10-Q 1 form10q-70293_provident.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ ------------------------------ Commission File Number: 0-25233 PROVIDENT NEW YORK BANCORP -------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 80-0091851 ------------------------------- ---------- (State or Other Jurisdiction of (IRS Employer ID No.) Incorporation or Organization) 400 Rella Boulevard, Montebello, New York 10901 ----------------------------------------- ----- (Address of Principal Executive Office) (Zip Code) (845) 369-8040 -------------- (Registrant's Telephone Number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Classes of Common Stock Shares Outstanding ----------------------- ------------------ $0.01 per share 43,850,552 as of August 2, 2005 1 PROVIDENT NEW YORK BANCORP QUARTERLY PERIOD ENDED JUNE 30, 2005 PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at June 30, 2005 and September 30, 2004 3 Consolidated Statements of Income for the Three Months and Nine Months Ended June 30, 2005 and 2004 5 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2005 6 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2005 and 2004 7 Consolidated Statements of Comprehensive Income/ (Loss) for the Three Months and Nine Months Ended June 30, 2005 and 2004 9 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk 37 Item 4. Controls and Procedures 38 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings 39 Item 2. Changes in Securities and Use of Proceeds 39 Item 3. Defaults upon Senior Securities 40 Item 4. Submission of Matters to a Vote of Security Holders 40 Item 5. Other Information 40 Item 6. Exhibits 40 Signatures 41 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except per share data)
Assets June 30, 2005 September 30, 2004 ------ ------------- ------------------ Cash and due from banks $ 51,578 $ 107,571 Securities (Note 7): Available for sale, at fair value (amortized cost of $851,822 at June 30, 2005 and $534,512 at September 30, 2004) 845,451 534,297 Held to maturity, at amortized cost (fair value of $71,927 at June 30, 2005 and $70,230 at September 30, 2004) 71,194 69,078 ----------- ----------- Total securities 916,645 603,375 ----------- ----------- Loans held for sale 3,684 855 Gross loans (Note 5) 1,314,716 997,634 Allowance for loan losses (Note 6) (22,252) (17,353) ----------- ----------- Total loans, net 1,292,464 980,281 ----------- ----------- FHLB stock, at cost 18,076 10,247 Accrued interest receivable, net 9,657 6,815 Premises and equipment, net 29,810 16,846 Goodwill (Notes 2 and 3) 157,927 65,260 Core deposit intangible (Notes 2 and 3) 14,953 5,624 Bank owned life insurance 37,256 13,245 Other assets 27,328 16,032 ----------- ----------- Total assets $ 2,559,378 $ 1,826,151 =========== ===========
(Continued) 3 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity June 30, 2005 September 30, 2004 ------------------------------------ ------------- ------------------ Liabilities: Deposits (Note 8): Non-interest bearing $ 382,394 $ 289,360 Interest bearing 1,365,876 950,172 ----------- ----------- Total deposits 1,748,270 1,239,532 Borrowings 377,626 214,909 Mortgage escrow funds 13,559 2,526 Other 20,229 19,672 ----------- ----------- Total liabilities 2,159,684 1,476,639 ----------- ----------- Stockholders' equity: Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding) -- -- Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 shares and 39,655,167 shares issued; 43,848,778 shares and 39,618,373 shares outstanding at June 30, 2005 and September 30, 2004, respectively) 459 397 Additional paid-in capital 345,301 269,325 Unallocated common stock held by the employee stock ownership plan ("ESOP") (1,321,967 shares at June 30, 2005 and 1,445,045 shares at September 30, 2004) (10,240) (10,854) Common stock awards under recognition and retention plan ("RRP," 762,400 shares at June 30, 2005) (9,247) -- Treasury stock, at cost (2,080,774 shares at June 30, 2005 and 36,794 shares at September 30, 2004) (24,134) (432) Retained earnings 101,303 91,373 Accumulated other comprehensive loss (3,748) (297) ----------- ----------- Total stockholders' equity 399,694 349,512 ----------- ----------- Total liabilities and stockholders' equity $ 2,559,378 $ 1,826,151 =========== =========== Book value per common share at period end $ 9.11 $ 8.82
See accompanying notes to unaudited consolidated financial statements 4 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share and share data)
For the Three Months For the Nine Months Ended June 30, Ended June 30, --------------------------- --------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Interest and dividend income: Loans $ 20,302 $ 14,300 $ 59,220 $ 38,651 Securities 8,365 5,646 25,852 14,633 Other earning assets 244 38 136 103 ----------- ----------- ----------- ----------- Total interest and dividend income 28,911 19,984 85,208 53,387 ----------- ----------- ----------- ----------- Interest expense: Deposits 4,362 2,137 11,207 5,682 Borrowings 3,281 1,350 9,609 3,719 ----------- ----------- ----------- ----------- Total interest expense 7,643 3,487 20,816 9,401 ----------- ----------- ----------- ----------- Net interest income 21,268 16,497 64,392 43,986 Provision for loan losses (Note 6) 225 225 525 575 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 21,043 16,272 63,867 43,411 ----------- ----------- ----------- ----------- Non-interest income: Deposit fees and service charges 2,673 1,797 7,613 4,761 Loan fees and late charges 381 186 1,011 591 Gains on sales of securities available for sale 57 446 369 1,894 Gains on sales of loans 105 61 185 231 Title insurance fees 361 -- 1,019 -- Bank owned life insurance 768 130 1,378 422 Previously unrecognized low income housing partnership investment 681 -- 681 -- Other 407 255 1,042 563 ----------- ----------- ----------- ----------- Total non-interest income 5,433 2,875 13,298 8,462 ----------- ----------- ----------- ----------- Non-interest expense: Compensation and employee benefits 8,277 6,070 24,063 16,523 Stock-based compensation plans 854 558 2,142 2,083 Occupancy and office operations 2,421 1,844 7,028 4,834 Advertising and promotion 808 509 2,620 1,544 Professional fees 523 656 1,801 1,660 Data and check processing 1,184 1,076 3,590 2,585 Stationery and office supplies 305 346 815 785 Merger integration costs 249 56 965 773 Amortization of intangible assets 929 681 3,046 1,468 ATM/debit card expense 322 206 948 565 Other 2,269 1,503 5,899 3,905 ----------- ----------- ----------- ----------- Subtotal 18,141 13,505 52,917 36,725 Establishment of Charitable Foundation -- -- -- 5,000 ----------- ----------- ----------- ----------- Total non-interest expense 18,141 13,505 52,917 41,725 ----------- ----------- ----------- ----------- Income before income tax expense 8,335 5,642 24,248 10,148 Income tax expense 2,676 1,988 8,394 3,377 ----------- ----------- ----------- ----------- Net income $ 5,659 $ 3,654 $ 15,854 $ 6,771 =========== =========== =========== =========== Weighted average common shares: Basic 42,440,624 37,806,911 43,545,750 36,450,748 Diluted 43,073,358 38,426,183 44,292,686 37,068,663 Per common share: (Note 10) Basic $ 0.13 $ 0.10 $ 0.36 $ 0.19 Diluted $ 0.13 $ 0.10 $ 0.36 $ 0.18
See accompanying notes to unaudited consolidated financial statements. 5 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except share and per share data)
Common Additional Unallocated Stock Number of Common Paid-In ESOP Awards Shares Stock Capital Shares Under RRP ---------- --------- ---------- ----------- --------- Balance at September 30, 2004 39,618,373 $ 397 $ 269,325 $ (10,854) $ 0 Net income Other comprehensive loss Total comprehensive income Purchase of Warwick Community Bancorp, Inc. 6,257,896 62 74,531 Tax benefits- stock-based compensation 465 Stock option transactions 54,509 58 ESOP shares allocated or committed to be released for allocation (123,078 shares) 922 614 RRP awards 762,400 Vesting of RRP shares (9,789) Purchase of treasury stock (2,844,400) 542 Cash dividends paid ($0.125 per common share) ---------- --------- --------- --------- --------- Balance at June 30, 2005 43,848,778 $ 459 $ 345,301 $ (10,240) $ (9,247) ========== ========= ========= ========= ========= Accumulated Other Total Treasury Retained Comprehensive Stockholders' Stock Earnings Loss Equity --------- --------- ------------- ------------- Balance at September 30, 2004 $ (432) $ 91,373 $ (297) $ 349,512 Net income 15,854 15,854 Other comprehensive loss (3,451) (3,451) --------- Total comprehensive income 12,403 Purchase of Warwick Community Bancorp, Inc. 74,593 Tax benefits- stock-based compensation 465 Stock option transactions 449 (416) 91 ESOP shares allocated or committed to be released for allocation (123,078 shares) 1,536 RRP awards 9,803 (14) 0 Vesting of RRP shares 542 Purchase of treasury stock (33,954) (33,954) Cash dividends paid ($0.125 per common share) (5,494) (5,494) --------- --------- --------- --------- Balance at June 30, 2005 $ (24,134) $ 101,303 $ (3,748) $ 399,694 ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements. 6 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands, except share amounts)
For the Nine Months Ended June 30 ------------------------ 2005 2004 --------- --------- Cash flows from operating activities: Net income $ 15,854 $ 6,771 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 525 575 Depreciation and amortization of premises and equipment 2,285 1,708 Amortization of core deposit intangible 3,046 1,468 Gain on sales of securities available for sale (369) (1,894) Gain on sales of loans held for sale (185) (231) Gain on sales of fixed assets sold -- (50) Gain on sales of real estate owned -- (55) Net amortization of premiums and discounts on securities 3,378 1,967 ESOP and RRP expense 2,543 1,753 Originations of loans held for sale (15,446) (10,101) Proceeds from sales of loans held for sale 12,802 11,311 Deferred income tax benefit (440) (3,154) Net changes in accrued interest receivable and payable 435 353 Other adjustments (principally net changes in other assets and other liabilities) (14,137) (2,808) --------- --------- Net cash provided by operating activities 10,291 7,613 --------- --------- Cash flows from investing activities: Purchases of securities: Available for sale (356,683) (443,267) Held to maturity (18,728) (9,349) Proceeds from maturities, calls and other principal payments on securities: Available for sale 93,847 72,389 Held to maturity 18,724 15,804 Proceeds from sales of securities available for sale 71,653 113,536 Loan originations (330,102) (251,328) Loan principal payments 303,988 197,136 Proceeds from sales of fixed assets -- 411 Proceeds from sales of other real estate owned -- 135 Purchase of FHLB stock (224) (1,535) Purchase of Warwick Community Bancorp, Inc. 164,486 -- Purchase of ENB Holding Company, Inc. -- 60,144 Purchase of HSBC South Fallsburg Branch 18,938 Increase in bank owned life insurance (10,691) (423) Purchases of premises and equipment (2,863) (2,371) --------- --------- Net cash used in investing activities (47,655) (248,718) --------- ---------
See accompanying notes to unaudited consolidated financial statements. 7 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands, except share amounts)
For the Nine Months Ended June 30 ------------------------ 2005 2004 --------- --------- Cash flows from financing activities: Net (decrease) increase in transaction and savings deposits (53,663) 50,378 Net increase (decrease) in time deposits 63,805 (6,049) Receipt of stock subscription funds -- 192,363 Net increase in borrowings 4,059 4,795 Net increase in mortgage escrow funds 6,527 8,416 Establishment of ESOP Plan -- (9,987) Common stock issued for formation of Charitable Foundation -- 4,000 Tax benefit: contribution of 400,000 shares to Charitable Foundation -- 115 Tax benefit: MHC contribution carry forward -- 512 Recapitalization -- 95 Treasury shares purchased (33,954) -- Stock option transactions 91 75 Cash dividends paid (5,494) (3,422) --------- --------- Net cash (used in) provided by financing activities (18,629) 241,291 --------- --------- Net (decrease) increase in cash and cash equivalents (55,993) 186 Cash and cash equivalents at beginning of period 107,571 33,500 --------- --------- Cash and cash equivalents at end of period $ 51,578 $ 33,686 ========= ========= Supplemental information: Interest payments $ 19,495 $ 8,952 Income tax payments 9,320 3,135 Fair value of assets acquired (incl. intangibles) 806,114 406,267 Fair value of liabilities assumed 658,919 329,797 --------- --------- Net fair value $ 147,195 $ 76,470 ========= ========= Cash portion of ENB Holding Co. purchase transaction -- $ 36,773 Stock portion of ENB Holding Co. purchase transaction -- 39,697 --------- Total paid for ENB Holding Co. -- $ 76,470 ========= Cash portion of Warwick Community Bancorp Inc. purchase transaction $ 72,601 -- Stock portion of Warwick Community Bancorp Inc. purchase transaction 74,594 -- --------- Total paid for Warwick Community Bancorp Inc. $ 147,195 -- ========= Cash received from HSBC branch purchase $ 18,938 ========= Transfer of loans to real estate owned -- 112 Net change in unrealized losses recorded on securities available for sale (6,004) (11,988) Change in deferred taxes on unrealized losses on securities available for sale 2,553 4,791 Issuance of RRP shares 762,400 --
See accompanying notes to unaudited consolidated financial statements. 8 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited) (Dollars in thousands)
Three Months Nine Months Ended June 30 Ended June 30 ---------------------- ---------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Net Income: $ 5,659 $ 3,654 $ 15,854 $ 6,771 Other Comprehensive Income (loss): Net unrealized holding gains (losses) 4,943 (7,817) (3,230) (6,049) arising during the year, net of taxes of $(3,293), $5,211, $2,153 and $4,033 Less reclassification adjustment for net realized gains included in net income, net of taxes of $23, $178, $148 and (34) (268) (221) (1,136) $758 -------- -------- -------- -------- Other comprehensive income (loss) 4,909 (8,085) (3,451) (7,185) -------- -------- -------- -------- Total comprehensive income (loss) $ 10,568 $ (4,431) $ 12,403 $ (414) ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. 9 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 1. Basis of Presentation --------------------- On June 29, 2005, the Company changed its name from Provident Bancorp, Inc., to Provident New York Bancorp in order to differentiate itself from the numerous bank holding companies with similar names. The consolidated financial statements and other financial information presented in this document as of June 30, 2005, include the accounts of Provident New York Bancorp, a Delaware corporation (the "Company"), Provident Bank (the "Bank") and Hardenburgh Abstract Company of Orange County, Inc. ("Hardenburgh"), and each subsidiary of Provident Bank [Provest Services Corp., (an inactive subsidiary), Provest Services Corp. I, Provest Services Corp. II, Provident REIT, Inc., WSB Funding, Inc., Warsave Development Corp., Provident Municipal Bank and WSB Financial Services, Inc. (an inactive subsidiary)]. Collectively, these entities are referred to herein as the "Company". Provident New York Bancorp is a publicly-held company and the parent of the Bank. Provest Services Corp. I holds a limited partnership interest in a low-income housing partnership that provides certain favorable tax consequences. Warsave holds an investment in a rental property that generates rental income. Hardenburgh is a title insurance agency that generates title insurance fees and commissions. Provest Services Corp. II has engaged a third-party provider to sell annuities to the customers of the Bank. Through June 30, 2005, the activities of these wholly-owned subsidiaries have had a minor impact on the Company's consolidated financial condition and results of operations. Provident REIT, Inc. and WSB Funding, Inc. hold a portion of the Company's real estate loans and are real estate investment trusts for federal income tax purposes. Provident Municipal Bank ("PMB") is a limited purpose New York State-chartered commercial bank and is authorized to accept deposits from municipalities in the Bank's New York business area. The Company's off-balance sheet activities are limited to loan origination commitments, lines of credit and letters of credit extended to customers or, in the case of letters of credit, on behalf of customers in the ordinary course of its lending activities. The Company does not engage in off-balance sheet financing transactions or other activities involving the use of special-purpose or variable-interest entities. The consolidated financial statements have been prepared by management without audit, but, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's financial position and results of operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented clear. The results of operations for the nine months ended June 30, 2005 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2005. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company's Form 10-K for the fiscal year ended September 30, 2004. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. A material estimate that is particularly susceptible to near-term change is the allowance for loan losses (see Note 6), which is a critical accounting policy. Certain prior-year amounts have been reclassified to conform to the current-year presentation. 10 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) Stock-Based Compensation ------------------------ The Company applies Accounting Pronouncement Bulletin ("APB") Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plan. No stock-based employee compensation cost is reflected in net income pertaining to stock options, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding awards in each period.
Three Months Ended Nine Months Ended June 30, June 30, 2005 2004 2005 2004 ------- ------- ------- ------- Net income, as reported $ 5,659 $ 3,654 $15,854 $ 6,771 Add RRP expense included in reported net income, net of related tax effects 263 75 325 $ 227 Deduct RRP and stock option expense determined under the fair-value-based method, net of related tax effects (500) (165) (1,496) (388) ------- ------- ------- ------- Pro forma net income $ 5,422 $ 3,564 $14,683 $ 6,610 ======= ======= ======= ======= Earnings per share: Basic, as reported $ 0.13 $ 0.10 $ 0.36 $ 0.19 Basic, pro forma 0.13 0.09 0.34 0.18 Diluted, as reported 0.13 0.10 0.36 0.18 Diluted, pro forma 0.13 0.09 0.33 0.18
In December 2004, the Financial Accounting Standards Board ("FASB") Issued Statement of Financial Accounting Standards No. 123R (Statement 123R), Share-Based Payments, the provisions of which become effective for the company as of October, 2005. This Statement eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. Statement 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. While the fair-value-based method prescribed by Statement 123R is similar to the fair-value-based method disclosed under the provisions of Statement 123 in most respects, there are some differences. The Company estimates that annual expense using the Black-Scholes method beginning in fiscal 2006 will be approximately $1.2 million, or $939 after tax, and the diluted earnings per share impact will be $0.02. This impact does not include the effect of reload options or forfeitures or options accelerations due to termination or retirement of personnel, the effect of which cannot be measured with any degree of certainty. 11 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 2. Mutual Holding Company Conversion --------------------------------- On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, the Company became the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Bancorp., Inc., a federal corporation ("Provident Federal") were sold to investors. In addition, the Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc. ("ENB"), located in Ellenville, New York (detailed in footnote 3). The Company sold 19,573,000 shares of common stock at $10.00 per share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The new holding company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of Provident Federal as of January 14, 2004 was converted into 4.4323 new shares of the Company's common stock. 3. Acquisitions ------------ The Company has been active in acquisitions over the past several years. All acquisitions were accounted for using the purchase method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded by the Company at their fair values at the acquisition date. On October 1, 2004 the Company completed its acquisition of Warwick Community Bancorp, Inc. ("WSB" or "Warwick"), located in Warwick, New York. WSB was the holding company for The Warwick Savings Bank, headquartered in Warwick, New York, The Towne Center Bank, headquartered in Lodi, New Jersey and Hardenburgh Abstract Company of Orange County, Inc. headquartered in Goshen, New York. On January 14, 2004, the Company completed its acquisition of ENB, located in Ellenville, New York. ENB was the holding company for Ellenville National Bank. On April 23, 2002, the Company completed its acquisition of The National Bank of Florida ("NBF"), located in Florida, New York. 12 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) Below is a summary of the financial transactions, including the most recent branch purchase on May 19, 2005 of an HSBC Bank USA, National Association ("HSBC") branch office in South Fallsburg New York, which will be consolidated with the Bank's existing branch in South Fallsburg.
------------------------------------------------------------------- HSBC WSB ENB NBF Total -------- ---------- ---------- ------- ----------- At Acquisition Date ------------------- Loans acquired $ 2,045 $ 284,522 $ 213,730 $23,112 $ 523,409 Deposits assumed 23,319 475,150 327,284 88,182 913,935 Cash paid/(received) (18,938) 72,601 36,773 28,100 118,536 Number of shares issued -- 6,257,896 3,969,676 -- 10,227,572 At June 30, 2005 ---------------- Goodwill $ -- $ 92,694 $ 51,767 $13,466 $ 157,927 Core deposit intangible 1,933 8,815 3,614 591 14,953
Goodwill is not amortized to expense, but is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit intangible asset is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated, at least annually, for impairment. The following table presents unaudited pro forma information as if WSB had been consummated on September 30, 2003. This pro forma information gives effect to certain adjustments, including accounting adjustments related to fair value adjustments, amortization of core deposit intangibles and related income tax effects. The pro forma information does not include merger integration costs and does not necessarily reflect the results of operations that would have occurred had the Company acquired WSB on September 30, 2003. Pro forma (unaudited) Nine Months Ended June 30, 2005 2004 ------- ------- Net interest income $64,964 $54,357 Non interest income 13,298 13,272 Non interest expense 51,581 58,701 Net income 17,423 5,957 ======= ======= Basic earnings per share $ 0.40 $ 0.16 ======= ======= Diluted earnings per share $ 0.39 $ 0.16 ======= ======= 13 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 4. Critical Accounting Policies ---------------------------- The accounting and reporting policies of the Company are prepared in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to the Company's financial results include the allowance for loan losses, accounting for goodwill and the recognition of interest income. The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. Accounting for goodwill is considered to be a critical policy because goodwill must be tested for impairment at least annually using a "two-step" approach that involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions utilized. Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on nonaccrual 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. At such time, unpaid interest is reversed by charging interest income. Interest payments received on nonaccrual loans (including impaired loans) are recognized as income unless future collections are doubtful. Loans are returned to accrual status when collectibility is no longer considered doubtful (generally, when all payments have been brought current). Application of assumptions different than those used by management could result in material changes in the Company's financial position or results of operations. Footnote 2 (Summary of Significant Accounting Policies) of the Annual Report on Form 10-K for the year ending September 30, 2004 provides detail with regard to the Company's accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since September 30, 2004. 5. Loans ----- Major classifications of loans, excluding loans held for sale, are summarized below: June 30, 2005 September 30, 2004 ------------- ------------------ Real estate - residential mortgage $ 439,097 $380,749 Real estate - commercial mortgage 487,160 327,414 Real estate - construction 68,866 54,294 Commercial and industrial 142,892 105,196 Consumer loans 176,701 129,981 ---------- -------- Total $1,314,716 $997,634 ========== ======== 6. Allowance for Loan Losses and Non-Performing Assets --------------------------------------------------- The allowance for loan losses is established through provisions for losses charged to earnings. Loan losses are charged against the allowance when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized. The allowance for loan losses is the amount that management has determined to be necessary to absorb probable loan losses inherent in the existing portfolio. Management's evaluations, which are subject to periodic review by the Company's regulators, are made using a consistently-applied methodology that takes into consideration such factors as the Company's past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and 14 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) collateral values, and current economic conditions that may affect the borrowers' ability to pay. Changes in the allowance for loan losses may be necessary in the future based on changes in economic and real estate market conditions, new information obtained regarding known problem loans, regulatory examinations, the identification of additional problem loans, and other factors. Activity in the allowance for loan losses for the periods indicated is summarized below:
Three Months Nine Months Ended June 30, Ended June 30, ----------------------- ----------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Balance at beginning of period $ 22,249 $ 17,093 $ 17,353 $ 11,069 Allowance acquired through acquisition -- -- 4,880 5,750 Provision for loan losses 225 225 525 575 Charge-offs (255) (101) (641) (249) Recoveries 33 114 135 186 -------- -------- -------- -------- Net (charge-offs)/recoveries (222) 13 (506) (63) -------- -------- -------- -------- Balance at end of period $ 22,252 $ 17,331 $ 22,252 $ 17,331 ======== ======== ======== ======== Net charge-offs to average loans outstanding (annualized) 0.02% 0.001% 0.04% 0.01%
The following table sets forth the amounts and categories of the Company's non-performing assets at the dates indicated. At both dates, the Company had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates).
June 30, 2005 September 30, 2004 ------------- ------------------ Non-accrual loans: One- to four-family residential mortgage loans $ 1,668 $ 1,597 Commercial real estate, commercial business and construction loans 1,521 962 Consumer loans 60 178 ------- ------- Total non-performing loans 3,249 2,737 Real estate owned: One to four family residence 93 -- ------- ------- Total non-performing assets $ 3,342 $ 2,737 ======= ======= Ratios: Non-performing loans to total loans, net 0.25% 0.27% Non-performing assets to total assets 0.13% 0.15% Allowance for loan losses to total non-performing loans 684.89% 634.02% Allowance for loan losses to total loans 1.69% 1.74%
15 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 7. Securities ---------- The following is a summary of securities available for sale at June 30, 2005 and September 30, 2004:
Available for Sale Portfolio June 30, 2005 ======================================================= Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed and SBA securities Mortgage-backed securities $516,811 $ 440 $ (3,168) $514,083 Collateralized mortgage obligations 24,525 -- (116) 24,409 SBAs and other 124 -- (2) 122 -------- -------- -------- -------- Total mortgage-backed and SBA securities 541,460 440 (3,286) 538,614 -------- -------- -------- -------- Investment Securities U.S. Government and federal agency securities 268,036 -- (3,539) 264,497 State and municipal securities 41,379 236 (160) 41,455 Equity securities 947 7 (69) 885 -------- -------- -------- -------- Total investment securities 310,362 243 (3,768) 306,837 -------- -------- -------- -------- Total available for sale $851,822 $ 683 $ (7,054) $845,451 ======== ======== ======== ======== Available for Sale Portfolio September 30, 2004 ======================================================= Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed and SBA securities Mortgage-backed securities $304,578 $ 1,155 $ (1,452) $304,281 Collateralized mortgage obligations 9,711 -- (95) 9,616 SBAs and other 5,948 377 -- 6,325 -------- -------- -------- -------- Total mortgage-backed and SBA securities 320,237 1,532 (1,547) 320,222 -------- -------- -------- -------- Investment securities U.S. Government and federal agency securities 192,788 522 (1,008) 192,302 State and municipal securities 20,482 172 (95) 20,559 Equity securities 1,005 337 (128) 1,214 -------- -------- -------- -------- Total investment securities 214,275 1,031 (1,231) 214,075 -------- -------- -------- -------- Total available for sale $534,512 $ 2,563 $ (2,778) $534,297 ======== ======== ======== ========
16 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) The following is a summary of securities held to maturity at June 30, 2005 and September 30, 2004:
Held to Maturity Portfolio June 30, 2005 ======================================================= Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed securities Mortgage-backed securities $ 27,021 $ 417 $ (164) $ 27,274 Collateralized mortgage obligations 2,130 47 -- 2,177 -------- -------- -------- -------- Total mortgage-backed securities 29,151 464 (164) 29,451 -------- -------- -------- -------- Investment securities State and municipal securities 41,735 733 (302) 42,166 Other investments 308 7 (5) 310 -------- -------- -------- -------- Total investment securities 42,043 740 (307) 42,476 -------- -------- -------- -------- Total held to maturity $ 71,194 $ 1,204 $ (471) $ 71,927 ======== ======== ======== ======== Held to Maturity Portfolio September 30, 2004 ======================================================= Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed securities Mortgage-backed securities $ 35,402 $ 741 $ (266) $ 35,877 Collateralized mortgage obligations 2,788 55 -- 2,843 Other 685 37 -- 722 -------- -------- -------- -------- Total mortgage-backed securities 38,875 833 (266) 39,442 -------- -------- -------- -------- Investment securities State and municipal securities 29,894 922 (293) 30,523 Other 309 -- (44) 265 -------- -------- -------- -------- Total investments 30,203 922 (337) 30,788 -------- -------- -------- -------- Total held to maturity $ 69,078 $ 1,755 $ (603) $ 70,230 ======== ======== ======== ========
17 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) At June 30, 2005 and September 30, 2004, the accumulated unrealized net loss on securities available for sale (net of tax of $2,684 and $86, respectively) that was included in accumulated other comprehensive income, a separate component of stockholders' equity, was ($3,637) and $(186) respectively. Gross realized gains were $57 and $446 respectively and gross realized losses were $0 and $0, respectively, for the three months ended June 30, 2005 and 2004. Gross realized gains were $914 and $1,894 respectively, and gross realized losses were $545 and $0, respectively, for the nine months ended June 30, 2005 and 2004. Securities with a carrying amount of $320,497 and $168,310 were pledged as collateral for municipal deposits, borrowings and other purposes at June 30, 2005 and September 30, 2004, respectively. The following table summarizes, for all securities in an unrealized loss position at June 30, 2005, the aggregate fair value and gross unrealized loss by length of time those securities have continuously been in an unrealized loss position:
Less than 12 Months 12 months or longer Total ------------------------ ------------------------ ------------------------ Unrealized Unrealized Unrealized Losses Fair Value Losses Fair Value Losses Fair Value ------------------------------------------------------------------------------ Available For Sale: Mortgage-backed securities $ (1,624) $120,246 $ (1,663) $300,000 $ (3,287) $420,246 U.S. government & federal securities (1,666) 75,326 (1,870) 189,172 (3,536) 264,498 Municipal securities (66) 5,240 (96) 13,199 (162) 18,439 Equity securities (69) 772 -- 105 (69) 877 ---------------------------------------------------------------------------- Total available-for-sale: (3,425) 201,584 (3,629) 502,476 (7,054) 704,060 ---------------------------------------------------------------------------- Held to Maturity: Mortgage-backed securities (163) 11,638 -- -- (163) 11,638 State and municipal securities (225) 3,042 (79) 18,248 (304) 21,290 Other securities (4) 100 -- -- (4) 100 ---------------------------------------------------------------------------- Total held to maturity: (392) 14,780 (79) 18,248 (471) 33,028 ---------------------------------------------------------------------------- Total securities: $ (3,817) $216,364 $ (3,708) $520,724 $ (7,525) $737,088 ============================================================================
18 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Unaudited) (Dollars in thousands, except per share amounts) Substantially all of the unrealized losses at June 30, 2005 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at June 30, 2005. A total of 263 securities were in a continuous unrealized loss position for less than 12 months, and 77 securities for 12 months or longer. For fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold securities with unrealized losses until a market price recovery (which, for fixed maturities, may be until maturity) the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2005, except for an investment in Freddie Mac perpetual preferred stock which had been determined that an impairment loss of $93 existed on a recorded basis of $905. (See Recent Accounting Standards for discussion of a new accounting pronouncement that will provide additional guidance with respect to impairment evaluations). 8. Deposits -------- Major classifications of deposits are summarized below: June 30, 2005 September 30, 2004 ------------- ------------------ Demand deposits: Retail $ 169,582 $ 122,276 Commercial and municipal 212,812 167,084 NOW 138,573 83,439 ---------- ---------- Total transaction accounts 520,967 372,799 Money market 218,689 173,272 Savings 515,593 360,138 Time under $100 349,229 239,411 Time over $100 143,792 93,912 ---------- ---------- Total $1,748,270 $1,239,532 ========== ========== 19 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Unaudited) (Dollars in thousands, except per share amounts) 9. FHLB and Other Borrowings ------------------------- The Company's FHLB and other borrowings and weighted average interest rates are summarized as follows:
----------------- ------------------ June 30, 2005 September 30, 2004 ----------------- ------------------ Amount Rate Amount Rate -------- ---- -------- ---- By type of borrowing: Advances $206,637 3.55% $164,947 2.81% Repurchase agreements 170,989 4.60 49,962 3.49 -------- -------- Total borrowings $377,626 3.37% $214,909 2.97% ======== ======== By remaining period to maturity: One year or less $169,390 3.27% $ 94,961 2.11% One to two years 19,751 3.60 28,000 3.18 Two to three years 52,837 3.63 18,651 3.65 Three to four years 47,924 3.71 29,443 3.78 Four to five years 21,827 3.77 40,017 3.76 Five years or greater 65,897 3.57 3,837 4.89 -------- -------- Total borrowings $377,626 3.37% $214,909 2.97% ======== ========
As a member of the FHLB of New York, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible mortgages that have been pledged as collateral under a blanket security agreement. As of June 30, 2005 and September 30, 2004, the Bank had pledged mortgages totaling $462,181 and $267,457, respectively. Based on outstanding borrowings under the line totaling $204,478 and $164,969 as of June 30, 2005 and September 30, 2004, the Bank had unused borrowing capacity under the FHLB of New York Line of Credit of $257,703 and $102,489, respectively. The Bank may borrow additional amounts by pledging securities not required to be pledged for other purposes with a market value of $596,881 as of June 30, 2005. 20 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Unaudited) (Dollars in thousands, except per share amounts) 10. Earnings Per Common Share ------------------------- The number of shares used in the computation of both basic and diluted earnings per share includes all shares issued to Provident Bancorp, MHC for all periods through January 14, 2004, but excludes unallocated ESOP shares that have not been released or committed to be released to participants. Common stock equivalent shares are incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options and unvested RRP shares were exercised or became vested during the periods. Prior period share information has been adjusted to reflect the 4.4323-to-one exchange ratio in connection with the second-step conversion completed January 14, 2004. Basic earnings per common share is computed as follows:
For the Three Months For the Nine Months Ended June 30, Ended June 30, --------------------------- --------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Weighted average common shares outstanding (basic) 42,440,624 37,806,911 43,545,750 36,450,748 ----------- ----------- ----------- ----------- Net income $ 5,659 $ 3,654 $ 15,854 $ 6,771 Basic earnings per common share $ 0.13 $ 0.10 $ 0.36 $ 0.19
Diluted earnings per common share is computed as follows:
For the Three Months For the Nine Months Ended June 30, Ended June 30, --------------------------- --------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Weighted average common shares outstanding (basic) 42,440,624 37,806,911 43,545,750 36,450,748 Effect of common stock equivalents 632,734 619,272 746,936 617,915 ----------- ----------- ----------- ----------- Total diluted shares 43,073,358 38,426,183 44,292,686 37,068,663 Net income $ 5,659 $ 3,654 $ 15,854 $ 6,771 Diluted earnings per common share $ 0.13 $ 0.10 $ 0.36 $ 0.18
21 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Unaudited) (Dollars in thousands, except per share amounts) 11. Pension and Other Post Retirement Plans --------------------------------------- Net post retirement cost, which is recorded within salaries and employee benefits expense in the consolidated statements of income, is comprised of the following:
Pension Plans Other Post Retirement Plans -------------------- --------------------------- Nine Months Ended Nine Months Ended June 30, June 30, -------------------- -------------------- 2005 2004 2005 2004 ---------------------------------------------- Service cost $ 968 $ 590 $ 77 $ 6 Interest cost 1,210 506 112 17 Expected return on plan assets (1,342) (592) -- -- Unrecognized net transition obligation 8 19 8 7 Amortization of prior service cost (8) (10) 4 4 Amortization of gain or loss 252 130 (1) (2) -------------------- -------------------- Net periodic cost $ 1,088 $ 643 $ 200 $ 32 -------------------- --------------------
The Company previously disclosed in its consolidated financial statements for the year ended September 30, 2004, that it expected to contribute $692 to its pension plan in fiscal 2005. As of June 30, 2005, the Company has contributed $149. As part of the acquisition of WSB, the Company assumed the WSB Pension Plan, a defined benefit plan. The WSB plan was frozen on April 30, 2002. As part of the acquisition of ENB, the Company assumed the ENB Pension Plan, a defined benefit plan. The ENB plan was frozen in connection with the merger of ENB into the Company. 12. Guarantor's Obligations Under Guarantees ---------------------------------------- Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary's compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor's completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of June 30, 2005, the Company had $15.5 million in outstanding letters of credit, of which $4.2 million were secured by cash collateral. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements -------------------------- The Company has made, and may continue to make, various forward-looking statements with respect to earnings, credit quality and other financial and business matters for 2005 and, in certain instances, subsequent periods. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements for subsequent periods are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward-looking statements; pricing pressures on loan and deposit products; changes in local and national economic conditions; the extent and timing of actions of the Company's regulators; customer deposit disintermediation; changes in customers' acceptance of the Company's products and services; general actions of competitors, other normal business risks such as credit losses, litigation, increases in the levels of non-performing assets, revenues following acquisitions if such revenues are lower than expected, and costs or difficulties related to the integration of acquired and existing businesses that are greater than expected. The Company's forward-looking statements speak only as of the date on which such statements are made. The Company assumes no duty to update forward-looking statements to reflect new, changing or unanticipated events or circumstances. The Company's significant accounting policies are summarized in Note 2 to the consolidated financial statements included in its September 30, 2004 Annual Report on Form 10-K. An accounting policy considered particularly critical to the Company's financial results is the allowance for loan losses. The methodology for assessing the appropriateness of the allowance for loan losses and non-performing loans is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes in the necessary allowance. As of January 14, 2004, the Company completed its stock offering and acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock conversion. The acquisition was accounted for as a purchase and, accordingly, amounts attributable to ENB have been included in the Company's consolidated financial statements from the date of acquisition. See Note 3 to the accompanying consolidated financial statements included in Item 1 of this quarterly report. As discussed in Note 3 to the consolidated financial statements included in Item 1 of this quarterly report, the Company completed its acquisition of WSB on October 1, 2004. The acquisition was accounted for as a purchase and, accordingly, amounts attributable to Warwick have been included in the Company's consolidated financial statements from the date of acquisition. 23 Comparison of Financial Condition at June 30, 2005 and September 30, 2004 ------------------------------------------------------------------------- Total assets as of June 30, 2005 were $2.6 billion, an increase of $733.2 million, or 40.2%, over assets of $1.8 billion at September 30, 2004, and an increase of $776.7 million, or 43.6%, over assets of $1.8 billion at June 30, 2004. The increase from September 30, 2004 was primarily due to the October 2004 acquisition of Warwick, whose assets totaled $703.7 million on the merger date, and the purchase of an HSBC Bank USA, National Association ("HSBC") branch office in South Fallsburg New York, which added $23.3 million of assets in the third quarter of 2005. The increase over June 30, 2004, was due to (i) the October 2004 acquisition of Warwick, (ii) internal growth of the Company, and (iii) the purchase of the South Fallsburg branch. Goodwill increased by $92.7 million from September 30, 2004 as a result of the completion of the Warwick acquisition, and core deposit intangibles increased by $9.3 million, net of $3.0 million in amortization, from September 30, 2004 as a result of the Warwick and the South Fallsburg HSBC branch acquisitions. Net loans as of June 30, 2005 were $1.3 billion, an increase of $312.2 million, or 31.8%, over net loan balances of $980.3 million at September 30, 2004, and an increase of $322.0 million, or 33.2 %, over balances at June 30, 2004. Loans acquired from WSB totaled $288.2 million, while allowances for loan losses acquired in connection with WSB were $4.9 million, or 1.7% of WSB's outstanding loan balances. Inclusive of Warwick loans acquired, commercial loans increased by $212.0 million, or 43.5%, over balances at September 30, 2004. Consumer loans increased by $46.7 million, or 35.9%, during the nine-month period ended June 30, 2005, while residential loans increased by $58.3 million, or 15.3%. Total loan originations have increased from $261.4 million for the nine months ended June 30, 2004 to $346.5 million for the nine months ended June 30, 2005. However, repayments and sales of loans have also increased from $208.4 million from the 2004 period to $316.7 million for the nine months ended June 30, 2005. Loan quality continues to be strong. At $3.2 million, non-performing loans as a percentage of total loans is 0.25%, as opposed to 0.27% at September 30, 2004 and 0.55% at June 30, 2004. Total securities increased by $313.3 million, or 51.9 %, to $916.6 million at June 30, 2005 from $603.4 million at September 30, 2004. Securities acquired from Warwick totaled $298.2 million. Investments were made primarily in mortgage-backed securities, which increased by $208.2 million, or 57.7%, and in U.S. Government and Federal Agency Securities, which increased by $105.1 million, or 43.3%. Deposits as of June 30, 2005 were $1.7 billion, up $508.7 million, or 41.0%, from September 30, 2004, and $507.4 million, or 40.9%, from June 30, 2004. Deposits acquired from Warwick and HSBC totaled $475.1 million and $23.3 million, respectively. As of June 30, 2005 retail and commercial transaction accounts were 29.8% of deposits compared to 30.1% at September 30, 2004 and 29.4% at June 30,2004. Borrowings increased by $162.7 million from September 2004, or 75.7%, to $377.6 million. Almost all of the increase is related to the borrowings assumed from Warwick. 24 Stockholders' equity increased by $50.2 million to $399.7 million at June 30, 2005 compared to $349.5 million at September 30, 2004. Shares of common stock with a value of $74.6 million were issued for the purchase of Warwick. Net income of $15.9 million and ESOP allocations of $1.5 million for the nine-month period also increased equity. Partially offsetting the increases were the payments of cash dividends totaling $5.5 million and a decrease of $3.5 million in other comprehensive income due to unrealized losses on available for sale securities. Since September 2004, we have purchased a total of 2.8 million treasury shares which further decreased stockholders' equity by $34.0 million. During the third quarter the Company completed its first stock repurchase program and announced a second repurchase plan for up to 2.2 million shares. Repurchases for the quarter were 1,656,600 shares for a total purchase price of $18.7 million, of which 549,000 shares were purchased as part of the second repurchase plan. Also during 2005, 762,400 shares of restricted stock have been granted from treasury shares. Bank Tier I capital to assets stands at 8.3% at June 30, 2005. Tangible capital at the holding company level is 9.6%. Comparison of Operating Results for the Three Months Ended June 30, 2005 and June 30, 2004 Net Income. For the three months ended June 30, 2005 net income was $5.7 million, an increase of $2.0 million, compared to $3.7 million for the same period in fiscal 2004. Net interest income after provision for loan losses for the three months ended June 30, 2005 increased by $4.7 million, or 29.3%, to $21.0 million compared to $16.3 million for the same period in the prior year. Non-interest income increased $2.5 million or 89.0% to $5.4 million for the three months ended June 30, 2005 compared to $2.9 million for the three months ended June 30, 2004. Non-interest expense increased $4.6 million, or 34.3%, to $18.1 million for the three months ended June 30, 2005 compared to $13.5 million for the same prior-year period. The relevant performance measures follow: Three Months Ended June 30, ------------------- 2005 2004 ------ ------ Per common share: Basic earnings $ 0.13 $ 0.10 Diluted earnings 0.13 0.10 Dividends declared 0.045 0.04 Return on average (annualized): Assets 0.90% 0.82% Equity 5.75% 4.24% 25 The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).
Three Months Ended June 30, --------------------------- 2005 2004 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ----------- ---------- ---------- ----------- ---------- ---------- Interest earning assets: Commercial and commercial mortgage loans(1) $ 688,978 $ 11,779 6.86% $ 447,784 $ 7,324 6.58% Consumer loans(1) 167,711 2,210 5.28 119,603 1,386 4.66 Residential mortgage loans(1) 429,400 6,313 5.90 378,454 5,590 5.94 ---------- ---------- ---------- ---------- Total loans 1,286,089 20,302 6.33 945,841 14300 6.08 ---------- ---------- ---------- ---------- Securities-taxable 833,718 7,769 3.74 557,661 5,233 3.77 Securities-tax exempt(2) 65,239 918 5.65 44,562 636 5.74 Other earning assets 19,147 244 5.12 10,473 8 1.46 ---------- ---------- ---------- ---------- Total securities and other earning assets 918,104 8,931 3.90 612,696 5,907 3.88 ---------- ---------- ---------- ---------- Total interest-earning assets 2,204,193 29,233 5.32 1,558,537 20,207 5.21 ---------- ---------- ---------- ---------- ---------- ---------- Non-interest-earning assets 320,732 236,410 ---------- ---------- Total assets $2,524,925 $1,794,947 ========== ========== Interest bearing liabilities: NOW checking $ 160,234 126 0.32% $ 98,611 $ 53 0.22% Savings, clubs and escrow 540,937 761 0.56 377,845 409 0.44 Money market accounts 223,134 687 1.23 176,544 225 0.51 Certificate accounts 458,023 2,788 2.44 349,126 1,450 1.67 ---------- ---------- ---------- ---------- Total interest-bearing deposits 1,382,328 4,362 1.27 1,002,126 2,137 0.86 Borrowings 384,073 3,281 3.43 180,154 1,350 3.01 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 1,766,401 7,643 1.74 1,182,280 3,487 1.19 ---------- ---------- ---------- ---------- ---------- ---------- Non-interest-bearing liabilities 363,592 265,904 ---------- ---------- Total liabilities 2,129,993 1,448,184 Stockholders' equity 394,932 346,763 ---------- ---------- Total liabilities and equity $2,524,925 $1,794,947 ========== ========== Net interest rate spread 3.58% 4.04% ========== ========== Net earning assets $ 437,792 $ 376,257 ========== ========== Net interest margin 21,590 3.93% 16,270 4.31% ========== ========== ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 124.78% 131.82% ========== ========== Less tax equivalent adjustment (322) (223) ---------- ---------- Net interest income $ 21,268 $ 16,497 ========== ==========
---------- (1) Includes non-accrual loans. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. 26 The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands):
Three Months Ended June 30, 2005 vs. 2004 Increase/(Decrease) Due to -------------------------- Volume(1) Rate(1) Total --------- ------- ------- Interest-earning assets Commercial and commercial mortgage loans $ 4,107 $ 348 $ 4,455 Consumer loans 615 209 824 Residential mortgage loans 751 (28) 723 Securities-taxable 2,564 (28) 2,536 Securities-tax exempt(2) 291 (9) 282 Other earning assets 52 154 206 ------- ------- ------- Total interest income 8,380 646 9,026 ------- ------- ------- Interest-bearing liabilities Savings 209 143 352 Money market 72 390 462 NOW checking 42 31 73 Certificates of deposit 536 803 1,339 Borrowings 1,713 217 1,930 ------- ------- ------- Total interest expense 2,572 1,584 4,156 ------- ------- ------- Net interest margin 5,808 (938) 4,870 ------- ------- ------- Less tax equivalent adjustment(2) (273) 174 (99) ------- ------- ------- Net interest income $ 5,535 $ (764) $ 4,771 ======= ======= =======
(1) Changes due to increases in both rate and volume have been allocated proportionately to rate and volume. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. Net interest income for the three months ended June 30, 2005 increased by $4.8 million, or 28.9%, to $21.3 million for the quarter ended June 30, 2005, compared to $16.5 million for the quarter ended June 30, 2004. Gross interest income increased by $8.9 million, or 44.7%, to $28.9 million for the quarter ended June 30, 2005, compared to $20.0 million for the same three months in 2004. The increase in interest income was largely due to a $645.7 million increase in average earning assets to $2.2 billion during the quarter ended June 30, 2005, as compared to $1.6 billion for the same quarter in the prior year. The increase is primarily due to the Warwick acquisition and continued internal growth. The increase in average earning assets was enhanced by an increase in average yield of 11 basis points from 5.21% to 5.32%, on a fully taxable equivalent basis. The average yields on the loan and investment portfolios increased 25 basis points and two basis points, respectively. Interest expense increased by $4.2 million for the quarter compared to the same quarter in 2004, as average interest-bearing liabilities increased by $584.0 million and the average cost of interest-bearing liabilities increased by 55 basis points. The tax equivalent net interest margin declined by 38 basis points to 3.93%, while net interest spread declined by 46 basis points to 3.58%. This was primarily the result of assets acquired from Warwick being recorded at then current market interest rates, coupled with the impact of the increase in the cost of interest-bearing liabilities resulting from the 225 basis point increase in the target federal funds rate since May of 2004. 27 Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level to absorb probable loan losses inherent in the existing portfolio. The Company recorded $225 in loan loss provisions in both the three months ended June 30, 2005 and 2004. Net charge-offs for the three months ended June 30, 2005 were $222, compared to a net recovery of $13 for the same period in 2004. (See Note 6 for further discussion). Non-interest income was $5.4 million for the three months ended June 30, 2005 compared to $2.9 million for the three months ended June 30, 2004, an increase of $2.6 million, or 89.0%. Deposit fees and service charges increased by $876,000 or 48.7%, of which $442,000 was generated from the acquired Warwick branches, while $418,000 was primarily due to volume-driven increases in overdraft, non-sufficient funds, and ATM and debit card fees. Income derived from the Company's bank owned life insurance ("BOLI") investments increased by $638,000 or 490.7% due to additional BOLI investments of $24.1 million ($13.3 million of which were added from the Warwick acquisition) and the receipt of death benefit proceeds. Title insurance fee income derived from the Company's new wholly-owned title subsidiary, Hardenburgh Abstract Company, Inc. (acquired as part of the Warwick acquisition), was $361,000 for the quarter. Gains on the sale of securities were $57,000 for the current three-month period, compared to $446,000 for the same period last year. During the three-month period ended June 30, 2005, the Company also recorded gains on sales of loans totaling $105,000 compared to $61,000 for the same period last year. For the quarter ending June 30, 2005, there was a recognition of $681,000 in income pertaining to our investment as a limited partner in a low-income housing partnership. The investment had been amortized quarterly since 1996 in excess of our interest in the partnership. There was no material impact on any quarter in the affected periods. Non-interest expenses for the three months ended June 30, 2005 increased by $4.6 million, or 34.3%, due largely to the increase in branch locations and office facilities, as well as staff acquired in the Warwick acquisition. Compensation and employee benefits increased by $2.2 million, or 36.4%, to $8.3 million for the three months ended June 30, 2005. In addition, there was an increase in the cost of stock-based compensation benefits of $296,000. Occupancy and office operations increased by $577,000 or 31.2%, for the three months ended June 30, 2005, of which $367,000 was attributable to the acquired Warwick properties. Advertising and promotion increased $299,000 or 58.7%, primarily as a result of the Company's new brand identity. Merger and integration costs increased $193,000, or 344.6% primarily due to the acquisition of the HSBC South Fallsburg branch. Other non-interest expense increased $766,000, or 51.0%, due to increased overhead relating to the increase in branch locations and administration costs associated with being a larger bank. These increases were partially offset by a $133,000 decrease in professional fees due to consulting fees incurred in 2004 in connection with the Warwick merger. The efficiency ratio, which excludes securities gains, merger costs, amortization of intangible assets, the $5.0 million charitable contribution, and the income from the low income housing investment, and includes the tax equivalent adjustment for interest income, has improved to 64.5% for the current quarter from 66.7% for the quarter ending June 30, 2004, reflecting the strides we have made in combining Warwick and Ellenville into Provident and the operating leverage derived from those efforts [see below table]. 28 Efficiency Ratio
3 Months Ended June 30, 9 Months Ended June 30, ----------------------- ----------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Non-interest expense $ 18,141 $ 13,505 $ 52,917 $ 41,725 ----------------------------------------------------- Interest & Non-interest income $ 26,701 $ 19,372 $ 77,690 $ 52,448 GAAP efficiency ratio 67.9% 69.7% 68.1% 79.6% Non-interest expense less: $ 18,141 $ 13,505 $ 52,917 $ 41,725 merger integration costs (249) (56) (965) (773) amortization of intangible assets (929) (681) (3,046) (1,468) Charitable foundation -- -- -- (5,000) ----------------------------------------------------- Adjusted non-interest expense $ 16,963 $ 12,768 $ 48,906 $ 34,484 Interest & Non-interest income $ 26,701 $ 19,372 $ 77,690 $ 52,448 add: Tax equivalent adjustment less: 322 223 824 507 gains on sales of securities (57) (446) (369) (1,894) gain on low income housing LLP (681) -- (681) -- ----------------------------------------------------- Adjusted income $ 26,285 $ 19,149 $ 77,464 $ 51,061 Adjusted (Non-GAAP) efficiency ratio 64.5% 66.7% 63.1% 67.5%
Income Taxes. Income tax expense was $2.7 million for the three months ended June 30, 2005, compared to a tax benefit of $2.0 million for the same period in 2004. The effective tax rates were 32.1% and 35.2%, respectively. The reduction in the effective rate is primarily due to increased investment in tax exempt securities and the increase in income realized from bank owned life insurance. Comparison of Operating Results for the Nine Months Ended June 30, 2005 and June 30, 2004 Net Income. For the nine months ended June 30, 2005 net income was $15.9 million, an increase of $9.1 million compared to $6.8 million for the same period in fiscal 2004. Net interest income after provision for loan losses for the nine months ended June 30, 2005 increased by $20.5 million, or 47.1%, to $63.9 million compared to $43.4 million for the same period in fiscal 2004. Non-interest income increased $4.8 million or 57.1% to $13.3 million for the nine months ended June 30, 2005 compared to $8.5 million for the nine months ended June 30, 2004. Non-interest expense increased $11.2 million, or 26.8%, to $52.9 million for the nine months ended June 30, 2005 compared to $41.7 million for the same period in fiscal 2004. The relevant performance measures follow: Nine Months Ended June 30, 2005 2004 ------ ------ Per common share: Basic earnings $ 0.36 $ 0.19 Diluted earnings 0.36 0.18 Dividends declared 0.125 0.11 Return on average (annualized): Assets 0.84% 0.59% Equity 5.13% 3.51% 29 The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).
Nine Months Ended June 30, -------------------------- 2005 2004 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ----------- ---------- ---------- ----------- ---------- ---------- Interest earning assets: Commercial and commercial mortgage loans(3) $ 676,340 $ 34,101 6.74% $ 358,255 $ 17,427 6.50% Consumer loans(1) 163,712 6,139 5.01 101,027 3,720 4.92 Residential mortgage loans(1) 431,565 18,980 5.88 393,407 17,504 5.94 ---------- ---------- ---------- ---------- Total loans 1,271,617 59,220 6.23 852,689 38,651 6.05 ---------- ---------- ---------- ---------- Securities-taxable 839,212 23,863 3.80 494,032 13,693 3.70 Securities-tax exempt(4) 55,303 2,355 5.69 35,143 1,447 5.50 Other earning assets 27,036 594 2.94 11,192 103 1.23 ---------- ---------- ---------- ---------- Total securities and other earning assets 921,551 26,812 3.89 540,367 15,243 3.77 ---------- ---------- ---------- ---------- Total interest-earning assets 2,193,168 86,032 5.24 1,393,056 53,894 5.17 ---------- ---------- ---------- ---------- ---------- ---------- Non-interest-earning assets 331,516 147,247 ---------- ---------- Total assets $2,524,684 $1,540,303 ========== ========== Interest bearing liabilities: NOW checking $ 153,192 386 0.34% $ 82,548 134 0.22% Savings, clubs and escrow 551,403 2,351 0.57 346,499 1,141 0.44 Money market accounts 227,810 1,883 1.11 144,264 601 0.56 Certificate accounts 418,572 6,587 2.10 302,918 3,805 1.68 ---------- ---------- ---------- ---------- Total interest-bearing deposits 1,350,977 11,207 1.11 876,229 5,681 0.87 Borrowings 385,610 9,609 3.33 157,207 3,720 3.16 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 1,736,587 20,816 1.60 1,033,436 9,401 1.22 ---------- ---------- ---------- ---------- ---------- ---------- Non-interest-bearing liabilities 375,013 248,963 ---------- ---------- Total liabilities 2,111,600 1,282,399 Stockholders' equity 413,084 257,904 ---------- ---------- Total liabilities and equity 2,524,684 1,540,303 ========== ========== Net interest rate spread 3.64% 3.95% ========== ========== Net earning assets $ 456,581 $ 359,620 ========== ========== Net interest margin 65,216 3.98% 44,493 4.27% ========== ========== ========== ========== Ratio of interest-earning assets to average interest-bearing liabilities 126.29% 134.81% ========== ========== Less tax equivalent adjustment (824) (507) ---------- ---------- Net interest income $ 64,392 $ 43,986 ========== ==========
---------- (3) Includes non-accrual loans (4) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. 30 The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands):
Nine Months Ended June 30, 2005 vs. 2004 Increase/(Decrease) Due to -------------------------- Volume (1) Rate (1) Total ---------- -------- -------- Interest-earning assets Commercial and commercial mortgage loans $ 15,970 $ 703 $ 16,673 Consumer loans 2,337 82 2,419 Residential mortgage loans 1,638 (162) 1,476 Securities-taxable 9,767 403 10,170 Securities-tax exempt(2) 853 55 908 Other earning assets 248 244 492 -------- -------- -------- Total interest income 30,813 1,325 32,138 -------- -------- -------- Interest-bearing liabilities Savings 815 396 1,210 Money market 470 812 1,282 NOW checking 149 103 252 Certificates of deposit 1,657 1,125 2,782 Borrowings 5,667 222 5,889 -------- -------- -------- Total interest expense 8,758 2,658 11,415 -------- -------- -------- Net interest margin 22,055 (1,333) 20,723 -------- -------- -------- Less tax equivalent adjustment(2) (415) 97 (317) -------- -------- -------- Net interest income $ 21,640 $ (1,236) $ 20,406 ======== ======== ========
(1) Changes due to increases in both rate and volume have been allocated proportionately to rate and volume. (2) Tax equivalent adjustment for tax exempt income is based on a 35% federal rate. Net interest income after provision for loan losses for the nine months ended June 30, 2005 was $64.4 million, compared to $44.0 million for the nine months ended June 30, 2004, an increase of $20.4 million or 46.4%. Interest income increased $31.8 million to $85.2 million for the nine months ending June 30, 2005, compared to $53.4 million for the 2004 period. The increase in interest income was largely due to a $800 million increase in average earning assets to $2.2 billion during the period ended June 30, 2005, as compared to $1.4 billion for the same period in the prior fiscal year. The increase is primarily due to the Warwick acquisition and continued internal growth. An increase in average yield on earning assets of eight basis points, from 5.17% to 5.24% ($1.8 million), on a fully taxable equivalent basis, also contributed to the increase in net interest income. Average yields increased in both the loan and securities portfolios, of 17 basis points and 12 basis points, respectively, with the overall yield on total interest-earning assets increasing in every category except for other loans (residential mortgages), which decreased six basis points in average yield. Interest expense increased by $11.4 million to $20.8 million for the nine months ended June 30, 2005 from $9.4 million for the nine month period ending June 30, 2004, as average interest-bearing liabilities increased by $703.2 million and the average cost of interest-bearing liabilities increased 39 basis points. The net interest margin declined by 29 basis points to 3.98%, while the net interest spread declined by 30 basis points to 3.64%, due to the assets acquired in the Warwick acquisition being recorded at then current market interest rates and the increase in short-term interest rates. This change in short-term rates, which affected funding costs to a larger degree than existing earning assets (which are primarily fixed 31 rate until maturity) was disproportionately large as compared to the change in longer term market interest rates, and thus has decreased net interest margin. The Federal Reserve has increased short-term rates nine times since May 2004, increasing the target federal funds rate from 1% to 3.25%. Conversely, the 10-year treasury rate has decreased from an average of 4.28% for the nine months ended June 30, 2004 to 4.20% for the nine months ended June 30, 2005. The bank's average cost of interest-bearing liabilities has increased, and, although the average asset yields increased this period, they did so at a slower pace due to continued market pressure. This has been offset somewhat by a greater increase of interest earning assets compared to interest bearing liabilities Should the yield curve continue to "flatten," a continued decline in net interest margin may occur, offsetting a portion of gains in net interest income generated from an increasing volume of assets. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level to absorb probable loan losses inherent in the existing portfolio. The Company recorded $525 and $575, respectively, in loan loss provisions during the nine months ended June 30, 2005 and 2004. Net charge-offs for the nine months ended June 30, 2005 were $506 compared to net charge-offs of $63 for the same period in 2004. (See Note 6 for further discussion). Non-interest income was $13.3 million for the nine months ended June 30, 2005 compared to $8.5 million for the nine months ended June 30, 2004. Deposit fees and service charges increased by $2.9 million, or 59.9%, of which $2.0 million was generated from the acquired Warwick and ENB branches, while $900,000 was primarily due to volume-driven increases in overdraft, non-sufficient funds, and ATM and debit card fees. Loan fees and late charges increased by $420,000 or 71.1% largely due to pre-payment penalties. Income derived from the Company's BOLI investments increased by $956,000 or 226.5% due to the additional BOLI investment and the death benefit previously discussed. Title insurance fee income derived from the new Hardenburgh Abstract Company, Inc., was $1.0 million. Gains on the sale of securities were $369,000 for the current nine-month period, compared to $1.9 million for the same period in the prior fiscal year. During the nine-month period ended June 30, 2005, the Company also recorded gains on sales of loans totaling $185,000 compared to $231,000 for the same period last year. For the year to date period ended June 30, 2005, there was income from the low income housing investment included above in the quarter to date information. Non-interest expenses for the nine months ended June 30, 2005 increased by $11.2 million, or 26.8%. Excluding the 2004 charge of $5.0 million, pre-tax, for the Charitable Foundation, non-interest expenses for the nine months ended June 30, 2005 increased by $16.2 million, or 44.1%, to $52.9 million, compared to $36.7 million for the nine months ended June 30, 2004. The acquisitions of ENB in January 2004 and Warwick in October 2004 played a major role in the increases in most categories. Compensation and employee benefits increased by $7.5 million, or 45.6%, to $24.0 million for the nine-month period ended June 30, 2005. The increase was primarily attributable to the acquisitions. Occupancy and office operations increased by $2.2 million, or 45.4%, for the nine months ended June 30, 2005, almost all of which was attributable to the acquisitions. Advertising and promotion increased $1.1 million or 69.7%, primarily as a result of the new brand identity the Company has unveiled and the additional promotions in the Orange County market. Amortization of core deposit intangible increased by $1.6 million as a result of acquired deposits. Data and check processing increased $1.0 million, or 38.9%, primarily due to the higher level of services related to the accounts acquired in the mergers and in the acquisition of the new HSBC South Fallsburg branch. Other expenses increased by $2.0 million, or 51.1%, primarily due to increases in correspondent bank expense, postage, telephone expense, loan servicing and credit report expenses, and insurance premium expense, all of which directly related to the increased size of the Bank following the mergers. ATM and debit card expense increased $383,000, or 67.8%, primarily as a result of the increase in the number of accounts. Income Taxes Income tax expense was $8.4 million for the nine months ended June 30, 2005 compared to $3.4 million expense for the same period in 2004. The effective tax rates were 34.6% and 33.3%, respectively. 32 Supplemental Reporting of Non-GAAP Results of Operations. The Company is providing supplemental reporting of its results on a "net operating" basis, from which the Company excludes the after-tax charge for expenses associated with merging acquired operations into the Company and excludes the after-tax charge for establishing the charitable foundation. Although "net operating income" as defined by the Company is not a GAAP measure, management believes that this information helps investors understand the effects of acquisition activity and the establishment of the charitable foundation on reported results. Merger integration costs were $149 ($0.003 per diluted share) and $34 ($0.00 per diluted share), after-tax for the three months ended June 30, 2005 and 2004, respectively. Similar merger expenses for the nine months ended June 30, 2005 and 2004 were $579 ($0.01 per diluted share) and $464 ($0.01 per diluted share) respectively. Income arising from the investment in the low-income housing partnership for the three and nine months ended June 30, 2005, was $409,000 net of taxes ($0.01 per share for both the three and nine months ended June 30, 2005). The after-tax effect of the establishment of the charitable foundation was $3.0 million ($0.08 per share for the nine months ended June 30, 2004). Net operating income on this basis for the most recent quarter was $5.4 million, an increase of 46.4% from $3.7 million in the prior year. Net operating income on this basis for the current nine-month period was $16.0 million, an increase of 56.6% from $10.2 million in the comparable period in fiscal 2004. Net operating income, as an annualized rate of return on average assets and average stockholders' equity, was 0.86% and 5.49% respectively, in the quarter ended June 30, 2005, compared with 0.83% and 4.28% in the quarter ended June 30, 2004. Net operating income, as an annualized rate of return on average assets and stockholders' equity, was 0.85% and 5.19%, respectively, for the nine months ended June 30, 2005, compared with 0.89% and 5.30%, respectively for the nine months ended June 30, 2004. Reconciliation of GAAP and Non-GAAP results of operations: A reconciliation of diluted earnings per share and net income with diluted net operating earnings per share and net operating income follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended June 30, June 30 -------------------- -------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Diluted cash earnings per share $ 0.13 $ 0.10 $ 0.36 $ 0.18 Charge for establishment of Charitable Foundation(1) -- -- -- 0.08 Income from low-income housing partnership(1) (0.01) -- (0.01) -- Merger integration expenses(1) 0.00 -- 0.01 0.01 ------- ------- ------- ------- Diluted net operating earnings per share $ 0.12 $ 0.10 $ 0.36 $ 0.27 ======= ======= ======= ======= Net income $ 5,659 $ 3,654 $15,854 $ 6,771 Charge for establishment of Charitable Foundation(1) -- -- -- 3,000 Income from low-income housing partnership(1) (409) -- (409) -- Merger integration expenses(1) 149 34 579 464 ------- ------- ------- ------- Net operating income $ 5,399 $ 3,688 $16,024 $10,235 ======= ======= ======= =======
(1) After related tax effect at 40% marginal rate Liquidity and Capital Resources ------------------------------- The objective of the Company's liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the Company's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturities of securities and short-term investments, and proceeds from sales of loans originated for sale and securities available for sale. Maturities and scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. 33 The Company's primary investing activities are the origination of both residential one- to four-family and commercial mortgage loans, and the purchase of investment securities and mortgage-backed securities. During the nine-months ended June 30, 2005 and June 30, 2004, loan originations, excluding loans originated for sale, totaled $330.1 million and $251.3 million, respectively, and purchases of securities totaled $375.4 million and $452.6 million, respectively. For the nine-month periods ended June 30, 2005 and 2004, these investing activities were funded primarily by principal repayments on loans, by proceeds from sales and maturities of securities, and by deposit growth. Loan origination commitments totaled $296.9 million at June 30, 2005. The Company anticipates that it will have sufficient funds available to meet current loan commitments. At September 30, 2004 the Company had investments of $13.2 million in BOLI contracts. The Company recorded an additional $13.3 million in BOLI as a result of the Warwick acquisition. In April 2005, the Company invested an additional $10.0 million in BOLI contracts. Such investments are illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, the appeal of non-deposit investments, and other factors. Excluding the Warwick and HSBC acquisitions, the net increase in total deposits for the nine months ended June 30, 2005 was $10.1 million, compared to a $44.3 million increase, which excludes the deposits acquired from ENB, for the nine months ended June 30, 2004. On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, the Company became the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Federal were sold to investors. In addition, the Company simultaneously completed its acquisition of ENB, located in Ellenville, New York. The Company sold 19,573,000 shares of common stock at $10.00 per share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The Company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of Provident Federal as of January 14, 2004 was converted into 4.4323 new shares of the Company's common stock. Shareholders of ENB as of the close of business on January 14, 2004 received total merger consideration of approximately $76.47 million, consisting of 3,969,676 shares of common stock of the Company and approximately $36.77 million in cash. Shareholders of Warwick as of the close of business on October 1, 2004 received total merger consideration of approximately $147.2 million, consisting of 6,257,896 shares of common stock of the Company and approximately $72.6 million in cash. The Company monitors its liquidity position on a daily basis. We generally remain fully invested and utilize additional sources of funds through Federal Home Loan Bank of New York overnight and term advances, of which $204.4 million were outstanding at June 30, 2005. The Company has the ability to borrow an additional $257,703 million under its credit facilities with the Federal Home Loan Bank of New York. The Company may borrow additional amounts by pledging securities not required to be pledged for other purposes with a market value of $596,881 as of June 30,2005. At June 30, 2005, the Bank exceeded all of its regulatory capital requirements with a Tier 1 capital (leverage) level of $198.5million, or 8.3% of adjusted assets (which is above the required level of $95.4 million, or 4.0%) and a total risk-based capital level of $219.3 million, or 13.2% of risk-weighted assets (which is above the required level of $132.6 million, or 8.0%). Regulations require leverage and total risk-based capital ratios of 5.0% and 10.0%, respectively, in order to be classified as well-capitalized. In performing this calculation, the intangible assets recorded in the NBF, ENB, Warwick, and HSBC acquisitions are deducted from capital and from total adjusted assets for purposes of regulatory capital measures. At June 30, 2005, the Bank exceeded all capital requirements for the well-capitalized classification. These capital requirements, which are applicable to the Bank only, do not consider additional capital retained at the holding company level. 34 The following table sets forth the Bank's regulatory capital position at June 30, 2005 and September 30, 2004, compared to OTS requirements.
OTS Requirements ---------------- Minimum Capital For Classification as Bank Actual Adequacy Well Capitalized ----------- --------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) ----------- June 30, 2005 ------------- Tangible Capital $198,535 8.3% $ 35,761 1.5% $ -- --% Tier 1 (core) capital 198,535 8.3 95,363 4.0 119,204 5.0 Risk-based capital: Tier 1 198,535 12.0 -- -- 99,443 6.0 Total 219,271 13.2 132,590 8.0 165,738 10.0 September 30, 2004 ------------------ Tangible Capital $189,486 11.3% $ 25,285 1.5% $ -- --% Tier 1 (core) capital 189,486 11.3 67,427 4.0 84,284 5.0 Risk-based capital: Tier 1 189,486 16.6 -- -- 68,593 6.0 Total 203,776 17.8 91,458 8.0 114,322 10.0
Recent Accounting Standards In December 2003, the FASB issued FASB Interpretation No. 46 (revised), Consolidation of Variable Interest Entities ("FIN 46R"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. As a public company that is not a small business issuer (as defined in applicable SEC regulations), the Company is required to apply FIN 46R to variable interests generally as of March 31, 2004 and to special-purpose entities as of December 31, 2003. For any VIE's that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts and any difference between the net amount added to the balance sheet and any previously recognized interest would be recorded as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R did not and is not expected to have a significant effect on the Company's consolidated financial statements. 35 In December 2003, the FASB also issued Statement of Financial Accounting Standards No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition of those plans. SFAS No. 132R retains and revises the disclosure requirements contained in the original standard. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. As a public company, the Company was required to provide substantially all of the revised disclosures beginning with its September 30, 2004 consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and requires that an issuer classify financial instruments that are considered a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 had no impact on the Company's consolidated statement of financial condition or results of operations upon implementation during the third quarter of 2003. In November 2003, the FASB also issued a staff position that indefinitely deferred the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests. The Company currently believes that the deferral of the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests will not have any impact on its consolidated statement of financial condition or results of operations when implemented. The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal Reserve Board announcing potential future reconsideration of trust preferred securities as elements of regulatory capital. The Company currently has no issuances of trust preferred securities. Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF 03-1") was issued. EITF 03-1 provides guidance for determining the meaning of "other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates ("other than temporary impairment") must be recorded for as are loans under the AICPA's Statement of Position 03-3 ("SOP 03-3") on purchased loans, which provides guidance on the treatment of potential credit losses (unrecoverable principle) and decreased, or lower then expected yields. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effects of the method used on reported results. 36 In December 2004, the FASB Issued Statement of Financial Accounting Standards No. 123R (Statement 123R), "Share-Based Payments", the provisions of which become effective for the corporation in fiscal 2006. This Statement eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. Statement 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. While the fair-value-based method prescribed by Statement 123R is similar to the fair-value-based method disclosed under the provisions of Statement 123 in most respects, there are some differences. The Company estimates that annual expense using the Black Sholes method beginning in fiscal 2006 will be approximately $1,151 or $939 after tax and the diluted earnings per share impact will be $0.02. This impact does not include the effect of reload options or forfeitures or options accelerations due to termination or retirement of personnel, the effect of which cannot be measured with any degree of certainty. In May 2005, the FASB Issued Statement of Financial Accounting Standards No. 154 ("SFAS 154"), "Accounting changes and error corrections," replacing APB Opinion No. 20 and FASB Statement No. 3, which changes the treatment and reporting requirements for both accounting errors and changes of accounting principles, and provides guidance on determining the treatment of the retrospective application of a change. This Statement applies to all voluntary changes in accounting principles. At this time, management believes this statement will have no impact on the reporting of our operations or financial condition. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's most significant form of market risk is interest rate risk, as the majority of its assets and liabilities are sensitive to changes in interest rates need Quantitative and qualitative disclosure about market risk is presented at September 30, 2004 in Item 7A in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 14, 2004. The following is an update of the discussion provided therein. The table below sets forth, as of June 30, 2005, the estimated changes in our NPV and our net tax equivalent 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.
NPV Net Interest Income --------------------------------------- ------------------------------------------- Estimated Increase Estimated Increase (Decrease) Change in (Decrease) in NPV Estimated in Net Interest Income Interest Rates Estimated ------------------------ Net Interest ----------------------------- (basis points) NPV Amount Percent Income Amount Percent -------------- --------- --------- ------- ------------ --------- ------- (Dollars in thousands) +300 $262,244 $(81,036) -23.61% $ 87,449 $ (1,619) -1.82% +200 291,346 (51,934) -15.13% 88,174 (894) -1.00% +100 319,772 (23,508) -6.85% 88,821 (247) -0.28% 0 343,280 -- 0.00% 89,068 -- 0.00% -100 350,106 6,826 1.99% 83,458 (5,610) -6.31% -200 348,408 5,128 1.49% 83,609 (5,459) -6.13%
37 The table set forth above indicates that at June 30, 2005, in the event of an immediate 100 basis point decrease in interest rates, we would be expected to experience a 1.99% increase in NPV and a 6.31% 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 15.13% decrease in NPV and a 1.00% decrease in net interest income. The Bank's interest rate profile has not changed significantly since September 30, 2004. Although the acquisition of Warwick was completed, the nature of the assets and liabilities acquired is consistent with the Bank's previously existing assets. As a result, the Bank has maintained an overall relatively neutral net interest income sensitivity position. As the Federal Reserve has increased term rates nine times since May 2004, increasing the target Federal Funds Rate from 1% to 3.25%, while longer term interest rates (10 year treasury) have only decreased from an average of 4.28% for the nine months ended June 30, 2004 to 4.20% for the nine months ended June 30, 2005, the Bank's average cost of interest bearing liabilities has increased faster than the average increase in asset yields. Should the yield curve continue to "flatten", a continued decline in net interest margin may occur, offsetting a portion of gains in net interest income arising from increasing volume of assets generated. Conversely, should market interest rates continue to fall below today's level the Company's net interest margin could also be negatively affected, as competitive pressures could keep the Bank from lowering rates on its deposits, and prepayments and curtailments on assets may continue. Such movements may cause a decrease in the interest rate spread and net interest margin. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. General: The Company's largest component of market risk continues to be interest rate risk. The Company is not subject to foreign currency exchange or commodity price risk. At June 30, 2005, neither the Company nor the Bank owned any trading assets, nor did they utilize hedging transactions such as interest rate swaps and caps. Interest Rate Risk Compliance: The Bank continues to monitor the impact of interest rate volatility upon net interest income and net portfolio value in the same manner as at September 30, 2004. There have been no changes in the board approved limits of acceptable variances in net interest income and net portfolio value change through June 30, 2005 compared to September 30, 2004, and the impact of possible changes within the Company's models continue to fall within all board approved limits for potential interest rate volatility. Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of the end of the period covered by this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time frames specified in the SEC's rules and forms. There were no significant changes made in the Company's internal controls over financial reporting or in other factors that could significantly affect the Company's internal control over financial reporting during the period covered by this report. 38 PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involved amounts which are believed to be immaterial to the consolidated financial condition and operations of the Company. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) - (d) Not applicable (e) Issuer Purchases of Equity Securities -------------------------------------
Total Number Average Total Number of Maximum Number of Shares (or Price Paid Shares (or Units) (or Approximate Units) Purchased(1) per Share Purchased as Part Dollar Value) of (or Unit) of Publicly Shares (or Units) Announced Plans that may yet be or Programs(2) Purchased Under the Period (2005) Plans or Programs April 1 - April 30 146,500 $ 10.62 146,500 960,700 May 1 - May 31 990,400 11.11 990,400 2,170,300 June 1 - June 30 519,700 11.78 519,700 1,650,600 --------- --------- --------- Total 1,656,600 $ 11.28 1,656,600 ========= ========= =========
---------- (1) The total number of shares purchased during the period1s indicated includes shares deemed to have been received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, as is permitted under the Company's stock benefit plans and shares repurchased as part of a previously authorized repurchase program. (2) The Company announced in May, 2005 that it authorized the repurchase of 2,200,000 shares, or approximately 5% of common shares currently outstanding, having completed its first repurchase program of 2,295,000 shares in May 2005. 39 Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits Exhibit Number Description -------------- ----------- 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 40 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Provident New York Bancorp -------------------------- (Registrant) By: /s/ George Strayton ---------------------------- George Strayton President and Chief Executive Officer (Duly Authorized Representative) Date: August 8, 2005 By: /s/ Paul A. Maisch ---------------------------- Paul A. Maisch Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) Date: August 8, 2005 41