10-Q 1 pbny-20130630master10q.htm 10-Q PBNY-2013 06.30 Master 10Q

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, 2013
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: 001-35385
______________________________ 
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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
¨
  
Accelerated Filer
 
x
 
 
 
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Classes of Common Stock
  
Shares Outstanding as of August 8, 2013
$0.01 per share
  
44,352,546


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
QUARTERLY PERIOD ENDED JUNE 30, 2013

 
PART I. FINANCIAL INFORMATION
 
Item 1. 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
(Dollars in thousands, except per share data)


 
 
     
 
June 30,
2013
 
September 30,
2012
ASSETS
 
 
 
Cash and due from banks
$
109,166

 
$
437,982

Securities:
 
 
 
Available for sale
889,747

 
1,010,872

Held to maturity, at amortized cost (fair value of $172,405 and $146,324 at June 30, 2013 and September 30, 2012, respectively)
175,977

 
142,376

Total securities
1,065,724

 
1,153,248

Assets held for sale
—

 
4,550

Loans held for sale
1,539

 
7,505

Gross loans
2,336,534

 
2,119,472

Allowance for loan losses
(28,374
)
 
(28,282
)
Total loans, net
2,308,160

 
2,091,190

Federal Home Loan Bank (“FHLB”) stock, at cost
28,368

 
19,249

Accrued interest receivable
11,320

 
10,513

Premises and equipment, net
37,473

 
38,483

Goodwill
163,117

 
163,247

Core deposit and other intangible assets
6,201

 
7,164

Bank owned life insurance (“BOLI”)
60,412

 
59,017

Foreclosed properties
4,376

 
6,403

Other assets
28,573

 
24,431

Total assets
$
3,824,429

 
$
4,022,982

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Deposits
$
2,739,214

 
$
3,111,151

FHLB and other borrowings
552,805

 
345,176

Mortgage escrow funds
25,915

 
11,919

Other liabilities
26,330

 
63,614

Total liabilities
3,344,264

 
3,531,860

Commitment and contingent liabilities


 


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; 52,188,056 issued; 44,353,276 and 44,173,470 shares outstanding at June 30, 2013 and September 30, 2012, respectively)
522

 
522

Additional paid-in capital
403,424

 
403,541

Unallocated common stock held by employee stock ownership plan (“ESOP”)
(5,493
)
 
(5,638
)
Treasury stock, at cost (7,834,780 and 8,014,586 shares at June 30, 2013 and September 30, 2012, respectively)
(88,517
)
 
(90,173
)
Retained earnings
187,886

 
175,971

Accumulated other comprehensive (loss) income, net of taxes
(17,657
)
 
6,899

Total stockholders’ equity
480,165

 
491,122

Total liabilities and stockholders’ equity
$
3,824,429

 
$
4,022,982


See accompanying notes to unaudited consolidated financial statements
3
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars in thousands, except per share data)


 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Interest and dividend income:
 
 
 
 
 
 
 
Loans
$
26,638

 
$
22,312

 
$
80,087

 
$
66,614

Taxable securities
4,189

 
4,224

 
12,761

 
12,629

Non-taxable securities
1,500

 
1,581

 
4,447

 
4,954

Other earning assets
266

 
228

 
863

 
727

Total interest and dividend income
32,593

 
28,345

 
98,158

 
84,924

Interest expense:
 
 
 
 
 
 
 
Deposits
1,151

 
1,262

 
4,872

 
3,792

Borrowings
3,125

 
3,001

 
9,227

 
9,907

Total interest expense
4,276

 
4,263

 
14,099

 
13,699

Net interest income
28,317

 
24,082

 
84,059

 
71,225

Provision for loan losses
3,900

 
2,312

 
9,450

 
7,112

Net interest income after provision for loan losses
24,417

 
21,770

 
74,609

 
64,113

Non-interest income:
 
 
 
 
 
 
 
Deposit fees and service charges
2,615

 
2,816

 
8,129

 
8,312

Net gain on sale of securities
1,945

 
2,412

 
5,590

 
7,300

Other than temporary impairment on securities
—

 
(6
)
 
(73
)
 
(542
)
Loss recognized in other comprehensive income
—

 
—

 
41

 
498

           Net impairment loss in earnings
—

 
(6
)
 
(32
)
 
(44
)
Bank owned life insurance
496

 
518

 
1,496

 
1,538

Gain on sale of loans
429

 
578

 
1,682

 
1,468

Investment management fees
613

 
802

 
1,740

 
2,367

Other
483

 
859

 
2,487

 
2,185

Total non-interest income
6,581

 
7,979

 
21,092

 
23,126

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
11,320

 
10,845

 
35,424

 
33,165

Stock-based compensation
547

 
326

 
1,726

 
885

Merger-related expense
1,516

 
451

 
2,058

 
997

Occupancy and office operations
3,423

 
3,388

 
11,187

 
10,498

Advertising and promotion
307

 
440

 
1,086

 
1,480

Professional fees
526

 
1,128

 
2,653

 
3,111

Data and check processing
588

 
705

 
2,060

 
2,087

Foreclosed property expense
(28
)
 
428

 
1,172

 
1,045

Other
3,590

 
3,451

 
10,308

 
9,905

Total non-interest expense
21,789

 
21,162

 
67,674

 
63,173

Income before income tax expense
9,209

 
8,587

 
28,027

 
24,066

Income tax expense
2,833

 
2,378

 
8,102

 
6,439

Net income
$
6,376

 
$
6,209

 
$
19,925

 
$
17,627

Weighted average common shares basic
43,801,867

 
37,302,693

 
43,766,402

 
37,278,507

Weighted average common shares diluted
43,906,158

 
37,330,467

 
43,850,601

 
37,292,366

Per common share basic
$
0.15

 
$
0.17

 
$
0.46

 
$
0.47

Per common share diluted
$
0.15

 
$
0.17

 
$
0.45

 
$
0.47


See accompanying notes to unaudited consolidated financial statements
4
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(Dollars in thousands, except per share data)

 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
6,376

 
$
6,209

 
$
19,925

 
$
17,627

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized holding (losses) gains on securities available for sale net of related tax (benefit) expense of ($12,121), $1,223 and ($15,161), $3,313
(17,727
)
 
1,790

 
(22,173
)
 
4,846

Less:
 
 
 
 
 
 
 
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $790, $980 and $2,270, $2,965
1,155

 
1,432

 
3,320

 
4,335

Reclassification adjustment for other than temporary impaired losses included in net income, net of related income tax benefit of $0, $3 and $13, $18
—

 
(3
)
 
(19
)
 
(26
)
 
(18,882
)
 
361

 
(25,474
)
 
537

Change in funded status of defined benefit plans, net of related income tax expense of $210, $230 and $629, $690
306

 
337

 
918

 
1,010

Other comprehensive (loss) income
(18,576
)
 
698

 
(24,556
)
 
1,547

Total comprehensive (loss) income
$
(12,200
)
 
$
6,907

 
$
(4,631
)
 
$
19,174



See accompanying notes to unaudited consolidated financial statements
5
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(Dollars in thousands, except per share data)

 
Number of
shares
 
Common
stock
 
Additional
paid-in
capital
 
Unallocated
ESOP
shares
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balance at September 30, 2012
44,173,470

 
$
522

 
$
403,541

 
$
(5,638
)
 
$
(90,173
)
 
$
175,971

 
$
6,899

 
$
491,122

Net income
—

 
—

 
—

 
—

 
—

 
19,925

 
—

 
19,925

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(24,556
)
 
(24,556
)
Deferred compensation transactions
—

 
—

 
31

 
—

 
—

 
—

 
—

 
31

Stock option transactions, net
6,250

 
—

 
519

 
—

 
72

 
(29
)
 
—

 
562

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

 
—

 
111

 
145

 
—

 
—

 
—

 
256

Recognition and Retention Plan (“RRP”) Awards, net
173,556

 
—

 
(778
)
 
—

 
1,584

 
—

 
—

 
806

Cash dividends paid ($0.18 per common share)
—

 
—

 
—

 
—

 
—

 
(7,981
)
 
—

 
(7,981
)
Balance at June 30, 2013
44,353,276

 
$
522

 
$
403,424

 
$
(5,493
)
 
$
(88,517
)
 
$
187,886

 
$
(17,657
)
 
$
480,165


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 per share data)

 
For the nine months ended June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
19,925

 
$
17,627

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
9,450

 
7,112

Loss on sales of real estate owned
181

 
427

Depreciation of premises and equipment
3,200

 
3,488

Amortization of intangibles
963

 
911

Net gain on loans held for sale
(1,682
)
 
(1,468
)
Other than temporary impairment loss recorded in earnings
32

 
44

Net gain on sale of securities
(5,590
)
 
(7,300
)
Fair value loss on interest rate cap
1

 
57

Net gain on sale of premises and equipment
(5
)
 
(5
)
Net amortization of premium on securities
2,341

 
(128
)
(Amortization) accretion on borrowings
(280
)
 
1

Accretion of early extinguishment fees on borrowings
1,099

 
1,092

ESOP and RRP expense
1,208

 
474

Stock option compensation expense
518

 
412

Originations of loans held for sale
(73,631
)
 
(53,107
)
Proceeds from sales of loans held for sale
81,279

 
53,382

Increase in cash surrender value of bank owned life insurance
(1,395
)
 
(1,539
)
Net changes in accrued interest receivable and payable
(1,173
)
 
581

Other adjustments (principally net changes in other assets and other liabilities)
(22,033
)
 
13,158

Net cash provided by operating activities
14,408

 
35,219

Cash flows from investing activities:
 
 
 
Purchases of available for sale securities
(324,463
)
 
(338,469
)
Purchases of held to maturity securities
(83,922
)
 
(83,574
)
Proceeds from maturities, calls and other principal payments on securities:
 
 
 
Available for sale
144,654

 
137,306

Held to maturity
48,484

 
21,916

Proceeds from sales of securities available for sale
261,865

 
235,559

Proceeds from sales of securities held to maturity
1,234

 
—

Loan originations
(818,395
)
 
(551,305
)
Loan principal payments
589,488

 
392,153

Proceeds from sales of other real estate owned
3,288

 
1,745

Purchase of FHLB stock, net
(9,119
)
 
(623
)
Purchases of premises and equipment
(2,185
)
 
(1,474
)
Proceeds from the sale of HVIA assets
4,738

 
—

Net cash used in investing activities
(184,333
)
 
(186,766
)
Cash flows from financing activities:
 
 
 
Net (decrease) increase in transaction, savings and money market deposits
(338,538
)
 
84,016

Net decrease in time deposits
(33,399
)
 
(48,620
)
Net increase (decrease) in short-term borrowings
217,000

 
(10,000
)

See accompanying notes to unaudited consolidated financial statements
7
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands, except per share data)

 
For the nine months ended June 30,
 
2013
 
2012
Gross repayments of long-term borrowings
(10,190
)
 
(5,183
)
Restructured debt
—

 
5,000

Payment of penalties on restructured borrowings
—

 
(278
)
Net decrease in senior note borrowings
—

 
(51,499
)
Net increase in mortgage escrow funds
13,996

 
14,522

Stock option transactions
190

 
153

Other stock-based compensation transactions
31

 
151

Cash dividends paid
(7,981
)
 
(6,827
)
Net cash used in financing activities
(158,891
)
 
(18,565
)
Net decrease in cash and cash equivalents
(328,816
)
 
(170,112
)
Cash and cash equivalents at beginning of period
437,982

 
281,512

Cash and cash equivalents at end of period
$
109,166

 
$
111,400

Supplemental information:
 
 
 
Interest payments
$
14,665

 
$
13,963

Income tax payments
4,700

 
1,644

Real estate acquired in settlement of loans
2,487

 
4,482

Unsettled securities transactions
—

 
9,314



See accompanying notes to unaudited consolidated financial statements
8
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


 

1. Basis of Presentation

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident” or the “Company”) and its consolidated subsidiaries. Provident Bank (the “Bank”) is the Company’s principal subsidiary and accounts for substantially all of the Company’s assets and results from operations. The Company’s other subsidiaries include:
•
PBNY Holdings, Inc., formerly known as PB Madison Holding, Inc., a holding company for the Company’s 50% joint venture in PB Madison Title Agency, L.P., a title insurance agency, which provides title searches and title insurance for residential and commercial real estate;
•
LandSave Development, LLC an inactive entity formally known as Hudson Valley Investment Advisors, LLC, the assets of which were sold in November 2012, with modest results from operations included in the Company’s financial statements for fiscal 2013; and
•
Provident Risk Management, Inc., a Vermont captive insurance company.

The Bank’s wholly-owned subsidiaries include:
•
Provident Municipal Bank (“PMB”) which is a limited-purpose, New York State-chartered commercial bank formed to accept deposits from municipalities in the Bank’s market area;
•
Provident REIT, Inc. and WSB Funding, Inc. which are real estate investment trusts that hold a portion of the Bank’s real estate mortgage loans;
•
Provest Services Corp. I, which has an investment in a low-income housing partnership;
•
Provest Services Corp. II, a New York licensed insurance agent, which has engaged a third-party provider to sell mutual funds, annuities and insurance to the Bank’s customers; and
•
Subsidiaries that hold foreclosed properties acquired by the Bank.

Intercompany transactions and balances are eliminated in consolidation.

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 its 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, 2013 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2013. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form10-K for the fiscal year ended September 30, 2012.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. A material estimate that is particularly susceptible to near-term change is the allowance for loan loss (see note 3), which reflects the application of a critical accounting policy.


9
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


2. Securities

A summary of the amortized cost and estimated fair value of our securities is presented below.

 
June 30, 2013
 
September 30, 2012
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
133,835

 
$
1,031

 
$
(3,614
)
 
$
131,252

 
$
155,601

 
$
5,806

 
$
—

 
$
161,407

Freddie Mac
48,570

 
910

 
(267
)
 
49,213

 
81,509

 
3,751

 
—

 
85,260

Ginnie Mae
3,717

 
160

 
—

 
3,877

 
4,488

 
290

 
—

 
4,778

CMO/Other MBS
176,906

 
482

 
(2,583
)
 
174,805

 
191,867

 
1,787

 
(590
)
 
193,064

Total residential mortgage-backed securities
363,028

 
2,583

 
(6,464
)
 
359,147

 
433,465

 
11,634

 
(590
)
 
444,509

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
303,579

 
3

 
(12,193
)
 
291,389

 
404,820

 
4,013

 
(10
)
 
408,823

Corporate bonds
93,987

 
—

 
(4,135
)
 
89,852

 
—

 
—

 
—

 
—

Obligations of states and political subdivisions
146,678

 
4,793

 
(2,112
)
 
149,359

 
146,136

 
10,349

 
(4
)
 
156,481

Equities
—

 
—

 
—

 
—

 
1,087

 
—

 
(28
)
 
1,059

Total other securities
544,244

 
4,796

 
(18,440
)
 
530,600

 
552,043

 
14,362

 
(42
)
 
566,363

Total available for sale
$
907,272

 
$
7,379

 
$
(24,904
)
 
$
889,747

 
$
985,508

 
$
25,996

 
$
(632
)
 
$
1,010,872


10
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



 
June 30, 2013
 
September 30, 2012
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair value
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair value
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
21,504

 
$
52

 
$
(75
)
 
$
21,481

 
$
28,637

 
$
1,212

 
$
—

 
$
29,849

Freddie Mac
29,258

 
104

 
(3
)
 
29,359

 
42,706

 
1,347

 
—

 
44,053

CMO/Other MBS
27,350

 
26

 
(317
)
 
27,059

 
27,921

 
226

 
(28
)
 
28,119

Total residential mortgage-backed securities
78,112

 
182

 
(395
)
 
77,899

 
99,264

 
2,785

 
(28
)
 
102,021

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
77,339

 
—

 
(3,331
)
 
74,008

 
22,236

 
106

 
—

 
22,342

Obligations of states and political subdivisions
19,026

 
541

 
(571
)
 
18,996

 
19,376

 
1,059

 
—

 
20,435

Other
1,500

 
14

 
(12
)
 
1,502

 
1,500

 
26

 
—

 
1,526

Total other securities
97,865

 
555

 
(3,914
)
 
94,506

 
43,112

 
1,191

 
—

 
44,303

Total held to maturity
$
175,977

 
$
737

 
$
(4,309
)
 
$
172,405

 
$
142,376

 
$
3,976

 
$
(28
)
 
$
146,324



The amortized cost and estimated fair value of securities at June 30, 2013 are presented below by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities are shown separately since they are not due at a single maturity date. Equities are shown separately since there is no maturity date.
 
 
June 30, 2013
 
Available for sale
 
Held to maturity
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Remaining period to contractual maturity:
 
 
 
 
 
 
 
One year or less
$
2,328

 
$
2,348

 
$
2,991

 
$
3,022

One to five years
85,325

 
85,481

 
2,291

 
2,373

Five to ten years
426,359

 
412,747

 
85,628

 
82,350

Greater than ten years
30,232

 
30,024

 
6,955

 
6,761

Total other securities
544,244

 
530,600

 
97,865

 
94,506

Residential mortgage-backed securities
363,028

 
359,147

 
78,112

 
77,899

Total securities
$
907,272

 
$
889,747

 
$
175,977

 
$
172,405



11
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


Sales of securities were as follows:
 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Available for sale securities:
 
 
 
 
 
 
 
Proceeds from sales
$
125,061

 
$
84,902

 
$
261,865

 
$
235,559

Gross realized gains
2,014

 
2,412

 
5,632

 
7,313

Gross realized losses
(69
)
 
—

 
(79
)
 
(13
)
Income tax expense on realized gains
598

 
668

 
1,605

 
1,953

Held to maturity securities: (1)
 
 
 
 
 
 
 
Proceeds from sales
—

 
—

 
1,234

 
—

Gross realized gains
—

 
—

 
37

 
—

Income tax expense on realized gains
—

 
—

 
11

 
—

(1) During the second quarter ended March 31, 2013, the Company sold eight held to maturity securities after the Company had already collected at least 85% of the principal balance outstanding at acquisition.











12
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following table summarizes those securities with unrealized losses, segregated by the length of time in a continuous unrealized loss position:
 
 
Continuous unrealized loss position
 
 
 
 
 
Less than 12 Months
 
12 months or longer
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
121,556

 
$
(3,881
)
 
$
—

 
$
—

 
$
121,556

 
$
(3,881
)
CMO/Other MBS
117,910

 
(2,583
)
 
—

 
—

 
117,910

 
(2,583
)
Total residential mortgage-backed securities
239,466

 
(6,464
)
 
—

 
—

 
239,466

 
(6,464
)
        Federal agencies
291,123

 
(12,193
)
 
—

 
—

 
291,123

 
(12,193
)
Obligations of states and political subdivisions
43,720

 
(2,103
)
 
112

 
(9
)
 
43,832

 
(2,112
)
Corporate bonds
89,852

 
(4,135
)
 
—

 
—

 
89,852

 
(4,135
)
Total
$
664,161

 
$
(24,895
)
 
$
112

 
$
(9
)
 
$
664,273

 
$
(24,904
)
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
CMO/Other MBS
$
64,065

 
$
(590
)
 
$
—

 
$
—

 
$
64,065

 
$
(590
)
Federal agencies
4,993

 
(10
)
 
—

 
—

 
4,993

 
(10
)
Obligations of states and political subdivisions
716

 
(4
)
 
—

 
—

 
716

 
(4
)
Equities
—

 
—

 
809

 
(28
)
 
809

 
(28
)
Total
$
69,774

 
$
(604
)
 
$
809


$
(28
)
 
$
70,583

 
$
(632
)

 
Continuous unrealized loss position
 
 
 
 
 
Less than 12 Months
 
12 Months or longer
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
26,016

 
$
(78
)
 
$
—

 
$
—

 
$
26,016

 
$
(78
)
CMO/Other MBS
23,004

 
(317
)
 
—

 
—

 
23,004

 
(317
)
Total residential mortgage-backed securities
49,020

 
(395
)
 
—

 
—

 
49,020

 
(395
)
Federal agencies
74,008

 
(3,331
)
 
—

 
—

 
74,008

 
(3,331
)
Obligations of states and political subdivisions
9,525

 
(571
)
 
—

 
—

 
9,525

 
(571
)
Other
238

 
(12
)
 
—

 
—

 
238

 
(12
)
Total
$
132,791

 
$
(4,309
)
 
$
—

 
$
—

 
$
132,791

 
$
(4,309
)
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
CMO/Other MBS
$
13,189

 
$
(28
)
 
$
—

 
$
—

 
$
13,189

 
$
(28
)
Total
$
13,189

 
$
(28
)
 
$
—

 
$
—

 
$
13,189

 
$
(28
)


13
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


Declines in the fair value of available for sale and held to maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses (“OTTI”), management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Substantially all of the unrealized losses at June 30, 2013 relate to investment grade debt securities and are attributable to changes in market interest rates subsequent to purchase. At June 30, 2013, a total of 324 available for sale securities were in a continuous unrealized loss position for less than 12 months and one security was in that position for 12 months or longer. For debt securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.

Within the CMO category of the available for sale portfolio there are four private label CMOs that had an amortized cost of $3,934 and a fair value (carrying value) of $3,963 as of June 30, 2013. Two of the four securities are considered to be other than temporarily impaired and are below investment grade. The impaired private label CMOs had an amortized cost of $3,578 and a fair value of $3,601 at June 30, 2013. There were no impairment charges on these securities for the three months ended June 30, 2013 and June 30, 2012, respectively. Impairment charges on these securities were $14 and $44 for the nine months ended June 30, 2013 and June 30, 2012, respectively. At June 30, 2013 total cumulative impairment charges on these two private label CMOs were $136. The remaining two securities are rated at or above Ba1 and were performing as of June 30, 2013 and are expected to perform based on current information. In determining whether OTTI existed on these debt securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit risk and liquidity risk, and determined that no losses were expected. The Company will continue to evaluate its investment securities portfolio for OTTI on at least a quarterly basis.

Excluding FHLB and New York Business Development Corporation stock, the Company owned one equity security with a balance of $809 at September 30, 2012, which was sold during the quarter ended June 30, 2013. The Company incurred no OTTI on this equity security during the three months ended June 30, 2013 and June 30, 2012. For the nine months ended June 30, 2013 and 2012, the Company incurred OTTI on this security of $19 and $0, respectively.

Securities pledged for borrowings at FHLB and other institutions, and securities pledged for municipal deposits and other purposes were as follows:
 
June 30, 2013
 
September 30, 2012
Available for sale securities pledged for borrowings, at fair value
$
203,133

 
$
144,041

Available for sale securities pledged for municipal deposits, at fair value
401,172

 
703,261

Held to maturity securities pledged for borrowings, at amortized cost
54,006

 
46,538

Held to maturity securities pledged for municipal deposits, at amortized cost
72,058

 
138,855

Total securities pledged
$
730,369

 
$
1,032,695



14
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


3. Loans

The composition of the Company’s loan portfolio, excluding loans held for sale, was the following:
 
 
June 30, 2013
 
September 30, 2012
Residential mortgage
$
369,613

 
$
350,022

Commercial:
 
 
 
       Commercial real estate
1,210,248

 
1,072,504

       Commercial & industrial
453,145

 
343,307

       Acquisition, development & construction
106,198

 
144,061

Total commercial
1,769,591

 
1,559,872

Consumer:
 
 
 
Home equity lines of credit
159,413

 
165,200

Homeowner
30,103

 
34,999

Other consumer loans
7,814

 
9,379

Total consumer
197,330

 
209,578

Total loans
2,336,534

 
2,119,472

Allowance for loan losses
(28,374
)
 
(28,282
)
Total loans, net
$
2,308,160

 
$
2,091,190


Total loans include net deferred loan origination costs of $850 at June 30, 2013 and net deferred loan origination fees of ($310) at September 30, 2012.

A substantial portion of the Company’s loan portfolio is secured by commercial real estate and residential mortgage loans located in the Company’s market area, primarily in Rockland and Orange Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam and Westchester Counties of New York, Bergen County, New Jersey and New York City. The ability of the Company’s borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company’s lending area. Acquisition, development and construction loans in particular, are considered by management to be of greater credit risk than other loan types such as loans to fund the purchase of a primary residence due to the generally larger loan amounts and dependency on income production or sale of the real estate.

Included in the Company’s loan portfolio are loans acquired from Gotham Bank. These loans were recorded at fair value at acquisition. These loans carried a balance of $152,825 and $205,764 at June 30, 2013 and September 30, 2012, respectively. The discount associated with these loans which includes adjustments associated with market interest rates and expected credit losses, was $2,319 and $3,924 at June 30, 2013 and September 30, 2012, respectively. We evaluate Gotham Bank acquired loans for impairment collectively. None of the Gotham Bank acquired loans were identified as purchase credit impaired at acquisition.


15
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following tables set forth the amounts and status of the Company’s loans and troubled debt restructurings (“TDRs”) at June 30, 2013 and September 30, 2012:

 
June 30, 2013
 
Current
 
30-59
Days
past due
 
60-89
Days
past due
 
90+
Days
past due
 
Non-
accrual
 
Total
Loans by segment:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
358,103

 
$
1,190

 
$
307

 
$
2,264

 
$
7,749

 
$
369,613

Commercial real estate
1,194,779

 
2,972

 
629

 
1,612

 
10,256

 
1,210,248

Commercial & industrial
449,752

 
1,878

 
521

 
100

 
894

 
453,145

Acquisition, development & construction
100,263

 
—

 
—

 
—

 
5,935

 
106,198

Consumer
194,326

 
353

 
1

 
240

 
2,410

 
197,330

Total loans
$
2,297,223

 
$
6,393

 
$
1,458

 
$
4,216

 
$
27,244

 
$
2,336,534

Total TDRs included above
$
23,901

 
$
—

 
$
—

 
$
—

 
$
2,368

 
$
26,269

Non-performing loans:
 
 
 
 
 
 
 
 
 
 
 
Loans 90+ days past due and still accruing
 
 
 
 
 
 
 
 
$
4,216

 
 
Non-accrual loans
 
 
 
 
 
 
 
 
27,244

 
 
Total non-performing loans
 
 
 
 
 
 
 
 
$
31,460

 
 

 
September 30, 2012
 
Current
 
30-59
Days
past due
 
60-89
Days
past due
 
90+
Days
past due
 
Non-
accrual
 
Total
Loans by segment:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
337,356

 
$
855

 
$
497

 
$
2,263

 
$
9,051

 
$
350,022

Commercial real estate
1,060,176

 
902

 
973

 
1,638

 
8,815

 
1,072,504

Commercial & industrial
342,726

 
96

 
141

 
—

 
344

 
343,307

Acquisition, development & construction
121,590

 
7,067

 
—

 
—

 
15,404

 
144,061

Consumer
205,463

 
1,551

 
265

 
469

 
1,830

 
209,578

Total loans
$
2,067,311

 
$
10,471

 
$
1,876

 
$
4,370

 
$
35,444

 
$
2,119,472

Total TDRs included above
$
13,543

 
$
270

 
$
264

 
$
—

 
$
10,870

 
$
24,947

Non-performing loans:
 
 
 
 
 
 
 
 
 
 
 
Loans 90+ days past due and still accruing
 
 
 
 
 
 
 
 
$
4,370

 
 
Non-accrual loans
 
 
 
 
 
 
 
 
35,444

 
 
Total non-performing loans
 
 
 
 
 
 
 
 
$
39,814

 
 



16
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



Activity in the allowance for loan losses for the three months ended June 30, 2013 and 2012 is summarized below: 
 
For the three months ended June 30, 2013
 
Beginning
allowance for
loan losses
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision
for loan
losses
 
Ending
allowance for
loan losses
Residential mortgage
$
4,443

 
$
(516
)
 
$
33

 
$
(483
)
 
$
57

 
$
4,017

Commercial real estate
9,149

 
(1,034
)
 
148

 
(886
)
 
1,058

 
9,321

Commercial & industrial
4,371

 
(230
)
 
63

 
(167
)
 
1,618

 
5,822

Acquisition, development & construction
6,102

 
(1,043
)
 
4

 
(1,039
)
 
938

 
6,001

Consumer
3,479

 
(531
)
 
36

 
(495
)
 
229

 
3,213

Total
$
27,544

 
$
(3,354
)
 
$
284

 
$
(3,070
)
 
$
3,900

 
$
28,374

 
 
 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average gross loans outstanding
 
 
 
0.54
%
 
 
 
 

 
For the three months ended June 30, 2012
 
Beginning
allowance  for
loan losses
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision
for loan
losses
 
Ending
allowance  for
loan losses
Residential mortgage
$
4,187

 
$
(244
)
 
$
17

 
$
(227
)
 
$
454

 
$
4,414

Commercial real estate
6,466

 
(655
)
 
4

 
(651
)
 
522

 
6,337

Commercial & industrial
4,731

 
(500
)
 
172

 
(328
)
 
54

 
4,457

Acquisition, development & construction
8,941

 
(1,263
)
 
263

 
(1,000
)
 
1,031

 
8,972

Consumer
3,462

 
(335
)
 
29

 
(306
)
 
251

 
3,407

Total
$
27,787

 
$
(2,997
)
 
$
485

 
$
(2,512
)
 
$
2,312

 
$
27,587

 
 
 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average gross loans outstanding
 
 
 
0.55
%
 
 
 
 


Activity in the allowance for loan losses for the nine months ended June 30, 2013 and 2012 is summarized below: 
 
For the nine months ended June 30, 2013
 
Beginning
allowance for
loan losses
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision
for loan
losses
 
Ending
allowance for
loan losses
Residential mortgage
$
4,359

 
$
(2,425
)
 
$
93

 
$
(2,332
)
 
$
1,990

 
$
4,017

Commercial real estate
7,230

 
(2,461
)
 
560

 
(1,901
)
 
3,992

 
9,321

Commercial & industrial
4,603

 
(748
)
 
310

 
(438
)
 
1,657

 
5,822

Acquisition, development & construction
8,526

 
(3,204
)
 
173

 
(3,031
)
 
506

 
6,001

Consumer
3,564

 
(1,762
)
 
106

 
(1,656
)
 
1,305

 
3,213

Total
$
28,282

 
$
(10,600
)
 
$
1,242

 
$
(9,358
)
 
$
9,450

 
$
28,374

 
 
 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average gross loans outstanding
 
 
 
0.57
%
 
 
 
 


17
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


 
For the nine months ended June 30, 2012
 
Beginning
allowance  for
loan losses
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision
for loan
losses
 
Ending
allowance  for
loan losses
Residential mortgage
$
3,498

 
$
(1,710
)
 
$
137

 
$
(1,573
)
 
$
2,489

 
$
4,414

Commercial real estate
5,568

 
(2,316
)
 
405

 
(1,911
)
 
2,680

 
6,337

Commercial & industrial
5,945

 
(1,201
)
 
801

 
(400
)
 
(1,088
)
 
4,457

Acquisition, development & construction
9,895

 
(2,559
)
 
263

 
(2,296
)
 
1,373

 
8,972

Consumer
3,011

 
(1,363
)
 
101

 
(1,262
)
 
1,658

 
3,407

Total
$
27,917

 
$
(9,149
)
 
$
1,707

 
$
(7,442
)
 
$
7,112

 
$
27,587

 
 
 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average gross loans outstanding
 
 
 
0.56
%
 
 
 
 


The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at June 30, 2013:
 
 
Loans evaluated by segment
 
Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total
 loans
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total allowance for loan losses
Residential mortgage
$
515

 
$
369,098

 
$
369,613

 
$
—

 
$
4,017

 
$
4,017

Commercial real estate
17,401

 
1,192,847

 
1,210,248

 
1,551

 
7,770

 
9,321

Commercial & industrial
2,853

 
450,292

 
453,145

 
452

 
5,370

 
5,822

Acquisition, development & construction
20,363

 
85,835

 
106,198

 
690

 
5,311

 
6,001

Consumer
3

 
197,327

 
197,330

 
1

 
3,212

 
3,213

Total
$
41,135

 
$
2,295,399

 
$
2,336,534

 
$
2,694

 
$
25,680

 
$
28,374


During the quarter ended June 30, 2013, we modified the methodology we use to determine the allowance for loan losses required for residential mortgage loans and equity lines of credit. In prior periods, we evaluated these loans for impairment on an individual basis. Effective for the quarter ended June 30, 2013, we evaluate residential mortgage loans and equity lines of credit with an outstanding balance of $500 or less on a homogeneous pool basis. This modified approach to our methodology did not have a material impact on the allowance for loan losses.

18
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following table sets forth the loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2012:
 
 
Loans evaluated by segment
 
Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total
loans
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total allowance for loan losses
Residential mortgage
$
12,739

 
$
337,283

 
$
350,022

 
$
871

 
$
3,488

 
$
4,359

Commercial real estate
13,017

 
1,059,487

 
1,072,504

 
1,036

 
6,194

 
7,230

Commercial & industrial
357

 
342,950

 
343,307

 
48

 
4,555

 
4,603

Acquisition, development & construction
24,880

 
119,181

 
144,061

 
996

 
7,530

 
8,526

Consumer
2,299

 
207,279

 
209,578

 
263

 
3,301

 
3,564

Total
$
53,292

 
$
2,066,180

 
$
2,119,472

 
$
3,214

 
$
25,068

 
$
28,282

 
The following table presents loans individually evaluated for impairment by segment of loans at June 30, 2013 and September 30, 2012:
 
June 30, 2013
 
September 30, 2012
 
Unpaid
principal
balance
 
Recorded
investment
 
Related allowance
 
Unpaid
principal
balance
 
Recorded
investment
 
Related allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
515

 
$
515

 
$
—

 
$
6,193

 
$
5,413

 
$
—

Commercial real estate
14,033

 
12,830

 
—

 
9,296

 
7,837

 
—

Commercial & industrial
2,003

 
1,959

 
—

 
262

 
262

 
—

Acquisition, development & construction
18,580

 
18,553

 
—

 
24,144

 
20,597

 
—

Consumer
—

 
—

 
—

 
1,146

 
1,122

 
—

Subtotal
35,131

 
33,857

 
—

 
41,041

 
35,231

 
—

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
—

 
—

 
—

 
8,485

 
7,326

 
871

Commercial real estate
7,229

 
4,571

 
1,551

 
5,942

 
5,180

 
1,036

Commercial & industrial
1,429

 
894

 
452

 
95

 
95

 
48

Acquisition, development & construction
3,616

 
1,810

 
690

 
7,159

 
4,283

 
996

   Consumer
4

 
3

 
1

 
1,400

 
1,177

 
263

Subtotal
12,278

 
7,278

 
2,694

 
23,081

 
18,061

 
3,214

Total
$
47,409

 
$
41,135

 
$
2,694

 
$
64,122

 
$
53,292

 
$
3,214


19
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the three months ended June 30, 2013 and 2012:
 
June 30, 2013
 
June 30, 2012
 
QTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
 
QTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
515

 
$
9

 
$
2

 
$
4,736

 
$
59

 
$
33

Commercial real estate
11,611

 
138

 
60

 
8,940

 
102

 
77

Commercial & industrial
1,886

 
41

 
19

 
604

 
17

 
17

Acquisition, development & construction
16,982

 
297

 
148

 
22,059

 
139

 
95

Consumer
—

 
—

 
—

 
2,221

 
10

 
3

Subtotal
30,994

 
485

 
229

 
38,560

 
327

 
225

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
—

 
—

 
—

 
7,309

 
38

 
31

Commercial real estate
5,885

 
—

 
—

 
7,095

 
38

 
28

Commercial & industrial
938

 
—

 
—

 
129

 
—

 
—

Acquisition, development & construction
1,303

 
—

 
—

 
8,793

 
44

 
44

   Consumer
1

 
—

 
—

 
1,065

 
—

 
—

Subtotal
8,127

 
—

 
—

 
24,391

 
120

 
103

Total
$
39,121

 
$
485

 
$
229

 
$
62,951

 
$
447

 
$
328


20
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the nine months ended June 30, 2013 and 2012:
 
June 30, 2013
 
June 30, 2012
 
YTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
 
YTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
257

 
$
23

 
$
5

 
$
5,228

 
$
197

 
$
109

Commercial real estate
10,474

 
235

 
180

 
8,191

 
281

 
211

Commercial & industrial
1,743

 
64

 
58

 
358

 
30

 
30

Acquisition, development & construction
11,548

 
446

 
444

 
22,402

 
423

 
290

Consumer
—

 
—

 
—

 
2,145

 
28

 
10

Subtotal
24,022

 
768

 
687

 
38,324

 
959

 
650

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
—

 
—

 
—

 
7,650

 
119

 
96

Commercial real estate
5,541

 
—

 
—

 
6,790

 
109

 
80

Commercial & industrial
653

 
—

 
—

 
162

 
—

 
—

Acquisition, development & construction
971

 
—

 
—

 
6,644

 
100

 
100

   Consumer
1

 
—

 
—

 
1,044

 
1

 
1

Subtotal
7,166

 
—

 
—

 
22,290

 
329

 
277

Total
$
31,188

 
$
768

 
$
687

 
$
60,614

 
$
1,288

 
$
927


Troubled Debt Restructuring:

The following tables set forth the amounts of the Company’s TDRs at June 30, 2013 and September 30, 2012:
 
 
 June 30, 2013
 
Current
 
30-59
Days
past due
 
60-89
Days
past due
 
90+
Days
past due
 
Non-
accrual
 
Total
Residential mortgage
$
2,013

 
$
—

 
$
—

 
$
—

 
$
1,918

 
$
3,931

Commercial real estate
5,572

 
—

 
—

 
—

 
—

 
5,572

Commercial & industrial
1,859

 
—

 
—

 
—

 
—

 
1,859

Acquisition, development & construction
14,457

 
—

 
—

 
—

 
149

 
14,606

Consumer loans, including home equity
—

 
—

 
—

 
—

 
301

 
301

Total
$
23,901

 
$
—

 
$
—

 
$
—

 
$
2,368

 
$
26,269

Allowance for loan losses
$
367

 
$
—

 
$
—

 
$
—

 
$
484

 
$
851



21
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


 
September 30, 2012
 
Current
 
30-59
Days
past due
 
60-89
Days
past due
 
90+
Days
past due
 
Non-
accrual
 
Total
Residential mortgage
$
1,226

 
$
—

 
$
264

 
$
—

 
$
2,178

 
$
3,668

Commercial real estate
2,640

 
270

 
—

 
—

 
—

 
2,910

Acquisition, development & construction
9,677

 
—

 
—

 
—

 
8,692

 
18,369

Total
$
13,543

 
$
270

 
$
264

 
$
—

 
$
10,870

 
$
24,947

Allowance for loan losses
$
—

 
$
—

 
$
41

 
$
—

 
$
955

 
$
996


The Company had outstanding commitments to lend additional amounts of $0 and $4,225 to customers with loans classified as TDRs as of June 30, 2013, and September 30, 2012, respectively.

The following table presents loans by segment modified as TDRs that occurred during the three months ended June 30, 2013 and 2012:
 
June 30, 2013
 
June 30, 2012
 
 
 
Recorded investment
 
 
 
Recorded investment
 
Number of loans
Pre-
modification
 
Post-
modification
 
Number of loans
Pre-
modification
 
Post-
modification
Residential mortgage
3
 
$
693

 
$
693

 
1
 
$
516

 
$
300

Commercial real estate
1
 
2,232

 
2,232

 
—
 
—

 
—

Commercial & industrial
1
 
191

 
191

 
1
 
1,535

 
1,535

Acquisition, development & construction
—
 
—

 
—

 
3
 
2,849

 
2,849

Consumer
1
 
302

 
302

 
—
 
—

 
—

Total restructured loans
6
 
$
3,418

 
$
3,418

 
5
 
$
4,900

 
$
4,684


The following table presents loans by segment modified as TDRs that occurred during the nine months ended June 30, 2013 and 2012:
 
June 30, 2013
 
June 30, 2012
 
 
 
Recorded investment
 
 
 
Recorded investment
 
Number of loans
Pre-
modification
 
Post-
modification
 
Number of loans
Pre-
modification
 
Post-
modification
  Residential mortgage
4
 
$
693

 
$
693

 
5
 
$
1,525

 
$
1,295

Commercial real estate
2
 
2,682

 
2,682

 
3
 
1,956

 
1,956

Commercial & industrial
4
 
1,860

 
1,860

 
—
 
—

 
—

Acquisition, development & construction
7
 
5,432

 
5,432

 
3
 
2,849

 
2,849

Consumer
1
 
302

 
302

 
—
 
—

 
—

Total restructured loans
18
 
$
10,969

 
$
10,969

 
11
 
$
6,330

 
$
6,100


The TDRs presented above increased the allowance for loan losses by $249 and $0for the three months ended June 30, 2013 and 2012, respectively. There were no charge-offs as a result of the above TDRs for the respective periods.

The TDRs presented above increased the allowance for loan losses by $658 and $134 for the nine months ended June 30, 2013 and 2012, respectively. There were $97 and $134 in charge-offs as a result of the above TDRs for the respective periods.


22
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


There were 4 residential mortgage loans totaling $792 and one consumer loan totaling $301 that were modified as TDRs during the last twelve months that had subsequently defaulted during the nine months ended June 30, 2013.
 
Credit Quality Indicators

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the analysis performed as of June 30, 2013 and September 30, 2012, the risk category of loans by segment of gross loans is as follows:
 
 
June 30, 2013
 
September 30, 2012
 
Special
mention
 
Substandard
 
Doubtful
 
Special
mention
 
Substandard
 
Doubtful
Residential mortgage
$
1,158

 
$
10,440

 
$
—

 
$
830

 
$
11,314

 
$
—

Commercial real estate
13,007

 
24,065

 
890

 
20,729

 
27,674

 
—

Commercial & industrial
5,118

 
4,562

 
324

 
14,920

 
3,995

 
338

Acquisition, development & construction
5,015

 
18,956

 
—

 
5,669

 
42,871

 
—

Consumer
29

 
2,928

 
—

 
274

 
2,482

 
—

Total
$
24,327

 
$
60,951

 
$
1,214

 
$
42,422

 
$
88,336

 
$
338



4. Deposits

The composition of the Company’s deposits was the following:  
 
June 30,
2013
 
September 30,
2012
Non-interest bearing demand
$
645,943

 
$
947,304

NOW
475,452

 
448,123

Savings
529,383

 
506,538

Money market
734,353

 
821,704

Certificates of deposit
354,083

 
387,482

Total deposits
$
2,739,214

 
$
3,111,151


Municipal deposits of $465,566 and $901,739 were included in total deposits at June 30, 2013 and September 30, 2012, respectively. Deposits received for tax receipts were approximately $425,000 at September 30, 2012. See Note 2, for the amount of securities that are pledged as collateral for municipal deposits and other purposes.

23
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



Summarized below are the Company’s brokered deposits included in the table above:
 
 
June 30,
2013
 
September 30,
2012
Savings
$
—

 
$
13,344

Money market
60,496

 
46,566

Reciprocal CDARs(1)
1,360

 
1,354

CDARs one way
48,806

 
764

Total brokered deposits
$
110,662

 
$
62,028

(1)  Certificate of deposit account registry service.  

5. Borrowings

The Company’s FHLB and other borrowings and weighted average interest rates are summarized below:
 
  
June 30, 2013
 
September 30, 2012
  
Amount
 
Rate
 
Amount
 
Rate
By type of borrowing:
 
 
 
 
 
 
 
Advances
$
323,953

 
1.53
%
 
$
106,904

 
3.89
%
Repurchase agreements
228,852

 
3.32

 
238,272

 
3.49

Total borrowings
$
552,805

 
2.27
%
 
$
345,176

 
3.61
%
By remaining period to maturity:
 
 
 
 
 
 
 
One year or less
$
253,519

 
0.69
%
 
$
10,136

 
1.88
%
One to two years
73,899

 
1.96

 
56,819

 
2.44

Two to three years
—

 
—

 
52,693

 
2.89

Three to four years
152,601

 
4.21

 
201

 
5.32

Four to five years
70,000

 
4.01

 
202,386

 
4.21

Greater than five years
2,786

 
4.92

 
22,941

 
3.74

Total borrowings
$
552,805

 
2.27
%
 
$
345,176

 
3.61
%

As a member of the FHLB, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of June 30, 2013 and September 30, 2012, the Bank had pledged mortgage loans totaling $740,047 and $613,554, respectively. The Bank had also pledged securities to secure borrowings, which are disclosed in Note 2. Securities. As of June 30, 2013, the Bank may increase its borrowing capacity by pledging securities and mortgage loans not required to be pledged for other purposes with a market value of $399,277.

FHLB borrowings which are putable quarterly at the discretion of the FHLB (includes both advance and repurchase agreements) were $200,000 as of June 30, 2013 and September 30, 2012. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 3.81 years and 4.56 years and weighted average interest rates of 4.23% at June 30, 2013 and September 30, 2012, respectively.

24
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


6. Guarantor’s Obligations Under Guarantees

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

As of June 30, 2013, the Company had $30,109 in outstanding letters of credit, of which $6,251 are cash secured and $4,933 were secured by other collateral. The carrying values of these obligations are not considered material.


7. Contingencies

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

Litigation

The Company and the Bank are involved in a number of judicial proceedings concerning matters arising from conducting their business activities. These proceedings include actions brought against the Company and the Bank with respect to corporate matters and transactions in which the Company and the Bank were involved. In addition, the Company and the Bank may be requested to provide information or otherwise cooperate with government authorities in the conduct of investigations of other persons or industry groups.

There can be no assurance as to the ultimate outcome of a legal proceeding; however, the Company and the Bank have generally denied, or believe they have meritorious defenses and will deny, liability in all significant litigation pending against us, including the matters described below, and we intend to defend vigorously each case, other than matters we describe as having settled. We accrue a liability for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.

On April 9, 2013, the first of seven actions, captioned Altman v. Sterling Bancorp, et al., Index No. 651263/2013 (Sup. Ct., N.Y. Cnty.), was filed on behalf of a putative class of Sterling shareholders against Sterling, its current directors, and Provident. All seven putative class actions were filed in the Supreme Court of the State of New York, New York County. On May 17, 2013, the seven actions were consolidated under the caption In re Sterling Shareholders Litigation, Index No. 651263/2013 (Sup. Ct., N.Y. Cnty.). On June 21, 2013, the lead plaintiffs filed a consolidated and amended class action complaint alleging that Sterling’s board of directors breached its fiduciary duties by agreeing to the proposed merger transaction described in Note 15 and by failing to disclose all material information to shareholders. The consolidated and amended complaint also alleges that Provident has aided and abetted those alleged fiduciary breaches. The action seeks, among other things, an order enjoining the defendants from proceeding with or consummating the merger, as well as other equitable relief and/or money damages in the event that the transaction is consummated. The defendants believe that the claims are without merit.
On June 5, 2013, a substantially similar litigation was filed in the United States District Court for the Southern District of New York, captioned Miller v. Sterling Bancorp, et al., No. 13‑3845, against Sterling, its current directors, and Provident on behalf of the same putative class of Sterling shareholders. The complaint alleges the same breach of fiduciary duty and aiding and abetting claims against defendants, and also alleges defendants’ preliminary proxy statement was inaccurate or incomplete in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. The plaintiff in this action has agreed to coordinate this case with the earlier filed New York State court actions. The defendants believe that the claims are also without merit.


25
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



8. Earnings Per Common Share

The number of shares used in the computation of basic earnings per share excludes unallocated ESOP shares and unvested shares of restricted stock that are not participating securities.

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 recognition and retention plan shares were exercised or became vested during the periods presented.

Basic earnings per common share are computed as follows:
 
 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Weighted average common shares outstanding (basic)
43,801,867

 
37,302,693

 
43,766,402

 
37,278,507

Net income
$
6,376

 
$
6,209

 
$
19,925

 
$
17,627

Basic earnings per common share
0.15

 
0.17

 
0.46

 
0.47


Diluted earnings per common share are computed as follows:
 
 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Weighted average common shares outstanding (basic)
43,801,867

 
37,302,693

 
43,766,402

 
37,278,507

Effect of common stock equivalents
104,291

 
27,774

 
84,199

 
13,859

Weighted average common shares outstanding (diluted)
43,906,158

 
37,330,467

 
43,850,601

 
37,292,366

Net income
$
6,376

 
$
6,209

 
$
19,925

 
$
17,627

Diluted earnings per common share
0.15

 
0.17

 
0.45

 
0.47


As of June 30, 2013 and June 30, 2012, 1,254,124 and 1,764,154 weighted average shares that could be exercised under stock option plans were anti-dilutive for the three month period, respectively. As of June 30, 2013 and June 30, 2012, 1,314,058 and 1,862,328 weighted average shares were anti-dilutive for the nine month period, respectively. Anti-dilutive shares are not included in the determination of diluted earnings per share.

9. Stock-Based Compensation

The Company has three active stock-based compensation plans as described below. Total compensation expense that was charged against income for those plans was $412 and $228, for the three months ended June 30, 2013 and 2012, respectively. There was no income tax benefit realized for the three months ended June 30, 2013 and 2012.

Total compensation expense that was charged against income for those plans was $1,362 and $601, for the nine months ended June 30, 2013 and 2012, respectively. There was no income tax benefit realized for the nine months ended June 30, 2013 and 2012.

Active Stock-Based Compensation Plans

The Company’s shareholders approved the 2012 Stock Incentive Plan (the “2012 Plan”) on February 16, 2012. The 2012 Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, performance units, deferred stock and other stock-based awards for up to 1,867,340 shares of common stock as of June 30, 2013. Awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those awards have vesting periods ranging from 2 to 5 years and have 10 year contractual terms. The Company

26
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


has a policy of using shares held as treasury stock to satisfy its stock-based compensation stock issuances. Currently, the Company has a sufficient number of treasury shares to satisfy expected stock-based compensation issuances.

The Company’s 2004 Stock Incentive Plan (the “2004 Plan”), which is shareholder approved, permits the grant of stock options to its employees for up to 185,057 shares of common stock as of June 30, 2013. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods ranging from 2 to 5 years and have 10 year contractual terms. The Company has a policy of using shares held as treasury stock to satisfy its stock-based compensation stock issuances.

The Company’s 2004 Restricted Stock Plan, which historically has been referred to as the Recognition and Retention Plan (“RRP”), provides for the issuance of shares to directors and officers. Compensation expense is recognized on a straight-line basis over the vesting period of the awards based on the fair value of the stock at issue date. RRP shares vest annually on the anniversary of the grant date over the vesting period. Total shares remaining that are authorized and available for future grant under the RRP are 7,120 at June 30, 2013.

Under the 2004 Plan and the RRP each grant of stock or restricted stock counts as one share against the number of shares available for grant. Under the 2012 Plan each share of restricted stock, (or non-vested stock awards), is counted as 3.6 shares against the number of shares available for grant. Under the 2012 Plan other grants, including stock options, stock appreciation rights, performance units, deferred stock and other stock awards will be counted as one share against the number of shares available for grant.
 
The fair value of each stock option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatility is based on the historical volatility of the Company’s common stock. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

The fair value of options granted was determined using the following weighted average assumptions as of the grant date:

 
For the nine months ended June 30,
 
2013
 
2012
Risk-free interest rate
0.96
%
 
1.50
%
Expected stock price volatility
40.8
%
 
39.8
%
Dividend yield (1)
2.61
%
 
3.10
%
Expected term in years
5.75

 
5.80

(1) Represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date. 


27
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following table summarizes the combined activity in the Company’s active stock-based compensation plans for the nine months ended June 30, 2013:
 
 
 
Non-vested stock awards/stock units outstanding
 
Stock options outstanding
 
Shares available for grant
 
Number of shares
 
Weighted average grant date fair value
 
Number of shares
 
Weighted average exercise price
Balance at October 1, 2012
2,875,877

 
97,817

 
$
8.31

 
1,972,480

 
$
11.04

Granted (1)
(1,028,140
)
 
186,900

 
9.04

 
360,500

 
9.04

Stock awards vested
—

 
(34,166
)
 
8.77

 
—

 
—

Exercised
—

 
—

 
—

 
(6,250
)
 
6.71

Forfeited
218,834

 
(9,300
)
 
7.28

 
(196,500
)
 
10.92

Canceled/expired
(7,054
)
 
—

 
—

 
(7,054
)
 
13.97

Balance at June 30, 2013
2,059,517

 
241,251

 
$
8.78

 
2,123,176

 
$
10.71

Exercisable at June 30, 2013
 
 
 
 
 
 
1,331,406

 
$
12.05

(1) Reflects certain non-vested stock awards that count as 3.6 shares for each share granted.  

The weighted average fair value of options granted was $2.74 and $2.27 for the nine months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013, there was $1,538 of total unrecognized compensation expense related to non-vested stock options granted under the Company’s stock-based compensation plans. The expense is expected to be recognized over a weighted average period of 2.24 years.

As of June 30, 2013, there was $1,443 of total unrecognized compensation expense related to non-vested restricted shares granted under the 2012 Plan and the RRP. The expense is expected to be recognized over a weighted average period of 1.86 years.

There were no modifications for the nine months ended June 30, 2013 and 2012.


28
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


10. Pension and Other Post Retirement Plans

Net pension and post-retirement expense, which is recorded within compensation and employee benefits expense in the consolidated statements of income, is comprised of the following:
  
Pension plan
 
Other post
retirement plans
 
For the three months ended June 30,
 
For the three months ended June 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
—

 
$
—

 
$
12

 
$
9

Interest cost
363

 
375

 
31

 
27

Expected return on plan assets
(616
)
 
(531
)
 
—

 
—

Amortization of net transition obligation
—

 
—

 
6

 
6

Amortization of prior service cost
—

 
—

 
11

 
12

Amortization of (gain) or loss
516

 
579

 
(6
)
 
(15
)
Total cost
$
263

 
$
423

 
$
54

 
$
39


  
Pension plan
 
Other post
retirement plans
 
For the nine months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
—

 
$
—

 
$
35

 
$
28

Interest cost
1,089

 
1,126

 
94

 
80

Expected return on plan assets
(1,847
)
 
(1,594
)
 
—

 
—

Amortization of net transition obligation
—

 
—

 
18

 
18

Amortization of prior service cost
—

 
—

 
35

 
36

Amortization of (gain) or loss
1,547

 
1,737

 
(19
)
 
(44
)
Total cost
$
789

 
$
1,269

 
$
163

 
$
118


As of June 30, 2013, no contributions had been made to the pension plan during the fiscal year 2013. The Company has not yet determined if additional contributions will be made during the fiscal year 2013.

The Company has also established a non-qualified Supplemental Executive Retirement Plan (“SERP”) to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $12 for the three months ended June 30, 2013 and June 30, 2012. The periodic pension expense for the supplemental plan amounted to $36 for the nine months ended June 30, 2013 and $38 for the nine months ended June 30, 2012.

For the three months ended June 30, 2013 and 2012 there was $26 and $9, respectively, in contributions to fund benefit payments related to the SERP. For the nine months ended June 30, 2013 and 2012, there was $53 and $93, respectively, in contributions to fund benefit payments related to the SERP.


29
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


11. Derivatives

The Company purchased two interest rate caps in fiscal 2010 to assist in offsetting a portion of interest rate exposure should short- term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.50% and 4.00%. These caps are stand-alone derivatives and therefore changes in fair value are reported in current period earnings; the amount for the quarter ended June 30, 2013 and 2012 is a fair value loss of $0 and a fair value loss of $14, respectively. For the nine months ended June 30, 2013 and 2012 the fair value loss was $1 and $57, respectively. The fair value of the interest rate caps and interest rate swaps discussed below at June 30, 2013 and September 30, 2012 are included in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.

The Company acts as an interest rate swap counterparty with certain commercial customers and manages this risk by entering into corresponding and offsetting interest rate risk agreements with third parties. The swaps are considered a derivative instrument and must be carried at fair value. As the swaps are not a designated qualifying hedge, the change in fair value is recognized in current earnings, with no offset from any other instrument. There was no net gain or loss recorded in earnings during the three and nine months ended June 30, 2013 and 2012.

The Company pledged collateral to derivative counterparties in the form of securities with an amortized cost of $5,041 and a fair value of $4,689 as of June 30, 2013. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is written into the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

Summary information regarding these derivatives is presented below:
 
  
Notional
amount
 
Weighted average
maturity (in years)
 
Weighted
average
fixed rate
 
Weighted average
variable rate
 
Fair value
At June 30, 2013
 
 
 
 
 
 
 
 
 
Interest rate caps
$
50,000

 
1.43
 
3.75
%
 
NA
 
$
1

Third-party interest rate swaps
54,693

 
6.01
 
4.22

 
1 m Libor + 2.45
 
930

Customer interest rate swaps
(54,693
)
 
6.01
 
4.22

 
1 m Libor + 2.45
 
(930
)
At September 30, 2012
 
 
 
 
 
 
 
 
 
Interest rate caps
$
50,000

 
2.18
 
3.75
%
 
NA
 
$
2

Third-party interest rate swaps
42,332

 
7.30
 
4.29

 
1 m Libor + 2.28
 
2,485

Customer interest rate swaps
(42,332
)
 
7.30
 
4.29

 
1 m Libor + 2.28
 
(2,485
)

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

30
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


12. Fair Value Measurements

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

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

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

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

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

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

Investment Securities Available for Sale

The majority of the Company’s available for sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.

The Company utilizes an outside vendor to obtain valuations for its securities as well as information received from a third-party investment adviser. The Company utilizes prices from a leading provider of financial market data and compares them to another widely-known third-party’s pricing. The Company does not make adjustments to these prices unless it is determined there is limited trading activity. For securities where there is limited trading activity (private label collateralized mortgage obligations or “CMOs”) and less observable valuation inputs, the Company has classified such valuations as Level 3.

The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there continues to be a decline in the volume and level of activity in the market for its private label mortgage-backed securities. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual security level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of private label residential mortgage-backed securities as Level 3. As of June 30, 2013, these securities have an amortized cost of $3,934 and a fair value of $3,963. In determining the fair value of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that management believes market participants would use in pricing these securities in an orderly market. Significant increases (decreases) in any of the unobservable inputs would result in a significantly lower (higher) fair value measurement of the securities. Present value estimated cash flow models were used to discount expected cash flows at the interest rate reflective of similarly structured securities in an orderly market. The resulting prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of June 30, 2013. These securities have a weighted average coupon rate of 3.08%, a weighted average life of 3.93 years, a weighted average one month constant prepayment rate history of 16.34 and a weighted average twelve month constant default rate of 3.27%. Of the four private label securities two of these securities with a fair value of $3,601 and an amortized cost of $3,578 were deemed to be OTTI which resulted in a $0 and $14 OTTI charge through earnings for the three and nine months ended June 30, 2013. These securities have an accumulated OTTI of $136 at June 30, 2013. The calculation of OTTI was determined by performing a present value of estimated credit loss using the underlying security book yields of 3.12% and 3.40%.


31
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The credit ratings of private label CMO securities at June 30, 2013 were as follows:
 
 
Amortized
cost
 
Fair
value
Credit rating:
 
 
 
Aa1
$
249

 
$
256

Aa2
107

 
106

B1
2,116

 
2,135

B3
1,462

 
1,466

Total private label CMOs
$
3,934

 
$
3,963


Derivatives

The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2). The Company’s derivatives consist of two interest rate caps and twelve interest rate swaps (see note 11).

Commitments to Sell Real Estate Loans

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

32
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


A summary of assets and liabilities at June 30, 2013 measured at estimated fair value on a recurring basis were as follows:
 
 
June 30, 2013
 
Fair value measurements
 
Quoted prices in active markets for
identical assets
Level 1
 
Significant
other
observable
inputs
Level 2
 
Significant
unobservable
inputs
Level  3
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Fannie Mae
$
131,252

 
$
—

 
$
131,252

 
$
—

Freddie Mac
49,213

 
—

 
49,213

 
—

Ginnie Mae
3,877

 
—

 
3,877

 
—

CMO/Other MBS
170,842

 
—

 
170,842

 
—

Private label CMOs
3,963

 
—

 
—

 
3,963

Total residential mortgage-backed securities
359,147

 
—

 
355,184

 
3,963

Other securities:
 
 
 
 
 
 
 
Federal agencies
291,389

 
—

 
291,389

 
—

Corporate bonds
89,852

 
—

 
89,852

 
—

Obligations of states and political subdivisions
149,359

 
—

 
149,359

 
—

Total other securities
530,600

 
—

 
530,600

 
—

Total investment securities available for sale
889,747

 
—

 
885,784

 
3,963

Interest rate caps and swaps
931

 
—

 
931

 
—

Total assets measured at estimated fair value on a recurring basis
$
890,678

 
$
—

 
$
886,715

 
$
3,963

Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
930

 
$
—

 
$
930

 
$
—

Total liabilities measured at estimated fair value on a recurring basis
$
930

 
$
—

 
$
930

 
$
—





33
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


A summary of assets and liabilities at September 30, 2012 measured at estimated fair value on a recurring basis were as follows:
 
 
September 30, 2012
 
Fair value measurements
 
Quoted prices in
active  markets for
identical
assets
Level 1
 
Significant
other
observable
inputs
Level 2
 
Significant
unobservable
inputs
Level 3
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Fannie Mae
$
161,407

 
$
—

 
$
161,407

 
$
—

Freddie Mac
85,260

 
—

 
85,260

 
—

Ginnie Mae
4,778

 
—

 
4,778

 
—

CMO/Other MBS
188,434

 
—

 
188,434

 
—

Private label CMOs
4,630

 
—

 
—

 
4,630

Total residential mortgage-backed securities
444,509

 
—

 
439,879

 
4,630

Other securities:
 
 
 
 
 
 
 
Federal agencies
408,823

 
—

 
408,823

 
—

Obligations of states and political subdivisions
156,481

 
—

 
156,481

 
—

Equities
1,059

 
—

 
1,059

 
—

Total other securities
566,363

 
—

 
566,363

 
—

Total investment securities available for sale
1,010,872

 
—

 
1,006,242

 
4,630

Interest rate caps and swaps
2,487

 
—

 
2,487

 
—

Total assets measured at estimated fair value on a recurring basis
$
1,013,359

 
$
—

 
$
1,008,729

 
$
4,630

Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
2,485

 
$
—

 
$
2,485

 
$
—

Total liabilities measured at estimated fair value on a recurring basis
$
2,485

 
$
—

 
$
2,485

 
$
—


There were no transfers between Level 1 and Level 2 inputs during the three and nine months ended June 30, 2013 and 2012.

34
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the three and nine months ended June 30, 2013 and 2012:
 
 
Fair value measurement for the three and nine months ended June 30, 2013 using significant unobservable inputs Level 3
 
Fair value measurement for the three and nine months ended June 30, 2012 using significant unobservable inputs Level 3
Balance at September 30,
$
4,630

 
$
4,851

Paydowns
(521
)
 
(326
)
Accretion, net
11

 
6

OTTI
(14
)
 
(38
)
Change in fair value
110

 
218

Balance at March 31,
4,216

 
4,711

Paydowns
(213
)
 
(169
)
Accretion, net
5

 
5

OTTI
—

 
(6
)
Change in fair value
(45
)
 
94

Balance at June 30,
$
3,963

 
$
4,635


Changes in fair value are included as part of net unrealized holding gains (losses) on securities available for sale net of related tax expense on the Consolidated Statements of Comprehensive Income (Loss).
 
The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances:

Loans Held for Sale and Impaired Loans

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value as determined by outstanding commitments from investors. Fair value of loans held for sale is determined using quoted prices for similar assets (Level 2).

Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the value of the servicing rights which is equal to its fair value. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

The Company may record adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based upon recent comparable sales of similar properties or assumptions generally observable by market participants. Any fair value adjustments for loans categorized here are classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classified as Level 3. Impaired loans are evaluated on at least a quarterly basis for additional impairment and their carrying values are adjusted as needed. Loans subject to non-recurring fair value measurements were $38,443 and $50,078 which equals the carrying value less the allowance for loan losses allocated to these loans at June 30, 2013 and September 30, 2012, respectively. Changes in fair value recognized on provisions on loans held by the Company were $4,365 and $2,579 for the nine months ended June 30, 2013 and 2012, respectively.

35
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



When valuing impaired loans that are collateral dependent, the Company charges-off the difference between the recorded investment in the loan and the appraised value, which is generally less than 12 months old. A discount for estimated costs to dispose of the asset is used when evaluating the impaired loans. Nearly all of our impaired loans are considered collateral dependent.

Impaired loans at June 30, 2013 measured at estimated fair value on a non-recurring basis were as follows:
 
 
June 30, 2013
 
Fair value measurements
 
Quoted prices  in active  markets for
identical assets
Level 1
 
Significant
other
observable
inputs
Level 2
 
Significant
unobservable
inputs
Level 3
Commercial real estate
$
6,084

 
$
—

 
$
—

 
$
6,084

Commercial & industrial
894

 
—

 
—

 
894

Acquisition, development & construction
2,010

 
—

 
—

 
2,010

Consumer
2

 
—

 
—

 
2

Total impaired loans measured at fair value
$
8,990

 
$
—

 
$
—

 
$
8,990


Impaired loans at September 30, 2012 measured at estimated fair value on a non-recurring basis were as follows:
 
 
September 30, 2012
 
Fair value measurements
 
Quoted prices  in active  markets for
identical assets
Level 1
 
Significant
other
observable
inputs
Level 2
 
Significant
unobservable
inputs
Level 3
Residential mortgage
$
8,628

 
$
—

 
$
—

 
$
8,628

Commercial real estate
6,537

 
—

 
—

 
6,537

Commercial & industrial
95

 
—

 
—

 
95

Acquisition, development & construction
8,232

 
—

 
—

 
8,232

Consumer loans
1,215

 
—

 
—

 
1,215

Total impaired loans measured at fair value
$
24,707

 
$
—

 
$
—

 
$
24,707

 
Mortgage Servicing Rights

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in net gain on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with FASB ASC Topic 860 - Transfers and Servicing, the Company must record impairment charges on a non-recurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights the Company utilizes a third-party vendor, which on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights for impairment purposes is considered a Level 3 valuation. The fair value of mortgage servicing rights at June 30, 2013 and 2012 was $2,016 and $1,432.

36
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)



Assets Taken in Foreclosure of Defaulted Loans

Assets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes a new cost basis. These loans are subsequently accounted for at the lower of cost or fair value less costs to sell and are primarily comprised of commercial and residential real property and upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments have been classified as Level 3. Appraisals are reviewed by our credit department, our external loan review consultant and verified by officers in our credit administration area. Assets taken in foreclosure of defaulted loans subject to non-recurring fair value measurement were $4,376 and $6,403 at June 30, 2013 and September 30, 2012, respectively. There were write-downs of $284 and $422 related to changes in fair value recognized through income for those foreclosed assets held by the Company during the three months ending June 30, 2013 and 2012, respectively.

There were write-downs of $1,065 and $684 related to changes in fair value recognized through income for those foreclosed assets held by the Company during the nine months ending June 30, 2013 and 2012, respectively.

Significant Unobservable Inputs to Level 3 Measurements

The following table presents quantitative information about significant unobservable inputs that are utilized to determine the estimated fair value of Level 3 assets that are presented at fair value on a non-recurring basis at June 30, 2013:

Non-recurring fair value measurements
 
Fair value
 
Valuation technique
 
Unobservable input / assumptions
 
Range(1) (weighted average)
Impaired loans:
 
 
 
 
 
 
 
 
Commercial real estate
 
$
6,084

 
Appraisal
 
Adjustments for comparable properties
 
15.0% - 36.0% (22.0%)
Commercial & industrial
 
894

 
Appraisal
 
Adjustments for comparable properties
 
9.0%-19.0% (14.4%)
Acquisition, development & construction
 
2,010

 
Appraisal
 
Adjustments for comparable properties
 
10.0% - 30.0% (13.5%)
Assets taken in foreclosure:
 
 
 
 
 
 
 
 
Residential mortgage
 
2,502

 
Appraisal
 
Adjustments by management to reflect current conditions/selling costs
 
16.0% - 59.0% (21.6%)
Commercial real estate
 
588

 
Appraisal
 
Adjustments by management to reflect current conditions/selling costs
 
20.0% - 37.0% (24.8%)
Acquisition, development & construction
 
1,286

 
Appraisal
 
Adjustments by management to reflect current conditions/selling costs
 
25.0% - 70.0% (30.2%)
Mortgage servicing rights
 
2,016

 
Third-party valuation
 
Discount rate
 
9.3% - 12.8%
 
 
 
 
Third-party valuation
 
Prepayment speed
 
100 - 968 (weighted average of 224)
(1) Represents range of discount factors applied to the appraisal to determine fair value. The amounts used for mortgage servicing rights are discounts applied by a third-party valuation provider which the Company believes are appropriate.

37
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


Fair Values of Financial Instruments

FASB Codification Topic 825 - Financial Instruments, requires disclosure of fair value information for those financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized in the consolidated statements of financial condition for interim and annual periods. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

Quoted market prices are used to estimate fair values when those prices are available, although active markets do not exist for many types of financial instruments. Fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with FASB Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.

The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes) as of June 30, 2013:
 
 
June 30, 2013
 
Carrying
amount
 
Quoted prices
in active  markets for
identical assets
Level 1
 
Significant
other
observable
inputs
Level 2
 
Significant
unobservable
inputs
Level 3
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
$
109,166

 
$
109,166

 
$
—

 
$
—

Securities available for sale
889,747

 
—

 
885,784

 
3,963

Securities held to maturity
175,977

 
—

 
172,405

 
—

Loans, net
2,308,160

 
—

 
—

 
2,345,415

Loans held for sale
1,539

 
—

 
1,539

 


Accrued interest receivable on securities
4,142

 
—

 
4,142

 
—

Accrued interest receivable on loans
7,178

 
—

 
—

 
7,178

FHLB stock
28,368

 
NA

 
NA

 
NA

Interest rate caps and swaps
931

 
—

 
931

 
—

Financial liabilities:
 
 
 
 
 
 
 
Non-maturity deposits
(2,385,131
)
 
(2,385,131
)
 
—

 
—

Certificates of deposit
(354,083
)
 
—

 
(354,185
)
 
—

FHLB and other borrowings
(552,805
)
 
—

 
(579,402
)
 
—

Mortgage escrow funds
(25,915
)
 
—

 
(25,910
)
 
—

Accrued interest payable on deposits including escrow
(144
)
 
—

 
(144
)
 
—

Accrued interest payable on borrowings
(1,432
)
 
—

 
(1,432
)
 
—

Interest rate caps and swaps
(930
)
 
—

 
(930
)
 
—



38
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2012:
 
 
September 30, 2012
 
Carrying
amount
 
Quoted prices
in active  markets for
identical assets
Level 1
 
Significant
other
observable
inputs
Level 2
 
Significant
unobservable
inputs
Level 3
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
$
437,982

 
$
437,982

 
$
—

 
$
—

Securities available for sale
1,010,872

 
—

 
1,006,242

 
4,630

Securities held to maturity
142,376

 
—

 
146,324

 
—

Loans, net
2,091,190

 
—

 
—

 
2,157,133

Loans held for sale
7,505

 
—

 
7,505

 
—

Accrued interest receivable on securities
4,011

 
—

 
4,011

 
—

Accrued interest receivable on loans
6,502

 
—

 
—

 
6,502

FHLB stock
19,249

 
NA

 
NA

 
NA

Interest rate caps and swaps
2,487

 
—

 
2,487

 
—

Financial liabilities:
 
 
 
 
 
 
 
Non-maturity deposits
(2,723,669
)
 
(2,723,669
)
 
—

 
—

Certificates of deposit
(387,482
)
 
—

 
(389,031
)
 
—

FHLB and other borrowings
(345,176
)
 
—

 
(377,906
)
 
—

Mortgage escrow funds
(11,919
)
 
—

 
(11,917
)
 
—

Accrued interest payable on deposits including escrow
(500
)
 
—

 
(500
)
 
—

Accrued interest payable on borrowings
(1,442
)
 
—

 
(1,442
)
 
—

Interest rate caps and swaps
(2,485
)
 
—

 
(2,485
)
 
—


The following paragraphs summarize the principal methods and assumptions, not previously presented, used by management to estimate the fair value of the Company’s financial instruments.
 
(a) Cash and due from banks

The carrying value of cash and due from banks approximates their fair value and are classified as Level 1.

(b) Securities

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

(c) Loans held for sale

Loans held for sale are recorded at the lower of cost or fair value in accordance with GAAP and are classified as Level 2.


39
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


(d) Loans

Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into adjustable-rate and fixed-rate categories. Fixed-rate loans were further segmented by type, such as residential mortgage, commercial mortgage, commercial business and consumer loans. Loans were also segmented by maturity dates. Fair values were estimated by discounting scheduled future cash flows through estimated maturity using a discount rate equivalent to the current market rate on loans that are similar with regard to collateral, maturity and the type of borrower. The discounted value of the cash flows was reduced by a credit risk adjustment based on loan categories. Based on the current composition of the Company’s loan portfolio, as well as past experience and current economic conditions and trends, the future cash flows were adjusted by prepayment assumptions that shortened the estimated remaining time to maturity and therefore affected the fair value estimates resulting in a Level 3 classification.

(e) FHLB stock

It is not practical to determine the fair value of FHLB stock due to the restrictions on transfer of their securities.

(f) Deposits and mortgage escrow funds

In accordance with FASB Codification Topic 825, deposits with no stated maturity (such as savings, demand and money market deposits) were assigned fair values equal to the carrying amounts payable on demand and are classified as Level 1. Certificates of deposit and mortgage escrow funds were segregated by account type and original term, and fair values were estimated by discounting the contractual cash flows and are classified as Level 2. The discount rate for each account grouping was equivalent to the current market rates for deposits of similar type and maturity.

These fair values do not include the value of core deposit relationships that comprise a significant portion of the Company’s deposit base. Management believes that the Company’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial value separate from the deposit balances.

(g) Borrowings

Fair values of FHLB of New York and other borrowings were estimated by discounting the contractual cash flows and are classified as Level 2. A discount rate was utilized for each outstanding borrowing equivalent to the then-current rate offered on borrowings of similar type and maturity.

(h) Accrued interest receivable/payable

The carrying amounts of accrued interest approximate fair value and are classified as Level 2.

(i) Other financial instruments

The other financial assets and liabilities listed in the preceding table have estimated fair values that approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

The fair values of the Company’s off-balance sheet financial instruments were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At June 30, 2013 and September 30, 2012, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.


40
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


13. Adoption of New Accounting Standards

Update Number 2013-02 - Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments would require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective for reporting periods beginning after December 15, 2012. See Note 14 for the impact of this standard.

14. Accumulated Other Comprehensive (Loss) Income

Activity in accumulated other comprehensive (loss) income (“AOCI”), net of tax, for the nine month period ended June 30, 2013 and 2012, was as follows:
 
Unrealized gains(losses) on securities
 
Unrealized gains (losses) for pension and other post-retirement obligations
 
Total
Balance at September 30, 2011
$
13,604

 
$
(8,468
)
 
$
5,136

Period change
537

 
1,010

 
1,547

Balance at June 30, 2012
$
14,141

 
$
(7,458
)
 
$
6,683

 
 
 
 
 
 
Balance at September 30, 2012
$
15,066

 
$
(8,167
)
 
$
6,899

Other comprehensive income before reclassifications
(22,173
)
 
—

 
(22,173
)
Amounts reclassified from AOCI
(3,301
)
 
918

 
(2,383
)
Period change
(25,474
)
 
918

 
(24,556
)
Balance at June 30, 2013
$
(10,408
)
 
$
(7,249
)
 
$
(17,657
)



41
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


The following table presents the reclassification adjustments from AOCI included in net income and the impacted line items on the income statement for the nine months ended June 30, 2013:
Components of AOCI
 
Amount reclassified from AOCI and impact on net income  (1)
 
Affected income statement line item
 
 
 
 
 
Unrealized gains (losses) on available for sale securities
 
 
 
 
 
 
$
5,590

 
Non-interest income - net gain on sale of securities
 
 
(32
)
 
Non-interest income - net impairment loss in earnings
 
 
5,558

 
Net change before tax
 
 
(2,257
)
 
Tax expense
 
 
$
3,301

 
Net change after tax
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Actuarial loss
 
$
(1,547
)
 
Non-interest expense - compensation and employee benefits (2)
 
 
(1,547
)
 
Total change before tax
 
 
629

 
Tax benefit
 
 
$
(918
)
 
Net change after tax
 
 
 
 
 
(1) Amounts in parentheses indicate a reduction from income.
(2) These accumulated other comprehensive (loss) income components are included in the computation of net periodic pension cost (see Note 10 - Pensions and Other Post Retirement Benefits for additional details).



42
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands, except per share data)


15. Pending Merger

On April 4, 2013 Provident announced it had entered into a merger agreement with Sterling Bancorp (NYSE: STL). In the merger, which is a stock-for-stock transaction valued at $344 million based on the closing price of Provident common stock on April 3, 2013, Sterling Bancorp shareholders will receive a fixed ratio of 1.2625 shares of Provident common stock for each share of Sterling Bancorp common stock. Upon closing, Provident shareholders will own approximately 53% of stock in the combined company and Sterling Bancorp shareholders will own approximately 47%. On a pro forma combined basis, for the twelve months ended September 30, 2012, the companies had revenue of $253 million and $33 million in net income. Upon completion of the merger the combined company is expected to have approximately $6.7 billion in assets. The transaction, which has been approved by the boards of directors of both companies, is expected to close in the fourth calendar quarter of 2013. The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions.

16. Subsequent Events

On July 2, 2013, Provident completed the offering of its Senior Notes due 2018 (the “Senior Notes”). The Senior Notes, which bear interest at 5.50% annually, were issued under an indenture dated July 2, 2013 (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Senior Notes were sold in a private placement and resold by the initial purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”).

The Senior Notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries. Interest on the Senior Notes will be payable on January 2 and July 2 beginning on January 2, 2014. Interest will be calculated on the basis of a 360-day year of twelve 30-day months. The Senior Notes will mature on July 2, 2018.

The Indenture includes provisions that, among other things, restrict the Company’s ability to dispose of or issue shares of voting stock of a Principal Subsidiary Bank (as defined in the Indenture) or transfer the entirety of or a substantial amount of the Company’s assets or merge or consolidate with or into other entities, without satisfying certain conditions.

The Senior Notes will not be registered under the Securities Act and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

43

•
ability to obtain regulatory approvals and meet other closing conditions to the merger (the “Merger”) between the Company and Sterling Bancorp ( “Sterling”), including approval by the Company and Sterling shareholders, on the expected terms and schedule;
•
delay in closing the Merger;
•
difficulties and delays in integrating the Company and Sterling businesses or fully realizing cost savings and other benefits;
•
business disruption following the proposed Merger;
•
changes in the Company’s stock price before completion of the Merger, including as a result of the financial performance of Sterling prior to closing;
•
the reaction to the Merger of the companies’ customers, employees and counterparties;
•
our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectibility of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
•
legislative and regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our business including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;
•
a deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended declines in the real estate market and constrained financial markets;
•
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;
•
our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
•
changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
•
computer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs;
•
changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees;
•
our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such matters;
•
our success at managing the risks involved in the foregoing and managing our business; and
•
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control.

Additional factors that may affect our results are discussed in our annual report on Form 10-K under “Item 1A, Risk Factors”, in the Company’s Form S-4/A filed with the SEC on July 17, 2013, and elsewhere in this Report under “Part II. Item IA, Risk Factors” or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

The following commentary presents management’s discussion and analysis of financial condition and results of operations and is intended to assist the reader in understanding our financial condition and results of operations. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes included in Part I, Item I of this document and with our consolidated financial statements and the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2012 Annual Report on Form 10-K. Operating results discussed herein are not necessarily indicative of the results of any future period. Tax-equivalent adjustments are the result of increasing income from tax-exempt securities by an amount equal to the federal taxes that would be paid if the income were fully taxable based on a 35.0% marginal effective income tax rate.

Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred

44

income taxes and the recognition of interest income. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by the Company to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, and review their risk components as a part of that evaluation. See our Annual Report on Form 10-K, Note 1, “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in our “Notes to Consolidated Financial Statements” for a discussion of the risk components. We consistently review the risk components to identify any changes in trends. During the quarter ended June 30, 2013, we modified the methodology we use to determine the allowance for loan losses required for residential mortgage loans and equity lines of credit. In prior periods, we evaluated these loans for impairment on an individual basis.
Goodwill and Other Intangible Assets. The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used.  Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.
We also use judgment in the valuation of other intangible assets. A core deposit intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we determine these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired.
Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless the Company considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when we have determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectibility is no longer considered doubtful.

Overview and Management Strategy

Provident New York Bancorp is headquartered in Montebello, New York. With $3.8 billion in assets, we are a growing financial services firm that specializes in the delivery of services and solutions to business owners, their families and consumers in communities within the greater New York metropolitan area through teams of dedicated and experienced relationship managers. We offer a complete line of commercial, business and consumer banking products and services. Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank. References to Provident New York Bancorp, we, us, or the Company may signify the Bank, depending on the context.

We focus our efforts on generating core deposits, especially transaction accounts, and originating high quality loans with an emphasis on growing our commercial loan balances. We seek to maintain a disciplined pricing strategy on deposits that will allow

45

us to compete for high quality loans while maintaining an appropriate spread over funding costs. Our strategic objectives include growing revenues and earnings by expanding client acquisitions, improving asset quality and increasing efficiency. To achieve these goals we are focusing on high value client segments, expanding our delivery and distribution channels, creating a high productivity performance culture, closely monitoring operating costs and proactively managing enterprise risk.

Our current target markets encompass New York City including Manhattan and Long Island; our Central Market, which consists of Rockland and Westchester counties in New York and Bergen county in New Jersey; and our Northern Market, which consists of Orange, Sullivan, Ulster, and Putnam counties in New York. Our goal is to create a regional bank operating in the greater New York metropolitan area that achieves top-tier performance on key metrics including return on equity, return on assets and earnings per share growth.

Recent Developments

Consistent with our strategy of expanding within the greater New York metropolitan area, on April 4, 2013 we announced a merger agreement with Sterling Bancorp (NYSE: STL). We are working closely with Sterling Bancorp and continue to see tremendous opportunity in combining the two institutions. We are diligently planning all aspects of the integration through cross-functional teams from both organizations. We expect the merger will create a larger, more diversified company and will allow us to accelerate the build-out of our differentiated strategy targeting small-to-middle market commercial and consumer clients.

In the merger, which is a stock-for-stock transaction valued at approximately $344 million based on the closing price of Provident common stock on April 3, 2013, Sterling Bancorp shareholders will receive a fixed ratio of 1.2625 shares of Provident common stock for each share of Sterling Bancorp common stock. Upon closing, Provident shareholders will own approximately 53% of stock in the combined company, and Sterling Bancorp shareholders will own approximately 47%. On a pro forma combined basis, for the twelve months ended September 30, 2012, the companies had revenue of $253 million and $33 million in net income. Upon completion of the merger the combined company is expected to have approximately $6.7 billion in assets. The merger is expected to generate approximately $34 million in fully phased-in annual cost savings or approximately 18% of the expected combined expense total. The merger is expected to be accretive to Provident earnings per share in 2014, excluding the impact of the potential revenue enhancement opportunities. The transaction, which has been approved by the boards of directors of both companies, is expected to close in the fourth calendar quarter of 2013. The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions.

On July 2, 2013, Provident issued $100 million of 5.50% Senior Notes due 2018. We anticipate approximately $70 million of the proceeds will be contributed to Provident Bank as equity to support the activities and planned growth of the Bank on a stand alone basis and a combined basis once the merger with Sterling Bancorp is completed.


























46


SELECTED FINANCIAL DATA
The following summary data is based in part on the consolidated financial statements and accompanying notes, and other information appearing elsewhere in this Form 10-Q.
 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Per Common Share Data
 
 
 
 
 
 
 
Earnings, basic
$
0.15

 
$
0.17

 
$
0.46

 
$
0.47

Earnings, diluted
0.15

 
0.17

 
0.45

 
0.47

Book value
10.83

 
11.73

 
10.83

 
11.73

Tangible book value (1)
7.01

 
7.39

 
7.01

 
7.39

Dividends declared per share
0.06

 
0.06

 
0.18

 
0.18

Performance Ratios (annualized)
 
 
 
 
 
 
 
Return on average assets
0.68
%
 
0.80
%
 
0.70
%
 
0.76
%
Return on average equity
5.18

 
5.65

 
5.40

 
5.38

Return on average tangible equity (1)
7.88

 
9.01

 
8.26

 
8.64

Core operating efficiency (1)
59.1

 
65.5

 
62.2

 
67.0

Balance Sheet Data (dollars in thousands)
 
 
 
 
 
 
 
Total assets
$
3,824,429

 
$
3,150,040

 
$
3,824,429

 
$
3,150,040

Total securities
1,065,724

 
885,433

 
1,065,724

 
885,433

Total loans
2,336,534

 
1,851,027

 
2,336,534

 
1,851,027

Allowance for loan losses
(28,374
)
 
(27,587
)
 
(28,374
)
 
(27,587
)
Total goodwill and intangible assets
169,318

 
164,579

 
169,318

 
164,579

Deposits
2,739,214

 
2,332,091

 
2,739,214

 
2,332,091

Borrowings
552,805

 
314,154

 
552,805

 
314,154

Stockholders’ equity
480,165

 
444,670

 
480,165

 
444,670

Tangible equity (1)
310,847

 
280,091

 
310,847

 
280,091

Income Statement Data (dollars in thousands)
 
 
 
 
 
 
 
Net interest income
$
28,317

 
$
24,082

 
$
84,059

 
$
71,225

Provision for loan losses
3,900

 
2,312

 
9,450

 
7,112

Non-interest income
6,581

 
7,979

 
21,092

 
23,126

Non-interest expense
21,789

 
21,162

 
67,674

 
63,173

Net income
6,376

 
6,209

 
19,925

 
17,627

Capital
 
 
 
 
 
 
 
Tangible equity as a % of tangible assets (1)
8.50
%
 
9.38
%
 
8.50
%
 
9.38
%
Asset Quality (dollars in thousands)
 
 
 
 
 
 
 
Non-performing loans (NPLs): non-accrual
$
27,244

 
$
41,048

 
$
27,244

 
$
41,048

Non-performing loans (NPLs): still accruing
4,216

 
3,450

 
4,216

 
3,450

Other real estate owned
4,376

 
7,292

 
4,376

 
7,292

Non-performing assets (NPAs)
35,836

 
51,790

 
35,836

 
51,790

Net charge-offs
3,070

 
2,512

 
9,358

 
7,442

Net charge-offs as a % of average loans (annualized)
0.54
%
 
0.55
%
 
0.57
%
 
0.56
%
NPLs as a % of total loans
1.35

 
2.40

 
1.35

 
2.40

NPAs as a % of total assets
0.94

 
1.64

 
0.94

 
1.64

Allowance for loan losses as a % of NPLs
90.2

 
62.0

 
90.2

 
62.0

Allowance for loan losses as a % of total loans
1.21

 
1.49

 
1.21

 
1.49

(1) See reconciliation of non-GAAP measure on page 57.

47


Summary
The key highlights as of and for the nine months ended June 30, 2013 included the following:

•
Net income of $19.9 million, which represents an increase of 13.0% compared to the nine months ended June 30, 2012.
•
Loan originations of $892.0 million.
•
Total loans reached $2.3 billion, representing growth of $217.1 million, or 13.7% annualized, compared to September 30, 2012.
•
Commercial & industrial and commercial real estate loans increased $247.6 million, or 23.3% annualized compared to September 30, 2012.
•
The allowance for loan losses to non-performing loans increased to 90.2% at June 30, 2013 from 71.0% at September 30, 2012.
•
Deposits declined $371.9 million at June 30, 2013 compared to September 30, 2012, due to a decline in municipal deposits given elevated levels of municipal deposits at the Company’s fiscal year end as a result of seasonal factors.
•
Return on average tangible equity, a non-GAAP measure, was 8.26% for the nine months ended June 30, 2013 compared to 8.64% for the nine months ended June 30, 2012 (see page 57 for non-GAAP reconciliation of return on tangible equity).
•
Return on average assets was 0.70% for the nine months ended June 30, 2013 compared to 0.76% for the nine months ended June 30, 2012.
•
The core operating efficiency ratio, a non-GAAP measure, improved to 62.2% for the nine months ended June 30, 2013 compared to 67.0% for the nine months ended June 30, 2012.

Comparison of Financial Condition at June 30, 2013 and September 30, 2012

Total assets as of June 30, 2013 decreased $198.6 million or 4.94% from September 30, 2012 mainly related to a decrease in our cash balance of $328.8 million. Our cash balance at September 30, 2012 was elevated due to municipal tax collections that were subsequently drawn down.

Total securities decreased by $87.5 million, or 7.59%, to $1.1 billion at June 30, 2013 as compared to September 30, 2012. Securities represented 27.9% of total assets at June 30, 2013 compared to 28.7% at September 30, 2012. For the nine months ended June 30, 2013, securities purchases were $408.4 million, sales of securities were $263.1 million, and maturities, calls, and repayments were $193.1 million. During the third quarter of 2013, the 5-year Treasury benchmark rate increased from 0.77% September 30, 2012 to 1.41% at June 30, 2013 which decreased the fair value of our securities. As a result of the decrease in fair value and realized gains from the sale of available for sale securities, the unrealized gain on securities at September 30, 2012 of $25.4 million declined by $42.9 million and is an unrealized loss of $17.5 million at June 30, 2013. Securities gains net of OTTI losses were $5.6 million and net amortization of securities premiums was $2.3 million for the nine months ended June 30, 2013. We are focusing on growing our loan portfolio, reducing the proportion of securities as a percentage of our total earning assets and diversifying our securities portfolio through purchases of shorter duration securities including corporate securities and other credit sensitive assets. At June 30, 2013, the investment portfolio weighted average duration was 5.07 years and the yield was 2.38% and 2.33% for the three months and nine months ended June 30, 2013, respectively.

Gross loans as of June 30, 2013 were $2.3 billion, which represented a $217.1 million increase relative to September 30, 2012. Commercial real estate and commercial & industrial loans increased $247.6 million over the same period. The Company has expanded its market reach in the greater New York metropolitan area by deploying a team-based relationship and distribution strategy, which is allowing us to better serve our small to middle market commercial clients and is driving our loan growth. Including loans originated for sale, the Company originated $892.0 million in loans for the nine months ended June 30, 2013, while repayments were $589.5 million.

Credit Quality (also see Note 3 to the consolidated financial statements)

Loans acquired in connection with the acquisition of Gotham Bank in August 2012 were recorded at fair value at the date of acquisition. These loans totaled $152.8 million at June 30, 2013, of which $151.5 million continue to carry no allowance for loan losses, compared to $205.8 million at September 30, 2012. Factors that went into the determination of fair value of the acquired loans included adjustments related to interest rates and expected credit losses. There had been no amounts charged-off against this discount for the nine months ended June 30, 2013. None of the Gotham Bank acquired loans were considered purchased credit impaired loans at the acquisition date.

Our non-performing loans decreased $8.4 million during the nine months ended June 30, 2013 to $31.5 million. The decrease was mainly the result of a decline in non-performing acquisition development and construction (“ADC”) of $9.5 million, due to the efforts of our credit administration team. Partially offsetting this decline were increases in non-performing commercial real

48

estate loans of $1.4 million and elevated levels of non-performing residential mortgage loans. Through nine months ended June 30, 2013, net charge-offs of residential mortgage loans were $2.3 million and the balance of non-performing residential mortgage loans was $10.0 million, which represented 31.8% of our non-performing loans. An extended time period is required to resolve loans in foreclosure processes, particularly in New York state where the majority of our portfolio is located.

Classified loans are loans rated substandard or lower in the Company’s risk rating system. Classified loans declined $26.5 million to $62.2 million at June 30, 2013 compared to $88.7 million at September 30, 2012. This represents 2.66% of the loan portfolio at June 30, 2013 compared to 4.18% of the loan portfolio at September 30, 2012.

Allowance for loan losses. Under accounting guidance established for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. A loan loss allowance is recorded by the Company for the emergence of new probable and estimable loan losses on acquired loans that were not impaired as of the acquisition date. Because of this accounting requirement certain measures of loan loss allowance and related metrics are not comparable to periods prior to the acquisition date.

The allowance for loan losses was $28.4 million at June 30, 2013 compared to $28.3 million at September 30, 2012. The allowance represented 1.21% of total loans at June 30, 2013 compared to 1.33% of total loans at September 30, 2012. The allowance as a percentage of total loans at June 30, 2013 declined from September 30, 2012 due to a lower required allowance given improvements in our classified assets and non-performing assets. In addition, the required allowance for newly originated commercial real estate loans is lower than for seasoned commercial real estate loans, which has an impact on our allowance for loan losses as a percentage of total loans given the increase in our loan balances through the nine months ended June 30, 2013.

The allowance for loan losses to non-performing loans equaled 90.2% at June 30, 2013, compared to 71.0% at September 30, 2012. Net charge-offs for the nine months ended June 30, 2013 were $9.4 million. The majority of charge-offs were driven by ADC loans, which totaled $3.0 million, and residential mortgage loans, which totaled $2.3 million. The ADC charge-offs were mainly related to the resolution of one significant relationship and the residential mortgage charge-offs were the result of updated appraisal information on certain under performing residential loans.

Loans transferred to foreclosed properties for the nine months ended June 30, 2013 were $2.5 million. This was offset by sales and write-downs of $4.5 million and resulted in a foreclosed properties balance of $4.4 million at June 30, 2013, compared to $6.4 million at September 30, 2012.

ADC loans declined $37.9 million to $106.2 million compared to $144.1 million at September 30, 2012. The Company expects it will continue to reduce ADC loan balances.

Deposits as of June 30, 2013 were $2.7 billion, a decrease of $371.9 million, or 12.0%, from September 30, 2012. As of June 30, 2013, transaction accounts were 40.9% of deposits, or $1.12 billion compared to $1.40 billion or 44.9% of deposits at September 30, 2012. As of June 30, 2013, savings deposits were $529.4 million, an increase of $22.8 million or 4.5% from September 30, 2012. Money market accounts decreased $87.4 million or 10.6% to $734.4 million at June 30, 2013. Certificates of deposit accounts decreased by $33.4 million or 8.6%.

Municipal deposits were $465.6 million at June 30, 2013 compared to $901.7 million at September 30, 2012. Municipal deposits reach peak volumes in connection with tax payments collected during the month of September. Excluding municipal deposits, deposits increased $64.2 million during the nine months ended June 30, 2013.

Borrowings increased by $207.6 million or 60.2%, from September 30, 2012 to $552.8 million, due primarily to an increase in short-term FHLB advances . The short-term advances were utilized principally to fund loan growth and a portion of the decline in municipal deposits. At June 30, 2013, the balance of the discount associated with our long-term FHLB borrowings that will accrete as additional interest expense over the remaining term of the borrowings was $438 thousand.

Stockholders’ equity decreased $11.0 million from September 30, 2012 to $480.2 million at June 30, 2013. This was principally the result of the decrease in accumulated other comprehensive income of $24.6 million due to the increase in interest rates, which caused the fair value of our available for sale securities to decline in value. Offsetting more than half of this decline was an increase in retained earnings of $11.9 million and treasury stock transactions of $1.7 million.

As of June 30, 2013, the Company had authorization to purchase up to an additional 776,713 shares of common stock; however, the Company has no plans to acquire any of its shares for the remainder of this fiscal year. The Bank’s Tier 1 leverage ratio was 8.49% at June 30, 2013. The Company’s tangible equity as a percentage of tangible assets was 8.50% at June 30, 2013 (see non-GAAP reconciliation of tangible equity as a percentage of tangible assets on page 57).

49


Comparison of Operating Results for the Three Months Ended June 30, 2013 and June 30, 2012

Net income for the three months ended June 30, 2013 was $6.4 million or $0.15 per diluted share, an increase of $167 thousand compared to $6.2 million or $0.17 per diluted share, for the three months ended June 30, 2012. Diluted earnings per share declined $0.02 due primarily to an increase in common shares outstanding as a result of the 6.3 million common shares the Company issued in August 2012 in connection with the Gotham acquisition. The primary factor contributing to the increase in net income for the current period was higher net interest income of $4.2 million or 17.6%. This increase in net interest income was offset by an increase of $1.6 million, or 68.7% in the provision for loan losses due principally to the growth of the loan portfolio; a decline of $1.4 million, or 18%, in non-interest income and an increase of $627 thousand, or 3% in non-interest expense.



50

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). 
 
For the three months ended June 30,
 
2013
 
2012
 
Average
outstanding
balance
 
Interest
 
Average
yield/
rate
 
Average
outstanding
balance
 
Interest
 
Average
yield/
rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
1,649,334

 
$
20,027

 
4.87
%
 
$
1,206,759

 
$
14,982

 
4.99
%
Consumer loans
205,692

 
2,180

 
4.25

 
219,462

 
2,623

 
4.81

Residential mortgage loans
371,901

 
4,431

 
4.78

 
363,544

 
4,707

 
5.21

Total net loans(1)
2,226,927

 
26,638

 
4.80

 
1,789,765

 
22,312

 
5.01

Securities-taxable
909,312

 
4,189

 
1.85

 
778,782

 
4,224

 
2.18

Securities-tax exempt(2)
184,325

 
2,308

 
5.02

 
182,003

 
2,433

 
5.38

Federal Reserve balances
32,717

 
25

 
0.31

 
27,767

 
14

 
0.20

Other earning assets
25,374

 
241

 
3.81

 
18,776

 
214

 
4.58

Total securities and other earning assets
1,151,728

 
6,763

 
2.36

 
1,007,328

 
6,885

 
2.75

Total interest earning assets
3,378,655

 
33,401

 
3.97

 
2,797,093

 
29,197

 
4.20

Non-interest earning assets
366,701

 
 
 

 
336,865

 
 
 
 
Total assets
$
3,745,356

 
 
 
 
 
$
3,133,958

 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
NOW deposits
$
461,390

 
74

 
0.06
%
 
$
412,072

 
110

 
0.11
%
Savings, club and escrow deposits
581,106

 
233

 
0.16

 
493,234

 
86

 
0.07

Money market deposits
777,857

 
456

 
0.24

 
697,342

 
540

 
0.31

Certificates of deposit
338,017

 
388

 
0.46

 
265,375

 
526

 
0.80

Total interest bearing deposits
2,158,370

 
1,151

 
0.21

 
1,868,023

 
1,262

 
0.27

Borrowings
440,579

 
3,125

 
2.84

 
320,237

 
3,001

 
3.77

Total interest bearing liabilities
2,598,949

 
4,276

 
0.66

 
2,188,260

 
4,263

 
0.78

Non-interest bearing deposits
625,684

 
 
 
 
 
483,589

 
 
 
 
Other non-interest bearing liabilities
26,674

 
 
 
 
 
20,153

 
 
 
 
Total liabilities
3,251,307

 
 
 
 
 
2,692,002

 
 
 
 
Stockholders’ equity
494,049

 
 
 
 
 
441,956

 
 
 
 
Total liabilities and equity
$
3,745,356

 
 
 
 
 
$
3,133,958

 
 
 
 
Net interest rate spread
 
 
 
 
3.31
%
 
 
 
 
 
3.42
%
Net earning assets
$
779,706

 
 
 
 
 
$
608,833

 
 
 
 
Net interest margin
 
 
29,125

 
3.46
%
 
 
 
24,934

 
3.59
%
Less tax equivalent adjustment(2)
 
 
(808
)
 
 
 
 
 
(852
)
 
 
Net interest income
 
 
$
28,317

 
 
 
 
 
$
24,082

 
 
Ratio of average interest earning assets to average interest bearing liabilities
130.0
%
 
 
 
 
 
127.8
%
 
 
 
 
 
(1) 
Includes non-accrual loans.
(2) 
Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate.

51

The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (dollars in thousands):
 
 
For the three months ended June 30, 2013 vs. 2012
Increase / (decrease) due to
 
Volume(1)
 
Rate(1)
 
Total
Interest earning assets:
 
 
 
 
 
Commercial loans
$
5,414

 
$
(369
)
 
$
5,045

Consumer loans
(155
)
 
(288
)
 
(443
)
Residential mortgage loans
110

 
(386
)
 
(276
)
Securities-taxable
656

 
(691
)
 
(35
)
Securities-tax exempt(2)
32

 
(157
)
 
(125
)
Federal Reserve excess reserves
2

 
9

 
11

Other earning assets
49

 
(22
)
 
27

Total interest income
6,108

 
(1,904
)
 
4,204

Interest bearing liabilities:
 
 
 
 
 
NOW deposits
14

 
(50
)
 
(36
)
Savings, club and escrow deposits
18

 
129

 
147

Money market deposits
54

 
(138
)
 
(84
)
Certificates of deposit
123

 
(261
)
 
(138
)
Borrowings
974

 
(850
)
 
124

Total interest expense
1,183

 
(1,170
)
 
13

Net interest margin
4,925

 
(734
)
 
4,191

Less tax equivalent adjustment(2)
11

 
(55
)
 
(44
)
Net interest income
$
4,914

 
$
(679
)
 
$
4,235

 
(1) 
Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.
(2) 
Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the three months ended June 30, 2013 was $28.3 million, an increase of $4.2 million or 17.6%, compared to the same quarter of fiscal 2012. Gross interest income on a tax-equivalent basis of $33.4 million increased $4.2 million for the quarter ended June 30, 2013, principally the result of an increase in the average daily balance of commercial loans due to loans acquired from Gotham Bank and new loans originated by our commercial banking teams. Interest expense increased $13 thousand, primarily the result of increased levels of average interest bearing liabilities.

The Company’s net interest margin declined 13 basis points to 3.46% for the three months ended June 30, 2013 compared to 3.59% for the three months ended June 30, 2012. Total interest earning assets on a tax-equivalent basis yielded 3.97% for the third fiscal quarter of 2013 compared to 4.20% for the third fiscal quarter of 2012. The decline in net interest margin was due to a decline in the yield on total loans of 21 basis points, to 4.80% for the three months ended June 30, 2013, and a 39 basis points decline in the yield on total securities and other earning assets, which was 2.36% for the three months ended June 30, 2013. The decline in interest earning asset yields is reflective of the interest rate environment. The cost of interest bearing liabilities declined 12 basis points to 66 basis points for the third fiscal quarter of 2013 compared to 78 basis points for the third fiscal quarter of 2012. The decline was due mainly to maturities of higher cost certificates of deposit repricing to current market rates and a reduction in the average rate paid on borrowings, which was caused by an increase in lower cost overnight borrowings used to fund loan growth.

Provision for loan losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable and estimable incurred loan losses inherent in the existing portfolio as of period end. The provision for loan losses and resulting level of the allowance for loan losses is a critical accounting estimate, which is subject to fluctuation from period to period. The Company recorded $3.9 million in provision for loan losses for the quarter ended June 30, 2013 compared to $2.3 million at June 30, 2012, an increase of $1.6 million. The increase in the

52

provision for loan losses is primarily attributable to $217.1 million increase in the loan portfolio between the periods. Please see the “Credit Quality” section for a discussion of the metrics associated with our loan portfolio.

Non-interest income for the three months ended June 30, 2013 decreased by $1.4 million or 17.5% to $6.6 million compared to third quarter of fiscal 2012. The decline in non-interest income was primarily the result of lower net gain on sale of securities of $467 thousand and lower investment management and title insurance fees of $373 thousand. In fiscal 2012 we sold the assets of our former subsidiaries that were active in title insurance and investment management businesses. During the third fiscal quarter of 2013, our new title insurance and investment management initiatives gained momentum and contributed $678 thousand to our non-interest income for the quarter. We expect both of these initiatives will allow us to drive growth in non-interest income. Other factors that contributed to the decline in non-interest income for the three months ended June 30, 2013 were lower gain on sale of loans of $149 thousand and lower deposit fees and services charges of $201 thousand.

Non-interest expense for the three months ended June 30, 2013 increased $627 thousand to $21.8 million, which represented a 3.0% increase compared to the same period in 2012. Merger-related expenses increased $1.1 million to $1.5 million for the three months ended June 30, 2013; these increased expenses were incurred in connection with our pending merger with Sterling Bancorp.
We also incurred an increase in compensation and benefits expense of $475 thousand due to an increase in personnel given the Gotham acquisition and the hiring of commercial banking teams. Partially offsetting these increases were decreases in foreclosed property expense of $456 thousand to $28 thousand of income for the three months ended June 30, 2013. Foreclosed property expense was comprised of a $146 thousand gain on sale of properties net of write-downs and expenses associated with owning properties of $118 thousand. Professional fees also declined in the period by $602 thousand based on lower foreclosure and loan collection costs as well as investment management professional fees that are no longer incurred due to our exit from our prior investment management business in fiscal 2012.

Income tax expense increased $455 thousand to $2.8 million for the three months ended June 30, 2013, compared to $2.4 million for the period ended June 30, 2012. The effective tax rate was 30.8% for the three months ended June 30, 2013 compared to 27.7% for the three months ended June 30, 2012. Our effective tax rate for the three months ended June 30, 2013 reflects our expectation of an increase in current and anticipated merger-related expense that we believe will not be tax deductible; however, the amount and timing of future merger-related expenses is difficult to predict and these increased expenses may have an impact on the Company’s pre-tax income and the proportion of tax exempt income as a percentage of total pre-tax income. This may reduce the effective tax rate in future periods.

Comparison of Operating Results for the Nine Months Ended June 30, 2013 and June 30, 2012

Net income for the nine months ended June 30, 2013 was $19.9 million or $0.45 per diluted share, an increase of $2.3 million compared to $17.6 million or $0.47 per diluted share, for the nine months ended June 30, 2012. Diluted earnings per share declined $0.02 due primarily to an increase in common shares outstanding as a result of the 6.3 million common shares the Company issued in August 2012 in connection with the Gotham acquisition. The primary factor contributing to the increase in earnings for the current period was higher net interest income of $12.8 million or 18.0%. Partially offsetting the increase in net interest income was a $2.3 million , or 32.9% increase in the provision for loan losses, a $2.0 million reduction in non-interest income and a $4.5 million, or 7.1% increase in non-interest income expense of.











53

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). 
 
For the nine months ended June 30,
 
2013
 
2012
 
Average
outstanding
balance
 
Interest
 
Average
yield/
rate
 
Average
outstanding
balance
 
Interest
 
Average
yield/
rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
1,603,027

 
$
60,176

 
5.02
%
 
$
1,157,067

 
$
43,828

 
5.06
%
Consumer loans
209,090

 
6,735

 
4.31

 
223,588

 
7,716

 
4.61

Residential mortgage loans
362,651

 
13,176

 
4.86

 
376,653

 
15,070

 
5.34

Total net loans(1)
2,174,768

 
80,087

 
4.92

 
1,757,308

 
66,614

 
5.06

Securities-taxable
943,809

 
12,761

 
1.81

 
758,050

 
12,629

 
2.23

Securities-tax exempt(2)
180,082

 
6,841

 
5.08

 
190,863

 
7,622

 
5.33

Federal Reserve balances
67,448

 
167

 
0.33

 
42,748

 
86

 
0.27

Other earning assets
21,626

 
696

 
4.30

 
18,891

 
641

 
4.53

Total securities and other earning assets
1,212,965

 
20,465

 
2.26

 
1,010,552

 
20,978

 
2.77

Total interest earning assets
3,387,733

 
100,552

 
3.97

 
2,767,860

 
87,592

 
4.23

Non-interest earning assets
396,751

 
 
 
 
 
341,413

 
 
 
 
Total assets
$
3,784,484

 
 
 
 
 
$
3,109,273

 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
NOW deposits
$
479,424

 
323

 
0.09
%
 
$
400,263

 
380

 
0.13
%
Savings, club and escrow deposits
562,465

 
744

 
0.18

 
467,399

 
233

 
0.07

Money market deposits
854,521

 
2,039

 
0.32

 
642,674

 
1,368

 
0.28

Certificates of deposit
358,148

 
1,766

 
0.66

 
284,343

 
1,811

 
0.85

Total interest bearing deposits
2,254,558

 
4,872

 
0.29

 
1,794,679

 
3,792

 
0.28

Borrowings
377,417

 
9,227

 
3.27

 
363,038

 
9,907

 
3.65

Total interest bearing liabilities
2,631,975

 
14,099

 
0.72

 
2,157,717

 
13,699

 
0.85

Non-interest bearing deposits
638,726

 
 
 
 
 
495,856

 
 
 
 
Other non-interest bearing liabilities
20,690

 
 
 
 
 
18,233

 
 
 
 
Total liabilities
3,291,391

 
 
 
 
 
2,671,806

 
 
 
 
Stockholders’ equity
493,093

 
 
 
 
 
437,467

 
 
 
 
Total liabilities and equity
$
3,784,484

 
 
 
 
 
$
3,109,273

 
 
 
 
Net interest rate spread
 
 
 
 
3.25
%
 
 
 
 
 
3.38
%
Net earning assets
$
755,758

 
 
 
 
 
$
610,143

 
 
 
 
Net interest margin
 
 
86,453

 
3.41
%
 
 
 
73,893

 
3.57
%
Less tax equivalent adjustment (2)
 
 
(2,394
)
 
 
 
 
 
(2,668
)
 
 
Net interest income
 
 
$
84,059

 
 
 
 
 
$
71,225

 
 
Ratio of average interest-earning assets to average interest bearing liabilities
128.7
%
 
 
 
 
 
128.3
%
 
 
 
 
 
(1) 
Includes non-accrual loans.
(2) 
Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate.

54

The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (dollars in thousands):
 
 
For the nine months ended June 30, 2013 vs. 2012 Increase / (decrease) due to
 
Volume(1)
 
Rate(1)
 
Total
Interest earning assets:
 
 
 
 
 
Commercial loans
$
16,700

 
$
(352
)
 
$
16,348

Consumer loans
(490
)
 
(491
)
 
(981
)
Residential mortgage loans
(554
)
 
(1,340
)
 
(1,894
)
Securities-taxable
2,775

 
(2,643
)
 
132

Securities-tax exempt(2)
(427
)
 
(354
)
 
(781
)
Federal Reserve excess reserves
59

 
22

 
81

Other earning assets
75

 
(20
)
 
55

Total interest income
18,138

 
(5,178
)
 
12,960

Interest-bearing liabilities:
 
 
 
 
 
NOW deposits
72

 
(129
)
 
(57
)
Savings, club and escrow deposits
59

 
452

 
511

Money market deposits
468

 
203

 
671

Certificates of deposit
411

 
(456
)
 
(45
)
Senior debt
(376
)
 
(377
)
 
(753
)
Borrowings
1,015

 
(942
)
 
73

Total interest expense
1,649

 
(1,249
)
 
400

Net interest margin
16,489

 
(3,929
)
 
12,560

Less tax equivalent adjustment(2)
(148
)
 
(126
)
 
(274
)
Net interest income
$
16,637

 
$
(3,803
)
 
$
12,834

 
(1) 
Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.
(2) 
Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the nine months ended June 30, 2013 was $84.1 million, an increase of $12.8 million, or 18.0%, compared to the nine months ended June 30, 2012. Interest income on a tax-equivalent basis of $100.6 million increased $13.0 million for the nine months ended June 30, 2013 compared to the same period in fiscal 2012. The increase in interest income on a tax-equivalent basis was principally the result of an increase in the average daily balance of commercial loans, driven by new loans originated by our banking teams and our August 2012 acquisition of Gotham Bank. Interest expense increased by $400 thousand primarily the result of increased levels of municipal money market deposits. Municipal deposits reach their peak volume in September, which resulted in increased average balances outstanding that were held at September 30, 2012 in transaction accounts and then were subsequently moved to interest bearing accounts. By June 30, 2013, a substantial portion of these deposits had been withdrawn; however, this increase had an impact on average deposit balances for the nine month period.

The Company’s net interest margin declined 16 basis points to 3.41% for the nine months ended June 30, 2013 compared to 3.57% for the nine months ended June 30, 2012. Total interest earning assets on a tax-equivalent basis yielded 3.97% for the first nine months of fiscal 2013 compared to 4.23% for the first nine months of fiscal 2012, principally due to a decrease of 52 basis points in the weighted average yield on our investment securities and a 48 basis points decline in the weighted average yield on our residential mortgage loans, both of which declined due to changes in market interest rates. The cost of interest bearing deposits increased 1 basis point to 29 basis points for the first nine months of fiscal 2013. The increase was mainly the result of an increase in the average volume and cost of money market accounts.

Provision for loan losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable and estimable incurred loan losses inherent in the existing

55

portfolio as of period end. The Company recorded $9.5 million in loan loss provisions for the nine month period ended June 30, 2013 compared to $7.1 million for the nine month period ended June 30, 2012, an increase of $2.3 million. Please see the “Credit Quality” section for a discussion of the metrics associated with our loan portfolio.

Non-interest income for the nine months ended June 30, 2013 decreased by $2.0 million; this represented an 8.8% decrease to $21.1 million compared to the nine months ended June 30, 2012. Non-interest income declined mainly due to a $1.7 million reduction in net gain on sale of securities. Also contributing to the decline was $627 thousand in lower investment management fees, which was discussed above in “Comparison of Operating Results for the three months ended June 30, 2013 and June 30, 2012 - Non-interest income.” Partially offsetting these declines were higher gain on sale of loans of $214 thousand and other loan fees included in other non-interest income, which increased by approximately $644 thousand due to higher levels of loan servicing fees and other miscellaneous loan fees increased loan origination volumes.

Non-interest expense for the nine months ended June 30, 2013 increased by 7.1% or $4.5 million, to $67.7 million compared to the same period in 2012. The increase in non-interest expense was principally the result of additional compensation and benefits expense of $2.3 million and a $689 thousand increase in occupancy and office operation expense both of which are related to the hiring of new banking teams; an increase of $127 thousand in foreclosed property expense as we exited non-performing assets; and a $841 thousand increase in stock-based compensation expense due to grants awarded to management and directors.

Income tax expense increased $1.7 million to $8.1 million for the nine months ended June 30, 2013, compared to $6.4 million for the nine month period ended June 30, 2012. The effective tax rate was 28.9% for the nine months ended June 30, 2013 compared to 26.8% for the nine months of fiscal 2012. The increase in the effective tax rate is attributable to higher pre-tax earnings and a reduction in the proportion of tax-exempt earnings from investment securities and bank owned life insurance.









56


The Company provides supplemental reporting of non-GAAP measures as management believes this information is useful to investors.
 
For the three months ended June 30,
 
For the nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Reconciliation of return on average tangible equity (dollars in thousands):
Average stockholders’ equity
$
494,049

 
$
441,956

 
$
493,093

 
$
437,467

Average goodwill and other amortizable intangibles
(169,509
)
 
(164,751
)
 
(170,767
)
 
(165,053
)
Average tangible stockholders’ equity
324,540

 
277,205

 
322,326

 
272,414

Net income
6,376

 
6,209

 
19,925

 
17,627

Net income (annualized)
25,574

 
24,972

 
26,640

 
23,546

Return on average tangible equity
7.88
%
 
9.01
%
 
8.26
%
 
8.64
%

Reconciliation of the core operating efficiency ratio (dollars in thousands) :
Net interest income
$
28,317

 
24,082

 
$
84,059

 
$
71,225

Non-interest income
6,581

 
7,979

 
21,092

 
23,126

Total net revenues
34,898

 
32,061

 
105,151

 
94,351

Tax equivalent adjustment on securities interest income
808

 
852

 
2,394

 
2,668

Net gain on sale of securities
(1,945
)
 
(2,412
)
 
(5,590
)
 
(7,300
)
Net gain on sale of fixed assets
—

 
—

 
(5
)
 
(5
)
Other than temporary loss on securities
—

 
6

 
32

 
44

Other (other gains and fair value loss on interest rate caps)
—

 
14

 
1

 
57

Core total revenues
33,761

 
30,521

 
101,983

 
89,815

Non-interest expense
21,789

 
21,162

 
67,674

 
63,173

Merger-related expense
(1,516
)
 
(451
)
 
(2,058
)
 
(997
)
Foreclosed property expense
28

 
(428
)
 
(1,172
)
 
(1,045
)
Amortization of intangible assets
(337
)
 
(283
)
 
(986
)
 
(911
)
Core non-interest expense
19,964

 
20,000

 
63,458

 
60,220

Core operating efficiency ratio
59.1
%
 
65.5
%
 
62.2
%
 
67.0
%
The core operating efficiency ratio reflects total revenues inclusive of the tax equivalent adjustment on municipal securities and excludes securities gains, other than temporary impairments and other adjustments shown above. Core non-interest expense is adjusted to exclude the effect of foreclosed property expense, merger-related expense, and amortization of intangible assets.
 
 
 
 
 
June 30,
 
 
 
 
 
2013
 
2012
Reconciliation of stockholders’ equity to tangible equity and the tangible equity ratio (dollars in thousands):
Total assets
 
 
 
 
$
3,824,429

 
$
3,150,040

Goodwill and other amortizable intangibles
 
 
 
 
(169,318
)
 
(164,579
)
Tangible assets
 
 
 
 
3,655,111

 
2,985,461

Stockholders’ equity
 
 
 
 
480,165

 
444,670

Goodwill and other intangible assets
 
 
 
 
(169,318
)
 
(164,579
)
Tangible stockholders’ equity
 
 
 
 
310,847

 
280,091

Shares of common stock outstanding at period end
 
 
 
 
44,353,276

 
37,899,007

Tangible equity as a % of tangible assets
 
 
 
 
8.50
%
 
9.38
%
Tangible book value per share
 
 
 
 
$
7.01

 
$
7.39




57

Liquidity and Capital Resources

The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortizations of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial loans and residential mortgage loans, and the purchase of investment securities. During the nine months ended June 30, 2013 and 2012, our loan originations totaled $892.0 million and $604.4 million, respectively. Purchases of securities available for sale totaled $324.5 million and $338.5 million for the nine months ended June 30, 2013 and 2012, respectively. Purchases of securities held to maturity totaled $83.9 million and $83.6 million for the nine months ended June 30, 2013 and 2012, respectively. These activities were funded primarily by sales of securities, borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $291.3 million at June 30, 2013 and unused lines of credit granted to customers were $103.6 million at June 30, 2013. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit.

The Company’s investments in bank owned life insurance (“BOLI”) policies are considered illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. The recorded value of BOLI contracts totaled $60.4 million and $59.0 million at June 30, 2013 and September 30, 2012, respectively.

Deposit flows are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, seasonal fluctuations related to municipal deposits and other factors. The net change in total deposits was a decrease of $371.9 million and an increase of $35.4 million for the nine months ended June 30, 2013 and 2012, respectively. The decline in the first nine months of the 2013 fiscal year is principally related to seasonal fluctuations in municipal deposits, which generally peak in September and are subsequently withdrawn. Based upon prior experience and our current pricing strategy, management believes that a majority of our deposits are core deposits and as such these deposits are expected to remain with us. Our relationship based banking teams provide a full range of services to our clients, and a high emphasis is placed on the generation and retention of core deposits. We compete in a highly competitive financial services marketplace, and we may be required to compete for certain deposits based on the interest rate we offer in addition to the quality of our services. The preference of depositors to invest their funds in deposit products subject to immediate withdrawal could lead to potential liquidity reductions in the future if we do not raise interest rates to retain these funds.

The Bank has substantial liquidity. In addition to the liquidity on our Statement of Financial Condition, Provident Bank has access to additional sources of funds through the FHLB. Borrowings from FHLB and other borrowings totaled $552.8 million at June 30, 2013. At June 30, 2013, we had the ability to borrow an additional $399.3 million under our credit facilities with the FHLB by pledging securities not required to be pledged for other purposes. Further, at June 30, 2013 we had $110.7 million in brokered deposits, which are included above, and have relationships with several brokers to access these low cost sources of funding should conditions warrant.

The Company has an effective shelf registration statement covering $29 million of debt and equity securities that may be used, subject to Board authorization and market conditions, to issue equity or debt securities in an expedited manner. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms at any given time or at all.

On July 2, 2013, Provident issued $100 million of 5.50% Senior Notes due 2018. We anticipate approximately $70 million of the proceeds will be contributed to Provident Bank as equity to support the activities and planned growth of the Bank on a stand alone basis and a combined basis once the merger with Sterling Bancorp is completed.

The Company declared a dividend of $0.06 per share payable on August 15, 2013 to stockholders of record on August 5, 2013.


58

The following table sets forth the Bank’s regulatory capital position at June 30, 2013 and September 30, 2012, compared to current OCC requirements:
 
  
 
 
 
 
OCC requirements
  
Bank actual
 
Minimum capital
adequacy
 
Classification as
well-capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
$
311,507

 
8.49
%
 
$
146,816

 
4.00
%
 
$
183,520

 
5.00
%
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Tier 1
311,507

 
11.82

 
—

 
—

 
158,149

 
6.00

Total
340,077

 
12.90

 
210,865

 
8.00

 
263,581

 
10.00

September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
$
289,441

 
7.50
%
 
$
153,469

 
4.00
%
 
$
191,836

 
5.00
%
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Tier 1
289,441

 
12.10

 
—

 
—

 
143,085

 
6.00

Total
317,929

 
13.30

 
190,780

 
8.00

 
238,475

 
10.0


The Bank’s capital levels are above current regulatory capital requirements to be considered well-capitalized.

In July 2013, Provident Bank’s primary federal regulator, the Office of the Comptroller of the Currency, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to depository institutions and bank holding companies, including Provident Bank, compared to the current U.S. risk-based capital rules. These Basel III Capital Rules will also be applicable to the parent company upon completion of our announced merger with Sterling Bancorp as we will become a bank holding company. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in regulatory capital ratios. The Basel III Capital Rules also address changes to risk-weighting of assets and other issues affecting the denominator in regulatory capital and replace the existing risk-weighting approach, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules are effective for Provident Bank and the Company on January 1, 2015 (subject to a phase-in period for full compliance through January 1, 2019). Management is currently assessing the impact of the Basel III Capital Rules on the Company’s and Provident Bank’s regulatory capital ratios.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. Provident Bank’s Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. A committee of the Board of Directors reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings.

We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial mortgage loans, commercial & industrial loans, and residential fixed-rate mortgage loans that are repaid monthly and bi-weekly, adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell or securitize all, or a portion of such longer-term loans, generally on a servicing-retained basis. We also invest in shorter-term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of

59

our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.

Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NII”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Company and the Bank’s economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The model assumes estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem reasonable, based on historical experience during prior interest rate changes.

Estimated Changes in EVE and NII. The table below sets forth, as of June 30, 2013, the estimated changes in our (1) EVE that would result from the designated instantaneous changes in the forward rate curves, and (2) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

Interest rates
 
Estimated
 
Estimated change in EVE
 
Estimated
 
Estimated change in NII
(basis points)
 
EVE
 
Amount
 
Percent
 
NII
 
Amount
 
Percent
 
 
(Dollars in thousands)
+300
 
$
522,241

 
$
(56,744
)
 
(9.8
)%
 
$
120,615

 
$
8,135

 
7.2
%
+200
 
546,913

 
(32,072
)
 
(5.5
)
 
117,319

 
4,839

 
4.3

+100
 
569,737

 
(9,248
)
 
(1.6
)
 
114,642

 
2,162

 
1.9

0
 
578,985

 
—

 
—

 
112,480

 
—

 
—

-100
 
579,576

 
591

 
0.1

 
105,589

 
(6,891
)
 
(6.1
)

The table set forth above indicates that at June 30, 2013, in the event of an immediate 200 basis point increase in interest rates, we would expect to experience a 5.5% decrease in EVE and a 4.3% increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on EVE and NII beyond -100 basis points.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and NII requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and NII table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the re-pricing characteristics of specific assets and liabilities. Accordingly, although the EVE and NII table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

During the first three quarters of fiscal year 2013, the federal funds target rate remained in a range of 0.00 - 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities increased 13 basis points from 0.23% to 0.36% at the end of the third quarter of fiscal year 2013 while the yield on U.S. Treasury 10-year notes increased 87 basis points from 1.65% to 2.52% over the same nine month period. The greater increase in yield on longer term maturities resulted in the 2-10 year treasury yield curve steepening at the end of the third quarter of fiscal 2013 relative to the beginning of the fiscal year. During the third quarter of the current fiscal year the FOMC reaffirmed its willingness to maintain an accommodative stance on monetary policy stating that it intends to do so until the unemployment rate and inflation expectations reach certain thresholds. The FOMC further stated that it viewed these thresholds as consistent with its earlier date-based guidance. However, should economic conditions improve, the FOMC could reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionately relative to the longer end, thereby resulting in short-term margin compression environment. We hold a notional amount of $50 million in interest rate caps to help mitigate this risk.

Item 4.
Controls and Procedures
The Company’s  management,  including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and

60

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 on management’s identification of two previously reported deficiencies in internal control over financial reporting that it considers to be material weaknesses, management has concluded that disclosure controls and procedures were not effective at June 30, 2013.  Steps being undertaken to remediate these weaknesses are discussed below.
 
Changes in Internal Controls
 
On December 5, 2012, the Company appointed a new Principal Financial Officer.  On January 2, 2013 the Company appointed a new Chief Accounting Officer and Controller.  The Company engaged an independent national public accounting firm that assisted the Company in implementing a systematic process and procedures to enable the Company to maintain effective internal controls over the provision for income taxes and deferred taxes, which resulted in the material weaknesses discussed above.  The Company has also commenced implementation of enhancements to its internal controls over financial reporting related to pension accounting in fiscal 2013.  The Company believes the steps taken to remediate these weaknesses are appropriate and the Company expects them to be fully remediated by the end of the Company’s 2013 fiscal year.

PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
Note 7 to the Consolidated Financial Statements included in Part I, Item 1 is incorporated herein by reference.

Item 1A.
Risk Factors
For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A of the Company’s most recent annual report on Form 10-K and the risk factors discussed under Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013. See also Part I, Item 2 (Forward-Looking Statements) of this quarterly report on Form 10-Q.

On April 4, 2013, the company announced it had entered into a merger agreement with Sterling Bancorp. In connection with the execution of that agreement, the Company supplemented the risk factors previously disclosed in the Company’s most recent annual report on Form 10-K in its Quarterly Report on Form 10-Q for the period ended March 31, 2013. There has been no material change in risk factors since March 31, 2013, except as follows:

Pending litigation against Sterling and Provident could result in an injunction preventing the completion of the merger or a judgment resulting in the payment of damages.
In connection with the merger, purported Sterling shareholders have filed putative shareholder class action lawsuits against Sterling, the members of the Sterling board of directors and Provident. Among other remedies, the plaintiffs seek to enjoin the merger. The outcome of any such litigation is uncertain. If the cases are not resolved, these lawsuits could prevent or delay completion of the merger and result in substantial costs to Provident and Sterling, including any costs associated with the indemnification of directors and officers. Plaintiffs may file additional lawsuits against Provident, Sterling and/or the directors and officers of either company in connection with the merger. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect Provident’s business, financial condition, results of operations and cash flows.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.
Before the merger and the bank merger may be completed, Provident and Sterling must obtain approvals from the Federal Reserve Board and the Office of the Comptroller of the Currency. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals the regulators consider a variety of factors, including the regulatory standing of each party and other factors. An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval or delay their receipt. These regulators may impose conditions on the completion of the merger or the bank merger or require changes to the terms of the merger or the bank merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or the bank merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger. Regulatory approvals could also be impacted based on the status of any ongoing investigation of either party or its customers, including subpoenas to provide information or investigations, by a federal, state or local governmental agency. Provident has received a subpoena from the United States Attorney for the Southern District of New York requesting information in respect of an investigation of certain of Provident’s communications and transactions with state and local government agencies. Provident has complied with this subpoena and is fully cooperating in this matter, and has been informed that there is no continuing investigation relating to Provident.

61


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Not applicable.
(b)
Not applicable
(c)
Issuer Purchases of Equity Securities

 
Total number
of shares
(or units)
Purchased (1)
 
Average
price paid
per share
(or Unit)
 
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs (2)
 
Maximum number
(or approximate
dollar value) of
Shares (or Units)
that may yet be
purchased under the
plans or programs (2)
Period (2013)
 
 
 
 
 
 
 
April 1 - April 30
—

 
$
—

 
—

 
776,713

May 1 - May 31
—

 
—

 
—

 
776,713

June 1 - June 30
—

 
—

 
—

 
776,713

Total
—

 
$
—

 
—

 
 
(1
)
The total number of shares purchased includes shares received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes as is permitted under the Company’s stock benefit plans.
(2
)
The Company announced its fifth repurchase program on December 17, 2009 authorizing the repurchase of 2,000,000 shares of which 776,713 remain available for repurchase.
Item 3.
Defaults Upon Senior Securities
None

Item 4.
Not Applicable

Item 5.
Other Information
None


62

Item 6.
Exhibits

Exhibit
Number
  
Description
31.1
  
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-
 
  
Oxley Act of 2002
 
 
 
31.2
  
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-
 
  
Oxley Act of 2002
 
 
 
32.1
  
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
  
XBRL Instance Document 1(filed herewith)
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document 1(filed herewith)
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document 1(filed herewith)
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document 1(filed herewith)
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document 1(filed herewith)
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document 1(filed herewith)

1 

In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed “not filed” for purposes of
 
section 18 of the Exchange Act, and otherwise are not subject to liability under that section.

63

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Provident New York Bancorp has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

Provident New York Bancorp
 
 
 
 
 
 
 
 
 
Date:
August 8, 2013
By:
/s/ Jack Kopnisky
 
 
 
Jack Kopnisky
 
 
 
President, Chief Executive Officer and Director
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 8, 2013
By:
/s/ Luis Massiani
 
 
 
  Luis Massiani
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer and Principal Accounting Officer)

64