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PBNY > SEC Filings for PBNY > Form 10-Q on 8-May-2013All Recent SEC Filings

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Quarterly Report

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


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:
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 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;

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;

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;

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;

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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" 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 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.
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

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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 collectability is no longer considered doubtful.

Overview and Management Strategy

Provident New York Bancorp is headquartered in Montebello, New York. With $3.7 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 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.

On April 4, 2013 we announced a merger agreement with Sterling Bancorp (NYSE:
STL). This merger presents an opportunity to continue building a high performing institution and is a significant step in our strategy of expanding within the greater New York metropolitan area. 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 $6.5 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.

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                                       As of or for the three months     As of or for the six months ended
                                              ended March 31,                        March 31,
                                          2013               2012             2013               2012
Per Common Share Data
Earnings, basic and diluted          $       0.15       $       0.15     $       0.31       $       0.31
Book value                                  11.15              11.60            11.15              11.60
Tangible book value (1)                      7.33               7.25             7.33               7.25
Dividends declared per share                 0.06               0.06             0.12               0.12
Performance Ratios (annualized)
Return on average assets                     0.70 %             0.73 %           0.72 %             0.74 %
Return on average equity                     5.37               5.22             5.52               5.25
Return on average tangible equity
(1)                                          8.21               8.36             8.46               8.46
Core operating efficiency (1)                64.6               67.9             63.8               67.8
Balance Sheet Data (dollars in
Total assets                         $  3,710,440       $  3,210,871     $  3,710,440       $  3,210,871
Total securities                        1,129,213          1,027,541        1,129,213          1,027,541
Total loans                             2,204,555          1,799,112        2,204,555          1,799,112
Allowance for loan losses                  27,544             27,787           27,544             27,787
Total goodwill and intangible assets      169,655            164,862          169,655            164,862
Deposits                                2,799,658          2,368,988        2,799,658          2,368,988
Borrowings                                367,976            313,849          367,976            313,849
Stockholders' equity                      494,711            439,699          494,711            439,699
Tangible equity (1)                       325,056            274,837          325,056            274,837
Income Statement Data (dollars in
Net interest income                  $     27,819       $     23,905     $     55,742       $     47,143
Provision for loan losses                   2,600              2,850            5,550              4,800
Non-interest income                         6,852              7,971           14,511             15,147
Non-interest expense                       23,339             21,290           45,885             42,011
Net income                                  6,529              5,701           13,549             11,418
Tangible equity as a % of tangible
assets (1)                                   9.18 %             9.02 %           9.18 %             9.02 %
Asset Quality (dollars in thousands)
Non-performing loans (NPLs):
non-accrual                          $     27,019       $     47,269     $     27,019       $     47,269
Non-performing loans (NPLs): still
accruing                                    4,257              4,693            4,257              4,693
Other real estate owned                     5,486              5,828            5,486              5,828
Non-performing assets (NPAs)               36,762             57,790           36,762             57,790
Net charge-offs                             3,170              3,308            6,288              4,930
Net charge-offs as a % of average
loans (annualized)                           0.58 %             0.74 %           0.58 %             0.56 %
NPLs as a % of total loans                   1.42               2.89             1.42               2.89
NPAs as a % of total assets                  0.99               1.80             0.99               1.80
Allowance for loan losses as a % of
NPLs                                         88.1               53.5             88.1               53.5
Allowance for loan losses as a % of
total loans                                  1.25               1.54             1.25               1.54

(1) See reconciliation of non-GAAP measure on page 55.

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The key highlights as of and for the six months ended March 31, 2013 included the following:

Net income of $13.5 million, which represents an increase of 18.7% compared to the six months ended March 31, 2012.

Loan originations of $544.3 million.

Total loans reached $2.2 billion, representing growth of $85.1 million compared to September 30, 2012.

Commercial & industrial and commercial real estate loans increased $103.9 million, or 15% on an annualized basis compared to September 30, 2012.

The allowance for loan losses to non-performing loans increased to 88.1% at March 31, 2013 from 71.0% at September 30, 2012.

Deposits declined $311.5 million at March 31, 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 8.46% for the six months ended March 31, 2013 compared to 8.46% for the six months ended March 31, 2012 (see page 55 for non-GAAP reconciliation of return on tangible equity).

Return on average assets was 0.72% for the six months ended March 31, 2013 compared to 0.74% for the six months ended March 31, 2012.

The efficiency ratio, a non-GAAP measure, improved to 63.8% for the six months ended March 31, 2013 compared to 67.8% for the six months ended March 31, 2012.

Comparison of Financial Condition at March 31, 2013 and September 30, 2012

Total assets as of March 31, 2013 decreased $312.5 million or 7.77% from September 30, 2012 mainly related to a decrease in our cash balance of $364.6 million. Our cash balance at September 30, 2012 was elevated due to municipal tax collections that were subsequently drawn down.

Total securities decreased by $24.0 million, to $1.1 billion at March 31, 2013 as compared to September 30, 2012. Due to the decrease in total assets, securities represented 30.4% of total assets at March 31, 2013 compared to 28.7% at September 30, 2012. Over time, we expect securities will decline as a percentage of total assets as we continue to grow our loan portfolio. For the six months ended March 31, 2013, securities purchases were $290.8 million, sales of securities were $138.0 million, and maturities, calls, and repayments were $167.6 million. A decrease in unrealized gains decreased the carrying values of securities by $11.1 million. Securities gains net of OTTI losses were $3.6 million and net amortization of securities premiums was $1.8 million for the six months ended March 31, 2013. We are focusing our securities purchases on 5-8 year duration municipal and corporate securities in order to diversify our investment portfolio. At March 31, 2013, the investment portfolio weighted average duration was 4.49 years and the yield was 2.32% and 2.31% for the three month and six month periods ended March 31, 2013, respectively.

Net loans as of March 31, 2013 were $2.2 billion, which represented an $85.8 million increase relative to September 30, 2012. Growth in commercial real estate and commercial & industrial loans was the main driver, as the balance in these loan categories increased $103.9 million. The Company has expanded its market reach in the greater New York metropolitan area by deploying a team-based relationship and distribution strategy. The success of our team-based approach 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 $544.3 million loans for the six months ended March 31, 2013, while repayments were $458.7 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 $176.4 million at March 31, 2013 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 six months ended March 31, 2013. None of the Gotham Bank acquired loans were considered purchased credit impaired loans.

Our non-performing loans decreased $8.5 million during the six months ended March 31, 2013 to $31.3 million. The decrease was mainly driven by declines in acquisition development and construction ("ADC") non-performing loans of $11.1 million, which was principally the result of the resolution of one significant relationship. Partially offsetting this decline were increases in non-performing commercial real estate loans of $1.6 million, and non-performing consumer loans of $767 thousand.

Classified loans are loans rated substandard or lower in the Company's risk rating system. Classified loans declined $18.0 million to $70.7 million at March 31, 2013 compared to $88.7 million at September 30, 2012. This represents 3.21% of the loan portfolio at March 31, 2013 compared to 4.18% of the loan portfolio at September 30, 2012.

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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 $27.5 million at March 31, 2013 compared to $28.3 million at September 30, 2012. The allowance represented 1.25% of total loans at March 31, 2013 compared to 1.33% of total loans at September 30, 2012. The allowance as a percentage of total loans for the prior two quarters is lower than it was previously due mainly to the acquisition of loans from Gotham that were recorded at fair value and for which there continues to be no allowance for loan losses, and to our continued efforts in reducing non-performing loan balances.

The allowance for loan losses to non-performing loans equaled 88.1% at March 31, 2013, compared to 71.0% at September 30, 2012. Net charge-offs for the six months ended March 31, 2013 were $6.3 million. The majority of charge-offs were driven by ADC loans, which totaled $2.0 million, and charge-offs in residential mortgage loans, which totaled $1.8 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 loans.

Loans transferred to foreclosed properties for the six months ended March 31, 2013 were $2.0 million. This was partially offset by sales and write-downs of $2.9 million and resulted in a foreclosed properties balance of $5.5 million at March 31, 2013, compared to $6.4 million at September 30, 2012.

ADC loans declined $25.9 million to $118.1 million compared to $144.1 million at September 30, 2012, reflecting the Company's de-emphasis on originations of this type of loan.

Deposits as of March 31, 2013 were $2.8 billion, a decrease of $311.5 million, or 10.0%, from September 30, 2012. As of March 31, 2013 transaction accounts were 38.2% of deposits, or $1.1 billion compared to $1.4 billion or 44.9% of deposits at September 30, 2012. As of March 31, 2013, savings deposits were $549.4 million, an increase of $42.9 million or 8.47% from September 30, 2012. Money market accounts increased $11.5 million or 1.40% to $833.2 million at March 31, 2013. Certificates of deposit accounts decreased by $40.1 million or 10.4%. Municipal deposits were $537.1 million at March 31, 2013 compared to $901.7 million at September 30, 2012. Municipal deposits reach peak volumes in . . .

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