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EX-32 - EXHIBIT 32 - STERLING BANCORPex32.htm
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EX-31.1 - EXHIBIT 31.1 - STERLING BANCORPex31_1.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________________
Commission File Number:      0-25233

PROVIDENT NEW YORK BANCORP
(Exact name of Registrant as Specified in its Charter)

Delaware
 
80-0091851
(State or Other Jurisdiction of Incorporation on Organization)
 
(IRS Employer Identification Number)
     
400 Rella Blvd., Montebello, New York
 
10901
(Address of Principal Executive Office)
 
(Zip Code)

(845) 369-8040
(Registrant’s Telephone Number including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Class
 
Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share
 
The NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasonal issuer, as defined in Rule 405 of the Securities Act     YES  o   NO     þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.             YES   o  NO     þ

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     þ     NO  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files)     YES  o   NO  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.     þ

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

Large Accelerated Filer  o
Accelerated Filer      þ
Non-Accelerated Filer     o
Smaller Reporting Company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      YES     o NO     þ

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of March 31, 2009 was $336,229,101.

As of December 4, 2009 there were outstanding 39,251,384 shares of the Registrant’s common stock.

DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s fiscal year ended September 30, 2009.
 


 
 

 

PROVIDENT NEW YORK BANCORP

FORM 10-K TABLE OF CONTENTS

September 30, 2009

PART I
 
1
ITEM 1.
1
ITEM 1A.
30
ITEM 1B.
35
ITEM 2.
35
ITEM 3.
36
ITEM 4.
36
     
PART II
 
36
ITEM 5.
36
ITEM 6.
39
ITEM 7.
42
ITEM 7A.
56
ITEM 8.
57
ITEM 9.
108
ITEM 9A.
108
ITEM 9B.
108
     
PART III
 
108
ITEM 10.
108
ITEM 11.
108
ITEM 12.
109
ITEM 13.
109
ITEM 14.
109
     
PART IV
 
109
ITEM 15.
109
     
112



ITEM 1.  Business

Provident New York Bancorp

Provident New York Bancorp (“Provident Bancorp” or the “Company”) is a Delaware corporation that owns all of the outstanding shares of common stock of Provident Bank (the “Bank”).  At September 30, 2009, Provident Bancorp had, on a consolidated basis, assets of $3.0 billion, deposits of $2.1 billion and stockholders’ equity of $427.5 million. As of September 30, 2009, Provident Bancorp had 39,547,207 shares of common stock outstanding.
 
Provident Bank

Provident Bank, an independent, full-service community bank founded in 1888, is headquartered in Montebello, New York and is the principal bank subsidiary of Provident Bancorp. With $3.0 billion in assets and 536 full-time equivalent employees, Provident Bank accounts for substantially all of Provident Bancorp’s consolidated assets and net income. We operate 33 branches which serve the Hudson Valley region, including 32 branches located in Rockland, Orange, Sullivan, Ulster, Westchester and Putnam Counties in New York, and one branch in Bergen County, New Jersey which operates under the name Towncenter Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, community business (small business) and retail banking products and services.

We also offer deposit services to municipalities located in the State of New York through Provident Bank’s wholly-owned subsidiary, Provident Municipal Bank.

Provest Services Corporation I is a wholly-owned subsidiary of Provident Bank, holding an investment in a limited partnership that operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident Bank that has engaged a third-party provider to sell annuities, life and health insurance products to Provident Bank’s customers. Through September 30, 2009, the activities of these subsidiaries have had an insignificant effect on our consolidated financial condition and results of operations. Provident REIT, Inc. and WSB Funding are subsidiaries in the form of real estate investment trust and hold both residential and commercial real estate loans.

Provident Bank’s website (www.providentbanking.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings, as well as ownership reports on Forms 3, 4 and 5 filed by the Company’s directors and executive officers.  Copies may also be obtained, without charge, by written request to Provident New York Bancorp Investor Relations, 400 Rella Boulevard, Montebello, New York 10901, Attention: Miranda Grimm.  Provident Bank’s website is not part of this Annual Report on Form 10-K.

Non-Bank Subsidiaries

In addition to Provident Bank, the Company owns Hardenburgh Abstract Company of Orange County, Inc. (“Hardenburgh’) that was acquired in connection with the acquisition of Warwick Community Bancorp (“WSB”) and Hudson Valley Investment Advisors, LLC, an investment advisory firm that generates investment management fees.  Hardenburgh had gross revenue from title insurance policies and abstracts of $1.0 million and net income of $156,000 in 2009, and Hudson Valley Investment Advisors, LLC generated $2.0 million in fee income in 2009 and net income of $317,000.

Provident Municipal Bank

Provident Municipal Bank, a wholly-owned subsidiary of Provident Bank, is a New York State-chartered commercial bank which is engaged in the business of accepting deposits from municipalities in our market area. New York State law requires municipalities located in the State of New York to deposit funds with commercial banks, effectively forbidding these municipalities from depositing funds with savings banks, including federally chartered savings associations, such as Provident Bank.


Forward-Looking Statements

From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance.  This Annual Report on Form 10-K also includes forward-looking statements.  With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A. and our Cautionary Statement Regarding Forward-Looking Information included in Item 7.

Market Area

Provident Bank is an independent community bank offering a broad range of financial services to businesses and individuals as an alternative to money center and large regional banks in our market area. At September 30, 2009, our 33 full-service banking offices consisted of 12 offices in Rockland County, New York, 14 offices in Orange County, New York, and 6 offices in contiguous Ulster, Putnam, Westchester and Sullivan Counties, New York.  There is one office located in Lodi, New Jersey operating as Towncenter Bank, a division of Provident Bank, New York.  Our primary market for deposits is currently concentrated around the areas where our full-service banking offices are located.

Our primary lending area consists of Rockland and Orange Counties as well as contiguous counties. Rockland and Orange Counties represent a suburban area with a broad employment base. These counties also serve as bedroom communities for nearby New York City and other suburban areas including Westchester County and northern New Jersey. According to data published by the Federal Deposit Insurance Corporation (“FDIC”) as of June 30, 2009, Provident Bank holds the #2 share of deposits in Rockland County and #3 share of deposits in Orange County, and overall has the combined #3 share of deposits in Rockland and Orange Counties, New York.

Management Strategy

We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional, multi-state and international banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area focusing on core deposit generation and quality loan growth which provides a favorable platform for long-term sustainable growth. Highlights of management’s business strategy are as follows:

Operating as a Community Bank. As an independent community bank, we emphasize the local nature of our decision-making to respond more effectively to the needs of our customers while providing a full range of financial services to the businesses, individuals, and municipalities in our market area. We offer a broad range of financial products to meet the changing needs of the marketplace, including internet banking, cash management services and, on a selective basis, sweep accounts. In addition, we offer asset management services to meet the investing needs of individuals, corporations and not-for-profit entities. As a result, we are able to provide, at the local level, the financial services required to meet the needs of the majority of existing and potential customers in our market.

Enhancing Customer Service. We are committed to providing superior customer service as a way to differentiate us from our competition. As part of our commitment to service, we have been engaged in Sunday banking since 1995. In addition, we offer multiple access channels to our customers, including our branch and ATM network, internet banking, our Customer Care Telephone Center and our Automated Voice Response system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards. In 2006, we launched our Service Excellence Program designed to maintain the highest level of service to our customer base.

Growing and maintaining a Diversified Loan Portfolio. We offer a broad range of loan products to commercial businesses, real estate owners, developers and individuals. To support this activity, we maintain commercial, consumer and residential loan departments staffed with experienced professionals to promote the continued growth and prudent management of loan assets. We have experienced consistent and significant growth in our commercial loan portfolio while continuing to provide our residential mortgage and consumer lending services. As a result, we believe that we have developed a high quality diversified loan portfolio with a favorable mix of loan types, maturities and yields.


Expanding our Banking Franchise. Management intends to continue the expansion of the banking franchise and to increase the number of customers served and products used by businesses and consumers in our market area. Our strategy is to deliver exceptional customer service, which depends on up-to-date technology and multiple access channels, as well as courteous personal contact from a trained and motivated workforce. This approach has resulted in a relatively high level of core deposits, which drives our overall cost of funds. Management intends to maintain this strategy, which will require ongoing investment in banking locations and technology to support exceptional service levels for Provident Bank’s customers.  Recent expansion efforts have been focused on Westchester County.

Lending Activities

General. We originate commercial real estate loans, commercial business loans and acquisition, development and construction loans (collectively referred to as the “commercial loan portfolio”). We also originate in our market area fixed-rate and adjustable-rate (“ARM”) residential mortgage loans collateralized by one- to four-family residential real estate, and consumer loans such as home equity lines of credit, homeowner loans and personal loans. We retain most of the loans we originate, although we may sell longer-term one- to four-family residential loans and participations in some commercial loans.

Commercial Real Estate Lending. We originate real estate loans secured predominantly by first liens on commercial real estate.  The commercial properties are predominantly non-residential properties such as office buildings, shopping centers, retail strip centers, industrial and warehouse properties and, to a lesser extent, more specialized properties such as churches, mobile home parks, restaurants and motel/hotels. We may, from time to time, purchase commercial real estate loan participations. We target commercial real estate loans with initial principal balances between $1.0 million and $15.0 million.  At September 30, 2009, loans secured by commercial real estate totaled $554.5 million, or 32.6% of our total loan portfolio and consisted of 1,038 loans outstanding, although there are a large number of loans with balances substantially greater than the average.  Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

The majority of our commercial real estate loans are written as five-year adjustable-rate or ten-year fixed-rate mortgages and typically have balloon maturities up to ten years.  Amortization on these loans is typically based on 20-year payout schedules.  Margins generally range from 200 basis points to 300 basis points above the applicable Federal Home Loan Bank advance rate.

In the underwriting of commercial real estate loans, we generally lend up to 75% of the property’s appraised value.  Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower.  In evaluating a proposed commercial real estate loan, we primarily emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally targeting a ratio of 120%), computed after deduction for a vacancy factor and property expenses we deem appropriate.  In addition, a personal guarantee of the loan or a portion thereof is generally required from the principal(s) of the borrower.  We require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property.  In addition, business interruption insurance or other insurance may be required.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one-to four-family residential mortgage loans.  Commercial real estate loans entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.  For commercial real estate loans in which the borrower is the primary occupant, repayment experience also depends on the successful operation of the borrower’s underlying business.


Commercial Business Loans. We make various types of secured and unsecured commercial loans to customers in our market area for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes.  The term of these loans generally range from less than one year to seven years.  The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index.  At September 30, 2009, we had 2,337 commercial business loans outstanding with an aggregate balance of $242.6 million, or 14.2% of the total loan portfolio.  As of September 30, 2009, the average commercial business loan balance was approximately $247,000 although there are a large number of loans with balances substantially greater than this average.

Commercial credit decisions are based upon a credit assessment of the loan applicant.  A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved.  An evaluation is made of the applicant to determine character and capacity to manage.  Personal guarantees of the principals are generally required, except in the case of not-for-profit corporations.  In addition to an evaluation of the loan applicant’s financial statements, a determination is made of the probable adequacy of the primary and secondary sources of repayment to be relied upon in the transaction.  Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness.  Checking with other banks and trade investigations may also be conducted.  Collateral supporting a secured transaction also is analyzed to determine its marketability.  For small business loans and lines of credit, generally those not exceeding $400,000, we use a credit scoring system that enables us to process the loan requests more quickly and efficiently.  Commercial business loans generally bear higher interest rates than residential loans of like duration because they involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of collateral, if any.

One- to Four-Family Real Estate Lending.  We offer conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally up to $1.1 million.  This portfolio totaled $460.7 million, or 27.0% of our total loan portfolio at September 30, 2009.

We offer both fixed- and adjustable-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with monthly or bi-weekly loan payments.  One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as “A” or “A-“.  Loans that conform to such guidelines are referred to as “conforming loans.”  We generally originate both fixed-rate and ARM loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently $417,000 for single-family homes or higher in certain areas up to $2.5 million. Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%.  We sold substantially all conforming fixed rate 1-4 family residential loans originated in fiscal 2009, totaling $48.7 million.
 
We also originate loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to substantially the same credit standards as conforming loans, which are generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans.  During the past year, the market for jumbo loans has been erratic with many of the normal outlets unable to purchase this type of loan; consequently, no loans were sold during fiscal 2009.

We also originate loans other than jumbo loans that are not saleable to Fannie Mae or Freddie Mac, but which we deem to be acceptable risks. The amount of such loans originated for fiscal 2009 was $8.1 million, all of which were retained in our loan portfolio.

We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and our capital and liquidity position, we may retain all of our newly originated longer term fixed-rate residential mortgage loans, or from time to time we may decide to sell all or a portion of such loans in the secondary mortgage market to government sponsored entities such as Fannie Mae and Freddie Mac or other purchasers. Our bi-weekly one- to four-family residential mortgage loans that are retained in our portfolio result in shorter repayment schedules than conventional monthly mortgage loans, and are repaid through an automatic deduction from the borrower’s savings or checking account. As of September 30, 2009, bi-weekly loans totaled $146.0 million, or 31.7% of our residential loan portfolio. We retain the servicing rights on a large majority of loans sold to generate fee income and reinforce our commitment to customer service, although we may also sell non-conforming loans to mortgage banking companies, generally on a servicing-released basis. As of September 30, 2009, loans serviced for others, excluding loan participations, totaled $106.0 million.


We currently offer several ARM loan products secured by residential properties with rates that are fixed for a period ranging from six months to ten years. After the initial term, if the loan is not already refinanced, the interest rate on these loans generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. At September 30, 2009, our ARM portfolio included $4.5 million in loans that re-price every six months, $29.9 million in loans that re-price once a year, $6.3 million in loans that re-price periodically after an initial fixed-rate period of one year or more and $104,000 that re-price based upon other miscellaneous re-pricing terms.  Our adjustable rate loans do not have interest-only or negative amortization features.  We do not nor have we in the past originated “subprime” loans, loans to borrowers with subprime credit scores combined with either high loan to value or high debt to income ratios.

We require title insurance on all of our one- to four-family mortgage loans, and we also require that borrowers maintain fire and extended coverage or all risk casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements, but in any event in an amount calculated to avoid the effect of any coinsurance clause. Nearly all residential first mortgage loans are required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance.

Acquisition, Development and Construction Loans. We originate land acquisition, development and construction (“ADC”) loans to builders in our market area. These loans totaled $193.8 million, or 11.4% of our total loan portfolio at September 30, 2009. Acquisition loans help finance the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income property. In some cases, we may make an acquisition loan before the borrower has received approval to develop the land as planned. In general, the maximum loan-to-value ratio for a land acquisition loan is 50% of the appraised value of the property, although for certain borrowers we deem to be our lowest risk, higher loan-to-value ratios may be allowed. We also make development loans to builders in our market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum amount loaned is generally limited to the cost of the improvements plus limited approval of soft costs. In general, we do not originate loans with interest reserves.  A portion of our ADC loans acquired through the purchase of participations do carry interest reserves. The total loans with interest reserves at September 30, 2009 were $77.4 million.  Advances are made in accordance with a schedule reflecting the cost of the improvements.

We also make construction loans to area builders, often in conjunction with development loans. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We commit to provide the permanent mortgage financing on most of our construction loans on income-producing property.

Land acquisition, development and construction lending exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.  In recent years as a result of the economic downturn, most projects have performed behind schedule, requiring the borrowers to carry these projects for a longer time frame than was originally contemplated when we approved the credit facilities.  As a result many of the borrowers have been utilizing other sources to maintain debt service or have been unable to maintain debt service requirements.  With current market conditions, the Bank is currently not considering unapproved land loans, and new acquisition, development and construction loans are being underwritten based on the current market.


Consumer Loans. We originate a variety of consumer and other loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. As of September 30, 2009, consumer loans totaled $251.5 million, or 14.8% of the total loan portfolio.

At September 30, 2009, the largest group of consumer loans consisted of $235.1 million of loans secured by junior liens on residential properties. We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit. As of September 30, 2009, homeowner loans totaled $54.9 million or 3.2% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $180.2 million, or 10.6% of our total loan portfolio at September 30, 2009, with $151.0 million remaining undisbursed.

Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2009, these loans totaled $16.4 million, or 1% of our total loan portfolio. We originate consumer loans directly to our customers or on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee.  Personal loans also include secured and unsecured installment loans for other purposes. Unsecured installment loans, which include most personal loans, generally have shorter terms than secured consumer loans, and generally have higher interest rates than rates charged on secured installment loans with comparable terms.  We also offer overdraft lines of credit on an unsecured basis, outstanding balances on these loans totaled $5.1 million with additional undrawn lines totaling $15.4 million.

Our procedures for underwriting consumer loans include an assessment of an applicant’s credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount.  We generally lend at an 80% loan to value ratio for home equity loans, but will go to 90% loan to value with a strong loan profile and higher pricing.

Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles. In addition, the repayment of consumer loans depends on the borrowers’ continued financial stability, as repayment historically has been more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy than a single family mortgage loan.


Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the dates indicated.

   
September 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                                                             
                                                             
One- to four-family residential mortgage loans
  $ 460,729       27.0 %   $ 513,381       29.6 %   $ 500,825       30.6 %   $ 462,996       31.4 %   $ 456,794       33.5 %
                                                                                 
Commercial real estate loans
    554,550       32.6       554,811       32.0       535,003       32.8       529,607       35.9       497,936       36.6  
Commercial business loans
    242,628       14.2       243,642       14.1       207,156       12.6       160,823       10.9       148,825       10.9  
Acquisition, development, construction
    193,828       11.4       170,979       9.9       153,074       9.3       96,656       6.6       66,710       4.9  
Total commercial loans
    991,006       58.2       969,432       56.0       895,233       54.7       787,086       53.4       713,471       52.4  
                                                                                 
Home equity lines of credit
    180,205       10.6       166,491       9.6       162,669       9.9       149,862       10.2       134,997       9.9  
Homeowner loans
    54,941       3.2       58,569       3.4       59,705       3.6       55,968       3.8       40,221       3.0  
Other consumer loans
    16,376       1.0       23,680       1.4       19,626       1.2       17,646       1.2       16,590       1.2  
Total consumer loans
    251,522       14.8       248,740       14.4       242,000       14.7       223,476       15.2       191,808       14.1  
                                                                                 
Total loans
    1,703,257       100.0 %     1,731,553       100.0 %     1,638,058       100.0 %     1,473,558       100.0 %     1,362,073       100.0 %
                                                                                 
Allowance for loan losses
    (30,050 )             (23,101 )             (20,389 )             (20,373 )             (21,047 )        
                                                                                 
Total loans, net
  $ 1,673,207             $ 1,708,452             $ 1,617,669             $ 1,453,185             $ 1,341,026          


Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2009. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

   
Residential Mortgage
   
Commercial Real Estate
   
Commercial Business
   
Construction (1)
   
Consumer
   
Total
 
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
 
   
(Dollars in thousands)
 
                                                                         
Due During the Years
                                                                       
Ending September 30,
                                                                       
2010
  $ 5,706       6.84 %   $ 44,899       5.27 %   $ 94,734       3.96 %   $ 130,165       4.05 %   $ 4,357       4.44 %   $ 279,861       4.27 %
2011 to 2014
    11,060       5.57       174,239       5.90       60,897       6.32       57,383       3.92       35,260       6.14       338,839       5.65  
2014 and beyond
    443,963       5.81       335,412       6.65       86,997       4.78       6,280       3.02       211,905       3.77       1,084,557       5.85  
                                                                                                 
Total
  $ 460,729       5.82 %   $ 554,550       6.30 %   $ 242,628       4.84 %   $ 193,828       3.98 %   $ 251,522       4.11 %   $ 1,703,257       5.55 %

(1)
Includes land acquisition and development loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2009 that are contractually due after September 30, 2010.

   
Fixed
   
Adjustable
   
Total
 
   
(Dollars in thousands)
 
                   
 Residential mortgage loans
  $ 414,158     $ 40,865     $ 455,023  
                         
Commercial real estate loans
    234,815       274,836       509,651  
Commercial business loans
    59,633       88,261       147,894  
Construction loans
    666       62,997       63,663  
Total commercial loans
    295,114       426,094       721,208  
                         
Consumer loans
    74,921       172,244       247,165  
                         
Total loans
  $ 784,193     $ 639,203     $ 1,423,396  


Loan Originations, Purchases, Sales and Servicing. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in our market area. These include competing banks, savings banks, credit unions, mortgage banking companies, life insurance companies and similar financial services firms. Loan originations are derived from a number of sources, including branch office personnel, existing customers, borrowers, builders, attorneys, real estate broker referrals and walk-in customers.

Our loan origination and sales activity may be adversely affected by a rising interest rate environment or period of falling house prices that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand, as well as being impacted by the level of unemployment and housing sale activity. Accordingly, the volume of loan origination, the mix of fixed and adjustable-rate loans, and the profitability of this activity can vary from period to period. One- to four-family residential mortgage loans are generally underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines, and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold, the sales are conducted generally using standard Fannie Mae/Freddie Mac purchase contracts and master commitments as applicable. One- to four-family mortgage loans may be sold to Fannie Mae or Freddie Mac on a non-recourse basis whereby foreclosure losses are generally the responsibility of the purchaser and not Provident Bank.  Consistent with its long-standing credit policies, Provident Bank does not originate or hold subprime mortgage loans.  We also hold no subprime loans through our investment portfolio.

We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our policy generally has been to retain the servicing rights for all conforming loans sold. We therefore continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings, if necessary. We retain a portion of the interest paid by the borrower on the loans as consideration for our servicing activities.

Loan Approval/Authority and Underwriting. We have four levels of lending authority beginning with the Board of Directors. The Board grants lending authority to the Director Loan Committee, the members of which are Directors. The Director Loan Committee, in turn, may grant authority to the Management Loan Committee and individual loan officers. In addition, designated members of management may grant authority to individual loan officers up to specified limits. Our lending activities are subject to written policies established by the Board. These policies are reviewed periodically.

The Director Loan Committee may approve loans in accordance with applicable loan policies, up to the limits established in our policy governing loans to one borrower. This policy places limits on the aggregate dollar amount of credit that may be extended to any one borrower and related entities. Loans exceeding the maximum loan-to-one borrower limit described below require approval by the Board of Directors. The Management Loan Committee may approve loans up to an aggregate of $2 million to any one borrower and group of related borrowers. Two loan officers with sufficient loan authority acting together may approve loans up to $1 million. The maximum individual authority to approve an unsecured loan is $50,000, however, for credit-scored small business loans; the maximum individual authority is $100,000.

We have established a risk rating system for our commercial business loans, commercial and multi-family real estate loans, and acquisition, development and construction loans to builders. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are performed by commercial credit personnel who do not have responsibility for loan originations. We determine our maximum loan-to-one-borrower limits based upon the rating of the loan. The large majority of loans fall into three categories. The maximum for the best-rated borrowers is $20 million, $15 million for the next group of borrowers and $12 million for the third group. Sublimits apply based on reliance on any single property, and for commercial business loans. On occasion, the Board of Directors may approve higher exposure limits for loans to one borrower in an amount not to exceed the legal lending limit of the Bank. The Board may also authorize the Director Loan Committee to approve loans for specific borrowers up to a designated Board approved limit in excess of the policy limit, for that borrower.

In connection with our residential and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas. Under certain conditions, appraisals may not be required for loans under $250,000 or in other limited circumstances. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in connection with certain residential mortgage refinances.


Loan Origination Fees and Costs. In addition to interest earned on loans, we also receive loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. We defer loan origination fees and costs, and amortize such amounts as an adjustment to yield over the term of the loan by use of the level yield method.  Deferred loan origination costs (net of deferred fees) were $1.7 million at September 30, 2009.

To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale.  The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid.  Originated mortgage servicing rights with an amortized cost of $840,315 are included in other assets at September 30, 2009.  See also Notes 2 and 5 of the “Notes to Consolidated Financial Statements”.

Loans to One Borrower. At September 30, 2009, our five largest aggregate amounts loaned to any one borrower and certain related interests (including any unused lines of credit) consisted of secured and unsecured financing of $22.9 million, $22.8 million, $19.7 million, $19.6 million and $18.2 million.  See “Regulation - Regulation of Provident Bank - Loans to One Borrower” for a discussion of applicable regulatory limitations.

Delinquent Loans, Other Real Estate Owned and Classified Assets

Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans.  A computer-generated late notice is sent by the 16th day after the payment due date on a loan requesting the payment due plus any late charge that was assessed. Accounts are distributed to a collector or account officer to contact borrowers, determine the reason for delinquency and arrange for payment, and accounts are monitored electronically for receipt of payments. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If payment is not received within 60 days of the due date, loans are generally accelerated and payment in full is demanded. Failure to pay within 90 days of the original due date generally results in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending upon individual circumstances.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due, unless well secured and in the process of collection. In addition, loans are placed on non-accrual status when, in the opinion of management, there is sufficient reason to question the borrower’s ability to continue to meet principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income related to current year income and charged to the allowance for loan losses with respect to income that was recorded in the prior fiscal year. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower’s financial condition and payment record. At September 30, 2009, we had non-accrual loans of $21.9 million and $4.6 million of loans 90 days past due and still accruing interest, which were well secured and in the process of collection. At September 30, 2008 we had non-accrual loans of $13.6 and $3.3 million of loans 90 days past due and still accruing interest.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned (“REO”) until such time as it is sold.

When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of book value or fair value less cost to sell. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2009 we had three REO properties with a recorded balance of $1.7 million.  In addition, $674,000 in loan balances was considered troubled debt restructures.


Loan Portfolio Delinquencies. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

   
Loans Delinquent For
             
   
30-89 Days
   
90 Days and Over & non-accrual
         
Total
 
   
Number
   
Amount
   
Number
   
Amount
   
Number
   
Amount
 
   
(Dollars in thousands)
 
At September 30, 2009
                                   
One- to four- family
    2     $ 390       31     $ 7,319       33     $ 7,709  
Commercial real estate
    2       398       24       6,803       26       7,201  
ADC
    1       366       21       11,308       22       11,674  
Commercial business
    18       999       8       457       26       1,456  
Consumer
    22       494       13       582       35       1,076  
Total
    45     $ 2,647       97     $ 26,469       142     $ 29,116  
At September 30, 2008
                                               
One- to four- family
    19     $ 4,106       19     $ 4,218       38     $ 8,324  
Commercial real estate
    8       1,666       12       3,832       20       5,498  
ADC
    -       -       9       5,596       9       5,596  
Commercial business
    29       1,318       35       2,811       64       4,129  
Consumer
    43       435       41       421       84       856  
Total
    99     $ 7,525       116     $ 16,878       215     $ 24,403  
At September 30, 2007
                                               
One- to four- family
    28     $ 4,829       15     $ 1,899       43     $ 6,728  
Commercial real estate
    31       3,387       8       2,586       39       5,973  
ADC
    -       -       2       689       2       689  
Commercial business
    9       357       19       1,683       28       2,040  
Consumer
    49       835       30       401       79       1,236  
Total
    117     $ 9,408       74     $ 7,258       191     $ 16,666  
At September 30, 2006
                                               
One- to four- family
    43     $ 4,502       10     $ 1,102       53     $ 5,604  
Commercial real estate
    15       1,098       6       2,980       21       4,078  
Commercial business
    -       -       12       489       12       489  
Consumer
    54       521       42       453       96       974  
Total
    112     $ 6,121       70     $ 5,024       182     $ 11,145  
At September 30, 2005
                                               
One- to four- family
    49     $ 6,126       6     $ 1,070       55     $ 7,196  
Commercial real estate
    25       1,372       3       92       28       1,464  
Commercial business
    11       264       3       120       14       384  
Consumer
    87       679       22       359       109       1,038  
Total
    172     $ 8,441       34     $ 1,641       206     $ 10,082  


Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
 
   
September 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005(1)
 
   
(Dollars in thousands)
 
                                                       
   
90 days past due and still accruing
   
Non-Accrual
   
90 days past due and still accruing
   
Non-Accrual
   
90 days past due and still accruing
   
Non-Accrual
   
90 days past due and still accruing
   
Non-Accrual
   
Non-Accrual
 
Non-performing loans:
                                                     
One- to four- family
  $ 2,894     $ 4,425     $ 2,487     $ 1,731     $ 1,899     $ -     $ 629     $ 472     $ 65  
Commercial real estate
    977       5,826       732       3,100       1,487       1,099       613       2,367       -  
Commercial
    478       10,830       -       2,811       46       1,637       30       459       120  
Acquisition, land and development
    -       457       -       5,596       45       644       -       -       -  
Consumer
    211       371       70       351       272       129       310       144       27  
Total non-performing loans
  $ 4,560     $ 21,909     $ 3,289     $ 13,589     $ 3,749     $ 3,509     $ 1,582     $ 3,442     $ 212  
                                                                         
                                                                         
Real estate owned:
            1,712               84               139               87       92  
Troubled Debt Restructures
            674               -               -               -       -  
Total non-performing assets
          $ 28,855             $ 16,962             $ 7,397             $ 5,111     $ 304  
                                                                         
Ratios:
                                                                       
Non-performing loans to total loans
            1.55 %             0.97 %             0.44 %             0.34 %     0.12 %
Non-performing assets to total assets
            0.95 %             0.57 %             0.26 %             0.18 %     0.07 %

(1)
The Company had no 90 days past due and accruing loans at September 30, 2005.

For the year ended September 30, 2009, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to $1.4 million. Interest income actually recognized on such loans totaled $724,000.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are either charged off or the subject of a specific reserve. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, designated as “special mention”.  As of September 30, 2009, we had $47.8 million of assets designated as “special mention”.

Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2009, classified assets consisted of substandard assets of $89.9 million and no loans were classified as doubtful.


Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management’s judgment, deserve current recognition in estimating probable incurred losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and other criticized or classified loans (if any), as well as allowances determined for each major loan category. After we establish a provision for loans that are known to be non-performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred losses inherent in that portion of the portfolio. When the loan portfolio increases, therefore, the percentage calculation results in a higher dollar amount of estimated probable incurred losses than would be the case without the increase, and when the loan portfolio decreases, the percentage calculation results in a lower dollar amount of estimated probable incurred losses than would be the case without the decrease. These percentages are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:

·
levels of, and trends in, delinquencies and non-accruals;
·
trends in volume and terms of loans;
·
effects of any changes in lending policies and procedures;
·
experience, ability, and depth of lending management and staff;
·
national and local economic trends and conditions;
·
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
·
for commercial loans, trends in risk ratings.

Of the major parts of our loan portfolio, we consider, land acquisition, development and construction loans, commercial real estate loans, and commercial business loans to be the higher risk categories.    We consider one-to-four family mortgage loans to be a lower risk category.  Although, we offer unsecured consumer loans and overdraft protection lines of credit, which are higher risk in nature, they constitute a modest percentage of our loan portfolio.

 Land acquisition, development and construction lending is considered higher risk and exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.  All of these factors are considered as part of the underwriting, structuring and pricing of the loan.

Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or the borrower may use the cash flow for other purposes.  In addition, the foreclosure process, if necessary may be slow and properties may deteriorate in the process.  The market values are also subject to a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.

Commercial business lending is also higher risk because repayment depends on the successful operation of the business which is subject to a wide range of risks and uncertainties.  In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before foreclosing which we cannot be assured of doing, and the value in a foreclosure sale or other means of liquidation is subject to downward pressure.

When we evaluate residential mortgage loans and equity loans we weigh both the credit capacity of the borrower and the collateral value of the home.  As unemployment and underemployment increases, and liquidity reserves if any, diminish, the credit capacity of the borrower decreases, which increases our risk.  Also, after a period of years of stable or increasing home values in our market, home prices have declined from a high in 2005 and 2006.  We are exposed to risk in both our first mortgage and equity lending programs due to declines in values in recent years.  We are also exposed to risk because the time to foreclose is significant and has become longer under current conditions.


The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

Allowance for Loan Losses by Year.  The following table sets forth activity in our allowance for loan losses for the years indicated.
   
At or For Years Ended September 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
                               
Balance at beginning of year
  $ 23,101     $ 20,389     $ 20,373     $ 21,047     $ 16,648  
                                         
Transfer to reserve for contingent loan commitments
    -       -       -       (395 )     (256 )
Charge-offs:
                                       
One- to four- family
    (461 )     (97 )     -       -       (23 )
Commercial real estate
    (902 )     (627 )     -       -       -  
ADC
    (1,515 )     -       -       -       -  
Commercial business
    (7,271 )     (3,596 )     (2,164 )     (1,509 )     (750 )
Consumer
    (1,140 )     (609 )     (329 )     (327 )     (380 )
Total charge-offs
    (11,289 )     (4,929 )     (2,493 )     (1,836 )     (1,153 )
                                         
Recoveries:
                                       
One- to four- family
    2       -       -       -       -  
ADC
    200       -       -       -       -  
Commercial business
    249       291       581       236       69  
Consumer
    187       150       128       121       109  
Total recoveries
    638       441       709       357       178  
                                         
Net charge-offs
    (10,651 )     (4,488 )     (1,784 )     (1,479 )     (975 )
Allowance recorded in acquisitions
            -       -       -       4,880  
Provision for loan losses
    17,600       7,200       1,800       1,200       750  
Balance at end of year
  $ 30,050     $ 23,101     $ 20,389     $ 20,373     $ 21,047  
                                         
Ratios:
                                       
Net charge-offs to average loans outstanding
    0.62 %     0.28 %     0.12 %     0.11 %     0.08 %
Allowance for loan losses to non-performing loans
    114 %     137 %     281 %     406 %     1283 %
Allowance for loan losses to total loans
    1.76 %     1.33 %     1.24 %     1.38 %     1.55 %


Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category (excluding loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
   
September 30,
 
   
2009
   
2008
   
2007
 
   
Allowance for Loan Losses
   
Loan Balances by Category
   
Percent of Loans in Each Category to Total Loans
   
Allowance for Loan Losses
   
Loan Balances by Category
   
Percent of Loans in Each Category to Total Loans
   
Allowance for Loan Losses
   
Loan Balances by Category
   
Percent of Loans in Each Category to Total Loans
 
   
(Dollars in thousands)
 
                                                       
One- to four- family
  $ 3,106     $ 460,729       27.0 %   $ 1,494     $ 513,381       29.6 %   $ 668     $ 500,825       30.6 %
Commercial real estate
    7,695       554,550       32.6       5,793       554,811       32.0       8,157       535,003       32.7  
Commercial business
    8,928       242,628       14.2       7,051       243,642       14.1       5,223       207,156       12.6  
ADC
    7,680       193,828       11.4       6,841       170,979       9.9       4,743       153,074       9.3  
Consumer
    2,641       251,522       14.8       1,922       248,740       14.4       1,598       242,000       14.8  
                                                                         
Total
  $ 30,050     $ 1,703,257       100.0 %   $ 23,101     $ 1,731,553       100.0 %   $ 20,389     $ 1,638,058       100.0 %

   
September 30,
 
   
2006
   
2005
 
   
Allowance for Loan Losses
   
Loan Balances by Category
   
Percent of Loans in Each Category to Total Loans
   
Allowance for Loan Losses
   
Loan Balances by Category
   
Percent of Loans in Each Category to Total Loans
 
   
(Dollars in thousands)
 
                                     
One- to four- family
  $ 765     $ 462,996       31.4 %   $ 503     $ 456,794       33.5 %
Commercial real estate
    9,382       529,607       35.9       10,662       497,936       36.6  
Commercial business
    5,461       160,823       10.9       5,851       148,825       10.9  
ADC
    2,862       96,656       6.6       2,343       66,710       4.9  
Consumer
    1,903       223,476       15.2       1,688       191,808       14.1  
                                                 
Total
  $ 20,373     $ 1,473,558       100.0 %   $ 21,047     $ 1,362,073       100.0 %


Securities Investments

Our securities investment policy is established by our Board of Directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management strategy. The Board’s Asset/Liability Committee oversees our investment program and evaluates on an ongoing basis our investment policy and objectives. Our chief financial officer, or our chief financial officer acting with our chief executive officer, is responsible for making securities portfolio decisions in accordance with established policies. Our chief financial officer, chief executive officer and certain other executive officers have the authority to purchase and sell securities within specific guidelines established by the investment policy. In addition, all transactions are reviewed by the Board’s Asset/Liability Committee at least quarterly.

Our current investment policy generally permits securities investments in debt securities issued by the U.S. government and U.S. agencies, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of government agencies and government sponsored enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank of New York (federal agency securities) and, to a lesser extent, other equity securities. Securities in these categories are classified as “investment securities” for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations (“CMOs”) issued or backed by securities issued by these government agencies. Also permitted are investments in securities issued or backed by the Small Business Administration, privately issued mortgage-backed securities and CMOs, and asset-backed securities collateralized by auto loans, credit card receivables, and home equity and home improvement loans. Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall investment securities yields while managing interest rate and credit risk.

FASB ASC Topic #320, Investments, Debt and Equity securities requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability to hold and our intent. Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. We do not have a trading portfolio.

Government and Agency Securities. At September 30, 2009, we held government and agency securities available for sale with a fair value of $207.8 million, consisting primarily of agency obligations with maturities less than five years. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes and as collateral for borrowings.

Corporate and Municipal Bonds. At September 30, 2009, we held $25.8 million in corporate debt securities. Corporate bonds have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this risk, our policy limits investments in corporate bonds to securities with maturities of ten years or less and rated “A” or better by at least one nationally recognized rating agency at time of purchase, and to a total investment of no more than $5.0 million per issuer and a total corporate bond portfolio limit of $40.0 million. The policy also limits investments in municipal bonds to securities with maturities of 20 years or less and rated as investment grade by at least one nationally recognized rating agency at the time of purchase, and favors issues that are insured, however we also purchase securities that are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy generally imposes an investment limitation of $5.0 million per municipal issuer and a total municipal bond portfolio limit of 10% of assets. At September 30, 2009, we held $204.8 million in bonds issued by states and political subdivisions, $31.4 million of which were classified as held to maturity at amortized cost and are unrated and $167.6 million of which were classified as available for sale at fair value.  At September 30, 2009 we held $5.4 million in obligations that were rated less than “A”, but still investment grade.

Equity Securities. At September 30, 2009, our equity securities available for sale had a fair value of $885,000.  We also held $23.2 million (at cost) of Federal Home Loan Bank of New York (“FHLBNY”) common stock, a portion of which must be held as a condition of membership in the Federal Home Loan Bank System, with the remainder held as a condition to our borrowing under the Federal Home Loan Bank advance program. Dividends on FHLBNY stock recorded in the year ended September 30, 2009 amounted to $1.2 million.  We held no preferred shares of Freddie Mac or Fannie Mae for the year ended September 30, 2009.  We also held no “auction rate securities” or “pooled trust preferred securities” during the year ended September 30, 2009.


Mortgage-Backed Securities. We purchase mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower credit risk as a result of the guarantees provided by Freddie Mac and Fannie Mae; (iii) increase liquidity, and (iv) maintain our status as a thrift for charter and income tax purposes. We invest primarily in mortgage-backed securities issued or sponsored by Freddie Mac, Fannie Mae and Ginnie Mae or private issuers for CMOs. To a lesser extent, we also invest in securities backed by agencies of the U.S. Government, such as Ginnie Mae. At September 30, 2009, our mortgage-backed securities portfolio totaled $437 million, consisting of $430.5 million available for sale at fair value and $6.5 million held to maturity at amortized cost. The total mortgage-backed securities portfolio includes CMOs of $66.9 million, consisting of $66 million available for sale at fair value and $860 thousand held to maturity at amortized cost.  Within this total, $11.2 million at amortized cost and $10.4 fair value were issued by private issuers. The remaining mortgage-backed securities of $370.1 million were pass-through securities, consisting of $364.5 million available for sale at fair value and $5.6 million held to maturity at amortized cost.

Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as us, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk in addition to the guarantee of repayment of principal outstanding that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We review prepayment estimates for our mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments.  As a result of our reviews, we anticipated an acceleration of prepayments.  Management sold $453.2 million in mortgage backed securities and realized $16.7 million in gains on the sales.  Such proceeds were reinvested in securities with yields which were lower than the recorded yields of the securities sold and a more diversified risk profile.

A portion of our mortgage-backed securities portfolio is invested in CMOs or collateralized mortgage obligations, including Real Estate Mortgage Investment Conduits (“REMICs”), backed by Fannie Mae and Freddie Mac and certain private issuers. CMOs and REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime rate caps, prepayment risk, and interest rates.


Available for Sale Portfolio. The following table sets forth the composition of our available for sale portfolio at the dates indicated.

   
September 30,
 
   
2009
   
2008
   
2007
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
   
(Dollars in thousands)
 
                                     
Investment Securities:
                                   
U.S. Government securities
  $ 20,893     $ 21,076     $ -     $ -     $ -     $ -  
Federal agency obligations
    186,301       186,700       30,022       30,041       84,005       83,857  
Corporate Bonds
    25,245       25,823                                  
State and municipal securities
    158,007       167,584       159,334       149,601       140,026       139,338  
Equity securities
    1,145       885       1,146       1,030       105       111  
                                                 
Total investment securities available for sale
    391,591       402,068       190,502       180,672       224,136       223,306  
                                                 
Mortgage-Backed Securities:
                                               
Pass-through securities:
                                               
Fannie Mae
    238,723       243,063       385,138       384,672       383,308       378,384  
Freddie Mac
    92,885       94,506       189,113       189,989       152,972       152,253  
Ginnie Mae
    26,586       26,929       2,300       2,300       2,877       2,838  
CMOs and REMICs
    66,784       66,017       34,521       34,055       38,249       38,216  
                                                 
Total mortgage-backed securities available for sale
    424,978       430,515       611,072       611,016       577,406       571,691  
                                                 
Total securities available for sale
  $ 816,569     $ 832,583     $ 801,574     $ 791,688     $ 801,542     $ 794,997  

At September 30, 2009, our available for sale federal agency securities portfolio, at fair value, totaled $207.8 million, or 6.9% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of one year or less, and $167.2 million had maturities of between five and ten years and a weighted average yield of 2.2%. The agency securities portfolio currently includes primarily callable debentures.

State and municipal securities portfolio, available for sale, based on amortized cost, had $3.7 million in securities with a final maturity of one year or less and a weighted average yield of 3.3%; $17.2 million maturing in one to five years with a weighted average yield of 3.6%; $60.5 million maturing in five to ten years with a weighted average yield of 3.9% and $76.7 million maturing in greater than ten years with a weighted average yield of 4.1%. Equity securities available for sale at September 30, 2009 had a fair value of $885,000.

At September 30, 2009, $364.5 million of our available for sale mortgage-backed securities, at fair value, consisted of pass-through securities, which totaled 12.1% of total assets and $66 million of CMO securities, at fair value. The total amortized cost of these pass- through securities was $358.2 million and consisted of $238.7 million, $92.9 million and $26.6 million of Fannie Mae, Freddie Mac and Ginnie Mae MBS, respectively, with respective weighted averages yields of 7.9%, 3.2% and 0.9%.  At the same date, the fair value of our available for sale CMO portfolio totaled $66 million, or 2.2% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae, Freddie Mac and $10.4 million sold by private party issuers. The amortized costs of these CMOs result in a weighted average yield of 2.8%. We own both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our portfolio of CMOs available for sale at September 30, 2009 had contractual maturities of over ten years. However, as with mortgage-backed pass-through securities, the actual maturity of a CMO may be less than its stated contractual maturity due to prepayments of the underlying mortgages and the terms of the CMO tranche owned.


Held to Maturity Portfolio. The following table sets forth the composition of our held to maturity portfolio at the dates indicated.

   
September 30,
 
   
2009
   
2008
   
2007
 
                                     
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
   
(Dollars in thousands)