operations.
•
We could agree to the Troubled Asset Relief Program (“TARP”) Capital Purchase Plan (“CPP”). Should we choose to participate, certain capital management programs would likely be curtailed. Specifically, our ability to increase dividends and repurchase shares of common stock will be limited and subject to the approval of the United States Treasury. Additionally, warrants will be granted for 15% of the amount received in preferred stock. The preferred stock will carry non deductible dividends of 5% for the first five years and 9% thereafter. Unless leveraged, the preferred stock issuance and warrants will have a dilutive effect on earnings available to common shareholders. Decreasing the dilutive effect may expose us to additional interest rate or credit risks. Limits on executive compensation may impact our ability to retain or attract executives for our company. Further within the agreement the U.S. Treasury as an investor, may unilaterally amend any term of the Agreement to the extent required to comply with any changes in applicable federal statutes enacted after the date the agreement is executed.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Management of Interest Rate Risk
Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. Provident Bank’s Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. A committee of the Board of Directors reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial mortgage loans, commercial business loans and residential fixed-rate mortgage loans that are repaid monthly and bi-weekly, fixed-rate commercial mortgage loans, adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell all, or a portion of such longer-term loans, generally on a servicing-retained basis. We also invest in short-term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.
Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NIM”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Company and the Bank’s net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. Both models assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem reasonable, based on historical experience during prior interest rate changes.
Estimated Changes in NPV and NIM. The table below sets forth, as of September 30, 2008, the estimated changes in our NPV and our net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
The table set forth above indicates that at September 30, 2008, in the event of an immediate 100 basis point decrease in interest rates, we would be expected to experience a 2.8% decrease in NPV and a 2.8% decrease in net interest income. In the event of an immediate 200 basis point increase in interest rates, we would be expected to experience a 20.9% decrease in NPV and a 1.1% decrease in net interest income.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table
presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
During the past fiscal year, the federal funds rate declined from 4.75% to 2.00% as the Federal Open Market Committee (“FOMC”) cut the target overnight lending rate six times between October, 2007 and March, 2008. U.S. Treasury yields in the two year maturities decreased by 202 basis points from 3.98% to 1.96% during fiscal year 2008 while the yield on U.S. Treasury 10 year notes decreased 76 basis points from 4.59% to 3.82% over the same time period. The disproportional lower rate of decrease on longer term maturities has resulted in the 2-10 year treasury yield curve being much steeper at the end of the past fiscal year than it was when the year began. The steeper yield curve caused a reduction in rates paid on deposits and short-term borrowings as well as rates charged on loans and other assets tied to the prime rate and similar indices. Nevertheless, the full impact of the favorably sloped yield curve was not realized as liquidity problems in the credit markets caused many financial institutions to maintain higher rates on deposits, despite FOMC rate reductions, in order to attract much needed liquidity. Should credit markets stabilize, the FOMC could reverse direction and increase the target federal funds rate. This could cause the shorter end of the yield curve to rise disproportionably more than the longer end thereby resulting in margin compression.
In September 2008, the credit markets virtually collapsed causing the interest rate spreads for all credit except U.S. Treasury securities to widen. Further, due to the market uncertainty, there is a lack of demand for many credit products causing the market price obtained to have less than normal price stability. The result is that the volatility in price has become more pronounced. In addition, recent downgrades on insurers of many of the state and local government bonds we hold has negatively impacted our ability to borrow against or liquidate these securities should a need to raise additional funds arise from our banking operations. Due to the market disruptions, many banks have been seeking deposit funding. At present the historical relationships of deposit pricing in the market place have been disrupted and we may have to increase our deposit pricing in order to compete for deposits.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
The following are included in this item:
(A) Report of Management on Internal Control Over Financial Reporting
(B) Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting
(C) Report of Independent Registered Public Accounting Firm - Financial Statements
(D) Report of KPMG - Prior Independent Registered Public Accounting Firm
(E) Consolidated Statements of Financial Condition as of September 30, 2008 and 2007
(F) Consolidated Statements of Income for the years ended September 30, 2008, 2007 and 2006
(G) Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2008, 2007 and 2006
(H) Consolidated Statements of Cash Flows for the years ended September 30, 2008, 2007 and 2006
(I) Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial data) is provided in Note 20 of the Notes to Consolidated Financial Statements.
Report of Management on Internal Control Over Financial Reporting
The Board of Directors and Stockholders
Provident New York Bancorp:
The management of Provident New York Bancorp (“the Company”) is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s system of internal controls is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.
All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the Company’s internal control over financial reporting as of September 30, 2008. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September 30, 2008, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm has issued an audit report on the effective operation of the Company’s internal control over financial reporting as of September 30, 2008. This report appears on the following page.
/s/ George Strayton
By:
George Strayton
President and Chief Executive Officer
(Principal Executive Officer)
December 9, 2008
/s/ Paul Maisch
By:
Paul Maisch
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 9, 2008
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Board of Directors and Stockholders
Provident New York Bancorp
We have audited Provident New York Bancorp’s (“the Company”) internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Provident New York Bancorp’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Provident New York Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Provident New York Bancorp as of September 30, 2008 and 2007 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the two years then ended and our report dated December 10, 2008 expressed an unqualified opinion on those consolidated financial statements.
Report of Independent Registered Public Accounting Firm on Financial Statements
Board of Directors and Stockholders
Provident New York Bancorp
We have audited the accompanying consolidated statements of financial condition of Provident New York Bancorp (“the Company”) as of September 30, 2008 and 2007 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Provident New York Bancorp as of September 30, 2008 and 2007 and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles. generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Provident New York Bancorp’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 10, 2008 expressed an unqualified opinion thereon.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Provident New York Bancorp:
We have audited the accompanying consolidated statements of income, changes in stockholders’ equity and cash flows of Provident New York Bancorp and Subsidiaries for the year ended September 30, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows of Provident New York Bancorp and Subsidiaries for the year ended September 30, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
December 11, 2006
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended September 30,
(Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended September 30, 2008, 2007 and 2006
(Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 2008, 2007 and
(Dollars in thousands)
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
Years Ended September 30, 2008, 2007 and 2006
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident Bancorp” or “the Company”), Hardenburgh Abstract Title Company, which provides title searches and insurance for residential and commercial real estate, Hudson Valley Investment Advisors, LLC, (“HVIA”) a registered investment advisor, 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, and (iv) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers. Intercompany transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Certain amounts from prior years have been reclassified to conform to the current fiscal year presentation
(a) Nature of Business
Provident New York Bancorp (“Provident Bancorp” or the “Company”), a unitary savings and loan holding company, is a Delaware corporation that owns all of the outstanding shares of Provident Bank (the “Bank”). Provident Bancorp was formed in connection with the second step offering on January 14, 2004.
On June 29, 2005, Provident Bancorp, Inc. changed its name to Provident New York Bancorp in order to differentiate itself from the numerous bank holding companies with similar names. It began trading on the NASDAQ under the stock symbol “PBNY” on that date. Prior to that date, from January 7, 1999 its common stock traded under the stock symbol “PBCP.”
The Bank is a community bank offering financial services to individuals and businesses primarily in Rockland and Orange Counties, New York and the contiguous Sullivan, Ulster, Westchester and Putnam Counties, New York and Bergen County, New Jersey. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. The Bank is a federally-chartered savings association and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). The Office of Thrift Supervision (OTS) is the primary regulator for the Bank and for Provident New York Bancorp. Of the Bank’s loans 88% are collateralized or dependent on real estate.
(b) Use of estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. An estimate that is particularly susceptible to significant near-term change is the allowance for loan losses, which is discussed below. Also subject to change are estimates involving mortgage servicing rights, benefit plans, deferred income taxes and fair values of financial instruments.
(c) Cash Flows
For purposes of reporting cash flows, cash equivalents include highly liquid, short-term investments such as overnight federal funds, as well as cash and deposits with other financial institutions. Net cash flows are reported for customer and deposit transactions and short-term borrowings with an original maturity of 90 days or less.
(d) Long Term Assets
Premises and equipment, core deposit and other intangible assets are reviewed annually for impairment or when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(e) Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
(f) Adoption of New Accounting Standards
FASB Statement No. 157:
In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies risk and the effect of a restriction on the sale or use of an asset. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on the consolidated earnings or financial position of the Company.
FSP No. 157-3:
On October 10, 2008 the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active, which provides an example that illustrates key considerations in determining the fair value of a financial instrument when the market for that instrument is not active. The FSP does not change existing generally accepted accounting principles. The FSP provides clarification for how to consider various inputs in determining fair value under current market conditions consistent with the principles of SFAS 157. The FSP includes only one example, as the FASB emphasized the need to apply reasonable judgment to each specific fact pattern. Several additional concepts addressed in the FSP include distressed sales; the use of 3rd party pricing information, the use of internal assumptions and the relevance of observable data, among others. The FSP was effective upon issuance, including prior periods for which financial statements have not yet been issued. Therefore, it first applies to September 30, 2008 annual consolidated financial statements. The impact of adoption will not be material to the Company’s consolidated financial condition or results of operations.
FASB 159:
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option of Financial Assets and Financial Liabilities” (“SFAS No. 159”). The fair value option established by this statement permits entities to choose to measure eligible items at fair value at specified election dates. The Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted under certain conditions. The Company is currently assessing the financial statement impact of implementing SFAS 159.
FASB 161:
In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). This statement requires enhanced disclosures regarding an entity’s derivative and hedging activities. The Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on the consolidated earnings or financial position of the Company.
SAB 108:
In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which was adopted on October 1, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108.
As a result of the implementation of SAB 108, the Company corrected immaterial errors which resulted in $292 being credited to retained earnings, net of taxes of $49 as of October 1, 2006. The components of the SAB 108 adjustments are as follows:
The Company considered these adjustments to be immaterial, individually and in the aggregate, to its prior consolidated financial statements.
SAB 110:
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, which permits the use of the “simplified” method for developing an estimate of expected term of share options. The Company has elected to utilize the simplified method. The Bulletin is effective for grants issued after December 31, 2007. The implementation of this bulletin did not have a material impact on the consolidated earnings or financial position of the Company.
(g) Securities
Securities include U.S. Treasury, U.S. Government Agency and Government Sponsored Agencies, municipal and corporate bonds, mortgage backed securities, collateralized mortgage obligations and marketable equity securities.
The Company can classify its securities among three categories: held to maturity, trading, and available for sale. Management determines the appropriate classification of the Company’s securities at the time of purchase.
Held-to-maturity securities are limited to debt securities for which management has the intent and the Company has the ability to hold to maturity. These securities are reported at amortized cost.
Trading securities are debt and equity securities held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in earnings. The Company does not engage in security trading activities.
All other debt and marketable equity securities are classified as available for sale. These securities are reported at fair value, with unrealized gains and losses (net of the related deferred income tax effect) excluded from earnings and reported in a separate component of stockholders’ equity (accumulated other comprehensive income or loss). Available-for-sale securities include securities that management intends to hold for an indefinite period of time, such as securities to be used as part of the Company’s asset/liability management strategy or securities that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest income on a level-yield basis over the period to maturity. Amortization of premiums and accretion of discounts on mortgage backed securities are based on the estimated cash flows of the mortgage backed securities, periodically adjusted for changes in estimated lives, on a level yield basis. The cost of securities sold is determined using the specific identification method. Unrealized losses are charged to earnings when management determines that the decline in fair value of a security is other than temporary.
Securities deemed to be other-than-temporarily impaired are permanently written down from their original cost basis to reflect the adjusted fair value subsequent to a measurement for impairment. The impairment is deemed other-than-temporary if there are serious credit concerns regarding a particular debt issuer, or severe fluctuation in interest rates. The other-than-temporary adjustment is charged to current earnings in the period of measurement. Declines in the fair value of securities below their cost that are other than temporary are reflected in earnings as realized losses. In estimating other-than -temporary losses, management considers the length of time and extent that fair value has been less than cost,
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery of fair value. Realized other than temporary impairment losses are calculated using the period end fair value of the specific security identified. There were no securities deemed to be other than temporary impaired as of September 30, 2008.
(h) Loans
Loans where management has the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Mortgage loans originated and held for sale in the secondary market (if any) are reported at the lower of aggregate cost or estimated fair value. Fair value is estimated based on outstanding investor commitments or, in the absence of such commitments, based on current investor yield requirements. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to earnings. Interest income on loans is accrued on the level yield method.
A loan is placed on non-accrual status when management has determined that the borrower may likely be unable to meet contractual principal or interest obligations, or when payments are 90 days or more past due, unless well secured and in the process of collection. Accrual of interest ceases and, in general, uncollected past due interest is reversed and charged against current interest income, related to the current year and interest, recorded in the prior year, is charged to the allowance for loan losses. Interest payments received on non-accrual loans, including impaired loans, are not recognized as income unless warranted based on the borrower’s financial condition and payment record.
The Company defers nonrefundable loan origination and commitment fees, and certain direct loan origination costs, and amortizes the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid or sold, the net deferred amount is recognized in the statement of income at that time. Interest and fees on loans include prepayment fees and late charges collected.
(i) Allowance for Loan Losses
The allowance for loan losses is established through provisions for losses charged to earnings. Losses on loans (including impaired loans) are charged to the allowance for loan losses when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized.
The allowance for loan losses is an amount that management believes is necessary to absorb probable incurred losses on existing loans that may become uncollectible. Management’s evaluations, which are subject to periodic review by the OTS, take into consideration factors such as the Company’s past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions that may affect the borrowers’ ability to pay. Future adjustments to the allowance for loan losses may be necessary, based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other factors.
The Company considers a loan to be impaired when, based on current information and events, it is probable that the borrower will be unable to comply with contractual principal and interest payments due. Certain loans are individually evaluated for collectability in accordance with the Company’s ongoing loan review procedures (principally commercial real estate, commercial business and construction loans). Smaller-balance homogeneous loans are collectively evaluated for impairment, such as residential mortgage loans and consumer loans. Impaired loans are based on one of three measures - the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at its measured value.
(j) Mortgage Servicing Assets
Servicing assets represent the allocated value of retained servicing rights on loans sold (as well as the cost of purchased rights). Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates and then, secondarily, as to loan type and investor. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the capitalized amount for a grouping. Upon adoption of SFAS 156 the Company elected to continue to use the amortization method.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(k) Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) of New York, the Bank is required to hold a certain amount of FHLB stock. This stock is a non-marketable equity security and, accordingly, is reported at cost.
(l) Premises and Equipment
Land is reported at cost, while premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three years for equipment and 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized.
(m) Goodwill and Other Intangible Assets
Goodwill recorded in acquisitions is not amortized to expense, but instead, is evaluated for impairment at least annually. The core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives of approximately eight years. Other intangible assets are evaluated for impairment at least annually. Intangibles related to HVIA are amortized over 10 years on a straight-line basis. Impairment losses on intangible assets are charged to expense, if and when they occur.
(n) Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with any resulting write-down charged to the allowance for loan losses. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and other available information. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Gains and losses on sales of real estate owned are recognized upon disposition. Real estate owned is included in other assets.
(o) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to a counterparty under an agreement to repurchase the identical securities at a fixed price on a future date. These agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets other specified criteria. Accordingly, the transaction proceeds are recorded as borrowings and the underlying securities continue to be carried in the Company’s securities portfolio. Disclosure of the pledged securities is made in the consolidated statements of financial condition if the counterparty has the right by contract to sell or repledge such collateral.
(p) Income Taxes
Net deferred taxes are recognized for the estimated future tax effects attributable to “temporary differences” between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change.
A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion, or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. See note 10 of the “Notes to Consolidated Financial Statements”.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(q) Bank Owned Life Insurance (BOLI)
The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized).
(r) Stock-Based Compensation Plans
Compensation expense is recognized for the ESOP equal to the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value at that time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released for allocation is deducted from stockholders’ equity.
The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation,” and related interpretations in accounting for its stock option plan. SFAS No. 123R, issued in December 2004, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans, and required adoption for all publicly owned companies for fiscal periods ending after June 15, 2005. As of October 1, 2005, the Company began to expense these grants as required by SFAS No. 123R. Stock-based employee compensation cost pertaining to stock options is reflected in net income, as all unvested options granted under the Company’s stock option plans had a value based on the fair value calculations using the Black-Scholes option pricing model, even though the exercise prices were equal to the market value of the underlying common stock on the date of the grant. Prior to October 1, 2005, the Company applied the requirements of APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock-based plans. Under APB 25, no compensation expense was recognized for the Company’s stock-based plans regarding employee stock-options. The Company did, however, recognize expense for its plans, which were compensatory under APB 25, and had grant-date intrinsic value such as restricted stock grants (RRPs).
The Company elected the modified prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all awards granted, vested or modified after the date of adoption. During 2008, 2007 and 2006 the Company issued 275,134, 70,958 and 141,000 new stock-based option awards and recognized total non-cash stock-based compensation cost of $1,196 $1,307 and 1,129 primarily for shares awarded during the transition period, along with the fair value of these new grants. As of September 30, 2008, the total remaining unrecognized compensation cost related to non-vested stock options was $1.4 million. In addition to the recording requirements, the Company has disclosure requirements under SFAS No. 123R.
The Company’s stock-based compensation plans allow for accelerated vesting when employees retire under circumstance in accordance with the terms of the plans. Under SFAS No. 123R, grants issued subsequent to adoption of SFAS 123R, which are subject to such accelerated vesting, are expensed over the shorter of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be less than the plan’s five-year vesting period depending upon the age of the grantee. As of September 30, 2008, 230,500 restricted shares and 170,340 stock options were potentially subject to accelerated vesting, but will not be expensed over a shorter time period, unless acceleration is deemed to have occurred. The Company recognized expense associated with the acceleration of 30,100, 21,980 and 10,000 restricted shares in 2006, 2007 and 2008, respectively.
(s) Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period.
Diluted EPS is computed in a similar manner, except that the weighted average number of common shares is increased to include incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options were exercised and unvested RRP shares became vested during the periods. For purposes of computing both basic and diluted EPS, outstanding shares exclude unallocated ESOP shares.
(t) Segment Information
Public companies are required to report certain financial information about significant revenue- producing segments of the business for which such information is available and utilized by the chief operating decision maker. As a community-
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of the community banking operation, which constitutes the Company’s only operating segment for financial reporting purposes.
(2) Acquisitions
On June 1, 2006 the Company acquired the net assets of Hudson Valley Investment Advisors, Inc. for $2.5 million in cash and 208,331 shares of its common stock, for total consideration of $5.2 million. In connection with this acquisition, the Company formed Hudson Valley Investment Advisors, LLC (“HVIA”) as a subsidiary of the Company. In connection with the acquisition, the Company recorded $2.8 million in amortizable intangible assets and $2.5 million in goodwill. The amortizable intangible assets consist of $2.3 million of the value of the non-competition rights and $0.5 million of the value of a customer list. Such intangible assets are being amortized over 10 years, equal to the term of the exclusive management contract established with the principal manager of HVIA. The manager receives a fee, payable quarterly, equal to 50% of the net revenues, as defined, and was initially eligible to receive an additional $1.0 million earnout over a five year period if certain revenues were achieved. The earnout was settled in 2007 for $750 which was recorded as additional goodwill. The Company has an option to purchase the management contract under certain circumstances.
This acquisition was accounted for using the purchase method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded by the Company at their fair values at the acquisition date.
Summary of Acquisition Transactions. Below is the summary of the acquisition transactions for Warwick Community Bancorp (2005) “WSB”, Ellenville National Bank (2004) “ENB”, National Bank of Florida (2002) “NBF” and one purchase in 2005 of a branch office of HSBC Bank USA, National Association (“HSBC”).
The changes to goodwill, reflected above, are due to tax related items in connection with acquisitions and the $750 settlement of the earnout provision for HVIA in 2007.
Future Amortization of Core Deposit and Other Intangible Assets. The following table sets forth the future amortization of core deposit and other intangible assets:
Goodwill is not amortized to expense and is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit and other intangible assets are recognized apart from goodwill and they are amortized to expense over their estimated useful life’s and evaluated at least annually for impairment.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(3) Securities Available for Sale
The following is a summary of securities available for sale:
Equity securities principally consist of corporate stock and 120 shares of Fannie Mae common stock in 2007 and 2008.
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.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Proceeds from sales of securities available for sale during the years ended September 30, 2008 and 2007 totaled $40,438 and $10,838, respectively. These sales resulted in gross realized gains of $983 and $3 for the years ended September 30, 2008 and 2007, respectively, and gross realized loss of $0 and $11 in fiscal year 2008 and 2007, respectively. There were no sales of securities for the year ended September 30, 2006.
Securities, including held to maturity securities, with carrying amounts of $323,694 and $342,873 were pledged as collateral for borrowings at September 30, 2008 and September 30, 2007, respectively. U.S. Government and municipal securities with carrying amounts of $441,640 and $220,157 were pledged as collateral for municipal deposits and other purposes at September 30, 2008 and September 30, 2007, 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:
Substantially all of the unrealized losses at September 30, 2008 relate to investment grade securities and are attributable to changes in market interest rates and credit risk spreads subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2008. A total of 552 available for sale securities were in a continuous unrealized loss position for less than 12 months and 100 securities for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold securities with unrealized losses until a market price recovery (which, for fixed maturities, may be until maturity) the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2008.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(4) Securities Held to Maturity
The following is a summary of securities held to maturity:
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.
There were no sales of securities held to maturity during the years ended September 30, 2008, 2007 and 2006.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per 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:
Substantially all of the unrealized losses on held to maturity securities at September 30, 2008 relate to investment grade securities or 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 were individually significant dollar amounts at September 30, 2008. A total of 37 held-to-maturity securities were in a continuous unrealized loss position for less than 12 months, and 5 securities for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold securities with unrealized losses until maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2008.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Loans
The components of the loan portfolio, excluding loans held for sale, were as follows:
Total loans include net deferred loan origination costs of $2,711 and $3,456 at September 30, 2008 and September 30, 2007, respectively.
A substantial portion of the Company’s loan portfolio is secured by residential and commercial real estate located in Rockland and Orange Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam Counties of New York and Bergen County, New Jersey. The ability of the Company’s borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company’s concentrated lending area. Commercial real estate and acquisition, development and construction loans are considered by management to be of somewhat greater credit risk than loans to fund the purchase of a primary residence due to the generally larger loan amounts and dependency on income production or sale of the real estate. Substantially all of these loans are collateralized by real estate located in the Company’s primary market area.
The principal balances of non-performing loans were as follows:
Gross interest income that would have been recorded if the foregoing non-accrual loans had remained current in accordance with their contractual terms totaled $1,129, $362 and $372, for the years ended September 30, 2008, 2007 and 2006, respectively, compared to interest income actually recognized (including income recognized on a cash basis) of $724, $105 and $127, respectively.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company had recorded investment in impaired loans of $13.2 million as defined by SFAS No. 114, at September 30, 2008 and $3.4 million impaired loans as of September 30, 2007. Substantially all of these loans were collateral-dependent loans measured based on the fair value of the collateral. The Company determines the need for an allowance for loan impairment under SFAS No. 114 on a loan-by-loan basis. An impairment allowance for impaired loans was $1.3 million and $0 as of September 30, 2008 and 2007, respectively. The Company’s average recorded investment in impaired loans was $9.5 million and $1.5 during the years ended September 30, 2008 and 2007, respectively. Interest income recognized (including income recognized on a cash basis) for impaired loans was $698 and $91 for the years ended September 30, 2008 and 2007, respectively.
Activity in the allowance for loan losses is summarized as follows:
Provisions for losses and other activity in the allowance for losses on real estate owned were insignificant during the years ended September 30, 2008, 2007 and 2006.
Certain residential mortgage and student loans originated by the Company are sold in the secondary market. Other non-interest income includes net gains on such sales of $0 in fiscal 2008, $155 in fiscal 2007, and $117 in fiscal 2006. At September 30, 2008 and 2007 there were $189 and $0 residential mortgage loans and no student loans held for sale, respectively. The Company ceased originating student loans in 2007.
Other assets at September 30, 2008 and 2007 include capitalized mortgage servicing rights with an amortized cost of $655 and $768, respectively, which are recorded at the lower of amortized cost or fair market value. The Company generally retains the servicing rights on mortgage loans sold. Servicing loans for others involves collecting payments, maintaining escrow accounts, making remittances to investors and, if necessary, processing foreclosures. Mortgage loans serviced for others, including loan participations, totaled approximately $129,331, $122,279 and $131,291 at September 30, 2008, 2007 and 2006, respectively. Mortgage escrow funds include balances of $766 and $644 at September 30, 2008 and 2007, respectively, related to loans serviced for others.
(6) Accrued Interest Receivable
The components of accrued interest receivable were as follows:
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(7) Premises and Equipment, Net
Premises and equipment are summarized as follows:
(8) Deposits
Deposit balances and weighted average interest rates at September 30, 2008 and 2007 are summarized as follows:
Municipal deposits held by PMB totaled $460.8 million and $176.5 million at September 30, 2008 and September 30, 2007, respectively. See Note 3, “Securities Available for Sale,” for the amount of securities that are pledged as collateral for municipal deposits and other purposes.
Certificates of deposit had remaining periods to contractual maturity as follows:
Certificate of deposit accounts with a denomination of $100 or more totaled $186,326 and $209,405 at September 30, 2008 and 2007, respectively. The Company had $16.6 million and $14.2 million of brokered deposits as of September 30, 2008 and 2007, respectively.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Interest expense on deposits is summarized as follows:
(9) FHLB and Other Borrowings
The Company’s FHLB and other borrowings and weighted average interest rates are summarized as follows:
As a member of the FHLB, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 2008 and September 30, 2007, the Bank had pledged mortgages totaling $385,279 and $382,502, respectively. The Bank had also pledged securities with carrying amounts of $323,694 and $342,873 as of September 30, 2008 and September 30, 2007, respectively, to secure repurchase agreements. Based on total outstanding borrowings with the FHLB which totaled $555,252 and $650,247 as of September 30, 2008 and September 30, 2007, the bank had unused borrowing capacity under the FHLB Line of Credit of $142,000 and $46,100, respectively. As of September 30, 2008, the Bank may borrow additional amounts by pledging securities and mortgages not required to be pledged for other purposes with a market value of $32,946 and $142,532. FHLB advances are subject to prepayment penalties if repaid prior to maturity.
Securities repurchase agreements had weighted average remaining terms to maturity of approximately 6.4 years and 6.9 years at September 30, 2008 and 2007, respectively. Average borrowings under securities repurchase agreements were $254,189 and $215,364 during the years ended September 30, 2008 and 2007, respectively, and the maximum outstanding month-end balance was $299,564 and $275,764, respectively.
FHLB borrowings of $302.5 million and $289.5 million at September 30, 2008 and 2007 respectively are callable quarterly, at the discretion of the FHLB. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 7.3 years and 7.5 years and weighted average interest rates of 4.24% and 4.45% at September 30, 2008 and 2007, respectively. No borrowings with associated premiums were called in 2008. The FHLB called $16.2 million in borrowings assumed in acquisitions resulting in the write-off of $520 in associated premiums and a corresponding reduction in interest expense for the year ended September 30 2007. No such borrowings were called in fiscal 2008.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(10) Income Taxes
Income tax expense consists of the following:
Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate, for the following reasons:
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized below. The net amount is reported in other assets or other liabilities in the consolidated statements of financial condition.
Based on management’s consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at September 30, 2008 and 2007.
The Bank is subject to special provisions in the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. Tax bad debt reserves consist of a defined “base-year” amount, plus additional amounts accumulated after the base year. Deferred tax liabilities are recognized with respect to reserves accumulated after the base year, as well as any portion of the base-year amount that is expected to become taxable (or recaptured) in the foreseeable future. The Bank’s base-year tax bad debt reserves for Federal tax purposes were $9,313 at both September 30, 2008 and 2007. The Bank’s tax bad debt reserves for NY State purposes were $48,423 and $46,835 at September 30, 2008 and 2007, respectively. Associated deferred tax liabilities of $5,976 and $5,857 have not been recognized at those dates since the Company does not expect that the Federal base-year reserves ($3,260) and New York State bad debt reserves ($2,716) and $2,597, net of federal benefit) will become taxable in the foreseeable future. Under the tax laws, events that would result in taxation of certain of these reserves include (i) redemptions of the Bank’s stock or certain excess distributions by the Bank to Provident New York Bancorp and (ii) failure of the Bank to maintain a specified qualifying-assets ratio or meet other thrift definition tests for New York State tax purposes.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Of this total $11 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The remainder represents potential disallowances related to acquisitions. The Company does not expect that the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The total amount of interest and penalties recorded in the income statement in income tax expense for the year ended September 30, 2008 was $58, and the amount accrued for interest and penalties at September 30, 2007 was $69.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of New York and various other state income taxes. The tax years that are currently open for audit are 2005 for both federal and for New York State income tax.
(11) Employee Benefit Plans and Stock-Based Compensation Plans
(a) Pension Plan
The Company has a noncontributory defined benefit pension plan covering substantially all of its employees. Employees who are twenty-one years of age or older and have worked for the Company for one year are eligible to participate in the plan. The Company’s funding policy is to contribute annually an amount sufficient to meet statutory minimum funding requirements, but not in excess of the maximum amount deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future. As part of the acquisitions of ENB and WSB the Company assumed the ENB and WSB Pension Plans, both of which were defined benefit plans. The ENB plan was frozen in connection with the merger of ENB into the Company. The WSB Pension Plan, which was already frozen at the time of acquisition, has also been assumed by the Company.
In April, 2006 the Company approved merging both the ENB and WSB pension plans into the Provident Bank Pension Plan, effective April 30, 2006. As a result, the discount rate to determine the accumulated pension obligation was increased from 5.75% to 6.25%. This reduced unrecognized loss on plan assets from $3.8 million to $1.8 million. As the unrecognized loss fell to below 10% of the projected benefit obligation or plan assets, amortization of the unrecognized loss was discontinued as of April 30, 2006.
In July, 2006 the Board of Directors of the Company approved a curtailment to the Provident Bank Defined Benefit Pension Plan (“the Plan”) as of September 30, 2006. At that time, all benefit accruals for future service ceased and no new participants may enter the plan. The purpose of the Plan curtailment was to afford flexibility in the retirement benefits the Company provides, while preserving all retirement plan participants’ earned and vested benefits, and to manage the increasing costs associated with the defined benefit pension plan. The Company recorded a curtailment gain, which reduced the unrecognized net losses in the Plan by $1.6 million with no gain or loss recognized in the financial statements of the Company.
In addition, the Board approved amending the Provident Bank 401(k) and Profit Sharing Plan, a 401(k) plan available to all employees who are age 21 or older. The amendment to the 401(k) plan added a profit sharing contribution for employees, which was 3% of eligible compensation for fiscal 2008.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following is a summary of changes in the projected benefit obligation and fair value of plan assets. The Company uses a September 30 measurement date for its pension plans.
Amounts recognized in accumulated other comprehensive loss at September 30, 2008 and 2007 consisted of:
Discount rates of 7.0% and 6.25% were used in determining the actuarial present value of the projected benefit obligation at September 30, 2008 and 2007 respectively. No compensation increases were used as the plan is frozen. The weighted average long-term rate of return on plan assets was 7.75% for fiscal years ended 2008 and 2007. The accumulated benefit obligation was $23,100 and $29,092 at year end September 30, 2008 and 2007 respectively.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The components of the net periodic pension expense were as follows:
Weighted-average pension plan asset allocations based on the fair value of such assets at September 30, 2008, and September 30, 2007 and target allocations for 2009, by asset category, are as follows:
The expected long-term rate of return assumption as of each measurement date was determined by taking into consideration asset allocations as of each such date, historical returns on the types of assets held, and current economic factors. The Company’s investment policy for determining the asset allocation targets was developed based on the desire to optimize total return while placing a strong emphasis on preservation of capital. In general, it is hoped that, in the aggregate, changes in the fair value of plan assets will be less volatile than similar changes in appropriate market indices. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns.
There were no pension plan assets consisting of Provident New York Bancorp equity securities (common stock) at September 30, 2008 or at September 30, 2007.
The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. At this time, the Company does not expect to make any material contributions in 2009.
The Company has also established a non-qualified Supplemental Executive Retirement Plan to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $82, $78 and $181 for the years ended September 30, 2008, 2007 and 2006, respectively. The actuarial present value of the projected benefit obligation was $1,353 and $1,330 at September 30, 2008 and 2007, respectively, and the vested benefit obligation was $1,353 and $1,330 for the same periods, respectively, all of which is unfunded.
(b) Other Postretirement Benefit Plans
The Company’s postretirement plans, which are unfunded, provide optional medical, dental and life insurance benefits to retirees or death benefit payments to beneficiaries of employees covered by the Company and Bank Owned Life Insurance policies. In accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” the cost of postretirement benefits is accrued over the years in which employees provide services to the date of their full eligibility for such benefits. As permitted by SFAS No. 106, the Company has elected to amortize the transition obligation for accumulated benefits to retirees as an expense over a 20-year period. In connection with the implementation of SAB 108 the actuarial present value of payments payable to BOLI covered employees’ beneficiaries were recorded as a liability as of October 1, 2006 in the amount of $394.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Data relating to the postretirement benefit plan follows:
The following benefit payments are expected to be paid in future years:
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
There is no impact of a 1% increase or decrease in health care trend rate due to the Company’s cap on cost.
Amounts recognized in accumulated other comprehensive income (loss) at September 30, 2008 and 2007 consisted of:
As of September 30, 2007, the Company adopted the provisions of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans”. Accordingly, the Company recorded a charge of $287, net of taxes, to accumulated other comprehensive loss related to our pension and other postretirement plans for the year ended September 30, 2007, as follows:
(c) Employee Savings Plan
The Company also sponsors a defined contribution plan established under Section 401(k) of the IRS Code. Eligible employees may elect to contribute up to 50% of their compensation to the plan. The Company currently makes matching contributions equal to 50% of a participant’s contributions up to a maximum matching contribution of 3% of eligible compensation. Effective after September 30, 2006, the Bank amended the plan to include a profit sharing component which was 3% of eligible compensation, in addition to the matching contributions for 2008. Voluntary matching and profit sharing contributions are invested, in accordance with the participant’s direction, in one or a number of investment options. Savings plan expense was $1,626, $1,368, and $458 for the years ended September 30, 2008, 2007 and 2006, respectively.
(d) Employee Stock Ownership Plan
In connection with the Company’s reorganization and initial common stock offering in 1999, Provident Federal established an ESOP for eligible employees who meet certain age and service requirements. The ESOP borrowed $3,760 from the Bank and used the funds to purchase 1,370,112 shares of common stock in the open market subsequent to the
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Offering. The Bank made periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan which matured December 31, 2007 The ESOP uses these contributions, any dividends received by the ESOP on unallocated shares and forfeitures beginning in 2007, to make principal and interest payments on the loan.
In connection with the Second-Step Stock Conversion and Offering in January 2004, the Company established an additional ESOP loan for eligible employees. The ESOP borrowed $9,987 from Provident New York Bancorp and used the funds to purchase 998,650 shares of common stock in the offering. The term of the second ESOP loan is twenty years.
ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years. Any forfeited shares were allocated to other participants in the same proportion as contributions through 2006 and beginning in 2007 are used by the plan to reduce debt service. A total of $293 and $250 was reversed against expense for the years ended September 30, 2008 and 2007, respectively.
ESOP expense was $802 (net of forfeitures), $2,393 (net of forfeitures), and $2,595 for the years ended September 30, 2008, 2007 and 2006, respectively. Through September 30, 2008 and 2007, a cumulative total of 1,605,214 shares and 1,520,785 shares, respectively, have been allocated to participants or committed to be released for allocation, respectively. The cost of ESOP shares that have not yet been allocated to participants or committed to be released for allocation is deducted from stockholders’ equity (763,554 shares with a cost of $7,635 and a fair value of approximately $10,094 at September 30, 2008 and 847,983 shares with a cost of $8,221 and a fair value of approximately $11,117 at September 30, 2007, respectively).
The Company’s ESOP was funded by two loans, in which approximately 187,700 shares were released each year. The first loan, initiated in connection with the first public offering, was paid off in December 2007. The second loan, initiated in connection with the second step public offering, matures in December 2023 and is expected to result in the release of 49,932 shares annually. For the year ended September 30, 2008, the ESOP expense for the shares released under the first and second loans totaled $440 and $638 respectively.
A supplemental savings plan has also been established for certain senior officers to compensate executives for benefits provided under the Bank’s tax qualified plans (employee’s savings plan and ESOP) that are limited by the IRS Code. Expense recognized for this plan including the defined benefit component was $234, $195, and $270 for the years ended September 30, 2008, 2007 and 2006, respectively. Amounts accrued and recorded in other liabilities at September 30, 2008 and 2007 including the defined benefit component were $2.4 million and $2.2 million respectively.
(e) Recognition and Retention Plan
In February 2000, the Company’s stockholders approved the Provident Bank 2000 Recognition and Retention Plan (the RRP). The principal purpose of the RRP is to provide executive officers and directors a proprietary interest in the Company in a manner designed to encourage their continued performance and service. A total of 856,320 shares were awarded under the RRP in February 2000, and the grant-date fair value of these shares of $2,995 was charged to stockholders’ equity. The awards vested at a rate of 20% on each of five annual vesting dates, the first of which was September 30, 2000. As of September 30, 2008 27,413 shares remain available for future grant from this plan. In January 2005, the Company’s stockholders approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the terms of which the Company is authorized to issue up to 798,920 shares of common stock as restricted stock awards. On March 10, 2005 a total of 762,400 shares were awarded under the RRP, and the grant-date fair value of $12.84 per share $(9,789), was charged to stockholders’ equity. The awards vested 10% on September 30, 2005. The remainder will vest 20% on each of four annual vesting dates beginning on September 30, 2006 and 10% on March 10, 2010. Employees who retire under circumstances in accordance with the terms of the Plan may be entitled to accelerate the vesting of individual awards. Such acceleration would require a charge to earnings for the award shares that would then vest. As of September 30, 2008, 230,500 shares were potentially subject to accelerated vesting. The Company granted an additional 6,000 shares in 2008 at an average grant date fair value of $13.46, vesting 20% each year.
Under the 2004 restricted stock plan, 49,620 shares of authorized but un-issued shares remain available for future grant at September 30, 2008. The Company also can fund the restricted stock plan with treasury stock. The fair market value of the shares awarded under the restricted stock plan is being amortized to expense on a straight-line basis over the five year vesting period of the underlying shares. Compensation expense related to the restricted stock plan was $1.8 million, $2.0 million and $2.2 million for the years ended September 30, 2008, 2007 and 2006, respectively. The remaining unearned
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
compensation cost is $2.7 million as of September 30, 2008 and is recorded as a reduction of additional paid in capital. On grant date, shares awarded under the restricted stock plan were transferred from treasury stock at cost with the difference between the fair market value on the grant and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. Upon adoption of SFAS No.123R the balance of unearned compensation as of October 1, 2006 was transferred to additional paid-in capital. The fair value of the shares awarded, measured as of the grant date continues to be recognized and amortized on a straight-line basis to compensation expense over the vesting period of the awards.
A summary of restricted stock award activity under the plan for the year ended September 30, 2008, is presented below:
The total fair value of restricted stock vested for fiscal year ended September 30, 2008, 2007 and 2006 was $1.9 million, $2.1 million and $2.3 million, respectively. The intrinsic value of shares vested during 2008 was $68.
(f) Stock Option Plan
The Company’s stockholders approved the Provident Bank 2000 Stock Option Plan (the Stock Option Plan) in February 2000. A total of 1,712,640 shares of authorized but unissued common stock was reserved for issuance under the Stock Option Plan, although the Company may also fund option exercises using treasury shares. The Company’s stockholders also approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, in February 2005. Under terms of the plan, a total of 1,997,300 shares of authorized but un-issued common stock was reserved for issuance under the Stock Option Plan. In March, 2005, 1,718,300 options were granted. Under both plans, options have a ten-year term and may be either non-qualified stock options or incentive stock options. Reload options may be granted under the terms of the 2000 Stock Option Plan and provide for the automatic grant of a new option at the then-current market price in exchange for each previously owned share tendered by an employee in a stock-for-stock exercise. The 2004 Plan options do not contain reload options. However, the 2004 plan allows for the grant of Stock appreciation rights. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date. Employees who retire under circumstances, in accordance with the terms of the Plan, may be entitled to accelerate the vesting of individual awards. As of September 30, 2008 170,340 shares were potentially subject to accelerated vesting. Substantially, all stock options outstanding are expected to vest. Compensation expense related to stock option plans was $1.2 million, $1.3 million and $1.1 million for the years ended September 30, 2008, 2007 and 2006, respectively.
The following is a summary of activity in the Stock Option Plan:
The total intrinsic value of stock options vested for fiscal years ended September 30, 2008, 2007 and 2006 was $5.6 million, $3.9 million and $18.0 million, respectively. The unrecognized compensation cost associated with stock options was $1.4 million as of September 30, 2008. The intrinsic value of stock options exercised during 2008 was $1.8 million.
At September 30, 2008 and 2007, respectively, there were 305,454 and 464,647 shares available for future grant. The aggregate intrinsic value of options outstanding as of September 30, 2008 was $5.8 million. The aggregate intrinsic value
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading date of the year ended September 30, 2008 and the exercise price, multiplied by the number of in the money options). The cash received from option exercises was $414 and $401 for fiscal 2008 and 2007 respectively. There was no tax benefit to the Company from the exercise of options for either fiscal 2008 or fiscal 2007.
A summary of stock options at September 30, 2008 follows:
The aggregate intrinsic value of options currently exercisable as of September 30, 2008 was $5.7 million.
The Company used an option pricing model to estimate the grant date present value of stock options granted. The weighted-average estimated value per option granted was $2.99 in 2008, $3.07 in 2007 and $4.08 in 2006. The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(12) Comprehensive Income (Loss)
Comprehensive income (loss) represents the sum of net income and items of other comprehensive income or loss that are reported directly in stockholders’ equity, such as the change during the period in the after-tax net unrealized gain or loss on securities available for sale and change in the funded status of defined benefit plans. The Company has reported its comprehensive income in the consolidated statements of changes in stockholders’ equity.
The components of other comprehensive income (loss) are summarized as follows:
The Company’s accumulated other comprehensive loss included in stockholders’ equity at September 30, 2008 and 2007 consists of the after-tax net unrealized loss on available for sale securities of $5,892 and $3,917 respectively, and the recognition of the funded status of defined benefit plans of $(3,689) and $(287), after tax, at September 30, 2008 and 2007, respectively.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(13) Earnings Per Common Share
The following is a summary of the calculation of earnings per share (EPS):
As of September 30, 2008 and 2007 there were 1,155,653 and 1,676,894 stock options, respectively, that were considered anti-dilutive for these periods and were not included in common-equivalent shares.
(14) Stockholders’ Equity
(a) Regulatory Capital Requirements
OTS regulations require banks to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements.
The regulations establish a framework for the classification of banks into five categories: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 (core) capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based, in part, on specific quantitative measures of assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. These capital requirements apply only to the Bank, and do not consider additional capital retained by Provident New York Bancorp.
Management believes that, as of September 30, 2008 and 2007 the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification.
The following is a summary of the Bank’s actual regulatory capital amounts and ratios at September 30, 2008 and 2007, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution. PMB is also subject to certain regulatory capital requirements, which it satisfied as of September 30, 2008 and 2007.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Tangible and Tier 1 capital amounts represent the stockholder’s equity of the Bank, less intangible assets and after-tax net unrealized gains (losses) on securities available for sale and any other disallowed assets, such as deferred income taxes. Total capital represents Tier 1 capital plus the allowance for loan losses up to a maximum amount equal to 1.25% of risk-weighted assets.
The following is a reconciliation of the Bank’s total stockholder’s equity under accounting principles generally accepted in the United States of America (“GAAP”) and its regulatory capital:
(b) Dividend Payments
Under OTS regulations, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to the sum of net income for the current year and net income retained for the two preceding calendar years. Dividend payments in excess of this amount require OTS approval. After September 30, 2008 the amount that can be paid to Provident New York Bancorp by Provident Bank is net income in fiscal 2009 for Provident Bank less $1.4 million. The Bank paid $19 million dividends to Provident New York Bancorp during the year ended September 30, 2008 ($25 million during the year ended September 30, 2007 and $20 million during the year ended September 30, 2006).
Unlike the Bank, Provident New York Bancorp is not subject to OTS regulatory limitations on the payment of dividends to its stockholders.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(c) Stock Repurchase Programs
The Company announced its fourth stock repurchase program on August 24, 2007, authorizing the repurchase of 2,000,000 shares, of which 1,165,901 remain to be purchased.
The total number of shares repurchased under repurchase programs during the fiscal year ended September 30, 2008, 2007 and 2006, was 1,570,757 , 1,540,471, and 1,161,894 respectively at a total cost of $19.8 million, $20.9 million, and $13.3 million, respectively.
(d) Liquidation Rights
Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with OTS regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s ownership interest in the retained earnings of Provident Federal as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The liquidation account is reduced annually on December 31 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount of the liquidation account.
(15) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company is a party to off-balance-sheet financial instruments that involve, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated financial statements. The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance-sheet financial instruments, are summarized as follows:
As of September 30, 2008 and September 30 2007 96% of lending related off balance sheet instruments were variable rates.
The contractual amounts of loan origination commitments, unused lines of credit and letters of credit represent the Company’s maximum potential exposure to credit loss, assuming (i) the instruments are fully funded at a later date, (ii) the borrowers do not meet the contractual payment obligations, and (iii) any collateral or other security proves to be worthless. The contractual amounts of these instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. Substantially all of these lending-related instruments have been entered into with customers located in the Company’s primary market area described in Note 5 (“Loans”).
Loan origination commitments are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments have fixed expiration dates (generally ranging up to 60 days) or other termination clauses, and may require payment of a fee by the customer. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if any, obtained by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include mortgages on residential and commercial real estate, deposit accounts with the Company, and other property. The Company’s loan origination commitments at September 30, 2008 provide for interest rates ranging principally from 3.63% to 8.50%.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Unused lines of credit are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the borrower.
Letters of credit are commitments issued by the Company on behalf of its customer in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are nearly all standby letters of credit and are primarily issued in favor of local municipalities to support the obligor’s completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
As of September 30, 2008, the Company had $27,908 in outstanding letters of credit, of which $13,893 were secured by cash collateral.
(16) Commitments and 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. Future minimum rental payments due under non-cancelable operating leases with initial or remaining terms of more than one year at September 30, 2008 were as follows (for fiscal years ending September 30th):
Occupancy and office operations expense includes net rent expense of $2,398, $1,992 and $1,892, for the years ended September 30, 2008, 2007 and 2006, respectively.
The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management, after consultation with legal counsel, does not anticipate losses on any of these claims or actions that would have a material adverse effect on the consolidated financial statements.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(17) Fair Values of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information for those financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized in the consolidated statements of financial condition. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices are available, although active markets do not exist for many types of financial instruments. Fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.
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):
The following paragraphs summarize the principal methods and assumptions used by management to estimate the fair value of the Company’s financial instruments.
(a) Securities
The estimated fair values of securities were based on quoted market prices.
(b) Loans
Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into adjustable-rate and fixed-rate categories. Fixed-rate loans were further segmented by type, such as residential mortgage, commercial mortgage, commercial business and consumer loans. Loans were also segmented by maturity dates. Fair values were estimated by discounting scheduled future cash flows through estimated maturity using a discount rate equivalent to the current market rate on loans that are similar with regard to collateral, maturity and the type of borrower. The discounted value of the cash flows was reduced by a credit risk adjustment based on loan categories. Based on the current composition of the Company’s loan portfolio, as well as past experience and current economic conditions and trends, the future cash flows were adjusted by prepayment assumptions that shortened the estimated remaining time to maturity and therefore affected the fair value estimates.
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(c) FHLB Stock
It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(d) Deposits and Mortgage Escrow Funds
In accordance with SFAS No. 107, deposits with no stated maturity (such as savings, demand and money market deposits) were assigned fair values equal to the carrying amounts payable on demand. Certificates of deposit 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.
(e) FHLB and Other 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.
(f) Other Financial Instruments
The other financial assets and liabilities listed in the preceding table have estimated fair values that approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.
The fair values of the Company’s off-balance-sheet financial instruments described in Note 15 (“Off Balance Sheet Financial Instruments”) were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At September 30, 2008 and 2007, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.
(18) Recent Accounting Standards and Interpretations
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS No. 162 did not have a significant impact on the Company’s financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”). For defined benefit post-retirement plans, SFAS 158 requires that the funded status be recognized in the statement of financial position, that assets and obligations that determine funded status be measured as of the end of the employer’s fiscal year, and that changes in funded status be recognized in comprehensive income in the year the changes occur. SFAS 158 does not change the amount of net periodic benefit cost included in net income or address measurement issues related to defined benefit post-retirement plans. The requirement to recognize funded status is effective for fiscal years ending after December 15, 2006. The requirement to measure assets and obligations as of the end of the employer’s fiscal year is effective for fiscal years ending after December 15, 2008. The unrecognized components of defined benefit pension plans and retiree medical plans were recorded on the balance sheet at September 30, 2007.
At its September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
accounted for under SFAS No. 106 or Accounting Principles Board Opinion (“APB”) No. 12, “Omnibus Opinion - 1967.” The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The provisions of Issue 06-04 should be applied through either a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption or retrospective application. The Company has one endorsement split-dollar life insurance policy that it inherited through certain acquisitions that are associated with employees who are no longer active, the effect, of which, is immaterial.
In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which attempts to set out a consistent framework for preparers to use to determine the appropriate level of tax reserves to maintain for “uncertain tax positions.” This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than fifty percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of a Company’s tax reserves. FIN 48 is effective October 1, 2007 for the Company. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.
In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140, (“SFAS 155”). SFAS 155 amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) and SFAS 140. SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives, or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”) to eliminate the prohibition of a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material impact on the consolidated earnings or financial position of the Company.
Please see Note 1 for a discussion of additional new accounting standards.
(19) Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition of Provident New York Bancorp and the related condensed statements of income and cash flows:
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(20) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the years ended September 30, 2008 and 2007:
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
ITEM 9A.
ITEM 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2008, under the supervision and with the participation of Provident New York Bancorp’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in Provident New York Bancorp’s periodic SEC reports. There were no changes in the Company’s internal controls over financial reporting during the fourth fiscal quarter of 2008 that have materially affected or a reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting (see “Report of Management on Internal Control Over Financial Reporting”)
Provident New York Bancorp’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the management of Provident New York Bancorp’s, including Provident New York Bancorp’s CEO and CFO, Provident New York Bancorp conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2008 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission which is also referred to as COSO. Based on that evaluation, management of Provident New York Bancorp concluded that the Company’s internal control over financial reporting was effective as of September 30, 2008. Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2008 has been audited by Crowe Horwath LLP, as stated in their report which is included elsewhere herein.
ITEM 9B.
ITEM 9B. Other Information
Not applicable.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
The “Proposal I - Election of Directors” section of Provident New York Bancorp’s Proxy Statement for the Annual Meeting of Stockholders to be held in February 2009 (the “Proxy Statement”) is incorporated herein by reference.
ITEM 11.
ITEM 11. Executive Compensation
The “Proposal I - Election of Directors” section of the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Provident New York Bancorp does not have any equity compensation programs that were not approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of September 30, 2008, regarding equity compensation that has been approved by stockholders.
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only, since RRP shares have no exercise price.
The “Proposal I - Election of Directors” section of the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
The “Transactions with Certain Related Persons” section of the Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The “Independent Registered Public Accounting Firm” section of the proxy statement is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules
(1) Financial Statements
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Statements of Financial Condition as of September 30, 2008 and 2007
(C) Consolidated Statements of Income for the years ended September 30, 2008, 2007 and 2006
(D) Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2008, 2007 and 2006
(E) Consolidated Statements of Cash Flows for the years ended September 30, 2008, 2007 and 2006
(F) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(3) Exhibits
Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (File No. 333-108795), originally filed with the Commission on September 15, 2003.
Incorporated by reference to Exhibit 3.2 of Amendment No. 2 to the 2007 10-K (File No. 0-25233), filed with the Commission on January 1, 2008.
Filed herewith.
Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No. 333-63593), filed with the Commission on September 17, 1998.
Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008.
Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008.
Incorporated by reference to Exhibit 10.6 of the 2007 10-K (File No. 0-25233), filed with the Commission on December 13, 2007.
Incorporated by reference to Exhibit 10.7 of Amendment No. 1 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No. 333-63593), filed with the Commission on September 17, 1998.
Incorporated by reference to Appendix A of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.
Incorporated by reference to Appendix B of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.
Incorporated by reference to Appendix A to the Proxy Statement for the 2005 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 19, 2005.
Incorporated by reference to Exhibit 10 to the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on December 5, 2005
Incorporated by reference to Exhibit 10.14 of the 2006 10-K (File No. 0-25233), filed with the Commission on December 13, 2006
Incorporated by reference to Item 8 of the Company’s 2008 Form 10-K.
Provident New York Bancorp has agreed to indemnify and hold KPMG LLP (KPMG) harmless against and from any and all legal costs and expenses incurred by KPMG in successful defense of any legal action or proceeding that arises as a result of KPMG’s consent to the incorporation by reference of its audit report on the Company’s past financial statements.
* Indicates management contract or compensatory plan or arrangement.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.