10-K 1 form10k-80489_pbny.txt 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, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to __________________ Commission File Number: 0-25233 PROVIDENT NEW YORK BANCORP -------------------------------------------------------- (Exact name of Registrant as Specified in its Charter) Delaware 80-0091851 ------------------------------- ------------------------------------ (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation on Organization) 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: Name of Each Exchange Title of Class On Which Registered -------------- ------------------- Common Stock, par value $0.01 per share The NASDAQ Stock Market, LLC 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 [_] NO [X] Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES [_] NO [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark 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.YES [_] NO [X] 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 [_] Accelerated Filer [X] Non-Accelerated Filer [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [_] NO [X] 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, 2006 was $497,950,906. As of December 3, 2006 there were issued and outstanding 42,695,846 shares of the Registrant's common stock. DOCUMENT INCORPORATED BY REFERENCE Proxy Statement for the Annual Meeting of Stockholders (Part III) to be held in February 2007. PROVIDENT NEW YORK BANCORP FORM 10-K TABLE OF CONTENTS September 30, 2006 PART I 1 ITEM 1. Business 1 ITEM 1A. Risk Factors 30 ITEM 1B. Unresolved Staff Comments 32 ITEM 2. Properties 33 ITEM 3. Legal Proceedings 34 ITEM 4. Submission of Matters to a Vote of Security Holders 34 PART II 34 ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of 34 Equity Securities ITEM 6. Selected Financial Data 36 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 38 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 53 ITEM 8. Financial Statements and Supplementary Data 54 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 112 ITEM 9A. Controls and Procedures 112 ITEM 9B. Other Information 112 PART III 112 ITEM 10. Directors and Executive Officers of the Registrant 112 ITEM 11. Executive Compensation 112 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 113 ITEM 13. Certain Relationships and Related Transactions 113 ITEM 14. Principal Accountant Fees and Services 113 PART IV 114 ITEM 15. Exhibits and Financial Statement Schedules 114 SIGNATURES 121 PART I 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, 2006, Provident Bancorp had consolidated assets of $2.8 billion, deposits of $1.7 billion and stockholders' equity of $405.3 million. As of September 30, 2006, Provident Bancorp had 42,699,046 shares of common stock outstanding. Acquisition of Warwick Community Bancorp, Inc. On October 1, 2004 the Company completed the acquisition of Warwick Community Bancorp, Inc. ("WSB" or "Warwick"). The Company paid $72.6 million in cash and issued 6,257,896 shares of its common stock in connection with the acquisition for total merger consideration of $147.2 million. Warwick had nine branch locations: six in Orange County, New York, one in Putnam County, New York and two office locations in Bergen County, New Jersey. Warwick had approximately $703.7 million in consolidated assets, $284.5 million in loans and $475.1 million in deposits. Second Step Common Stock Offering and Acquisition of E.N.B. Holding Company, Inc. On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC, the former mutual holding company for the Bank. As part of the conversion, the Company succeeded to Provident Bancorp, Inc., a federal corporation ("Provident Federal") as the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Federal were sold to investors. The Company sold 19,573,000 shares of common stock at $10.00 per share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The Company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of Provident Federal as of January 14, 2004 was exchanged for 4.4323 new shares of the Company's common stock. The Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc. ("ENB"), headquartered in Ellenville, New York. Shareholders of ENB as of the close of business on January 14, 2004 received total merger consideration of approximately $76.5 million, consisting of 3,969,671 shares of common stock of the Company and approximately $36.8 million in cash. ENB had total assets of $349.7 million, total loans of $213.5 million and total deposits of $326.8 million. ENB had five offices in Orange County, two offices in Ulster County and two offices in Sullivan County, all in New York State. Financial statements as of September 30, 2006 reflect the effect of the exchange of shares in the second-step conversion, the stock offering, the acquisitions of ENB and WSB and the issuance of shares and contribution of cash to the charitable foundation. Goodwill recorded in the ENB and WSB acquisitions ($52.3 million and $91.7 million, respectively) is not amortized to expense, but instead is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. Core deposit and other amortizable intangible assets resulting from all acquisitions of $13.3 million at September 30, 2006 is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated for impairment. Provident Bank Provident Bank, an independent, full-service community bank founded in 1888, is the banking subsidiary of Provident New York Bancorp, headquartered in Montebello, New York. With $2.8 billion in assets and 537 full time equivalent employees, we operate 33 branches that serve the Hudson Valley region, including 32 branches located in Rockland, Orange, Sullivan, Ulster and Putnam Counties in New York, and one branch in Bergen County, New Jersey that operates under the name Towncenter Bank, a division of Provident Bank, New York. We also offer deposit services to municipalities located in the State of New York through Provident Bank's wholly-owned subsidiary, Provident Municipal Bank. Provident Bank offers a complete line of commercial, community business and retail banking products and services. We have increased our number of branch offices from 11 branch offices at September 30, 1998 to 33 branch offices at September 30, 2006. Subsequent to our mutual holding company reorganization and initial stock offering, we have broadened our market reach through de novo branching, our acquisitions of The National Bank of Florida ("NBF") in April 1 2002 and the ENB and WSB acquisitions discussed above. 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 report on Forms 3,4 and 5 filed by the Company's directors and executive officers. Copies may also be obtained, without charge, by written request to Provident New York Bancorp Investor Relations, Attention: Miranda Grimm, 400 Rella Boulevard, Montebello, New York 10901. Provident Municipal Bank Provident Municipal Bank, a wholly-owned subsidiary of Provident Bank, is a New York State-chartered commercial bank that 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 In addition to historical information, this annual report contains forward-looking statements. For this purpose, any statements contained herein (including documents incorporated herein by reference) that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause Provident Bancorp's actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, Provident Bancorp's continued ability to originate quality loans, fluctuations in interest rates, real estate conditions in Provident Bancorp's lending areas, general and local economic conditions, Provident Bancorp's continued ability to attract and retain deposits, Provident Bancorp's ability to control costs, effect of new accounting pronouncements and changing regulatory requirements, and the effect on Provident Bancorp's operation from the assimilation of recent acquisitions. Provident Bancorp undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 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 centers and large regional banks in our market area. At September 30, 2006, our 33 full-service banking offices consisted of 12 offices in Rockland County, New York, 15 offices in Orange County, New York, and five offices in contiguous Ulster, Putnam, 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. According to data published by the Federal Deposit Insurance Corporation ("FDIC") as of June 30, 2006, Provident Bank holds the #2 market share of deposits in Rockland County and #1 share of deposits in Orange County, and overall has the #1 share of deposits in the combined markets of Rockland and Orange Counties, New York. Rockland and Orange counties constitute a suburban market with a broad employment base. They also serve as bedroom communities for nearby New York City and other suburban areas including Westchester County and northern New Jersey. Orange County is one of the two fastest growing counties in New York State. The economic environment in Rockland, Orange and contiguous counties continues to be favorable and has supported increased commercial and residential activity in recent years. Lending Activities General. We originate commercial real estate loans, commercial business loans 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. 2 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 offices 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 $8.0 million. Loans secured by commercial real estate totaled $529.6 million, or 35.9% of our total loan portfolio at September 30, 2006, and consisted of 1,037 loans outstanding with an average loan balance of approximately $510,000, although there are a large number of loans with balances substantially greater than this average. Substantially all of our commercial real estate loans are secured by properties located in our primary market area. Most of our commercial real estate loans are written as five-year adjustable-rate or ten-year fixed-rate mortgages and typically have balloon maturities of ten years. Amortization on these loans is typically based on 20-year payout schedules. We also originate some 15- to 20-year fixed-rate, fully amortizing loans. Margins generally range from 175 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 those on one-to four-family residential mortgage loans. Commercial real estate loans, however, 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 terms 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, 2006, we had 2,007 commercial business loans outstanding with an aggregate balance of $160.8 million, or 10.9% of the total loan portfolio. As of September 30, 2006, the average commercial business loan balance was approximately $80,000 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 also may 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 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 $463 million, or 31.4% of our total loan portfolio at September 30, 2006. 3 We currently 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, and 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. Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. We also originate loans above conforming limits, referred to as "jumbo loans," that have been underwritten to the credit standards of Fannie Mae or Freddie Mac. These loans are generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans, although we retained in our portfolio all such loans originated in fiscal 2006, totaling $88.1 million. In our market area, due to our proximity to New York City, such larger residential loans are not uncommon. We also originate loans at higher rates that do not meet the credit standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable risks. The amount of such loans originated for fiscal 2006 was $2.1 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, 2006, bi-weekly loans totaled $177.2 million, or 38.3% 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, 2006, loans serviced for others, including loan participations, totaled $131.3 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 is 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, 2006, our ARM portfolio included $2.7 million in loans that re-price every six months, $44.3 million in loans that re-price once a year and $8.2 million in loans that re-price periodically after an initial fixed-rate period of one year or more. 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. For loans with initial loan-to-value ratios in excess of 80% we generally require private mortgage insurance, although occasional exceptions may be made. Nearly all residential loans are generally required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance. Construction Loans, Land Acquisition and Development Loans. We originate land acquisition, development and construction loans to builders in our market area. These loans totaled $96.7 million, or 6.6% of our total loan portfolio at September 30, 2006. 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. 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 an interest reserve, if one is required. Advances are made in accordance with a schedule reflecting the cost of the improvements. 4 We also grant 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. 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, 2006, consumer loans totaled $223.5 million, or 15.2% of the total loan portfolio. At September 30, 2006, the largest group of consumer loans consisted of $205.8 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, 2006, homeowner loans totaled $56.0 million or 3.8% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $149.9 million, or 10.2% of our total loan portfolio at September 30, 2006, with $141.2 million remaining undisbursed. Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2006, these loans totaled $17.6 million, or 1.2% 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 includes 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. 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. 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 is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy than a single family mortgage loan. Student Loans. We also originate student loans in connection with a third party who has contracted to repurchase the loans upon completion of the annual advances. Such loans are classified as held for sale. At September 30, 2006 we had $7.5 million in outstanding loans which were expected to be sold to the third party upon completion of the annual advances. 5 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, -------------------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------- ------------------- ----------------- ----------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ---------- ------- ---------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) One- to four-family residential mortgage loans $ 462,996 31.4% $ 456,794 33.5% $380,749 38.2% $380,776 53.3% $366,111 54.6% ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Commercial real estate loans 529,607 35.9 497,936 36.6 327,414 32.8 188,360 26.4 163,329 24.3 Commercial business loans 160,823 10.9 148,825 10.9 105,196 10.5 54,174 7.6 41,320 6.2 Construction loans 96,656 6.6 66,710 4.9 54,294 5.4 10,323 1.4 17,020 2.5 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total commercial loans 787,086 53.4 713,471 52.4 486,904 48.7 252,857 35.4 221,669 33.0 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Home equity lines of credit 149,862 10.2 134,997 9.9 80,013 8.1 50,197 7.0 39,727 5.9 Homeowner loans 55,968 3.8 40,221 3.0 26,921 2.7 25,225 3.6 36,880 5.5 Other consumer loans 17,646 1.2 16,590 1.2 23,047 2.3 5,198 0.7 6,812 1.0 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total consumer loans 223,476 15.2 191,808 14.1 129,981 13.1 80,620 11.3 83,419 12.4 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total loans 1,473,558 100.0% 1,362,073 100.0% 997,634 100.0% 714,253 100.0% 671,199 100.0% ===== ===== ===== ===== ===== Allowance for loan losses (20,373) (21,047) (16,648) (10,698) (10,187) ---------- --------- -------- -------- -------- Total loans, net $1,453,185 $1,341,06 $980,986 $703,555 $661,012 ========== ========= ======== ======== ========

6 Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2006. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

Residential Commercial Commercial Mortgage Real Estate Business Construction (1) Consumer Total ----------------- ----------------- ----------------- ----------------- ---------------- ------------------ Weighted Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- ---------- ---- (Dollars in thousands) Due During the Years Ending September 30, ---------------------- 2007 $ 27,414 6.30% $ 82,624 7.54% $104,939 8.68% $ 72,787 8.81% $158,191 7.94% $ 445,955 8.08% 2008 to 2011 52,621 5.85 150,466 6.97 45,895 7.27 22,060 8.44 22,669 7.91 293,711 7.00 2011 and beyond 382,961 6.01 296,517 6.90 9,989 7.61 1,809 7.20 42,616 6.72 733,892 6.38 -------- -------- -------- -------- -------- --------- Total $462,996 6.01% $529,607 7.00% $160,823 8.21% $ 96,656 8.69% $223,476 7.71% $1,473,558 7.04% ======== ======== ======== ======== ======== ==========

---------- (1) Includes land acquisition loans. The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2006 that are contractually due after September 30, 2007. Fixed Adjustable Total ---------- ---------- ---------- (In thousands) Residential mortgage loans $ 386,819 $ 48,763 $ 435,582 ---------- ---------- ---------- Commercial real estate loans 284,374 162,609 446,983 Commercial business loans 45,135 10,749 55,884 Construction loans 1,545 22,324 23,869 ---------- ---------- ---------- Total commercial loans 331,054 195,682 526,736 ---------- ---------- ---------- Consumer loans 65,285 -- 65,285 ---------- ---------- ---------- Total loans $ 783,158 $ 244,445 $1,027,603 ========== ========== ========== 7 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 that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand. 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. We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our policy 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 of 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 $150,000. 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. 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. The Board of Directors may approve higher exposure limits for loans to one borrower in an amount not to exceed the legal limit of the Bank. 8 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 $2.9 million at September 30, 2006. To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale in accordance with applicable accounting standards (Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"). 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 $877,000 are included in other assets at September 30, 2006. See also Notes 3 and 6 of the "Notes to Consolidated Financial Statements". Loans to One Borrower. At September 30, 2006, 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 $24.2 million, $19.6 million, $15.5 million, $13.8 million and $13.5 million. See "Regulation - Federal Banking Regulation - 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, 2006, we had non-accrual loans of $3.4 million and $1.6 million of loans 90 days past due and still accruing interest, which were well secured and in the process of collection. At September 30, 2005 we had non-accrual loans of $212,000 and $1.4 million of loans 90 days past due and still accruing interest. For the years ended September 30, 2004 and prior there were no loans 90 days past due and still accruing. 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 its fair value, less estimated costs of disposal. 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, 2006 we had one REO property with a recorded balance of $87,000. 9 Loan Portfolio Delinquencies. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

Loans Delinquent For --------------------------------- 60-89 Days 90 Days and Over Total Number Amount Number Amount Number Amount ------ ------ ------ ------ ------ ------ (Dollars in thousands) At September 30, 2006 --------------------- One- to four- family 6 $ 580 10 $1,102 16 $1,682 Commercial real estate -- -- 6 2,980 6 2,980 Commercial business -- -- 12 489 12 489 Consumer 18 120 42 453 60 573 ------ ------ ------ ------ ------ ------ Total 24 $ 700 70 $5,024 94 $5,724 ====== ====== ====== ====== ====== ====== At September 30, 2005 --------------------- One- to four- family 6 $ 638 6 $1,070 12 $1,708 Commercial real estate -- -- 3 92 3 92 Commercial business 11 264 3 120 14 384 Consumer 28 150 22 359 50 509 ------ ------ ------ ------ ------ ------ Total 45 $1,052 34 $1,641 79 $2,693 ====== ====== ====== ====== ====== ====== At September 30, 2004 --------------------- One- to four- family 6 $ 762 11 $1,597 17 $2,359 Commercial real estate 1 377 4 488 5 865 Commercial business 7 158 7 474 14 632 Consumer 25 107 19 178 44 285 ------ ------ ------ ------ ------ ------ Total 39 $1,404 41 $2,737 80 $4,141 ====== ====== ====== ====== ====== ====== At September 30, 2003 --------------------- One- to four- family 6 $ 626 6 $ 951 12 $1,577 Commercial real estate 1 36 8 3,632 9 3,668 Commercial business 1 36 0 0 1 36 Consumer 7 63 3 114 10 177 ------ ------ ------ ------ ------ ------ Total 15 $ 761 17 $4,697 32 $5,458 ====== ====== ====== ====== ====== ====== At September 30, 2002 --------------------- One- to four- family 6 $ 577 22 $2,291 28 $2,868 Commercial real estate -- -- 3 2,492 3 2,492 Consumer 7 37 14 171 21 208 ------ ------ ------ ------ ------ ------ Total 13 $ 614 39 $4,954 52 $5,568 ====== ====== ====== ====== ====== ======

10 Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At each date presented, we had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) .

September 30, ------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 --------------------- --------------------- --------- --------- --------- (Dollars in thousands) 90 days 90 days past due past due and still Non- and still accruing Accrual accruing Non-Accrual Loans --------- --------- --------- ------------------------------------------------ Non-performing loans: One- to four- family $ 629 $ 472 $ 1,337 $ 65 $ 1,597 $ 951 $ 2,291 Commercial real estate 613 2,367 92 -- 488 3,632 2,492 Commercial business 30 459 -- 120 474 -- -- Consumer 310 144 -- 27 178 114 171 --------- --------- --------- --------- --------- --------- --------- Total non-performing loans $ 1,582 $ 3,442 $ 1,429 $ 212 $ 2,737 $ 4,697 $ 4,954 --------- --------- --------- --------- --------- --------- --------- Real estate owned: One- to four- family 87 92 -- -- 41 --------- --------- --------- --------- --------- Total real estate owned 87 92 -- -- 41 --------- --------- --------- --------- --------- Total non-performing assets $ 5,111 $ 1,733 $ 2,737 $ 4,697 $ 4,995 ========= ========= ========= ========= ========= Ratios: ------- Non-performing loans to total loans 0.34% 0.12% 0.27% 0.66% 0.74% Non-performing assets to total assets 0.18% 0.07% 0.15% 0.40% 0.49%

For the year ended September 30, 2006, 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 $372,000. Interest income actually recognized on such loans totaled $127,000. 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. 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, are required to be designated as "special mention". As of September 30, 2006, we had $5.8 million of assets designated as "special mention." When we classify assets as either "substandard" or "doubtful", we allocate a portion of the related general loss allowances to such assets as deemed prudent by management. The allowance for loan losses represents amounts that have been established to recognize losses inherent in the loan portfolio that are both probable and reasonably estimable at the date of the financial statements. When we classify a problem asset as "loss," we charge-off such amount. 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, 2006, classified assets consisted of substandard assets of $5.4 million and $95,000 of doubtful assets. 11 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 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 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 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 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: o levels of, and trends in, delinquencies and non-accruals; o trends in volume and terms of loans; o effects of any changes in lending policies and procedures; o experience, ability, and depth of lending management and staff; o national and local economic trends and conditions; o concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and o for commercial loans, trends in risk ratings. We consider commercial real estate loans, commercial business loans, and land acquisition, development and construction loans to be riskier 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 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/or business operation of the borrower who is also the primary occupant, and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Commercial business loans involve a higher risk of default than residential loans of like duration since their repayment is generally dependent on the successful operation of the borrower's business and the sufficiency of collateral, if any. 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. 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. 12 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, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Balance at beginning of year $ 21,047 $ 16,648 $ 10,698 $ 10,187 $ 9,123 -------- -------- -------- -------- -------- Transfer to reserve for contingent loan commitments (395) (256) (334) (175) (196) Charge-offs: One- to four- family -- (23) (1) -- -- Commercial real estate -- -- -- -- (31) Commercial business (1,509) (750) (284) (212) (130) Consumer (327) (380) (199) (140) (163) -------- -------- -------- -------- -------- Total charge-offs (1,836) (1,153) (484) (352) (324) Recoveries: One- to four- family -- -- 86 -- -- Commercial business 236 69 32 40 40 Consumer 121 109 100 98 107 -------- -------- -------- -------- -------- Total recoveries 357 178 218 138 147 Net charge-offs (1,479) (975) (266) (214) (177) Allowance recorded in acquisitions -- 4,880 5,750 -- 537 Provision for loan losses 1,200 750 800 900 900 -------- -------- -------- -------- -------- Balance at end of year $ 20,373 $ 21,047 $ 16,648 $ 10,698 $ 10,187 ======== ======== ======== ======== ======== Ratios: Net charge-offs to average loans outstanding 0.11% 0.08% 0.03% 0.03% 0.03% Allowance for loan losses to non- performing loans 405.51% 1,282.57% 608.26% 227.76% 205.63% Allowance for loan losses to total loans 1.38% 1.55% 1.67% 1.50% 1.52%

The tables below reflect the nature of the portfolios acquired and their impact on the combined portfolio composition and asset quality:

Residential Equity Line of Total Comm'l Const & Total ENB Acquisition Mortgage Credit Consumer Retail C & I Mortgage land Comm'l -------- -------- -------- -------- -------- -------- -------- -------- Provident Bank before 1/14/04 acquisition 52% 7% 4% 63% 7% 28% 2% 37% ENB 6% 5% 19% 30% 17% 53% 0% 70% -------- -------- -------- -------- -------- -------- -------- -------- Provident Bank after 1/14/04 acquisition 41% 7% 8% 55% 9% 34% 1% 45% ======== ======== ======== ======== ======== ======== ======== ======== Percentage point change (10.75)% (0.66)% +3.61% (7.80)% +2.54% +5.72 (0.46)% +7.80%

Residential Equity Line of Total Comm'l Const & Total WSB Acquisition Mortgage Credit Consumer Retail C & I Mortgage land Comm'l -------- -------- -------- -------- -------- -------- -------- -------- Provident Bank before 10/1/04 acquisition 38% 8% 5% 51% 11% 33% 5% 49% WSB 23% 10% 0% 34% 10% 57% 0% 66% -------- -------- -------- -------- -------- -------- -------- -------- Provident Bank after 10/1/04 acquisition 35% 8% 4% 47% 10% 38% 4% 53% ======== ======== ======== ======== ======== ======== ======== ======== Percentage point change (3.38)% +0.46% (1.02)% (3.94)% (0.16)% +5.32% (1.22)% +3.94%

13 ENB Acquisition --------------- Retail Com'l ------ ----- Critized Critized Total Critized -------- -------- -------------- Provident Bank pre-acquisition 0.23% 0.70% 0.93% ENB 0.55% 1.52% 2.07% ---- ---- ---- Provident Bank post-acquisition 0.30% 0.90% 1.20% ==== ==== ==== Percentage point change 0.08% 0.19% 0.27% WSB Acquisition --------------- Retail Com'l ------ ----- Critized Critized Total Critized -------- -------- -------------- Provident Bank pre-acquisition 0.28% 0.65% 0.93% WSB 0.07% 0.10% 0.17% ---- ---- ---- Provident Bank post-acquisition 0.27% 0.59% 0.85% ==== ==== ==== Percentage point change (0.01)% (0.07)% (0.08)% The E.N.B. Holding Company, Inc. (""ENB") acquisition increased the proportion of commercial loan assets due to the greater concentration in commercial mortgage and commercial & industrial loans compared to the Provident Bank portfolio. In addition, the proportion of criticized loans in both the retail and commercial portfolios in the acquired portfolio was higher than in the Provident portfolio. As a result of the greater proportion of commercial loans and a higher proportion of criticized loans, asset quality was modestly reduced. The acquisition of Warwick Community Bancorp, Inc. ("WSB") increased the proportion of commercial loan assets due to a higher concentration of commercial mortgage loans in the WSB portfolio compared to the Provident portfolio. The acquired portfolio had a lower proportion of criticized loans in the retail and commercial portfolios than the Provident portfolio, which provided an improvement in that measure of asset quality. This resulted in an overall neutral effect on asset quality, as the increase in commercial loan assets was offset by a reduction in the proportion of criticized loans. Following is the chart of the allocation of the allowance for loan losses for the acquired portfolios: Impact of ENB Acquisition on Allowance Account ---------------------------------------------- Retail Retail Commercial Commercial Total Total $000's % $ 000's % $000's % Provident before $ 4,525 40% $ 6,724 60% $11,249 100% ENB 690 12% 5,060 88% 5,750 100% ------- ------- ------- ------- ------- ------- Provident after $ 5,215 31% $11,784 69% $16,999 100% ======= ======= ======= ------- Impact of WSB Acquisition on Allowance Account ---------------------------------------------- Retail Retail Commercial Commercial Total Total $000's % $ 000's % $000's % Provident before $ 6,290 36% $11,062 64% $17,352 100% WSB 373 8% 4,507 92% 4,880 100% ------- ------- ------- Provident after $ 6,663 30% $15,569 70% $22,232 100% ======= ======= ======= As a result of the ENB acquisition, $5.8 million in loan loss reserve was recorded and $4.9 million was recorded with respect to the WSB acquisition. These represent the amounts, which in the opinion of management, were necessary to absorb the losses inherent in the acquired portfolios in accordance with the same standards as then applied to the Provident loan portfolio. 14 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, ------------------------------------------------------------------------------------------------------------ 2006 2005 2004 ---------------------------------- ----------------------------------- ----------------------------------- Percent of Percent of Percent of Loans in Loans in Loans in Loans in Allowance Loan Each Allowance Loan Each Allowance Loan Each for Loan Balances by Category to for Loan Balances by Category to for Loan Balances by Category to Losses Category Total Loans Losses Category Total Loans Losses Category Total Loans --------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------- (Dollars in thousands) One- to four- family $ 765 462,996 31.4% $ 503 $ 456,794 33.5% $ 1,523 $ 380,749 38.2% Commercial real estate 9,382 529,607 35.9 10,662 497,936 36.6 7,141 327,414 32.8 Commercial business 5,461 160,823 10.9 5,851 148,825 10.9 4,385 105,196 10.5 Construction 2,862 96,656 6.6 2,343 66,710 4.9 2,005 54,294 5.4 Consumer 1,903 223,476 15.2 1,688 191,808 14.1 1,594 129,981 13.1 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 20,373 1,473,558 100.0% $ 21,047 $1,362,073 100.0% $ 16,648 $ 997,634 100.0% ========= ========== ========== ========== ========== ========== ========== ========== ==========

September 30, ----------------------------------------------------------------------- 2003 2002 ---------------------------------- ----------------------------------- Percent of Percent of Loans in Loans in Loans in Allowance Loan Each Allowance Loan Each for Loan Balances by Category to for Loan Balances by Category to Losses Category Total Loans Losses Category Total Loans --------- ---------- ----------- ---------- ---------- ----------- (Dollars in thousands) One- to four- family $ 1,462 $ 380,776 53.3% $ 3,252 $ 366,111 54.6% Commercial real estate 5,808 188,360 26.4 4,194 163,329 24.3 Commercial business 2,332 54,174 7.6 908 41,320 6.2 Construction 406 10,323 1.4 855 17,020 2.5 Consumer 690 80,620 11.3 978 83,419 12.4 --------- ---------- ---------- ---------- ---------- ---------- Total $ 10,698 $ 714,253 100.0% $ 10,187 $ 671,199 100.0% ========= ========== ========== ========== ========== ==========

15 Securities Activities 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 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 risk. Statement of Financial Accounting Standard (SFAS) No. 115 requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability and 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. In November 2003, the Emerging Issues Task Force ("EITF") issued issue summary 03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. EITF 03-1 addressed an entity's treatment of the impairment of securities when such impairment is considered other than temporary. The preliminary summary required disclosures only related to other than temporary impairment. In March 2004, the EITF continued its discussion and reached a consensus on the procedures for recognizing an impairment of securities considered other than temporarily impaired. The guidance in EITF 03-1 was intended to be effective for reporting periods beginning after June 15, 2004. However, in September 2004, the FASB issued FSP EITF 03-1-1, which deferred the effective date for the measurement and recognition provisions of EITF 03-1 until further implementation guidance could be established. Management does not believe the provisions of this standard, as currently written, will have a material impact on the results of future operations. Government and Agency Securities. At September 30, 2006, we held government securities available for sale with a fair value of $286.2 million, consisting primarily of U.S. Treasury and Agency obligations with short- to medium-term maturities (one to 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, as collateral for borrowings, and for prepayment protection. Corporate and Municipal Bonds. At September 30, 2006, we held no corporate debt securities. Although corporate bonds may offer a higher yield than that of a U.S. Treasury or Agency security of comparable duration, corporate bonds also have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this potential 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, 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 16 limits investments in municipal bonds to securities with maturities of 20 years or less and rated AA or better by at least one nationally recognized rating agency, and favors issues that are insured unless the issuer is a local government entity within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy 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, 2006, we held $136.9 million in bonds issued by states and political subdivisions, $40.9 million of which were classified as held to maturity at amortized cost and $96.0 million of which were classified as available for sale at fair value. Equity Securities. At September 30, 2006, our equity securities available for sale had a fair value of $879,000 and consisted of stock issued by Freddie Mac and Fannie Mae, and certain other equity investments. We also held $33.5 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, 2006 amounted to $1.3 million. 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, Fannie Mae and Ginnie Mae; and (iii) increase liquidity, (iv) maintain our status as a thrift for charter purposes 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. At September 30, 2006, our mortgage-backed securities portfolio totaled $588.6 million, consisting of $568.7 million available for sale at fair value and $19.9 million held to maturity at amortized cost. The total mortgage-backed securities portfolio includes CMOs of $38.9 million, consisting of $37.4 million available for sale at fair value and $1.5 million held to maturity at amortized cost. The remaining mortgage-backed securities of $549.7 million were pass-through securities, consisting of $531.3 million available for sale at fair value and $18.4 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 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. 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. 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. 17 Available for Sale Portfolio. The following table sets forth the composition of our available for sale portfolio at the dates indicated.

September 30, --------------------------------------------------------------------------- 2006 2005 2004 ----------------------- ----------------------- ----------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) Investment Securities: U.S. Government securities $ 17,012 $ 16,718 $ 19,006 $ 18,608 $ 4,992 $ 5,042 Federal agency obligations 272,494 269,462 243,763 239,017 187,796 187,260 Corporate debt securities -- -- -- -- State and municipal securities 95,405 95,970 50,176 49,691 20,482 20,559 Equity securities 947 879 947 858 1,005 1,214 ---------- ---------- ---------- ---------- ---------- ---------- Total investment securities available for sale 385,858 383,029 313,892 308,174 214,275 214,075 ---------- ---------- ---------- ---------- ---------- ---------- Mortgage-Backed Securities: Pass-through securities: Fannie Mae 404,168 396,484 422,867 416,611 238,112 237,474 Freddie Mac 132,921 131,119 71,733 70,231 66,466 66,807 Ginnie Mae 3,798 3,701 5,450 5,374 1,626 1,630 Other -- -- -- -- 4,322 4,695 CMOs and REMICs 37,668 37,396 22,759 22,562 9,711 9,616 ---------- ---------- ---------- ---------- ---------- ---------- Total mortgage-backed securities available for sale 578,555 568,700 522,809 514,778 320,237 320,222 ---------- ---------- ---------- ---------- ---------- ---------- Total securities available for sale $ 964,413 $ 951,729 $ 836,701 $ 822,952 $ 534,512 $ 534,297 ========== ========== ========== ========== ========== ==========

At September 30, 2006, our available for sale U. S. Treasury securities portfolio, at fair value, totaled $16.7 million, or 0.6% of total assets, and the federal agency securities portfolio, at fair value, totaled $269.5 million, or 9.5% of total assets. Of the combined U.S. government and agency portfolio, based on amortized cost, $180.4 million had maturities of one year or less and a weighted average yield of 3.07%, and $109.1 million had maturities of between one and five years and a weighted average yield of 4.05%. The agency securities portfolio includes both non-callable and callable debentures. The agency debentures may be callable on a quarterly or one time basis depending on the security's individual terms following an initial holding period of from 12 to 24 months. State and municipal securities portfolio, available for sale, based on amortized cost, had $3.0 million in securities with a final maturity of one year or less and a weighted average yield of 2.73%; $5.6 million maturing in one to five years with a weighted average yield of 3.3%; $10.9 million maturing in five to ten years with a weighted average yield of 3.86% and $75.9 million maturing in greater than ten years with a weighted average yield of 4.09%. Equity securities available for sale at September 30, 2006 had a fair value of $879,000. At September 30, 2006, $531.3 million of our available for sale mortgage-backed securities, at fair value, consisted of pass-through securities, which totaled 18.7% of total assets. The total amortized cost of these pass- through securities was $540.9 million and consisted of $404.2 million, $132.9 million and $3.8 million of Fannie Mae, Freddie Mac and Ginnie Mae MBS, respectively, with respective weighted averages yields of 4.62%, 4.90% and 5.75%. At the same date, the fair value of our available for sale CMO portfolio totaled $37.4 million, or 1.3% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae, Freddie Mac and private party issuers. The amortized cost of this CMO had a weighted average yield of 4.66%. We own both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our portfolio of CMOs available for sale at September 30, 2006 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. 18 Held to Maturity Portfolio. The following table sets forth the composition of our held to maturity portfolio at the dates indicated.

September 30, --------------------------------------------------------------------------- 2006 2005 2004 ----------------------- ----------------------- ----------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) Investment Securities: State and municipal securities $ 40,892 $ 40,927 $ 43,931 $ 44,092 $ 29,894 $ 30,523 Other 156 160 307 310 309 265 ---------- ---------- ---------- ---------- ---------- ---------- Total investment securities held to maturity 41,048 41,087 44,238 44,402 30,203 30,788 ---------- ---------- ---------- ---------- ---------- ---------- Mortgage-Backed Securities: Pass-through securities: Fannie Mae 9,102 8,982 11,504 11,497 17,157 17,413 Freddie Mac 9,138 9,058 12,838 12,825 18,245 18,464 Ginnie Mae 232 238 416 434 685 722 CMOs and REMICs 1,467 1,511 1,953 1,993 2,788 2,843 ---------- ---------- ---------- ---------- ---------- ---------- Total mortgage-backed securities held to maturity 19,939 19,789 26,711 26,749 38,875 39,442 ---------- ---------- ---------- ---------- ---------- ---------- Total securities held to maturity $ 60,987 $ 60,876 $ 70,949 $ 71,151 $ 69,078 $ 70,230 ========== ========== ========== ========== ========== ==========

At September 30, 2006, our held to maturity mortgage-backed securities portfolio totaled $19.9 million at amortized cost, consisting of: $363,000 with a weighted average yield of 4.45% and contractual maturities of one year or less and $1.0 million with a weighted average yield of 6.09% and contractual maturities within five years and $4.9 million with a weighted average yield of 6.08% and contractual maturities of greater than five years, but no more than ten and $13.7 million with a weighted average yield of 4.76% with contractual maturities of greater than ten years; CMOs of $1.5 million are included in this portfolio. While the contractual maturity of the CMOs underlying collateral is greater than ten years, the actual period to maturity of the CMOs may be shorter due to prepayments on the underlying mortgages and the terms of the CMO tranche owned. State and municipal securities consisted of $22.5 million, with a final maturity of one year or less and a weighted average yield of 3.69%; and $7.8 million, maturing in one to five years, with a weighted average yield of 3.78%; $6.1 million maturing in five to ten years, with a weighted average yield of 4.05% and $4.5; million, maturing in greater than ten years, with a weighted average yield of 4.21%. 19 Portfolio Maturities and Yields. The following table summarizes the composition and maturities of the investment debt securities portfolio and the mortgage backed securities portfolio at September 30, 2006. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis.

More than One Year More than Five Years One Year or Less through Five Years through Ten Years More than Ten Years Total Securities ---------------- ------------------ ----------------- ------------------- -------------------------- Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Fair Value Yield -------- ------ -------- ------ -------- ------ -------- ------ -------- ---------- ------ (Dollars in thousands) Available for Sale: Mortgage-Backed Securities Fannie Mae $ 1 5.58% $ 18,149 3.82% $ 15,123 4.10% $370,895 4.69% $404,168 $396,484 4.62% Freddie Mac 114 4.19 3,134 4.35 14,205 4.13 115,468 5.01 132,921 131,119 4.90 Ginnie Mae -- 3.39 6 6.26 37 5.39 3,755 5.76 3,798 3,701 5.75 CMOs and REMICs -- -- -- -- 584 4.78 37,084 4.66 37,668 37,396 4.66 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Total 115 4.23 21,289 3.90 29,949 4.13 527,202 4.76 578,555 568,700 4.70 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Investment Securities U.S. Government and agency securities 180,360 3.07 109,050 4.05 -- -- 96 6.00 289,506 286,180 3.44 State and municipal securities 2,981 2.73 5,628 3.30 10,861 3.86 75,935 4.09 95,405 95,970 3.97 Equity Securities -- -- -- -- 947 0.71 -- -- 947 879 0.71 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Total 183,341 3.06 114,678 4.01 11,808 3.61 76,031 4.09 385,858 383,029 3.56 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Total debt securities available for sale $183,456 3.07% $135,967 3.99% $ 41,757 3.98% $603,233 4.68% $964,413 $951,729 4.24% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======== ====== Held to Maturity: Mortgage-Backed Securities Fannie Mae $ -- --% $ 222 6.25% $ 3,727 5.82% $ 5,153 4.51% $ 9,102 $ 8,982 5.09% Freddie Mac 363 4.45 779 6.04 906 6.71 7,090 4.84 9,138 9,058 5.12 Ginnie Mae -- -- -- -- 232 7.91 -- -- 232 238 7.91 CMOs and REMICs -- -- -- -- -- -- 1,467 5.23 1,467 1,511 5.23 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Total 363 4.45 1,001 6.09 4,865 6.08 13,710 4.76 19,939 19,789 5.14 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Investment Securities State and municipal securities 22,492 3.69 7,788 3.78 6,148 4.05 4,464 4.21 40,892 40,927 3.82 Other 101 2.06 55 3.32 -- -- -- -- 156 160 2.50 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Total 22,593 3.68 7,843 3.78 6,148 4.05 4,464 4.21 41,048 41,087 3.81 -------- ------ -------- ------ -------- ------ -------- ------ -------- -------- ------ Total debt securities held to maturity $ 22,956 3.69% $ 8,844 4.04% $ 11,013 4.95% $ 18,174 4.62% $ 60,987 $ 60,876 4.25% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======== ======

20 Sources of Funds General. Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are the primary sources of our funds for use in lending, investing and for other general purposes. Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, NOW accounts, checking accounts, money market accounts, club accounts, certificates of deposit and IRAs and other qualified plan accounts. In fiscal 2006 we introduced our `power money market account.' With this account, interest is earned at a higher rate, but requires substantial balances and a checking account relationship. We provide a variety of commercial checking accounts and other products for businesses. In addition, we provide low-cost checking account services for low-income customers. At September 30, 2006, our deposits totaled $1.7 billion. Interest-bearing deposits totaled $1.4 billion, and non-interest-bearing demand deposits totaled $366.8 million. NOW, savings and money market deposits totaled $771.0 million at September 30, 2006. Also at that date, we had a total of $591.8 million in certificates of deposit, of which $552.6 million had maturities of one year or less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, our management monitors activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of such accounts upon maturity, although we may have to match competitive rates to retain many of these accounts. Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our favorable locations, customer service and competitive pricing to attract and retain these deposits. While we accept certificates of deposit in excess of $100,000 for which we may provide preferential rates, we do not actively solicit such deposits as they are more difficult to retain than core deposits. Our limited purpose commercial bank subsidiary, Provident Municipal Bank, accepts municipal deposits. Municipal time accounts (certificates of deposit) are generally obtained through a bidding process, and tend to carry higher average interest rates than retail certificates of deposit of similar term. Distribution of Deposit Accounts by Type. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

For the year ended September 30, ----------------------------------------------------------------------------- 2006 2005 2004 ----------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Demand deposits: Retail $ 163,582 9.5% $ 170,434 9.9% $ 122,276 9.9% Commercial 203,265 11.8 214,647 12.4 142,819 11.5 ---------- ---------- ---------- ---------- ---------- ---------- Total demand deposits 366,847 21.2 385,081 22.3 265,095 21.4 Business NOW deposits 50,546 2.9 60,214 3.5 44,176 3.6 Personal NOW deposits 103,186 6.0 105,730 6.1 63,528 5.1 Savings deposits 378,337 21.9 481,674 27.9 360,138 29.0 Money market deposits 238,977 13.8 222,091 12.9 173,272 14.0 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal 1,137,893 65.8 1,254,790 72.7 906,209 73.1 Certificates of deposit 591,766 34.2 471,611 27.3 333,323 26.9 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits $1,729,659 100.0% $1,726,401 100.0% $1,239,532 100.0% ========== ========== ========== ========== ========== ==========

21 The following table sets forth the distribution of average deposit accounts by account category with the average rates paid at the dates indicated.

September 30, ------------------------------------------------------------------------------------------------- 2006 2005 2004 -------------------------------- -------------------------------- ------------------------------- Average Average Rate Average Average Rate Average Average Rate Balance Interest Paid Balance Interest Paid Balance Interest Paid --------- -------- ------- --------- -------- ------- --------- -------- ------- Non interest bearing deposits $ 356,869 $ -- -- $ 349,507 $ -- -- $ 229,530 $ -- -- NOW depostis 154,708 511 0.33% 153,058 509 0.33% 88,677 189 0.21% Savings deposits 445,419 2,258 0.51% 545,829 3,070 0.56% 356,998 1,570 0.44% Money market deposits 230,933 4,178 1.81% 228,197 2,646 1.16% 150,866 859 0.57% Certificates deposits 538,045 19,855 3.69% 434,644 9,851 2.27% 311,197 5,283 1.70% ---------- ------- ------- ---------- ------- ------- ---------- ------- ------- Total interest bearing deposits 1,369,105 $26,802 1.96% 1,361,727 $16,076 1.18% 907,738 $ 7,901 0.87% ---------- ---------- ---------- Total deposits $1,725,974 $1,711,235 $1,137,268 ========== ========== ==========

Certificates of Deposit by Interest Rate Range. The following table sets forth information concerning certificates of deposit by interest rate ranges at the dates indicated.

At September 30, 2006 ----------------------------------------------------------------------------------- Period to Maturity ----------------------------------------------------------------------------------- Less than One to Two Two to More than Percent of Total at September 30, ------------------------- One Year Years Three Years Three Years Total Total 2005 2004 ----------- ----------- ------------ ------------ ----------- ----------- ------------------------- (Dollars in thousands) Interest Rate Range: 2.00% and below $ 2,013 $ 30 $ -- $ -- $ 2,043 0.35% $ 42,305 $ 249,625 2.01% to 3.00% 20,778 3,111 1,173 105 25,167 4.25% 185,300 42,691 3.01% to 4.00% 122,524 9,746 3,296 4,346 139,912 23.64% 230,032 21,839 4.01% to 5.00% 302,025 3,208 8,174 548 313,955 53.05% 13,409 16,231 5.01% to 6.00% 105,258 5,258 173 -- 110,689 18.70% 488 2,320 6.01% and above -- -- -- -- -- -- 77 617 ----------- ----------- ------------ ------------ ----------- ----------- ----------- ----------- Total $ 552,598 $ 21,353 $ 12,816 $ 4,999 $ 591,766 100% $ 471,611 $ 333,323 =========== =========== ============ ============ =========== =========== =========== ===========

Certificates of Deposit by Time to Maturity. The following table sets forth certificates of deposit by time remaining until maturity as of September 30, 2006.

Maturity ------------------------------------------------------------------------ 3 months or Over 3 to 6 Over 6 to 12 Over 12 Less Months Months Months Total ------------ ------------ ------------ ------------ ------------ Certificates of deposit less than $100,000 $ 139,260 $ 90,997 $ 126,297 $ 32,529 $ 389,083 Certificates of deposit of $100,000 or more (1) 118,944 42,628 34,473 6,638 202,683 ------------ ------------ ------------ ------------ ------------ Total of certificates of deposit $ 258,204 $ 133,625 $ 160,770 $ 39,167 $ 591,766 ============ ============ ============ ============ ============

------------------------ (1) The weighted interest rates for these accounts, by maturity period, are 4.82% for 3 months or less; 4.97% for 3 to 6 months; 4.49% for 6 to 12 months; and 3.99% for over 12 months. The overall weighted average interest rate for accounts of $100,000 or more was 4.77%. 22 Short-term Borrowings. Our short-term borrowings (less than one year) consist of advances, repurchase agreements and overnight borrowings. At September 30, 2006, we had access to additional Federal Home Loan Bank advances of up to an additional $406.1 million on a collateralized basis. The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates and for the years indicated.

At or For the Years Ended September 30, -------------------------------------- 2006 2005 2004 ---------- ---------- ---------- (Dollars in thousands) Balance at end of year $ 538,437 $ 187,600 $ 70,000 Average balance during year 373,471 124,004 42,356 Maximum outstanding at any month end 538,437 187,600 70,246 Weighted average interest rate at end of year 5.46% 3.99% 2.04% Average interest rate during year 4.96% 3.61% 1.35%

Activities of Subsidiaries and Affiliated Entities Provident Municipal Bank is a wholly-owned subsidiary of Provident Bank. Provident Municipal Bank is a New York State-chartered commercial bank whose purpose is limited to accepting municipal deposits and investing funds obtained into investment securities. 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. At September 30, 2006 Provident Municipal Bank had $147.6 million in deposits from municipal entities in the communities served by Provident Bank. Provest Services Corp. I is a wholly-owned subsidiary of Provident Bank, holding an investment in a limited partnership that operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident Bank that has engaged a third-party provider to sell annuities, life and health insurance products to Provident Bank's customers. Through September 30, 2006, the activities of these subsidiaries have had an insignificant effect on our consolidated financial condition and results of operations. During fiscal 1999, Provident Bank established Provident REIT, Inc., a wholly-owned subsidiary in the form of a real estate investment trust. Provident REIT, Inc. holds both residential and commercial real estate loans. WSB Funding was acquired in the Warwick acquisition and operates in the same manner as Provident REIT. Hardenburgh Abstract Company of Orange County Inc. ("Hardenburgh") is a title insurance agency that we acquired in connection with the acquisition of WSB. Hardenburgh had gross revenue from title insurance policies and abstracts of $1.7 million and net income of $493,000 in 2006. The Company acquired Hudson Valley Investment Advisors, LLC ("HVIA") on June 1, 2006. HVIA is an investment advisory firm that generates investment management fees. HVIA generated $594,000 in fee income in 2006 for the Company and net income of $57,000 in 2006. Competition We face significant competition in both originating loans and attracting deposits. The New York metropolitan area has a high concentration of financial institutions, many of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. We have emphasized personalized banking and the advantage of local decision-making in our banking business and this strategy appears to have been well received in our market area. We do not rely on any individual, group, or entity for a material portion of our deposits. Employees As of September 30, 2006, we had 507 full-time employees and 58 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good. 23 Regulation General As a federally chartered savings association, Provident Bank is regulated and supervised by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Provident Municipal Bank is regulated by the New York State Department of Banking and the Federal Deposit Insurance Corporation. This regulation and supervision establishes a comprehensive framework of activities in which a financial institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation's deposit insurance funds and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. After completing an examination, the federal agency critiques the financial institution's operations and assigns its rating, known as an institution's "CAMELS". Under federal law, an institution may not disclose its CAMELS rating to the public. Provident Bank also is a member of, and owns stock in, the Federal Home Loan Bank of New York, which is one of the 12 regional banks in the Federal Home Loan Bank System. Provident Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, which governs reserves maintained against deposits and other matters. The Office of Thrift Supervision examines Provident Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Provident Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of Provident Bank's loan documents. Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the New York State Department of Banking or Congress, could have a material adverse impact on Provident New York Bancorp, Provident Bank, Provident Municipal Bank and their respective operations. Federal Banking Regulation Business Activities. A federal savings association derives its lending and investment powers from the Home Owners' Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, Provident Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other loans and assets. Provident Bank also may establish subsidiaries that may engage in activities not otherwise permissible for Provident Bank directly, including real estate investment, and securities and insurance brokerage. Capital Requirements. Office of Thrift Supervision regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio; a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks inherent in the type of asset. Core capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. At September 30, 2006, Provident Bank's capital exceeded all applicable requirements. Loans to One Borrower. A federal savings association generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus on an unsecured basis. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2006, Provident Bank was in compliance with the loans-to-one-borrower limitations. 24 Qualified Thrift Lender Test. As a federal savings association, Provident Bank is subject to a qualified thrift lender, or "QTL," test. Under the QTL test, Provident Bank must maintain at least 65% of its "portfolio assets" in "qualified thrift investments" in at least nine months of the most recent 12-month period. "Portfolio assets" generally means total assets of a bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association's business. Provident Bank also may satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. A savings association that fails the QTL test must either convert to a bank charter or operate under specified restrictions. At September 30, 2006, Provident Bank maintained approximately 82% of its portfolio assets in qualified thrift investments, and therefore satisfied the QTL test. Capital Distributions. Office of Thrift Supervision regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the institution's capital account. A savings association must file an application for approval of a capital distribution if: o the total capital distributions for the applicable calendar year exceed the sum of the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years; o the savings association would not be at least adequately capitalized following the distribution; o the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or o the savings association is not eligible for expedited treatment of its filings. Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the Office of Thrift Supervision at least 30 days before the Board of Directors declares a dividend or approves a capital distribution. The Office of Thrift Supervision may disapprove a notice or application if: o the savings association would be undercapitalized following the distribution; o the proposed capital distribution raises safety and soundness concerns; or o the capital distribution would violate a prohibition contained in any statute, regulation or agreement. As of October 1, 2006, the maximum amount of dividends that could be declared by Provident Bank for fiscal 2007, without regulatory approval, was $22.9 million plus net income for fiscal 2007. Liquidity. A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the Office of Thrift Supervision is required to assess the savings association's record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association's failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. Provident Bank received an "outstanding" Community Reinvestment Act rating in its most recent federal examination. Transactions with Related Parties. A federal savings association's authority to engage in transactions with its "affiliates" is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act. The term "affiliates" for these purposes generally means any company that controls or is under common control 25 with an institution. Provident Bancorp, Inc. and its non-bank subsidiaries will be affiliates of Provident Bank. In general, transactions with affiliates must be on terms that are as favorable to the savings association as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings association's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings association. In addition, Office of Thrift Supervision regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Provident Bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent, than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Provident Bank's capital. In addition, extensions of credit in excess of certain limits must be approved by Provident Bank's Board of Directors. Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal banks and has the authority to bring enforcement action against all "institution-affiliated parties," including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular bank. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances. Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the Office of Thrift Supervision is required and authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the savings association's capital: o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital); o adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based capital and 8% total risk-based capital); o undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based capital or 8% total risk-based capital); o significantly undercapitalized (less than 3% leverage capital, 3% tier 1 risk-based capital or 6% total risk-based capital); and o critically undercapitalized (less than 2% tangible capital). Generally, the banking regulator is required to appoint a receiver or conservator for a savings association that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the Office 26 of Thrift Supervision within 45 days of the date a bank receives notice that it is "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the savings association, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. The Office of Thrift Supervision may also take any one of a number of discretionary supervisory actions against undercapitalized savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors. At September 30, 2006, Provident Bank met the criteria for being considered "well-capitalized." Insurance of Deposit Accounts. Deposit accounts in Provident Bank are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Provident Bank's deposits, therefore, are subject to Federal Deposit Insurance Corporation deposit insurance assessments. On February 15, 2006, federal legislation to reform federal deposit insurance was enacted. This new legislation requires, among other things, an increase in the amount of federal deposit insurance coverage from $100,000 to $130,000 (with a cost of living adjustment to become effective in five years). The legislation also requires the reserve ratio to be modified to provide for a range between 1.15% and 1.50% of estimated insured deposits. On November 2, 2006, the Federal Deposit Insurance Corporation adopted final regulations that assess insurance premiums based on risk. As a result, the new regulation will enable the Federal Deposit Insurance Corporation to more closely tie each financial institution's deposit insurance premiums to the risk it poses to the deposit insurance fund. Under the new risk-based assessment system, which becomes effective in the beginning of 2007, the Federal Deposit Insurance Corporation will evaluate the risk of each financial institution based on its supervisory rating, its financial ratios, and its long-term debt issuer rating. The new rates for nearly all of the financial institution industry will vary between five and seven cents for every $100 of domestic deposits. At the same time, the Federal Deposit Insurance Corporation also adopted final regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits. Effective March 31, 2006, the Federal Deposit Insurance Corporation merged the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") into a single fund called the "Deposit Insurance Fund." As a result of the merger, the BIF and the SAIF were abolished. The merger of the BIF and the SAIF into the Deposit Insurance Fund does not affect the authority of the Financing Corporation ("FICO") to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in the years 2017 through 2019. For the quarter ended September 30, 2006, the annualized FICO assessment was equal to 1.24 basis points for each $100 in domestic deposits maintained at an institution. Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates, or not obtain services of a competitor of the institution. Federal Home Loan Bank System. Provident Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of The Federal Home Loan Bank of New York, Provident Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1 % of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of September 30, 2006, Provident Bank was in compliance with this requirement. Federal Reserve System Federal Reserve Board regulations require savings associations to maintain non-interest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At September 30, 2006, Provident Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision. As of September 30, 2006 the required balance for Provident Bank was $6.3 million and 27 was satisfied by the cash on hand in the Bank's branches. Other Regulations Interest and other charges collected or contracted for by Provident Bank are subject to state usury laws and federal laws concerning interest rates. Provident Bank's operations are also subject to federal laws applicable to credit transactions, such as the: o Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; o Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; o Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; o Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; o Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and o rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The operations of Provident Bank also are subject to the: o Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; o Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services; o Check Clearing for the 21st Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check; o Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the "USA PATRIOT Act"), which significantly expanded the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Among other provisions, the USA PATRIOT Act and the related regulations of the Office of Thrift Supervision require savings associations operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations; and o The Gramm-Leach-Bliley Act, which placed limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution's privacy policy and provide such customers the opportunity to "opt out" of the sharing of certain personal financial information with unaffiliated third parties. The USA PATRIOT Act The USA PATRIOT Act of 2001 gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Act is the International Money Laundering Abatement and Anti- 28 Terrorist Financing Act of 2001, which includes numerous provisions for fighting international money laundering and blocking terrorist access to the U.S. financial system. The provisions of the USA PATRIOT Act affecting banking organizations are generally set forth as amendments to the Bank Secrecy Act. Certain provisions of the act impose affirmative obligations on a broad range of financial institutions, such as Provident Bank. These obligations include enhanced anti-money laundering programs, customer identification programs and restrictions relating to private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States.) Federal law also requires all U.S. persons to comply with economic restrictions and trade sanctions administered and enforced by the Office of Foreign Assets Control ("OFAC"). OFAC rules apply to all financial institutions through which funds might travel. We have established policies, procedures and systems designed to comply with the USA PATRIOT Act and implemented regulations, as well as with OFAC. Holding Company Regulation Provident Bancorp is a unitary savings and loan holding company, subject to regulation and supervision by the Office of Thrift Supervision. The Office of Thrift Supervision has enforcement authority over Provident Bancorp and its non-bank subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a risk to Provident Bank. Under prior law, a unitary savings and loan holding company generally had no regulatory restrictions on the types of business activities in which it could engage, provided that its subsidiary savings bank was a qualified thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan holding companies not existing on, or applied for before, May 4, 1999 to those activities permissible for financial holding companies or for multiple savings and loan holding companies. Provident Bancorp is not a grandfathered unitary savings and loan holding company and, therefore, is limited to the activities permissible for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain additional activities authorized by Office of Thrift Supervision regulations. Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another bank or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire banks, the Office of Thrift Supervision must consider the financial and managerial resources and future prospects of the bank involved the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors. Federal Securities Law The common stock of Provident Bancorp is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). Provident Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Common stock of Provident Bancorp held by persons who are affiliates (generally officers, directors and principal stockholders) of Provident Bancorp may not be resold without registration or unless sold in accordance with certain resale restrictions. If Provident Bancorp meets specified current public information requirements, each affiliate of Provident Bancorp is able to sell in the public market, without registration, a limited number of shares in any three-month period. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate governance, accounting and reporting measures for companies that have securities registered under the Exchange Act, including publicly-held bank holding companies such as Provident Bancorp. Specifically, the Sarbanes-Oxley Act of 2002 and the various regulations promulgated thereunder, established, among other things: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of the reporting company's securities by the Chief Executive Officer in the 12-month period following the initial publication of any financial statements that later require 29 restatement; (iv) the creation of an independent accounting oversight board; (v) new standards for auditors and regulation of audits, including independence provisions that restrict non-audit services that accountants may provide to their audit clients; (vi) increased disclosure and reporting obligations for the reporting company and their directors and executive officers, including accelerated reporting of stock transactions and a prohibition on trading during pension blackout periods; (vii) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on nonpreferential terms and in compliance with other bank regulatory requirements; and (viii) a range of new and increased civil and criminal penalties for fraud and other violations of the securities law. The Company's Chief Executive Officer and Chief Financial Officer are required to certify that its quarterly and annual reports filed with the Securities and Exchange Commission do not contain any untrue statement of a material fact. Rules promulgated under the Sarbanes-Oxley Act require that these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls. The Company has existing policies, procedures and systems designed to comply with the Sarbanes-Oxley Act. ITEM 1A. Risk Factors ----------------------- Our Commercial Real Estate, Commercial Business and Construction Loans Expose Us to Increased Credit Risks. At September 30, 2006, our portfolio of commercial real estate loans totaled $529.6 million, or 35.9% of total loans, our commercial business loan portfolio totaled $160.8 million, or 10.9% of total loans, and our portfolio of construction loans totaled $96.7 million, or 6.6% of total loans. We plan to continue to emphasize the origination of these types of loans. Commercial real estate, commercial business and construction loans generally have greater credit risk than one- to four-family residential mortgage loans because repayment of these loans often depends on the successful business operations of the borrowers. These loans typically have larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Many of our borrowers also have more than one commercial real estate, commercial business or construction loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss, compared to an adverse development with respect to a one- to four-family residential mortgage loan. Changes in the Value of Goodwill Could Reduce Our Earnings. We are required by accounting principles generally accepted in the United States of America to test goodwill for impairment at least annually. Testing for impairment of goodwill involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2006, if our goodwill were fully impaired and we were required to charge-off all of our goodwill, the pro forma reduction to our stockholders' equity would be approximately $3.74 per share. We May Have Difficulty Managing Our Growth, Which May Divert Resources and Limit Our Ability to Successfully Expand Our Operations. We have experienced substantial growth from acquisitions, from $757.9 million of total assets and $595.1 million of total deposits at December 31, 1998 to $2.8 billion of total assets and $1.7 billion of total deposits at September 30, 2006. Since 1998, we have expanded our branch network by both acquiring financial institutions and establishing de novo branches. At September 30, 1998, we had 11 branch offices, compared to 33 branches at September 30, 2006. We have incurred substantial expenses to build our management team and personnel, develop our delivery systems and establish an infrastructure to support future growth. Our future success will depend on the ability of our officers and key employees to continue to implement and improve our operational, financial and management controls, reporting systems and procedures, and to manage a growing number of client relationships. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner, and we may discover deficiencies in our existing systems and controls. Thus, we cannot be certain that our growth strategy will not place a strain on our administrative and operational infrastructure or require us to incur additional expenditures beyond current projects to support our future growth. Our future profitability will depend in 30 part on our continued ability to grow. We cannot be certain that we will be able to sustain our historical growth rate or continue to grow at all, absent acquisitions. Our Continuing Concentration of Loans in Our Primary Market Area May Increase Our Risk. Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the New York metropolitan area in general. Unlike large banks that are more geographically diversified, we provide banking and financial services to customers primarily in Rockland and Orange Counties, New York. We also have a branch presence in Ulster, Sullivan and Putnam Counties in New York and in Bergen County, New Jersey. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would affect the local economic conditions and could adversely affect our financial condition and results of operations. Additionally, because we have a significant amount of commercial real estate loans, decreases in tenant occupancy also may have a negative effect on the ability of many of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. Changes in Market Interest Rates Could Adversely Affect Our Financial Condition and Results of Operations. Our financial condition and result of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. Our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets. If rates increase rapidly as a result of an improving economy, we may have to increase the rates paid on our deposits and borrowed funds more quickly than loans and investments reprice, resulting in a negative impact on interest spreads and net interest income. In addition, the impact of rising rates could be compounded if deposit customers move funds from savings accounts back to higher rate certificate of deposit accounts. Conversely, should market interest rates continue to fall below current levels, our net interest margin could also be negatively affected, as competitive pressures could keep us from further reducing rates on our deposits, and prepayments and curtailments on assets may continue. Such movements may cause a decrease in our interest rate spread and net interest margin. The Bank's average cost of interest-bearing liabilities has increased, and, although the average asset yields increased this period, they did so at a slower pace due to continued market pressure. This has been offset somewhat by the increase of interest earning assets compared to interest bearing liabilities. Should the yield curve continue to remain "flat" or inverted, a continued decline in net interest margin may occur, offsetting a portion, or all gains in net interest income generated from an increasing volume of assets. We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At September 30, 2006, our investment and mortgage-backed securities available for sale totaled $951.7 million. Unrealized losses on securities available for sale, net of tax, amounted to $7.5 million and are reported as a separate component of stockholders' equity. Decreases in the fair value of securities available for sale, therefore, could have an adverse effect on stockholders' equity. A Breach of Information Security Could Negatively Affect our Earnings. Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. We cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings. 31 We are Subject to Heightened Regulatory Scrutiny with respect to Bank Secrecy and Anti-money Laundering Statutes and Regulations. Recently, regulators have intensified their focus on the USA PATRIOT Act's anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in this area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place are flawless. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Various Factors May Make Takeover Attempts More Difficult to Achieve. Our Board of Directors has no current intention to sell control of Provident Bancorp. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of Provident Bancorp without the consent of our Board of Directors. One may want a take over attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may discourage takeover attempts or make them more difficult include: Office of Thrift Supervision regulations. Office of Thrift Supervision regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the direct or indirect acquisition of more than 10% of any class of equity security of a converted bank without the prior approval of the Office of Thrift Supervision. We completed our mutual-to-stock conversion on January 14, 2004. Certificate of incorporation and statutory provisions. Provisions of the certificate of incorporation and bylaws of Provident Bancorp and Delaware law may make it more difficult and expensive to pursue a takeover attempt that management opposes. These provisions also would make it more difficult to remove our current Board of Directors or management, or to elect new directors. These provisions also include limitations on voting rights of beneficial owners of more than 10% of our common stock, supermajority voting requirements for certain business combinations and the election of directors to staggered terms of three years. Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the Board of Directors. Required change in control payments and issuance of stock options and recognition and retention plan shares. We have entered into employment agreements with executive officers, which will require payments to be made to them in the event their employment is terminated following a change in control of Provident Bancorp or Provident Bank. We have also adopted the 2004 Provident Bancorp, Inc. Stock Incentive Plan to permit additional issuance of stock options and recognition and retention plan shares to key employees and directors that will require payments to them in connection with a change in control of Provident Bancorp. We have granted additional restricted shares and options under this plan. In 2006 we adopted the Provident Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of the Company. These payments will have the effect of increasing the cost of acquiring Provident Bancorp, thereby discouraging future takeover attempts. The Federal Deposit Insurance Corporation has Issued New Rules. Under prior rules, the Federal Deposit Insurance Corporation did not assess deposit insurance premiums on financial institutions, such as Provident Bank, that were, among other criteria, well-capitalized. On November 2, 2006, the Federal Deposit Insurance Corporation adopted final regulations that assess insurance premium based on risk. As a result, the new regulation will enable the Federal Deposit Insurance Corporation to more closely tie each financial institution's deposit insurance premiums to the risk it poses to the deposit insurance fund. Under the new rules, the Federal Deposit Insurance Corporation will evaluate the risk of each financial institution based on its supervisory rating, its financial ratios, and its long-term debt issuer rating. The new rates for nearly all of the financial institution industry will vary between five and seven cents for every $100 of domestic deposits. If this rule had been in effect September 30, 2006, we would have paid an annual deposit insurance assessment to the Federal Deposit Insurance Corporation of approximately $1.3 million, which would have reduced our net income. We have a tentative credit for future FDIC assessments of $1.4 million, which can be applied against future assessments. ITEM 1B. Unresolved Staff Comments ------------------------------------ Not Applicable. 32 ITEM 2. Properties --------------------- As of September 30, 2006, Provident Bank leased 19 properties, including its headquarters location, from third parties. In addition, Provident Bank owns 19 properties. At September 30, 2006, the net book value of our properties was $24.9 million. The following is a list of our locations: Corporate Office, Commercial Lending Division, and Investment Management and Trust Department:

400 Rella Boulevard # Montebello, NY 10901 (845) 369-8040 ROCKLAND COUNTY, NY CHESTER # WALLKILL PLAZA # ------------------- AIRMONT * 69 Brookside Ave., 400 Route 211 East, Middletown 10940 196 Route 59, Airmont 10901 Chester 10918 (845) 344-0125 (845) 369-8360 (845) 469-2255 BARDONIA # FLORIDA * WARWICK * 715 Route 304, Bardonia 10954 7 Edward J. Lempka Dr., 18 Oakland Ave., Warwick 10990 (845) 623-6340 Florida 10921 (845) 986-2206 (845) 651-4091 CONGERS # GOSHEN # WARWICK # (Shoprite) 1 Lake Rd. West, Ste.1, Congers 10920 60 Matthews St., Goshen 10924 153 Route 94 South, Warwick 10990 (845) 267-2180 (845) 294-8353 (845) 986-9540 HAVERSTRAW # HARRIMAN # WOODBURY * 38-40 New Main St., Haverstraw 10927 300 Larkin Dr., Monroe 10950 556 Route 32, Highland Mills 10930 (845) 942-3880 (845) 782-7226 (845) 928-6855 MOUNT IVY # (Pomona) MIDDLETOWN # (Shoprite) HARDENBURG ABSTRACT CO. OF ORANGE 1633 Route 202, Pomona 10970 125 Dolson Ave., COUNTY, INC. # (845) 364-5690 Middletown 10940 12 Scotchtown Ave. (845) 342-5777 Goshen, NY 10920 NANUET # MONROE * HUDSON VALLEY INVESTMENT ADVISORS, LLC # 44 West Route 59, Nanuet 10954 591 Route 17M, Monroe 10950 97 West Main Street (845) 627-6180 (845) 782-8166 Goshen, NY 10924 NEW CITY * NEWBURGH # ULSTER COUNTY ------------- 179 South Main St. New City 10956 1425 Route 300, Newburgh 12550 ELLENVILLE * (845) 639-7750 (845) 566-6600 70 Canal St., Ellenville 12428 (845) 647-4300 ORANGBURG * NEWBURGH * (Stony Brook) KERHONKSON * 375 Route 303, Orangeburg, 10962 200 Stony Brook Ct., 6100 Route 209, Kerhonkson 12446 (845) 398-4810 Newburgh 12550 (845) 626-3500 (845) 561-1000 PEARL RIVER # (Shoprite) PINE BUSH # SULLIVAN COUNTY --------------- 26 North Middletown, Pearl River 10965 2380 Route 52, Pine Bush 12566 SOUTH FALLSBURG * (845) 627-6170 (845) 744-2088 5250 Main St., South Fallsburgh 12779 (845) 434-3070 SPRING VALLEY * PINE BUSH # WOODRIDGE * 72 W. Eckerson Rd., Boniface Drive 13 Broadway, Woodridge 12789 Spring Valley 10977 Pine Bush 12566 (845) 434-6440 (845) 426-7230 PUTNAM COUNTY ------------- STONY POINT * SLATE HILL * CARMEL * 148 Route 9W, Stony Point 10980 1992 Route 284, Slate Hill 10973 1875 Route 6, Carmel 10512 (845) 942-3890 (845) 355-6181 (845) 225-2265 SUFFERN * WALLKILL EAST * BERGEN COUNTY, NJ ----------------- 71 Lafayette Ave., Suffern 10901 1 Industrial Dr., Middletown 10941 LODI # (845) 369-8350 (845) 695-2265 2 Arnot St., Lodi 07644 (973) 591-1400 ORANGE COUNTY, NY ----------------- BLOOMING GROVE * 815 Route 208, Monroe 10950 (845) 782-4111 * Owned # Leased

33 ITEM 3. Legal Proceedings -------------------------- Provident Bancorp is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts that are believed by management to be immaterial to Provident Bancorp's financial condition and results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ No matters were submitted to a vote of stockholders during the quarter ended September 30, 2006. PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and -------------------------------------------------------------------------------- Issuer Purchases of Equity Securities ------------------------------------- (A) The shares of common stock of Provident New York Bancorp are quoted on the Nasdaq Global Select ("NASDAQ") under the symbol "PBNY." Prior to June 29, 2005 the Company traded on the NASDAQ under the symbol "PBCP". As of September 30, 2006, Provident Bancorp had 31 registered market makers, 6,282 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 42,699,046 shares outstanding. Market Price and Dividends. The following table sets forth market price and dividend information for the common stock for the past two fiscal years. Information prior to January 14, 2004 has been restated to reflect the 4.4323-to-1 stock split in conjunction with the Company's second-step stock offering. Cash Dividends Quarter Ended High Low Declared ------------------------ ------------- --------------- -------------- September 30, 2006 $ 14.33 $ 12.61 $ 0.05 June 30, 2006 13.49 12.35 0.05 March 31, 2006 12.97 10.93 0.05 December 31, 2005 12.05 10.50 0.05 September 30, 2005 12.60 11.33 0.05 June 30, 2005 12.17 10.13 0.045 March 31, 2005 13.21 12.04 0.045 December 31, 2004 13.76 11.50 0.04 Payment of dividends on Provident Bancorp's common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. Repurchases of the Company's shares of common stock during the fourth quarter of the fiscal year ended September 30, 2006 are detailed in (C) below. There were no sales of unregistered securities during the quarter ended September 30, 2006. (B) Not Applicable 34 (C)

Issuer Purchases of Equity Securities ------------------------------------- Maximum Number Total Number of (or Approximate Shares (or Units) Dollar Value) of Total Number Average Purchased as Part Shares (or Units) of Shares Price Paid of Publicly that may yet be (or Units) per share Announced Plans Purchased Under the Purchased (1) (or Unit) or Programs (2) Plans or Programs --------------- ---------- -------------------- ------------------- Period (2006) July 1 - July 31 -- $ -- 2,281,129 August 1 - August 31 4,000 13.00 4,000 2,277,129 September 1 - September 30 31,623 13.68 -- 2,277,129 --------------- ---------- -------------------- ------------------- Total 35,623 $ 13.60 4,000 =============== ========== ====================

(1) The total number of shares purchased during the periods indicated includes shares deemed to have been received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes, as is permitted under the Company's stock benefit plans and shares repurchased as part of a previously authorized repurchase program. (2) The Company announced in February 2006 that it authorized the repurchase of 2,100,000 shares, or approximately 5% of common shares currently outstanding, having neared the completion of its repurchase program of 2,200,000 shares. 35 ITEM 6. Selected Financial Data ------------------------------- The following financial condition data and operating data are derived from the audited consolidated financial statements of Provident Bancorp. Additional information is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes included as Item 7 and Item 8 of this report, respectively.

At September 30, --------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- (In thousands) Selected Financial Condition Data: Total assets $ 2,841,337 $ 2,598,323 $ 1,826,856 $ 1,174,305 $ 1,027,701 Loans, net (1) 1,453,185 1,341,026 980,986 703,555 661,012 Securities available for sale 951,729 822,952 534,297 300,715 206,146 Securities held to maturities 60,987 70,949 69,078 73,544 86,791 Deposits 1,729,659 1,726,401 1,239,532 869,553 799,626 Borrowings 682,739 442,203 214,909 164,757 102,968 Equity 405,286 395,157 349,512 117,857 110,867

Years Ended At September 30, --------------------------------------------------------------------- 2006 2005(10) 2004(8) 2003 2002(9) ----------- ----------- ----------- ----------- ----------- (In thousands) Selected Operating Data: Interest and dividend income $ 135,616 $ 116,171 $ 74,946 $ 58,382 $ 60,289 Interest expense 50,859 29,400 12,982 12,060 17,201 ----------- ----------- ----------- ----------- ----------- Net interest income 84,757 86,771 61,964 46,322 43,088 Provision for loan losses 1,200 750 800 900 900 ----------- ----------- ----------- ----------- ----------- Net interest income after provission for loan losses 83,557 86,021 61,164 45,422 42,188 Non-interest income 17,152 17,007 11,135 8,963 5,063 Non-interest expense 71,256 70,582 56,146 36,790 32,161 ----------- ----------- ----------- ----------- ----------- Income before income tax expense 29,453 32,446 16,153 17,595 15,090 Income tax expense 9,258 11,204 5,136 6,344 5,563 ----------- ----------- ----------- ----------- ----------- Net income $ 20,195 $ 21,242 $ 11,017 $ 11,251 $ 9,527 =========== =========== =========== =========== =========== (footnotes on following pages)

36

At or For the Years Ended September 30, ------------------------------------------------------------- 2006 2005(10) 2004(8) 2003 2002(9) --------- --------- --------- --------- --------- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) 0.75% 0.84% 0.69% 1.04% 0.99% Return on equity (ratio of net income to average equity) 5.15 5.16 3.94 9.92 8.92 Average interest rate spread (2) 3.19 3.63 4.02 4.35 4.37 Net interest margin (3) 3.68 3.98 4.34 4.61 4.75 Efficiency ratio(4) 69.92 68.01 76.81 66.55 66.79 Non-interest expense to average total assets 2.63 2.79 3.49 3.40 3.36 Ratio of average interest-earning assets to average interest-bearing liabilities 122.48 126.07 135.27 121.33 120.03 Per Share Related Data: Basic earnings per share (7) $ 0.49 $ 0.49 $ 0.30 $ 0.33 $ 0.28 Diluted earnings per share(7) 0.49 0.49 0.29 0.32 0.27 Dividends per share 0.20 0.17 0.15 0.13 0.09 Book value per share (6) 9.49 9.08 8.82 3.35 3.13 Dividend payout ratio (5) 40.82% 34.69% 50.00% 39.39% 32.14% Asset Quality Ratios: Non-performing assets to total assets 0.18% 0.07% 0.15% 0.40% 0.49% Non-performing loans to total loans 0.34 0.12 0.27 0.66 0.74 Allowance for loan losses to non-performing loans 405.51 1,282.57 608.26 227.76 205.63 Allowance for loan losses to total loans 1.38 1.55 1.67 1.50 1.52 Capital Ratios: Equity to total assets at end of year 14.26% 15.21% 19.14% 10.04% 10.79% Average equity to average assets 14.49 16.26 17.41 10.47 11.15 Tier 1 leverage ratio (bank only) 7.82 8.20 11.28 8.14 8.45 Other Data: Number of full service offices 33 35 27 18 17

-------------------------------------------------------------------------------- (1) Excludes loans held for sale. (2) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. (3) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (4) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. (5) The dividend payout ratio represents dividends per share divided by basic earnings per share. (6) Book value per share is based on total stockholders' equity and 42,699,046, 43,505,659, 39,618,373, 35,221,365 and 35,447,372 outstanding common shares at September 30, 2006, 2005, 2004, 2003 and 2002, respectively. For this purpose, common shares include unallocated employee stock ownership plan shares but exclude treasury shares. (7) Prior period share information has been adjusted to reflect the 4.4323-to-one exchange ratio in connection with the Company's second step conversion in January 2004. (8) Includes $5.0 million ($3.0 million after tax) and $773,000 ($464,000 after tax) for the establishment of the charitable foundation and merger integration costs, respectively. (9) Includes $531,000 ($319,000 after tax) in merger integration costs. (10) Includes $1.124 million ($674,000 after tax) of merger integration costs. 37 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations ------------- Overview Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Non-interest income consists primarily of banking fees and service charges, and net increases in the cash surrender value of bank-owned life insurance ("BOLI") contracts, title insurance fees and investment management fees. Our non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization and data processing expenses. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. 2006 has been particularly challenging as short-term interest rates have risen faster than intermediate and longer term interest rates, leading to a flattening and slightly inverted yield curve. Therefore, cost of funds has risen faster than our yield on assets, negatively impacting net interest income. The financial condition and results of operations of Provident New York Bancorp are discussed herein on a consolidated basis with the Bank. Reference to Provident New York Bancorp or the Company may signify the Bank, depending on the context. The Company provides financial services to individuals and businesses in New York and New Jersey. The Company's business is primarily accepting deposits from customers through its banking centers and investing those deposits, together with funds generated from operations and borrowings, in residential mortgages, commercial real estate loans, commercial business loans and leases, consumer loans, and investment securities. Additionally, the Company offers wealth management services. The following is an analysis of the financial condition and results of the Company's operations. This item should be read in conjunction with the consolidated financial statements and related notes filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data" and the description of the Company's business filed here within Part I, Item 1, "Business." Total assets increased to $2.8 billion at September 30, 2006 from $2.6 billion at September 30, 2005. As the Company furthered its commercial lending and banking initiatives, loans increased by 8.2%, investment securities increased by 13.3% compared to the year ended September 30, 2005. Net income for the year ended September 30, 2006, decreased 4.9% to $20.2 million, or $0.49 per diluted share from $21.2 million, or $0.49 per diluted share for the year ended September 30, 2005. Net income for the year ended September 30, 2004 was $11.0 million, or $0.29 per diluted share. Net income for fiscal 2004 included a $3.0 million after-tax charge ($0.08 per diluted share) for the formation of the Charitable Foundation. The decrease in net income in 2006 is primarily due to the decrease in net interest income in 2006 as compared to 2005. During 2005, the Company additionally benefited for a full year from the investment of funds raised in the 2004 offering, the acquisitions of ENB in January 2004, WSB in October 2004, and increased commercial real estate and business lending activity. These benefits were partially offset by the impact of the rising short-term interest rate environment on its investment and loan portfolio yields, and higher costs of deposits and borrowings, which reduced the Company's net interest margin. Critical Accounting Policies Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income. The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our assets at least quarterly, and review their risk components as a part of that evaluation. See Note 3, "Summary of Significant Accounting Policies - Allowance for Loan Losses" 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. 38 Accounting for goodwill is considered to be a critical policy because goodwill must be tested for impairment at least annually using a "two-step" approach that involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions utilized. If goodwill is determined to be impaired, it would be expensed in the period in which it became impaired. We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in an acquisition that was accounted as a purchase business combination. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired. In 2006 we also recorded other intangible assets related to non-competition agreements and customer lists acquired. Such intangibles will also be reviewed annually for impairment. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when management has determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectibility is no longer considered doubtful. Management Strategy We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to money center banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of individuals, businesses and municipalities in our market area focusing on core deposit generation and quality loan growth. This has resulted in a change in our business mix, providing a favorable platform for long-term sustainable growth. Highlights of management's business strategy are as follows: Operating as a Community Bank. As an independent community bank, we emphasize the local nature of our decision-making to respond more effectively to the needs of our customers while providing a full range of financial services to the individuals, corporations 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 and trust 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 established Sunday banking (since 1995) and extended service hours (since 1987). In addition, we offer multiple access channels to our customers, including our branch and ATM network, internet banking, our Customer Care Telephone Center and our Automated Voice Response system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards. In 2006 we launched our Service Excellence Program designed to maintain the highest level of service to our customer base. 39 Growing and Diversifying our Loan Portfolio. We offer a broad range of loan products to commercial businesses, real estate owners, developers and individuals. To support this activity, we maintain commercial, consumer and residential loan departments staffed with experienced professionals to promote the continued growth and prudent management of loan assets. We have experienced consistent and significant growth in our commercial loan portfolio while continuing to grow our residential mortgage and consumer lending businesses. As a result, we believe that we have developed a high quality diversified loan portfolio with a favorable mix of loan types, maturities and yields. Expanding our Retail Banking Franchise. Management intends to continue the expansion of the retail banking franchise and to increase the number of households served and products used by customers and businesses in our market area. Our strategy is to deliver exceptional customer service, which depends on up-to-date technology and multiple access channels, as well as courteous personal contact from a trained and motivated workforce. This approach has resulted in a relatively high level of core deposits, which improves our overall cost of funds. Management intends to maintain this strategy, which will require ongoing investment in retail banking locations and technology to support exceptional service levels for Provident Bank's customers. Analysis of Net Interest Income Net interest income is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively. 40 The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. Tax-exempt securities are reported on a tax-equivalent basis, using a 35% federal tax rate. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

Years Ended September 30, -------------------------------------------------------------------------------------------------- 2006 2005 2004 ------------------------------ -------------------------------- ------------------------------ Average Average Average Outstanding Yield/ Outstanding Yield/ Outstanding Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ (Dollars in Thousands) Interest Earning Assets: Loans(1) $1,391,562 $ 95,531 6.87% $1,288,829 $ 81,674 6.34% $ 886,749 $ 54,531 6.15% Securities taxable 836,265 34,378 4.11 835,754 31,360 3.75 508,123 18,865 3.71 Securities-tax exempt 108,925 6,441 5.91 63,598 3,546 5.57 38,505 2,102 5.46 Other 30,852 1,520 4.93 25,420 832 3.27 12,626 184 1.46 ---------- -------- ---------- -------- ---------- -------- Total Interest-earnings assets 2,367,604 137,870 5.82 2,213,601 117,412 5.30 1,446,003 75,682 5.23 -------- -------- -------- Non-interest earning assets 337,815 317,945 161,591 ---------- ---------- ---------- Total assets $2,705,419 $2,531,546 $1,607,594 ========== ========== ========== Interest Bearing Liabilities: NOW deposits $ 154,708 511 0.33 $ 153,058 509 0.33 $ 88,677 189 0.21 Savings deposits(2) 445,419 2,258 0.51 545,829 3,070 0.56 356,998 1,570 0.44 Money market deposits 230,933 4,178 1.81 228,197 2,646 1.16 150,866 859 0.57 Certificates of deposit 538,045 19,855 3.69 434,644 9,851 2.27 311,197 5,283 1.70 Borrowings 564,006 24,057 4.27 394,079 13,324 3.38 161,272 5,081 3.15 ---------- -------- ---------- -------- ---------- -------- Total interest-bearing liabilities 1,933,111 50,859 2.63 1,755,807 29,400 1.67 1,069,010 12,982 1.21 Non-interest bearing deposits 356,869 349,507 229,530 Other non-interest bearing liabilities 23,510 14,587 29,166 ---------- ---------- ---------- Total liabilities 2,313,490 2,119,901 1,327,706 Stockholders' equity 391,929 411,645 279,888 ---------- ---------- ---------- Total liabilities and Stockholders' equity $2,705,419 $2,531,546 $1,607,594 Net interest rate spread(3) 3.19% 3.63% 4.02% Net Interest-earning assets(4) $ 434,493 $ 457,794 $ 376,993 ========== ========== ========== Net interest margin(5) 87,011 3.68% 88,012 3.98% 62,700 4.34% Less tax equivalent adjustment (2,254) (1,241) (736) Net Interest income $84,757 86,771 $61,964 ======= ====== ======= Ratio of interest-earning assets to interest bearing liabilities 122.48% 126.07% 135.27% ======= ======= =======

-------------------------------------------------------------------------------- (1) Balances include the effect of net deferred loan origination fees and costs, and the allowance for the loan losses. Includes prepayment fees and late charges. (2) Includes club accounts and interest-bearing mortgage escrow balances. (3) Net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (5) Net interest margin represents net interest income (tax equivalent) divided by average total interest-earning assets. 41 The following table presents the dollar amount of changes in interest income (on a fully tax-equivalent basis) and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

-------------------------------------------------------------------------------- 2006 vs. 2005 2005 vs. 2004 -------------------------------------- -------------------------------------- Increase (Decrease) Due Total Increase (Decrease) Due Total to Increase to Increase Volume Rate (Decrease) Volume Rate (Decrease) ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) Interest-earning assets: Loans $ 6,583 $ 7,274 $ 13,857 $ 26,177 $ 965 $ 27,142 Securities taxable 19 2,999 3,018 12,291 205 12,496 Securities tax exempt 2,667 228 2,895 1,397 47 1,444 Other earning assets 204 484 688 291 357 648 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 9,473 10,985 20,458 40,156 1,574 41,730 ---------- ---------- ---------- ---------- ---------- ---------- Interest-bearing liabilities: NOW deposits 2 -- 2 179 141 320 Savings deposits (546) (266) (812) 990 510 1,500 Money market deposits 32 1,500 1,532 592 1,195 1,787 Certificates of deposit 2,756 7,248 10,004 2,475 2,093 4,568 Borrowings 6,664 4,069 10,733 7,845 397 8,242 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 8,908 12,551 21,459 12,081 4,336 16,417 ---------- ---------- ---------- ---------- ---------- ---------- Less tax equivalent adjustment (933) (80) (1,013) (490) (16) (506) ---------- ---------- ---------- ---------- ---------- ---------- Change in net interest income $ (368) $ (1,646) $ (2,014) $ 27,585 $ (2,778) $ 24,807 ========== ========== ========== ========== ========== ==========

Comparison of Financial Condition at September 30, 2006 and September 30, 2005 Total assets as of September 30, 2006 were $2.8 billion, an increase of $243.0 million, or 9.4%, from September 30, 2005. The increase from September 30, 2005 was primarily due to an increase in securities and loans. Securities increased $118.8 million, or 13.3%, and loans increased $111.5 million, or 8.2%. Net deferred income taxes decreased from $10.6 million at September 30, 2005 to $8.5 million at September 30, 2006, a decrease of $2.1 million, or 19.5%. The change in deferred income taxes is primarily attributable to the tax effects on utilization of the contribution carryforward for tax purposes and the net tax effects of purchase accounting adjustments. Core deposit and other intangibles decreased by $0.4 million in net, of the HVIA acquisition, amortization from September 30, 2005. Goodwill increased by $2.2 million as a result of the acquisition of HVIA. Loans held for sale totaled $7.5 million at September 30, 2006. The Company had no loans held for sale as of September 30, 2005. Net loans as of September 30, 2006 were $1.5 billion, an increase of $112.2 million, or 8.4%, over net loan balances of $1.3 billion at September 30, 2005. Commercial loans, primarily commercial mortgage loans, increased by $73.6 million, or 10.3%, over balances at September 30, 2005. Consumer loans increased by $31.7 million, or 16.5%, during the fiscal year ended September 30, 2006, while residential loans increased by $6.2 million, or 1.4%. Total loan originations, excluding loans originated for sale, were $624.5 million for the fiscal year ended September 30, 2006. However, repayments were $511.7 million for the fiscal year ended September 30, 2006. Non-performing loans increased $3.4 million from September 30, 2005, in addition to net charge-offs of $1.5 million, due primarily to two commercial loan relationships from the acquired ENB portfolio. The Bank also charged off $770,000 of one of those relationships. (The Bank acquired $5,750,000 in allowance for loan losses in connection with the ENB 42 acquisition.) Net charge-offs to average loans, outstanding, however, on an annualized basis, was only 0.11% for the fiscal year ended September 30, 2006. Loan quality continues to be strong. At $5.0 million, non-performing loans as a percentage of total loans was 0.34%, as compared to 0.12% at September 30, 2005. Total securities increased by $118.8 million, or 13.3%, to $1.0 billion at September 30, 2006 from $893.9 million at September 30, 2005. Investments were made primarily in government and federal agency securities and municipal securities, which increased by $28.6 million, or 11.1% and $43.2 million, or 46.2%, respectively. Mortgage-backed securities also increased, by $47.2 million, or 8.7%. Deposits as of September 30, 2006 were $1.7 billion, a growth of $3.3 million, or 0.2%, from September 30, 2005. As of September 30, 2006 retail and commercial transaction accounts were 30.1% of deposits compared to 31.9% at September 30, 2005. The decrease of $30.4 million, or 5.5%, in transaction accounts and the decrease in savings deposits of $103.3 million, or 21.5%, was largely due to the migration of the lower-yielding accounts to our certificate of deposit and money market deposit products or, in some cases, to other institutions offering higher yields (see "Liquidity and Capital Resources"). These decreases were offset by increase of $120.2 million, or 25.5%, in certificates of deposit and $16.9 million, or 7.6%, in money market deposit accounts. The Company has been offering certain new products that offer higher, market-competitive interest rates and others that offer transaction account incentives. Borrowings increased by $240.5 million, or 54.4%, from September 2005, to $682.7 million. Much of the increase is related to the borrowings used to fund the increases in securities and loans and, to a lesser extent, for repurchases of shares of the Company's common stock. Stockholders' equity increased by $10.1 million, or 2.6%, to $405.3 million at September 30, 2006 compared to $395.2 million at September 30, 2005. The increase is largely attributable to $20.2 million in current earnings for the 2006 fiscal year and a $0.8 million reduction in other accumulated comprehensive loss, $8.1 million in stock-based and deferred compensation and $2.7 million issued for the HVIA acquisition. These increases were partially offset by decreases attributable to the repurchase of 1.2 million shares of common stock at a cost of $13.3 million as well as dividend payments of $8.4 million. During the second quarter of fiscal 2006, the Company neared completion of its second stock repurchase program and announced a third repurchase plan for up to 2.1 million shares. Repurchases during the fiscal year totaled 1.16 million shares at a purchase price of $13.3 million. As of September 30, 2006 the Company had authorization to purchase up to an additional 2.3 million shares of common stock. Also during fiscal 2006, 24,000 shares of restricted stock were granted from treasury shares. Bank Tier I capital to assets was at 7.8% at September 30, 2006. Tangible capital at the holding company level was 8.7%. Comparison of Operating Results for the Years Ended September 30, 2006 and -------------------------------------------------------------------------------- September 30, 2005 ------------------ Net income for the year ended September 30, 2006, was $20.2 million. This compares to $21.2 million for the year ended September 30, 2005. Diluted earnings per share were $0.49 for the year ended September 30, 2006 compared to $0.49 for the prior fiscal year. Interest Income. Interest income for the year ended September 30, 2006 increased to $135.6 million, an increase of $19.4 million, or 16.7%, compared to the prior year. The increase was primarily due to higher average balances of loans and securities, along with higher yields in both asset classes. Average interest-earning assets for the year ended September 30, 2006 were $2.4 billion, an increase of $154.0 million, or 7.0%, over average interest-earning assets for the year ended September 30, 2005 of $2.2 billion. Average loan balances grew by $102.7 million and average balances of securities and other earning assets increased by $51.3 million. On a tax-equivalent basis, average yields on interest earning assets increased by 52 basis points to 5.82% for the year ended September 30, 2006, from 5.30% for the year ended September 30, 2005. New security purchases and loan originations at higher market interest rates, as well as the repricing of floating rate assets were the primary reason for the increase in asset yields. Interest income on loans for the year ended September 30, 2006, grew 17.0% to $95.5 million from $81.7 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2006 increased to $55.0 million, up 16.7% from commercial loan interest income of $47.1 million for the prior fiscal year. Average balances of commercial loans grew $43.1 million to $727.9 million, with a 67 basis point increase in the average yield. Interest income on consumer loans increased by $4.7 million, or 52.4%. Our fixed-rate consumer loans have shorter average maturities, and our adjustable-rate consumer loans float with the prime rate. Income earned on residential mortgage loans was $27.0 million for the year ended September 30, 2006, up $1.3 million, or 43 5.1%, from the prior year. Interest income on securities and other earning assets increased to $42.3 million for the year ended September 30, 2006, compared to $35.7 million for the prior year. This was due to a tax-equivalent increase of 47 basis points in yields along with the $51.3 million increase in the average balances of securities and other earning assets. Interest Expense. Interest expense for the year ended September 30, 2006, increased by $21.5 to $50.9 million, an increase of 73.0% compared to interest expense of $29.4 million for the prior fiscal year. This increase was net of the recognition of accretion of $1.5 million in premiums recorded on called Federal Home Loan Bank borrowings that were assumed in acquisitions. The increase in interest expense was primarily due to an increase in the average balance of interest-bearing liabilities of $177.3 million, or 10.1%. In addition, average rates paid on interest-bearing liabilities for the year ended September 30, 2006 increased by 96 basis points to 2.63% from 1.67% in fiscal 2005. The average interest rate paid on certificates of deposit increased by 142 basis points to 3.69% for the year ended September 30, 2006, from 2.27% for the prior year. For the year ended September 30, 2006, average balances of lower cost savings decreased by $100.4 million, or 18.4%, while average balances of certificates of deposit increased by $103.4 million compared to the year ended September 30, 2005. The average interest rate paid on savings decreased by 5 points to 0.51% for the year ended September 30, 2006, while money market rates increased 65 basis points to 1.81% for the year ended September 30, 2006. The migration of account balances from non-interest bearing accounts and low yielding deposit accounts to certificates of deposit and market rate money market accounts is expected to continue, if short-term rates remain at the current levels or continue to increase. Net Interest Income for the fiscal year ended September 30, 2006 was $84.8 million, compared to $86.8 million for the year ended September 30, 2005, a decrease of $2.0 million or 2.3%. The net interest margin declined by 30 basis points to 3.68%, while the net interest spread declined by 44 basis points to 3.19%. This change in short-term rates, which affected funding costs to a larger degree than existing earning assets (which are primarily fixed-rate until maturity) was disproportionately large as compared to the change in longer term market interest rates, and thus has decreased net interest margin. The Federal Reserve has increased short-term rates six times since September 2005, increasing the target federal funds rate from 3.75% to 5.25%. The 10-year treasury rate has increased from an average of 4.20% for the fiscal year ended September 30, 2005 to 4.75% for the year ended September 30, 2006. The Bank's average cost of interest-bearing liabilities has increased and, although the average asset yields increased during this period, they did so at a slower pace due to continued market pressure. This has been offset somewhat by a greater increase of interest earning assets compared to interest bearing liabilities. Should the yield curve continue to "flatten" or invert, a continued decline in net interest margin may occur, offsetting a portion of gains in net interest income generated from an increasing volume of assets. However, the bank has $272 million in securities, which will mature or reprice in the next fiscal year, in addition to mortgage-backed securities amortization, at a current yield of 3.6%. The cash flows from such securities will be reinvested at current rates or used to fund reduction in borrowed funds or higher cost deposits, depending on the interest rate environment and other corporate requirements at the time the cash is received. Provision for Loan Losses. We recorded $1.2 million and $750,000 in loan loss provisions for the year ended September 30, 2006 and September 30, 2005, respectively. At September 30, 2006 the allowance for loan losses totaled $20.4 million, or 1.4% of the loan portfolio, compared to $21.0 million, or 1.6% of the loan portfolio at September 30, 2005. Net charge-offs for the years ended September 30, 2006 and 2005 were $1.5 million and $975,000, respectively (an annual rate of 0.11% and 0.08%, respectively, of the average loan portfolio). The $504,000 increase occurred primarily due to the increase in volume. The provision for loan losses was primarily attributable to growth in the loan portfolio of $111.5 million, representing an increase of 8.2%. Higher risk loan categories, primarily commercial real estate loans and commercial business loans, provided most of this increase. Non-performing loans increased $3.4 million from September 30, 2005, to $5.0 million at September 30, 2006. We view the economy in our market area as stable with a positive outlook. We expect modest business expansion primarily driven by small businesses. In our market area, we have benefited by growth in healthcare, education and professional services; healthcare and education, in particular, help insulate us from economic downturns as demand is less sensitive to a recession than other segments of the economy generally. The employment picture remains positive with unemployment rates in our market area below the national average. However, housing activity is vulnerable to the current slowdown. We expect the primary impact to be felt in new housing sales, and therefore in the value of residential building lots as well. Existing home sales are slowing as well. As a result of this outlook, we increased the percentage allowance requirements in the retail loan portfolio to reflect the potential impact of declining values in residential real estate. We also increased the percentage allowance 44 requirements for construction and land loans in the commercial loan portfolio. These loans are also potentially impacted by declining values and demand for residential real estate. We decreased percentage allowance requirements on commercial mortgage loans due to consideration for initial underwriting and commercial and industrial loans, due to strong economic performance in our market area. Non-interest income was $17.2 million for the fiscal year ended September 30, 2006 compared to $17.0 million for the prior fiscal year. Deposit fees and service charges increased by $338,000, or 3.2% to $10.7 million. Income derived from the Company's BOLI investments decreased by $149 thousand, or 8.3%, due to death benefit proceeds received in 2005. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $140,000 and investment management fees increased $662,000 of which $594,000 related to HVIA acquired on June 1, 2006. There are no gains on the sale of securities for the 2006 fiscal year compared to $369,000 for the prior fiscal year. During the year ended September 30, 2006, the Company also recorded gains on sales of loans totaling $117,000 compared to $206,000 for the prior year. For the year ending September 30, 2005, there was $681,000 in income pertaining to our investment as a limited partner in a low-income housing partnership. Non-interest expense for the fiscal year ended September 30, 2006 increased by $674 thousand, or 1.0% to $71.3 million, compared to $70.6 million for the same period in 2005. Compensation and employee benefits increased by $609 million, or 1.9%, to $32.2 million for the year ended September 30, 2006. The increase was primarily attributable to increased support staff and bringing data processing in-house. These increases were partially offset by a decrease of $748,000 in pension and post-retirement health insurance expense. Stock-based compensation increased due to $1.1 million in stock option expense under SFAS No. 123R which was implemented in 2006, $368,000 was for the acceleration of certain restricted stock awards and $604,000 was for an increase in ESOP expense, which reflected the release of the same number of shares for the 2005 ESOP plan year as in past years. Stock-based compensation also reflects a full year's expense of $2.2 million related to restricted stock awards that were granted in March 2005, compared to $1.0 million for the prior year. Occupancy and office operations increased by $1.8 million, or 19.3%, for the year ended September 30, 2006. Advertising and promotion decreased $657,000 or 21.2%, primarily as a result of the Company's new brand identity and the additional promotions in the Orange County market that occurred in 2005. Data and check processing expense decreased $1.7 million, or 35%, due to the transfer of our data processing operations in-house, November 2005, which was offset by related increases in compensation and occupancy costs. Other expenses decreased by $1.3 million, or 13.9%. ATM and debit card expense increased $208,000, or 15.3%, primarily as a result of the increase in volume of transactions processed. The year ended September 30, 2005 included $1.1 million in merger integration costs. Income Taxes. Income tax expense was $9.3 million for the fiscal year ended September 30, 2006 compared to $11.2 million for fiscal 2005, representing effective tax rates of 31.4% and 34.5%, respectively. The lower tax rate in 2006 was primarily due to the shift to tax-exempt securities, which represented 11.5% of the average securities portfolio in 2006, compared to 7.1% of the average securities portfolio for 2005. The effective tax rate was also positively impacted by a land donation during 2006, which resulted in a federal tax benefit of $212,000. Comparison of Operating Results for the Years Ended September 30, 2005 and -------------------------------------------------------------------------------- September 30, 2004 ------------------ Net income for the year ended September 30, 2005, was $21.2 million. This compares to $11.1 million for the year ended September 30, 2004. Diluted earnings per share were $0.49 for the year ended September 30, 2005, compared to $0.29 for the prior fiscal year. Fiscal 2004 includes a $5 million charge (3.0 million after tax for the formation of the charitable foundation in connection with the second step conversion or $0.08 per diluted share.) Earnings per share results for the prior year have been restated to reflect the 4.4323-to-one exchange ratio as a result of the Company's second-step conversion in 2004. Interest Income. Interest income for the year ended September 30, 2005 increased to $116.2 million, an increase of $41.2 million, or 55.0%, compared to the prior year. The increase was primarily due to higher average balances of loans and securities, along with higher yields in both asset classes. Average interest-earning assets for the year ended September 30, 2005 were $2.2 billion, an increase of $767.6 million, or 53.1%, over average interest-earning assets of $1.4 billion for the year ended September 30, 2004. Average loan balances grew by $402.1 million and average balances of securities and other earning assets increased by $365.5 million. On a tax-equivalent basis, average yields on interest earning assets increased by seven basis points to 5.30% for the year ended September 30, 2005, from 5.23% for the year ended September 30, 2004. Higher market interest rates were the primary reason for the increase in asset yields. Interest income on loans and fees for the year ended September 30, 2005 grew 49.8% to $81.7 million from $54.5 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2005 increased to $47.1 million, up 78.5% from commercial loan interest income of $26.4 million for the prior fiscal year. 45 Average balances of commercial loans grew $299.1 million to $684.8 million, with four basis point increase in the average yield. Interest income on consumer loans increased by $3.6 million, or 69.5%. Our fixed-rate consumer loans have short average maturities, and our adjustable-rate consumer loans float with the prime rate. Income earned on residential mortgage loans was $25.7 million for the year ended September 30, 2005, up $2.8 million, or 12.2%, from the prior year. Loan prepayment fees and late charges, previously reported under non-interest income, are now included in interest income and they totaled $901,000 and $438,000 for the years ended September 30, 2005 and September 30, 2004, respectively. Interest income on securities and other earning assets increased to $35.7 million for the year ended September 30, 2005, compared to $21.2 million for the prior year. This was due to a tax-equivalent increase of eight basis points in yields along with the $365.5 million increase in the average balances of securities and other earning assets. Interest Expense. Interest expense for the year ended September 30, 2005 increased by $16.4 to $29.4 million, an increase of 126.5% compared to interest expense of $13.0 million for the prior fiscal year. The increase was primarily due to an increase in the average balance of interest-bearing liabilities of $686.8 million, or 64.3%, which resulted primarily from the Warwick and HSBC South Fallsburg branch acquisitions, which were acquired in 2005. In addition, average rates paid on interest-bearing liabilities for the year ended September 30, 2005 increased by 46 basis points to 1.67% from 1.21% in fiscal 2004. The average interest rate paid on certificates of deposit increased by 57 basis points to 2.27% for the year ended September 30, 2005, from 1.70% for the prior year. For the year ended September 30, 2005, average balances of lower cost savings and money market accounts increased by $188.8 million and $77.3 million, respectively, while average balances of certificates of deposit increased by $123.4 million compared to the year ended September 30, 2004. The average interest rate paid on savings and money market accounts increased by 12 and 59 basis points to 0.56% and 1.16%, respectively, for the year ended September 30, 2005, from 0.44% and 0.57% for the prior year. Net Interest Income for the fiscal year ended September 30, 2005 was $86.8 million, compared to $62.0 million for the year ended September 30, 2004, an increase of $24.8 million or 40.0%. Interest income increased $41.2 million to $116.2 million for the fiscal year ending September 30, 2005, compared to $74.9 million for the prior year. The increase in interest income was largely due to a $767.6 million increase in average interest-earning assets to $2.2 billion during the year ended September 30, 2005, as compared to $1.4 billion for the prior fiscal year. The increase is primarily due to the Warwick acquisition and continued internal growth. Loan prepayment fees and late charges, previously reported under non-interest income, are now included in interest income and totaled $901,000 and $438,000 for the years ended September 30, 2005 and September 30, 2004, respectively. An increase in average yield on earning assets of seven basis points, from 5.23% to 5.30%, on a fully taxable equivalent basis, also contributed to the increase in net interest income. Average yields increased in both the loan and securities and other earning assets portfolios, of 19 basis points and eight basis points, respectively, with the overall yield on total interest-earning assets increasing in every category. Interest expense increased by $16.4 million for the fiscal year ended September 30, 2005 from $13.0 million for the year ended September 30, 2004, to $29.4 million, as average interest-bearing liabilities increased by $686.8 million and the average cost of interest-bearing liabilities increased 46 basis points. The net interest margin declined by 36 basis points to 3.98%, while the net interest spread declined by 39 basis points to 3.63%, due to the assets acquired in the Warwick acquisition being recorded at then-current market interest rates and the increase in short-term interest rates. This change in short-term rates, which affected funding costs to a larger degree than existing earning assets (which are primarily fixed-rate until maturity) was disproportionately large as compared to the change in longer term market interest rates, and thus has decreased net interest margin. The Federal Reserve increased short-term rates 11 times since May 2004 to September 2005, increasing the target federal funds rate from 1% to 3.75%. Conversely, the 10-year treasury rate decreased from an average of 4.29% for the fiscal year ended September 30, 2004 to 4.20% for the year ended September 30, 2005. The Bank's average cost of interest-bearing liabilities has increased and, although the average asset yields increased during this period, they did so at a slower pace due to continued market pressure. This has been offset somewhat by a greater increase of interest earning assets compared to interest bearing liabilities Provision for Loan Losses. We recorded $750,000 and $800,000 in loan loss provisions for the year ended September 30, 2005 and September 30, 2004, respectively. At September 30, 2005 the allowance for loan losses totaled $21.0 million, or 1.55% of the loan portfolio, compared to $16.6 million, or 1.67% of the loan portfolio at September 30, 2004. Net charge-offs for the years ended September 30, 2005 and 2004 were $975,000 and $266,000, respectively (an annual rate of 0.08% and 0.03%, respectively, of the average loan portfolio). The $709,000 increase occurred primarily due to the increase in volume and loans acquired through our acquisitions. The provision for loan losses was primarily attributable to growth in the loan portfolio of $364.4 million, representing an increase of 36.5%, which included $288.2 million of loans acquired, along with $4.9 million in acquired allowance for loan losses, as part of our acquisition of WSB. In addition, higher risk loan categories, 46 primarily commercial real estate loans and commercial business loans, provided most of this increase. However, non-performing loans decreased $1.1 million from September 30, 2004, to $1.6 million at September 30, 2005. We increased the percentage allowance requirements in the retail loan portfolio to reflect the increase in home equity lines of credit, as they are considered somewhat more risky than first mortgage loans, because they are secured by second mortgages, and are tied to a recently increasing prime rate. We also increased the percentage allowance in the commercial loan portfolio to reflect the potential impact of loan growth in new adjacent markets, and continued growth in larger, more complex loans. There has also been a slight increase in the risk ratings of the performing loan portfolio. Non-interest income was $17.0 million for the fiscal year ended September 30, 2005 compared to $11.1 million for the prior fiscal year. Deposit fees and service charges increased by $3.8 million, or 57.5% to $10.4 million, of which $1.8 million was generated from the acquired Warwick branches, while $2.0 million was primarily due to volume-driven increases in overdraft, non-sufficient funds, and ATM and debit card fees. Income derived from the Company's BOLI investments increased by $1.2 million, or 224.3%, due to the additional BOLI investment of $24.1 million ($13.3 million of which were added from the WSB acquisition), and the receipt of death benefit proceeds. Title insurance fee income derived from the new Hardenburgh Abstract Company, Inc. was $1.6 million. Gains on the sale of securities were $369,000 for the 2005 fiscal year compared to $2.5 million for the prior fiscal year. For the year ending September 30, 2005, there was of $681,000 in income pertaining to our investment as a limited partner in a low-income housing partnership. The investment had been amortized quarterly since 1996 in excess of our interest in the partnership. There was no material impact on any quarter in the affected periods. Non-interest expense for the fiscal year ended September 30, 2005 increased by $14.4 million, or 25.7%. Excluding the 2004 charge of $5.0 million, pre-tax, for the Charitable Foundation, non-interest expenses for the year ended September 30, 2005 increased by $19.4 million, or 38.0%, to $70.6 million, compared to $51.1 million for the same period in 2004. The acquisitions of ENB in January 2004 and Warwick in October 2004, played a major role in the increases in most categories. Compensation and employee benefits increased by $8.6 million, or 37.3%, to $31.6 million for the year ended September 30, 2005. The increase was primarily attributable to the acquisitions. Occupancy and office operations increased by $2.8 million, or 42.2%, for the year ended September 30, 2005, almost all of which was attributable to the acquisitions. Advertising and promotion increased $1.1 million or 51.3%, primarily as a result of the Company's new brand identity and the additional promotions in the Orange County market. Amortization of core deposit intangible increased by $1.9 million as a result of acquired deposits. Data and check processing expense increased $1.1 million, or 31.2%, primarily due to the higher level of services related to the accounts acquired in the mergers and in the acquisition of the new HSBC South Fallsburg branch. Other expenses increased by $2.6 million, or 39.7%, primarily due to increases in correspondent bank expense, postage, telephone expense, loan servicing and credit report expenses, and insurance premium expense, all of which directly related to the increased size of Provident Bank following the mergers. ATM and debit card expense increased $550,000, or 68.2%, primarily as a result of the increase in volume processed. Income Taxes. Income tax expense was $11.2 million for the fiscal year ended September 30, 2005 compared to $5.1 million for fiscal 2004, representing effective tax rates of 34.5% and 31.8%, respectively. The higher effective rate in fiscal 2005 was primarily attributable to the lower proportion of non-taxable securities to taxable, an increase in state taxes, and the release of tax contingency reserves in 2004 that did not occur in 2005. These increases were partially offset by a relative decrease in nondeductible stock-based compensation expense. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for funding. The Company's off-balance sheet arrangements, which principally include lending commitments, are described below. At September 30, 2006 and 2005, the Company had no interests in non-consolidated special purpose entities. Lending Commitments. Lending commitments include loan commitments, standby letters of credit and unused credit lines. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the normal course of business. 47 For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements, or for development and construction in the case of real estate businesses. For retail customers, loan commitments are generally lines of credit secured by residential property. At September 30, 2006, commercial and retail loan commitments totaled $62.1million. Approved closed undrawn lines of credit totaled $211.9 and $150.6 for commercial and retail accounts. Standby letters of credit totaled $20.9 million. Nearly all letters of credit issued by or on behalf of the Company are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary's compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor's completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Standby letters of credit are conditional commitments to guarantee performance, typically of a contract or the financial integrity, of a customer to a third party. Provident Bank applies essentially the same credit policies and standards as it does in the lending process when making these commitments. See Note 16 to "Consolidated Financial Statements" in Item 8 hereof for additional information regarding lending commitments. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment. Payments Due by Period. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2006. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

Payments Due by Period -------------------------------------------------------------------------------------------- Less than One to Three Three to Five More Than Contractual Obligations One Year Years Years Five Years Total --------------------------------- ----------------- ----------------- ---------------- ----------------- ----------------- FHLB and other borrowings $ 565,555 $ 70,446 $ 42,897 $ 3,841 $ 682,739 Letters of credits 15,848 2,894 33 2,109 20,884 Operating leases 1,954 3,901 3,210 13,438 22,503 ----------------- ----------------- ---------------- ----------------- ----------------- Total $ 583,357 $ 77,241 $ 46,140 $ 19,388 $ 726,126 ================= ================= ================ ================= ================= Commitments to extend credit $ 197,168 $ 22,449 $ 5,980 $ 136,988 $ 362,585 ================= ================= ================ ================= =================

Impact of Inflation and Changing Prices The financial statements and related notes of Provident Bancorp have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation. Liquidity and Capital Resources The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. Our primary sources of funds are deposits, principal and interest payments on loans and securities, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, is predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and 48 mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial real estate and residential one- to four-family loans, and the purchase of investment securities and mortgage-backed securities. During the years ended September 30, 2006, 2005 and 2004, our loan originations, including origination of loans held for sale, totaled $640.5 million, $515.4 million and $357.1 million, respectively. Purchases of securities available for sale totaled $259.0 million, $385.3 million and $468.4 million for the years ended September 30, 2006, 2005 and 2004, respectively. Purchases of securities held to maturity totaled $22.6 million, $23.7 million and $12.2 million for the years ended September 30, 2006, 2005 and 2004, respectively. These activities were funded primarily by deposit growth, borrowings, and by principal repayments on loans and securities. Loan origination commitments totaled $62.1 million at September 30, 2006, and consisted of $48.8 million at adjustable or variable rates and $13.3 million at fixed rates. Unused lines of credit granted to customers were $362.6 million at September 30, 2006. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit. In December 2002 we invested $12.0 million in BOLI contracts and an additional $10.0 million in April 2005. An additional $13.3 million was acquired in acquisitions. These investments are illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. BOLI contracts totaled $39.3 million and $37.7 million at September 30, 2006 and September 30, 2005, respectively. Deposit flows are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, and other factors. The net (decrease)/increase in total deposits (excluding deposits acquired during 2005 and 2004 as part of acquisitions) was $3.4 million, $(11.7) million and $43.1 million for the years ended September 30, 2006, 2005 and 2004, respectively. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2006 totaled $552.6 million. Based upon prior experience and our current pricing strategy, management believes that a significant portion of such deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment. We generally remain fully invested and utilize additional sources of funds through Federal Home Loan Bank of New York advances and other sources of which $682.7 million was outstanding at September 30, 2006. At September 30, 2006, we had the ability to borrow an additional $102.6 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow an additional $406.1 million by pledging securities not required to be pledged for other purposes as of September 30, 2006. Recent Accounting Standards In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post-retirement Plans," an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158"). For defined benefit post-retirement plans, SFAS 158 requires that the funded status be recognized in the statement of financial position, that assets and obligations that determine funded status be measured as of the end of the employer's fiscal year, and that changes in funded status be recognized in comprehensive income in the year the changes occur. SFAS 158 does not change the amount of net periodic benefit cost included in net income or address measurement issues related to defined benefit post-retirement plans. The requirement to recognize funded status is effective for fiscal years ending after December 15, 2006. The requirement to measure assets and obligations as of the end of the employer's fiscal year is effective for fiscal years ending after December 15, 2008. The unrecognized components of defined benefit pension plans and retiree medical plans will be recorded on the balance sheet at September 30, 2007. If such amounts were recorded as of September 30, 2006, accumulated other comprehensive loss would be increased by $605. The adoption of SFAS 158 is not expected to have a material impact on the consolidated earnings or financial position of the Company. In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" ("SFAS 157"). This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2006. The adoption of SFAS 157 is not expected to have a material impact on the consolidated earnings or financial position of the Company. 49 In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108 to require quantification of financial statement misstatements under both the "rollover approach" and the "iron curtain approach." The "rollover approach" quantifies a misstatement based on the amount of the error originating in the current year income statement, but ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The "iron curtain approach" quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement's year(s) of origination. The provisions of SAB No. 108 must be applied to financial statements for fiscal years ending after November 15, 2006. The Company does not anticipate that the quantification of financial statement misstatements pursuant to the provisions of SAB No. 108 will result in any material impact to the Company's financial statements for fiscal 2007. At its September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue 06-04, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or "Accounting Principles Board Opinion" ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The provisions of Issue 06-04 should be applied through either a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption or retrospective application. The Company has endorsement split-dollar life insurance policies that it inherited through certain acquisitions that are associated with employees who are no longer active, which it is currently in the process of evaluating to determine the impact of adoption of Issue 06-04, which is not expected to be material. In July 2006, the FASB issued FIN 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"), which attempts to set out a consistent framework for preparers to use to determine the appropriate level of tax reserves to maintain for "uncertain tax positions." This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit which is greater than fifty percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of a Company's tax reserves. FIN 48 is effective January 1, 2007. We are currently assessing the financial statement impact of implementing FIN 48. In July 2006, the FASB adopted FASB Staff Position No. 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction" ("FSP 13-2"). FSP 13-2 requires that a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease shall be accounted for in accordance with the guidance in paragraph 46 of SFAS No. 13, "Accounting for Leases." That is, the projected timing of income tax cash flows generated by a leveraged lease transaction shall be reviewed annually or more frequently, if events or changes in circumstances indicate that a change in timing has occurred or is projected to occur. If, during the lease term, the projected timing of income tax cash flows generated by a leveraged lease is revised, the rate of return and the allocation of income to positive investment years shall be recalculated from inception of the lease following the method described in paragraph 44 of SFAS No. 13. The guidance in FSP 13-2 shall be applied to fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions of FSP 13-2 shall be reported as an adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. The Company does not expect that the adoption of FSP 13-2 will have a material effect on its financial position or results of operations. In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 ("SFAS 156"), "Accounting for Servicing of Financial Assets", an amendment of FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 156 requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS 156 is effective for the fiscal year beginning after September 15, 2006. We are currently assessing the financial statement impact of implementing SFAS156. In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155, "Accounting for Certain Hybrid Financial Instruments," an amendment of FASB Statements No. 133 and 140, ("SFAS 155"). SFAS 50 155 amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133") and SFAS 140. SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140") to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected to have a material impact on the consolidated earnings or financial position of the Company. In May 2005, the FASB Issued Statement of Financial Accounting Standards No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections," replacing APB Opinion No. 20 and FASB Statement No.3, which changes the treatment and reporting requirements for both accounting errors and changes of accounting principles, and provides guidance on determining the treatment of the retrospective application of a change. This Statement applies to all voluntary changes in accounting principles. At this time management believes this statement will have no impact on the reporting of our operations or financial condition. In December 2004, the FASB Issued Statement of Financial Accounting Standards No. 123R (Statement 123R), "Share-Based Payments," the provisions of which became effective for the corporation in fiscal 2006. This Statement eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. Statement 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. While the fair-value-based method prescribed by Statement 123R is similar to the fair-value-based method disclosed under the provisions of Statement 123 in most respects, there are some differences. The Company began using the Black Scholes option pricing method beginning in fiscal 2006 and recorded an expense of $1.1 million or $0.7 million after tax and the diluted earnings per share impact was $0.02. This impact includes the effect of reload options or forfeitures or options accelerations due to termination or retirement of personnel, the effect of which could not be previously estimated with any degree of certainty. Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1") was issued. EITF 03-1 provides guidance for determining the meaning of "other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates ("other than temporary impairment"), must be recorded for as are loans under the AICPA's Statement of Position 03-3 ("SOP 03-3") on purchased loans, which provides guidance on the treatment of potential credit losses (unrecoverable principal) and decreased, or lower then expected yields. On March 9, 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to Loan Commitments." SAB No. 105 requires that when a company is recognizing and valuing a loan commitment at fair value, only differences between the guaranteed interest rate in the loan commitment and a market interest rate should be included. Any expected future cash flows related to the customer relationships or loan servicing should be excluded from the fair value measurement. The expected future cash flows that are excluded from the fair-value determination include anticipated fees for servicing the funded loan, late-payment charges, other ancillary fees, or other cash flows from servicing rights. The guidance in SAB No. 105 is effective for mortgage-loan commitments that are accounted for as derivatives and are entered into after March 31, 2004. The adoption of the provisions of this standard did not have a material impact on the results of operations. In December 2003, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. The SOP applies to loans acquired in business combinations but does not apply to loans originated by the Company. 51 Management does not believe the provision of this standard will have a material impact on the results of future operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effects of the method used on reported results. The provisions of this statement did not have a material impact on the consolidated financial statements. 52 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk -------------------------------------------------------------------- Management of Interest Rate Risk Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. Provident Bank's Asset/Liability Management Committee ("ALCO"), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. A committee of the Board of Directors reviews the ALCO's activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings. We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial mortgage loans, commercial business loans and residential fixed-rate mortgage loans that are repaid monthly and bi-weekly, fixed-rate commercial mortgage loans, adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell all, or a portion of such longer-term loans, generally on a servicing-retained basis. We also invest in short-term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments. Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income ("NIM") under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Company and the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. Both models assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem reasonable, based on historical experience during prior interest rate changes. Estimated Changes in NPV and NIM. The table below sets forth, as of September 30, 2006, the estimated changes in our NPV and our net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

------------------------------------------------------ ----------------------------------------------------- Estimated Increase (Decrease) Increase (Decrease) in Change in in NPV Estimated Estimated Net Interest Income Interest Rates Estimated ----------------------------------- Net Interest --------------------------------- (basis points) NPV Amount Percent Income Amount Percent ------------------ --------------- --------------- ---------------- ---------------- --------------- -------------- (Dollars in thousands) +300 $ 377,249 $ (87,366) -18.8% $ 83,196 $ (7,987) -8.8% +200 415,342 (49,273) -10.6% 86,023 (5,160) -5.7% +100 441,645 (22,970) -4.9% 88,710 (2,473) -2.7% 0 464,615 - 0.0% 91,183 - 0.0% -100 478,105 13,490 2.9% 93,010 1,827 2.0% -200 478,151 13,536 2.9% 93,717 2,534 2.8%

The table set forth above indicates that at September 30, 2006, in the event of an immediate 200 basis point decrease in interest rates, we would be expected to experience a 2.9% increase in NPV and a 2.8% increase in net interest income. In the event of an immediate 200 basis point increase in interest rates, we would be expected to experience a 10.6% decrease in NPV and a 5.7% decrease in net interest income. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest 53 income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. During the past fiscal year, the federal funds rate has increased 150 basis points from 3.75% to 5.25% while U.S. Treasury rates in the five year maturities have risen 38 basis points increased from 4.20% to 4.58%. U.S. Treasury 10 year notes have increased by 55 basis points from 4.20% to 4.75%. The disproportional lower rate of increase on longer term maturities has completely flattened the yield curve which has in fact, become inverted at various times this past year. The flat-to-inverted yield curve effectively increased the rate paid on interest-bearing deposits at a faster pace than the rate earned on term investments and fixed rate loans in the Bank's portfolio. The continued existence of a flat or inverted yield curve could cause further disintermediation of deposits into higher yielding liabilities and further increase the rate paid for short term borrowings while receiving little benefit on the yield earned on assets that are invested in periods beyond the period of short term interest rates. In addition, continued flattening could cause a further decline in the market value of available sale securities without a commensurate change in the notional market value of liabilities used in the calculation of "NPV". ITEM 8. Financial Statements and Supplementary Data ------------------------------------------------------ The following are included in this item: (A) Report of Management on Internal Control Over Financial Reporting (B) Report of Independent Registered Public Accounting Firm - Financial Statements (C) Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting (D) Consolidated Statements of Financial Condition as of September 30, 2006 and 2005 (E) Consolidated Statements of Income for the years ended September 30, 2006, 2005 and 2004 (F) Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2006, 2005 and 2004 (G) Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005 and 2004 (H) Notes to Consolidated Financial Statements The supplementary data required by this item (selected quarterly financial data) is provided in Note 21 of the Notes to Consolidated Financial Statements. 54 Report of Management on Internal Control Over Financial Reporting ----------------------------------------------------------------- The Board of Directors and Stockholders Provident New York Bancorp: The management of Provident New York Bancorp ("the Company") is responsible for establishing and maintaining effective internal control over financial reporting. The Company's system of internal controls is designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the Company's internal control over financial reporting as of September 30, 2006. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September 30, 2006, the Company's disclosure controls and procedures and internal control over financial reporting are effective. The Company's independent registered public accounting firm has issued an audit report on our assessment of, and the effective operation of, the Company's internal control over financial reporting as of September 30, 2006. This report appears on the following page. /s/ George Strayton ---------------------------------- By: George Strayton President and Chief Executive Officer (Principal Executive Officer) December 11, 2006 /s/ Paul Maisch ---------------------------------- By: Paul Maisch Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) December 11, 2006 55 Report of Independent Registered Public Accounting Firm ------------------------------------------------------- The Board of Directors and Stockholders Provident New York Bancorp: We have audited the accompanying consolidated statements of financial condition of Provident New York Bancorp and subsidiaries as of September 30, 2006 and 2005 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of September 30, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of September 30, 2006, based on the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 11, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP ------------------ New York, New York December 11, 2006 56 Report of Independent Registered Public Accounting Firm ------------------------------------------------------- The Board of Directors and Stockholders Provident New York Bancorp: We have audited management's assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Provident New York Bancorp and subsidiaries (the Company) maintained effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of September 30, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity, cash flows for each of the years in the three-year period ended September 30, 2006, and our report dated December 11, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP New York, New York December 11, 2006 57 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Consolidated Statements of Financial Condition September 30, 2006 and 2005 (Dollars in thousands, except per share data)

Assets 2006 2005 ----------- ----------- Cash and due from banks $ 57,293 $ 64,117 Securities (including $608,383 and $297,359 pledged as collateral for borrowings and deposits in 2006 and 2005, respectively): Available for sale, at fair value (note 4) 951,729 822,952 Held to maturity, at amortized cost (fair value of $ 60,876 and $71,151 in 2006 and 2005, respectively) (note 5) 60,987 70,949 ----------- ----------- Total securities 1,012,716 893,901 ----------- ----------- Loans held for sale 7,473 -- Loans (note 6): One- to four-family residential mortgage loans 462,996 456,794 Commercial real estate, commercial business and construction loans 787,086 713,471 Consumer loans 223,476 191,808 Allowance for loan losses (20,373) (21,047) ----------- ----------- Total loans, net 1,453,185 1,341,026 ----------- ----------- Federal Home Loan Bank ("FHLB") stock, at cost 33,518 21,333 Accrued interest receivable (note 7) 13,228 10,594 Premises and equipment, net (note 8) 31,739 32,101 Goodwill (note 3) 159,817 157,656 Core deposit and other intangible assets (note 3) 14,189 14,607 Bank owned life insurance 39,308 37,667 Deferred income taxes, net (note 11) 8,526 10,596 Other assets (notes 6, 11 and 12) 10,345 14,725 ----------- ----------- Total assets $ 2,841,337 $ 2,598,323 =========== =========== Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $ 1,729,659 $ 1,726,401 FHLB and other borrowings (including repurchase agreements of $332,576 and $145,567 at September 30, 2006 and 2005, respectively) (note 10) 682,739 442,203 Mortgage escrow funds (note 6) 4,612 4,122 Other (note 11) 19,041 30,440 ----------- ----------- Total liabilities 2,436,051 2,203,166 ----------- ----------- Commitments and contingencies (notes 16 and 17) Stockholders' equity (notes 1 and 15): Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding) -- -- Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 shares issued; 42,699,046 shares and 43,505,659 shares outstanding in 2006 and 2005, respectively) 459 459 Additional paid-in capital 343,574 345,631 Unallocated common stock held by employee stock ownership plan ("ESOP") (note 12) (9,099) (10,045) Treasury stock, at cost (3,230,506 shares in 2006 and 2,423,893 shares in 2005) (note 15) (36,973) (28,195) Common stock awards under recognition and retention plan ("RRP") (note 12) -- (8,810) Retained earnings 114,927 104,484 Accumulated other comprehensive loss, net of taxes (note 13) (7,602) (8,367) ----------- ----------- Total stockholders' equity 405,286 395,157 ----------- ----------- Total liabilities and stockholders' equity $ 2,841,337 $ 2,598,323 =========== ===========

See accompanying notes to consolidated financial statements 58 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Consolidated Statements of Income Years Ended September 30, 2006, 2005 and 2004 (Dollars in thousands, except per share data)

2006 2005 2004 -------- -------- -------- Interest and dividend income: Loans, including fees $ 95,531 $ 81,674 $ 54,531 Securities 38,565 33,665 20,231 Other earning assets 1,520 832 184 -------- -------- -------- Total interest and dividend income 135,616 116,171 74,946 -------- -------- -------- Interest expense: Deposits (note 9) 26,802 16,076 7,901 Borrowings (note 10) 24,057 13,324 5,081 -------- -------- -------- Total interest expense 50,859 29,400 12,982 -------- -------- -------- Net interest income 84,757 86,771 61,964 Provision for loan losses (note 6) 1,200 750 800 -------- -------- -------- Net interest income after provision for loan losses 83,557 86,021 61,164 -------- -------- -------- Non-interest income: Deposit fees and service charges 10,689 10,351 6,570 Net gain on sales of securities available for sale (note 4) -- 369 2,455 Title insurance fees 1,700 1,560 -- Bank owned life insurance 1,641 1,790 552 Investment management fees 1,490 828 525 Previously unrecognized low income housing partnership investment -- 681 -- Other (note 6) 1,632 1,428 1,033 -------- -------- -------- Total non-interest income 17,152 17,007 11,135 -------- -------- -------- Non-interest expense: Compensation and employee benefits (note 12) 32,182 31,573 23,001 Stock-based compensation plans (note 12) 5,826 2,960 2,790 Occupancy and office operations (note 17) 11,435 9,587 6,741 Advertising and promotion 2,445 3,102 2,050 Professional fees 3,450 2,908 2,655 Data and check processing 3,088 4,767 3,634 Merger integration costs (note 3) -- 1,124 773 Amortization of intangible assets (note 3) 3,288 3,939 2,063 ATM/debit card expense 1,565 1,357 807 Other 7,977 9,265 6,632 -------- -------- -------- Subtotal 71,256 70,582 51,146 Establishment of charitable foundation -- -- 5,000 -------- -------- -------- Total non-interest expense 71,256 70,582 56,146 -------- -------- -------- Income before income tax expense 29,453 32,446 16,153 Income tax expense (note 11) 9,258 11,204 5,136 -------- -------- -------- Net income $ 20,195 $ 21,242 $ 11,017 ======== ======== ======== Earnings per common share (note 14): Basic $ 0.49 $ 0.49 $ 0.30 Diluted 0.49 0.49 0.29

See accompanying notes to consolidated financial statements 59 PROVIDENT BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Y ears Ended September 30, 2006, 2005 and 2004 (Dollars in thousands, except per share data)

Accumulated Other Total Additional Unallocated Common Compre- Stock- Common Paid-in ESOP Stock Awards Treasury Retained hensive holders' Stock Capital Shares Under RRP Stock Earnings Loss Equity --------- --------- --------- --------- --------- --------- --------- --------- Balance at October 1, 2003 82 $ 38,032 $ (1,597) $ (506) $ (7,780) $ 85,398 $ 3,482 $ 117,857 Net income -- -- -- -- -- 11,017 -- 11,017 Other comprehensive loss (note 13) -- -- -- -- -- -- (3,779) (3,779) --------- Total comprehensive income 7,238 Reorganization and common stock offering (476) 185,254 -- -- 7,680 -- -- 192,458 Purchase of ENB Holding Co., Inc. (3,969,671 shares) 40 39,657 -- -- -- -- -- 39,697 Establishment of ESOP Plan (998,650 shares) -- -- (9,987) -- -- -- -- (9,987) Formation of Charitable Foundation 4 3,996 -- -- -- -- -- 4,000 Cash dividends paid ($0.15 per common share) -- -- -- -- -- (5,008) -- (5,008) Purchases of treasury stock (36,794 shares) -- -- -- -- (432) -- -- (432) ESOP shares allocated or committed to be released for allocation (145,850 shares) -- 1,166 730 -- -- -- -- 1,896 Vesting of RRP shares -- -- -- 506 -- -- -- 506 Stock option transactions, net 1 1,220 -- -- 100 (34) -- 1,287 --------- --------- --------- --------- --------- --------- --------- --------- Balance at September 30, 2004 397 269,325 (10,854) -- (432) 91,373 (297) 349,512 Net income -- 21,242 21,242 Other comprehensive loss (note 13) -- (8,070) (8,070) --------- Total comprehensive income 13,172 Purchase of Warwick Community Bancorp, Inc. ("WCBI") (6,257,896 shares) 62 74,531 -- -- -- -- -- 74,593 Tax benefits: Elimination of WCBI RRP Plan -- 276 -- -- -- -- -- 276 Stock-based compensation plans -- 265 -- -- -- -- -- 265 RRP awards -- -- -- (9,789) 9,803 (14) -- -- Stock option transactions, net -- 58 -- -- 695 (650) -- 103 ESOP shares allocated or committed to be released for allocation (161,250 shares) -- 1,176 809 -- -- -- -- 1,985 Vesting of RRP shares -- -- -- 979 -- -- -- 979 Purchase of treasury stock (3,206,318 shares) (38,261) (38,261) Cash dividends paid ($0.17 per common share) -- -- -- -- -- (7,467) -- (7,467) --------- --------- --------- --------- --------- --------- --------- --------- Balance at September 30, 2005 459 345,631 (10,045) (8,810) (28,195) 104,484 (8,367) 395,157 Net income 20,195 20,195 Other comprehensive (loss)/income (note 13) 765 765 --------- Total comprehensive income 20,960 Reclassification in accordance with SFAS No.123R -- (8,810) -- 8,810 -- -- -- -- Purchase of Hudson Valley Investment Advisors, Inc. (208,331 shares) -- 57 -- -- 2,683 -- -- 2,740 Deferred compensation transactions -- 1,220 -- -- -- -- -- 1,220 Stock option transactions, net -- 1,510 -- -- 2,130 (1,393) -- 2,247 ESOP shares allocated or committed to be released for allocation (212,622 shares) -- 1,651 946 -- -- -- -- 2,597 RRP awards -- (311) -- -- 307 4 -- -- Vesting of RRP shares -- 1,822 -- -- -- -- -- 1,822 Other RRP transactions -- 804 -- -- (562) -- -- 242 Purchase of treasury stock (1,161,894 shares) -- -- -- -- (13,336) -- -- (13,336) Cash dividends paid ($0.20 per common share) -- -- -- -- -- (8,363) -- (8,363) --------- Balance at September 30, 2006 459 $ 343,574 $ (9,099) $ -- $ (36,973) $ 114,927 $ (7,602) $ 405,286 ========= ========= ========= ========= ========= ========= ========= =========

See accompanying notes to consolidated financial statements. 60 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended September 30, 2006, 2005 and 2004 (Dollars in thousands)

2006 2005 2004 --------- --------- --------- Cash flows from operating activities: Net income $ 20,195 $ 21,242 $ 11,017 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,200 750 800 Depreciation and amortization of premises and equipment 4,049 3,227 2,381 Amortization of intangibles 3,288 3,939 2,063 Gain on sales of securities available for sale -- (369) (2,455) Gain on sales of loans held for sale (117) (206) (320) Gain on sales of fixed assets -- -- (73) Net amortization of premiums and discounts on securities 2,957 4,398 2,661 ESOP and RRP expense 4,771 2,964 2,402 Stock option compensation expense 1,129 -- -- Originations of loans held for sale (16,022) (19,255) (14,638) Proceeds from sales of loans held for sale 8,666 20,316 16,467 Increase in cash surrender value of bank owned life insurance (1,641) (1,418) (552) Deferred income tax (benefit) expense 1,886 3,261 (1,076) Net changes in accrued interest receivable and payable (523) (786) 208 Other adjustments (principally net changes in other assets and other liabilities) (6,011) (3,573) (3,239) --------- --------- --------- Net cash provided by operating activities 23,827 34,490 15,646 --------- --------- --------- Cash flows from investing activities: Purchases of securities: Available for sale (258,996) (385,270) (468,417) Held to maturity (22,610) (23,673) (12,245) Proceeds from maturities, calls and other principal payments on securities: Available for sale 128,413 146,597 91,256 Held to maturity 32,486 23,872 19,634 Proceeds from sales of securities available for sale -- 61,522 163,263 Cash paid for securities purchased, not yet settled (7,392) -- -- Loan originations (624,524) (496,117) (342,456) Loan principal payments 511,680 421,991 278,011 Purchase of FHLB stock, net (12,185) (3,481) (2,027) Purchase of Warwick Community Bancorp, Inc. -- 164,486 -- Purchase of ENB Holding Co., Inc. -- -- 60,355 Purchase of HSBC South Fallsburg Branch -- 18,938 -- Purchase of Hudson Valley Investment Advisors, Inc., net of cash and cash equivalents acquired (2,622) -- -- Increase in bank owned life insurance -- (9,684) -- Purchases of premises and equipment (3,883) (6,096) (3,631) Proceeds from sales of fixed assets 196 -- 434 Proceeds from sales of other real estate owned -- -- 135 Other investing activities 331 -- (55) --------- --------- --------- Net cash used in investing activities (259,106) (86,915) (215,743) --------- --------- ---------

61 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Continued Years Ended September 30, 2006, 2005 and 2004 (Dollars in thousands)

2006 2005 2004 --------- --------- --------- Cash flows from financing activities: Net (decrease) increase in deposits $ 3,366 $ (11,671) $ 43,121 Net increase in borrowings 243,459 68,636 50,152 Net (decrease) increase in mortgage escrow funds 490 (2,910) (1,423) Common stock offering proceeds, net -- -- 192,363 Treasury shares purchased (13,336) (38,261) (432) Stock option transactions 737 103 125 Shares purchased for ESOP plan -- -- (9,987) Formation of charitable foundation -- -- 4,000 Recapitalization related to second-step stock conversion -- -- 95 Tax benefits generated from equity transactions 640 541 1,162 Other stock-based compensation transactions 1,462 -- -- Cash dividends paid (8,363) (7,467) (5,008) --------- --------- --------- Net cash provided by financing activities 228,455 8,971 274,168 --------- --------- --------- Net (decrease) increase in cash and cash equivalents $ (6,824) $ (43,454) $ 74,071 Cash and cash equivalents at beginning of year 64,117 107,571 33,500 --------- --------- --------- Cash and cash equivalents at end of year $ 57,293 $ 64,117 $ 107,571 Supplemental information: Interest payments $ 48,748 $ 28,361 $ 8,948 Income tax payments 2,530 8,511 4,461 Acquisition of Hudson Valley Investment Advisors, Inc. (2006), Warwick Community Bancorp, Inc. (2005) and ENB Holding Co., Inc. (2004), accounted for using the purchase method: Fair value of assets acquired (incl. intangible assets) $ 5,240 $ 806,114 $ 406,267 Fair value of liabilities assumed -- 658,919 329,797 --------- --------- --------- Net fair value $ 5,240 $ 147,195 $ 76,470 --------- --------- --------- Cash portion of purchase transaction $ 2,500 $ 72,601 $ 36,773 Stock portion of purchase transaction 2,740 74,594 39,697 --------- --------- --------- Total consideration paid for acquisitions $ 5,240 $ 147,195 $ 76,470 ========= ========= ========= Cash received from HSBC branch purchase $ -- $ 18,938 $ -- Loans transferred to real estate owned -- -- 112 Net change in unrealized gains recorded on securities available for sale 1,118 13,494 (6,130) Change in deferred taxes on unrealized gains on securities available for sale (466) 5,375 2,447 Issuance of RRP shares 311 9,789 --

See accompanying notes to consolidated financial statements 62 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (1) Reorganization and Stock Offerings Initial Public Offering On January 7, 1999, Provident Bank (the Bank) completed its reorganization into a mutual holding company structure (the Reorganization). As part of the Reorganization, the Bank converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank (the Conversion). The Bank became the wholly owned subsidiary of Provident Bancorp, Inc., a federal corporation ("Provident Federal"), which became the majority-owned subsidiary of Provident Bancorp, MHC ("the Mutual Holding Company"). Provident Bancorp, Inc. issued a total of 8,280,000 common shares on January 7, 1999, consisting of 3,864,000 shares (or 46.67%) sold to the public (the Offering) and 4,416,000 shares (or 53.33%) issued to the Mutual Holding Company. The net proceeds from the sale of shares to the public amounted to $37,113. Provident Bancorp, Inc. utilized net proceeds of $24,000 to make a capital contribution to the Bank. The Company's employee stock ownership plan (ESOP) purchased 309,120 shares (or 8% of the number of shares sold in the Offering) in open market transactions, during January and February 1999, at a total cost of $3,760. Second Step Conversion On January 14, 2004 Provident Bancorp, Inc. completed its stock offering in connection with the second-step conversion from a mutual holding company, a federal corporation, to a publicly held stock holding company, incorporated in the State of Delaware. In anticipation of the second-step conversion the Board of Directors of the MHC formed a Delaware corporation known as "Provident Bancorp, Inc." Concurrent with the public stock offering of shares, representing the former ownership interest of the MHC, the MHC ceased to exist and Provident Federal was replaced by the new Provident Bancorp. Inc. As a result of the stock offering and conversion, the Bank was a wholly owned subsidiary of Provident Bancorp, Inc. (Parent), which changed its name as described below, to a publicly held bank holding company. Collectively, the Bank and Parent company are referred to herein as the "Company." In addition, the Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc., ("ENB") located in Ellenville, New York (see Note 3 "Acquisitions"). Provident Bancorp, Inc. sold 19,573,000 shares of common stock at $10.00 per share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The new holding company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of Provident Federal, as of January 14, 2004 was exchanged for 4.4323 new shares of the Company's common stock. Cash was paid in lieu of the issuance of fractional shares. In connection with the Conversion, the number of shares of authorized but un-issued preferred stock was unchanged and the amount of common stock authorized was increased to 75,000,000 shares par value $0.01. The Conversion was accounted for as reorganization in corporate form, with no change in the historical basis of the Company's assets and liabilities. Outstanding shares for purposes of calculating prior year per share amounts have been adjusted to reflect to the exchange ratio applied in the Conversion. 63 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Prior year share data within the consolidated statements of condition have not been restated for the exchange ratio. Costs related to the Offering, primarily marketing fees paid to the Company's investment banking firm, professional fees, registration fees, and printing and mailing costs, were $3.5 million and accordingly, net offering proceeds were $192.2 million. On June 29, 2005, Provident Bancorp, Inc. changed its name to Provident New York Bancorp in order to differentiate itself from the numerous bank holding companies with similar names. It began trading on the NASDAQ under the stock symbol "PBNY" on that date. Prior to that date its common stock traded under the stock symbol "PBCP." (2) Nature of Business and Summary of Significant Accounting Policies The Bank is a community bank offering financial services to individuals and businesses primarily in Rockland and Orange Counties, New York and the contiguous Sullivan, Ulster and Putnam Counties, New York and Bergen County, New Jersey. The Bank's principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. The Bank is a federally-chartered savings association and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC) as a result of the merger of the Savings Insurance Fund and the Bank Insurance Funds of the FDIC effective March 31, 2006. The Office of Thrift Supervision (OTS) is the primary regulator for the Bank and for Provident New York Bancorp. 83% of the Bank's loans are collateralized or dependent on real estate. (a) Basis of Financial Statement Presentation The consolidated financial statements include the accounts of Provident New York Bancorp, Hardenburgh Abstract Title Company, which provides title searches and insurance for residential and commercial real estate, the Bank, Hudson Valley Investment Advisors, LLC, a registered investment advisor, and the Bank's wholly owned subsidiaries. These subsidiaries are (i) Provident Municipal Bank (PMB) which is a limited-purpose, New York State-chartered commercial bank formed to accept deposits from municipalities in the Company's market area, (ii) Provident REIT, Inc. and WSB Funding, Inc. which are real estate investment trusts that hold a portion of the Company's real estate loans, (iii) Provest Services Corp. I, which has invested in a low-income housing partnership, and (iv) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank's customers. Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. An estimate that is particularly susceptible to significant near-term change is the allowance for loan losses, which is discussed below. Certain prior-year amounts have been reclassified to conform to the current-year presentation. Effective September 30, 2003, $371 was reclassified from the allowance for loan losses to a reserve for contingent loan commitments. On September 30, 2004, 2005 and 2006, respectively, an 64 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) additional $334, $256 and $395 were reclassified. All previous information has been adjusted to reflect this reclassification. For purposes of reporting cash flows, cash equivalents (if any) include highly liquid, short-term investments such as overnight federal funds. (b) Securities Securities include US Treasury, US Government Agency, municipal and corporate bonds, mortgage backed securities, collateralized mortgage obligations, marketable and equity securities. The Company can classify its securities among three categories: held to maturity, trading, and available for sale. Management determines the appropriate classification of the Company's securities at the time of purchase. Held-to-maturity securities are limited to debt securities for which management has the intent and the Company has the ability to hold to maturity. These securities are reported at amortized cost. Trading securities are debt and equity securities held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in earnings. The Company does not engage in security trading activities. All other debt and marketable equity securities are classified as available for sale. These securities are reported at fair value, with unrealized gains and losses (net of the related deferred income tax effect) excluded from earnings and reported in a separate component of stockholders' equity (accumulated other comprehensive income or loss). Available-for-sale securities include securities that management intends to hold for an indefinite period of time, such as securities to be used as part of the Company's asset/liability management strategy or securities that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase capital, or similar factors. Premiums and discounts on debt securities are recognized in interest income on a level-yield basis over the period to maturity or call date. The cost of securities sold is determined using the specific identification method. Unrealized losses are charged to earnings when management determines that the decline in fair value of a security is other than temporary. Securities deemed to be other-than-temporarily impaired are permanently written down from their original cost basis to reflect the adjusted fair value subsequent to a measurement for impairment. The impairment is deemed other-than-temporary if there are serious credit concerns regarding a particular debt issuer, or severe fluctuation in interest rates. The other-than-temporary adjustment is charged to current earnings in the period of measurement. The method employed to determine the loss in value is covered in Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer", which covers the requisite treatment for purchased loans with potential credit loss and/or those which return a lower than expected yield. (c) Loans Loans (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Mortgage loans originated and held for sale in the secondary market (if any) are reported at the lower of aggregate cost or estimated fair value. Fair value is estimated based on outstanding investor commitments or, in the absence of such commitments, based on current investor yield 65 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) requirements. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to earnings. Interest income on loans is accrued on a level yield method. A loan is placed on non-accrual status when management has determined that the borrower may be unable to meet contractual principal or interest obligations, or when payments are 90 days or more past due, unless well secured and in the process of collection. Accrual of interest ceases and, in general, uncollected past due interest is reversed and charged against current interest income, related to the current year and interest, recorded in the prior year, is charged to the allowance for loan losses. Interest payments received on non-accrual loans, including impaired loans, are not recognized as income unless warranted based on the borrower's financial condition and payment record. The Company defers nonrefundable loan origination and commitment fees, and certain direct loan origination costs, and amortizes the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid or sold, the net deferred amount is recognized in the statement of income at that time. Interest and fees on loans include prepayment fees and late charges collected. Such accounts include $959 for 2006 and $901 and $438 reclassified from non-interest income in 2005 and 2004 to interest income, respectively. (d) Allowance for Loan Losses The allowance for loan losses is established through provisions for losses charged to earnings. Losses on loans (including impaired loans) are charged to the allowance for loan losses when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized. The allowance for loan losses is an amount that management believes is necessary to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of the loans. Management's evaluations, which are subject to periodic review by the OTS, take into consideration factors such as the Company's past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions that may affect the borrowers' ability to pay. Future adjustments to the allowance for loan losses may be necessary, based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other factors. The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all principal and interest contractually due. Certain loans are individually evaluated for collectability in accordance with the Company's ongoing loan review procedures (principally commercial real estate, commercial business and construction loans). Smaller-balance homogeneous loans are collectively evaluated for impairment, such as residential mortgage loans and consumer loans. Impaired loans are based on one of three measures -- the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, an impairment loss is recognized as a charge to the allowance for loan losses. 66 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (e) Mortgage Servicing Assets The cost of an originated mortgage loan that is sold with servicing retained is allocated between the loan and the servicing right. The cost allocated to the retained servicing right is capitalized as a separate asset and amortized thereafter in proportion to, and over the period of, estimated net servicing income. Capitalized mortgage servicing rights are included in other assets and are assessed for impairment based on the fair value of those rights, and impairment losses are recognized in a valuation allowance by charges to income. (f) Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank (FHLB) of New York, the Bank is required to hold a certain amount of FHLB stock. This stock is a non-marketable equity security and, accordingly, is reported at cost. (g) Premises and Equipment Premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to 40 years. Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. (h) Goodwill and Other Intangible Assets Goodwill recorded in the acquisitions is not amortized to expense, but instead, is evaluated for impairment at least annually. The core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives of approximately eight years, and are evaluated for impairment at least annually. Impairment losses on intangible assets are charged to expense, if and when they occur. (i) Real Estate Owned Real estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with any resulting write-down charged to the allowance for loan losses. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and other available information. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Gains and losses on sales of real estate owned are recognized upon disposition. Real estate owned is included in other assets. 67 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (j) Securities Repurchase Agreements In securities repurchase agreements, the Company transfers securities to a counterparty under an agreement to repurchase the identical securities at a fixed price on a future date. These agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets other specified criteria. Accordingly, the transaction proceeds are recorded as borrowings and the underlying securities continue to be carried in the Company's securities portfolio. Disclosure of the pledged securities is made in the consolidated statements of financial condition if the counterparty has the right by contract to sell or repledge such collateral. (k) Income Taxes Net deferred taxes are recognized for the estimated future tax effects attributable to "temporary differences" between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion, or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management's judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. (l) Stock-Based Compensation Plans Compensation expense is recognized for the ESOP equal to the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value at that time and the ESOP's original acquisition cost is charged or credited to stockholders' equity (additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released for allocation is deducted from stockholders' equity. The Company applies Statement of Financial Accounting Standards ("SFAS") No. 123R, "Accounting for Stock-Based Compensation," and related interpretations in accounting for its stock option plan. SFAS No. 123R, issued in December 2004, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans, and required adoption for all publicly owned companies for fiscal periods ending after June 15, 2005. As of October 1, 2005, the Company began to expense these grants as required by SFAS No. 123R. Stock-based employee compensation cost pertaining to stock options is reflected in net income, as all unvested options granted under the Company's stock option plans had a value based on the fair value calculations using the Black-Scholes option pricing model, even 68 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) though the exercise prices were equal to the market value of the underlying common stock on the date of the grant. Prior to October 1, 2005, the Company applied the requirements of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its stock-based plans. Under APB 25, no compensation expense was recognized for the Company's stock-based plans regarding employee stock-options. The Company did, however, recognize expense for its plans, which were compensatory per APB 25, and had grant-date intrinsic value such as restricted stock grants (RRPs). The Company elected the modified prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all awards granted, vested or modified after the date of adoption. During 2006 the Company issued 141,000 new stock-based option awards and recognized total non-cash stock-based compensation cost of $1,129 primarily for shares awarded during the transition period, along with the fair value of these new grants. As of September 30, 2006, the total remaining unrecognized compensation cost related to non-vested stock options was $3.7 million. In addition to the recording requirements, the Company has disclosure requirements under SFAS No. 123R. The Company's stock-based compensation plans allow for accelerated vesting when employees retire under circumstance in accordance with the terms of the plans. Under SFAS No. 123R, grants issued subsequent to adoption of SFAS 123R, which are subject to such accelerated vesting, are expensed over the shorter of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be far less than the plan's five-year vesting period depending upon the age of the grantee. As of September 30, 2006, 400,860 restricted stock shares and 383,824 stock options were potentially subject to accelerated vesting, but will not be expensed over a shorter time period, unless acceleration is deemed to have occurred. During 2006, the Company recognized expense associated with the acceleration of 30,100 restricted stock shares. The Company granted 5,000 stock options which will be expensed over a shorter period, reflecting the potential for acceleration. The following table illustrates the effect on net income if the fair-value-based method per SFAS No. 123R had been applied to all outstanding awards for the years ended September 30, 2005 and 2004: ----------------------- 2005 2004 ---------- ---------- Net income, as reported $ 21,242 $ 11,017 Add: total stock-based compensation expense included in net income as reported, net of related tax effects 641 345 Deduct: stock option expense determined under the fair-value-based method, net of related tax effects (2,125) (539) ---------- ---------- Pro forma net income $ 19,758 $ 10,823 ========== ========== Earnings per share:(1) Basic, as reported $ 0.49 $ 0.30 ========== ========== Basic, pro forma 0.46 0.29 ========== ========== Diluted, as reported 0.49 0.29 ========== ========== Diluted, pro forma 0.45 0.29 ========== ========== (1) Prior period share information has been adjusted to reflect the 4.4323-to-one exchange ratio in connection with the Company's second-step conversion in January 2004. 69 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The estimated per-share fair value of stock options granted in fiscal 2006, 2005 and 2004 was $3.68, $3.07, and $2.71, respectively, using the Black-Scholes option-pricing model with assumptions as follows for the respective years: dividend yields of 1.6%, 1.4%, and 1.4%; expected volatility rates of 25%, 19%, and 20%; risk-free interest rates of 4.9%, 4.5%, and 2.7%; and expected option lives of approximately 8.6 years, 7.9 years, and 4.0 years. (m) Earnings Per Share Basic earnings per share (EPS) is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted EPS is computed in a similar manner, except that the weighted average number of common shares is increased to include incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options were exercised and unvested RRP shares became vested during the periods. For purposes of computing both basic and diluted EPS, outstanding shares include all shares issued to the Mutual Holding Company (for the period outstanding during the year ending September 30, 2004), but exclude unallocated ESOP shares. (n) Segment Information Public companies are required to report certain financial information about significant revenue- producing segments of the business for which such information is available and utilized by the chief operating decision maker. As a community-oriented financial institution, substantially all of the Company's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of the community banking operation, which constitutes the Company's only operating segment for financial reporting purposes. (3) Acquisitions The Company has been active in acquisitions over the past several years. All acquisitions were accounted for using the purchase method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded by the Company at their fair values at the acquisition date. On June 1, 2006 the Company acquired the net assets of Hudson Valley Investment Advisors, Inc. for $2.5 million in cash and 208,331 shares of its common stock, for total consideration of $5.2 million. In connection with this acquisition, the Company formed Hudson Valley Investment Advisors, LLC ("HVIA") as a subsidiary of the Company. In connection with the acquisition, the Company recorded $2.8 million in amortizable intangible assets and $2.5 million in goodwill. The amortizable intangible assets consist of $2.3 million of the value of the non-competition rights and $0.5 million of the value of a customer list. Such intangible assets are being amortized over 10 years, equal to the term of the exclusive management contract established with the principal manager of HVIA. The manager receives a fee, payable quarterly, equal to 50% of the net revenues, as defined, and is eligible to receive an additional $1.0 million earnout over a five year period, if certain revenues are achieved. The Company has an option to purchase the management contract under certain circumstances. On October 1, 2004 the Company completed its acquisition of Warwick Community Bancorp, Inc. ("WSB" or "Warwick"), located in Warwick, New York. WSB was the holding company for the Warwick 70 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Savings Bank, headquartered in Warwick, New York, the Towne Center Bank, headquartered in Lodi, New Jersey and Hardenburgh Abstract Company of Orange County, Inc. in Goshen, New York. On January 14, 2004, the Company completed its acquisition of ENB, located in Ellenville, New York. ENB was the holding company for Ellenville National Bank. On April 23, 2002, the Company completed its acquisition of the National Bank of Florida ("NBF"), located in Florida, New York. Summary of Financial Transactions. Below is the summary of the financial transactions, including a branch purchase in 2005 of an HSBC Bank USA, National Association ("HSBC") branch office.

HVIA HSBC WSB ENB NBF Total ---------------------------------------------------------------------------------- At Acquisition Date ------------------------------------------- Number of shares issued 208,331 -- 6,257,896 3,969,676 -- 10,435,903 Loans acquired $ -- $ 2,045 $ 284,522 $ 213,730 $ 23,112 $ 523,409 Deposits assumed -- 23,319 475,150 327,284 88,182 913,935 Cash paid/(received) 2,500 (18,938) 72,601 36,773 28,100 121,036 Goodwill 2,531 -- 91,576 51,794 13,063 158,964 Core deposit/other intangibles 2,830 1,690 10,395 6,624 1,787 23,326 At September 30, 2006 ------------------------------------------- Goodwill $ 2,533 $ -- $ 91,671 $ 52,277 $ 13,336 $ 159,817 Accumulated core deposit/other amortization 94 487 3,604 4,419 1,409 10,013 Net core deposit/other intangible 2,736 1,203 6,791 2,205 378 13,313

---------------------------------------------- * In addition to the above, the Company also carries $877 in mortgage sericing rights. The changes to goodwill, reflected above, are due to tax related items in connection with acquisitions. Future Amortization of Core Deposit and Other Intangible Assets. The following table sets forth the future amortization of core deposit and other intangible assets: At September 30, 2006 Amortization --------------------------- -------------- Less than one year $ 3,039 One to two years 2,599 Two to three years 2,192 Three to four years 1,848 Four to five years 1,358 Beyond five years 2,277 -------------- Total $13,313 ============== Goodwill is not amortized to expense, but is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit intangible asset is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated, at least annually, for impairment. 71 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Purchase Price Allocation. The following table summarizes the purchase price allocation relating to the acquisitions of WSB, ENB and HVIA. This allocation is based on the estimated fair values of assets acquired and liabilities assumed at the acquisition date.

HVIA WSB ENB June 1, October 1, January 14, 2006 2004 2004 ---------- ---------- ---------- Cash and cash equivalents $ -- $ 83,458 $ 29,218 Securities available for sale -- 302,159 96,960 Loans, net -- 286,511 213,730 Goodwill 2,531 91,576 51,794 Core deposit and other intangible assets 2,830 10,395 6,624 Other assets -- 32,388 8,005 ---------- ---------- ---------- Total assets 5,361 806,487 406,331 Deposits -- 480,054 327,284 Other liabilities 121 179,238 2,577 ---------- ---------- ---------- Total liabilities assumed -- 659,292 329,861 ---------- ---------- ---------- Net assets acquired $ 5,240 $ 147,195 $ 76,470 ========== ========== ========== Consideration paid for acquisitions $ 5,240 $ 147,195 $ 76,470 ========== ========== ==========

The Company incurred $1,124 and $773 in costs associated with the integration of acquisitions into the Company. These costs are included in non- interest expense for the year ended September 30, 2005 and 2004, respectively. 72 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (4) Securities Available for Sale The following is a summary of securities available for sale:

Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- September 30, 2006 ------------------ Mortgage-backed securities Fannie Mae $ 404,168 $ 270 $ (7,954) $ 396,484 Freddie Mac 132,921 212 (2,014) 131,119 Other 41,466 139 (508) 41,097 --------- --------- --------- --------- 578,555 621 (10,476) 568,700 --------- --------- --------- --------- Investment securities U.S. Government securities 17,012 -- (294) 16,718 Federal agencies 272,494 29 (3,061) 269,462 State and municipal securities 95,405 799 (234) 95,970 Equities 947 7 (75) 879 --------- --------- --------- --------- 385,858 835 (3,664) 383,029 --------- --------- --------- --------- Total available for sale $ 964,413 $ 1,456 $ (14,140) $ 951,729 ========= ========= ========= ========= September 30, 2005 ------------------ Mortgage-backed securities Fannie Mae $ 422,867 $ 99 $ (6,356) $ 416,610 Freddie Mac 71,733 9 (1,511) 70,231 Other 28,209 -- (272) 27,937 --------- --------- --------- --------- 522,809 108 (8,139) 514,778 --------- --------- --------- --------- Investment securities U.S. Government securities 19,006 -- (398) 18,608 Federal agencies 243,763 -- (4,746) 239,017 State and municipal securities 50,176 87 (572) 49,691 Equities 947 5 (94) 858 --------- --------- --------- --------- 313,892 92 (5,810) 308,174 --------- --------- --------- --------- Total available for sale $ 836,701 $ 200 $ (13,949) $ 822,952 ========= ========= ========= =========

Equity securities principally consist of Freddie Mac and Fannie Mae common and preferred stock. 73 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The following is a summary of the amortized cost and fair value of investment securities available for sale (other than equity securities), by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or prepay their obligations. September 30, 2006 --------------------------------- Amortized cost Fair Value --------------- --------------- Remaining period to contractual maturity Less than one year $ 183,341 $ 181,521 One to five years 114,678 113,097 Five to ten years 10,861 10,814 Greater than ten years 76,031 76,718 --------------- --------------- Total $ 384,911 $ 382,150 =============== =============== Proceeds from sales of securities available for sale during the years ended September 30, 2005 and 2004 totaled $61,522 and $163,263, respectively. These sales resulted in gross realized gains of $916, and $2,556 for the years ended September 30, 2005 and 2004, respectively, and gross realized losses of $547, and $101 in fiscal 2005 and 2004, respectively. There were no sales of securities for the year ended September 30, 2006. Securities, including held to maturity securities, with carrying amounts of $427,905 and $162,580 were pledged as collateral for borrowings at September 30, 2006 and September 30, 2005, respectively. U.S. Government and municipal securities with carrying amounts of $180,478 and $134,779 were pledged as collateral for municipal deposits and other purposes at September 30, 2006 and September 30, 2005, respectively. Securities Available for Sale with Unrealized Losses. The following table summarizes those securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position:

Continuous Unrealized Loss Position ---------------------------------------------------------- Less Than 12 Months 12 Months or Longer Total ------------------------------------------------------------------------------------------ Fair Unrealized Fair Unrealized Fair Unrealized As of September 30, 2006 Value Losses Value Losses Value Losses ---------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 71,092 $ (627) $ 392,338 $ (9,849) $ 463,430 $ (10,476) U.S. Government and agency securities 34,655 (282) 231,584 (3,073) 266,239 (3,355) State and municipal securities 9,281 (31) 14,409 (203) 23,690 (234) Equity securities 105 -- 767 (75) 872 (75) ------------------------------------------------------------------------------------------ Total $ 115,133 $ (940) $ 639,098 $ (13,200) $ 754,231 $ (14,140) ==========================================================================================

74 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data)

Continuous Unrealized Loss Position ---------------------------------------------------------- Less Than 12 Months 12 Months or Longer Total ------------------------------------------------------------------------------------------ Fair Unrealized Fair Unrealized Fair Unrealized As of September 30, 2005 Value Losses Value Losses Value Losses ---------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 318,663 $ (4,193) $ 178,500 $ (3,946) $ 497,163 $ (8,139) U.S. Government and agency securities 162,731 (2,644) 94,895 (2,500) 257,626 (5,144) State and municipal securities 37,665 (457) 5,546 (115) 43,211 (572) Equity securities 105 -- 748 (94) 853 (94) ------------------------------------------------------------------------------------------ Total $ 519,164 $ (7,294) $ 279,689 $ (6,655) $ 798,853 $ (13,949) ==========================================================================================

Substantially all of the unrealized losses at September 30, 2006 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2006. A total of 55 available for sale securities were in a continuous unrealized loss position for less than 12 months, and 272 securities for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold securities with unrealized losses until a market price recovery (which, for fixed maturities, may be until maturity) the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2006 except for an investment in Freddie Mac perpetual preferred stock, for which it has been determined that an impairment loss (in 2005) of $94 existed on a recorded basis of $935. (See Recent Accounting Standards for discussion of a new accounting pronouncement that will provide additional guidance with respect to impairment evaluations). 75 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (5) Securities Held to Maturity The following is a summary of securities held to maturity:

Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- September 30, 2006 Mortgage-backed securities Fannie Mae $ 9,102 $ 56 $ (176) $ 8,982 Freddie Mac 9,138 38 (118) 9,058 Ginnie Mae & other 1,699 50 -- 1,749 ---------- ---------- ---------- ---------- 19,939 144 (294) 19,789 Investment securities State and municipal 40,892 323 (288) 40,927 Other 156 5 (1) 160 ---------- ---------- ---------- ---------- Subtotal 41,048 328 (289) 41,087 ---------- ---------- ---------- ---------- Total held to maturity $ 60,987 $ 472 $ (583) $ 60,876 ========== ========== ========== ========== September 30, 2005 Mortgage-backed securities Fannie Mae $ 11,504 $ 152 $ (160) $ 11,496 Freddie Mac 12,838 122 (135) 12,825 Ginnie Mae & other 2,369 59 -- 2,428 ---------- ---------- ---------- ---------- 26,711 333 (295) 26,749 Investment securities State and municipal 43,931 482 (321) 44,092 Other 307 7 (4) 310 ---------- ---------- ---------- ---------- Subtotal 44,238 489 (325) 44,402 ---------- ---------- ---------- ---------- Total held to maturity $ 70,949 $ 822 $ (620) $ 71,151 ========== ========== ========== ==========

76 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The following is a summary of the amortized cost and fair value of investment securities held to maturity, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or repay their obligations. September 30, 2006 ----------------------- Amortized cost Fair value ---------- ---------- Remaining period to contractual maturity: Less than one year $ 22,593 $ 22,570 One to five years 7,843 7,891 Five to ten years 6,148 6,133 Greater than ten years 4,464 4,493 ---------- ---------- Total $ 41,048 $ 41,087 ========== ========== There were no sales of securities held to maturity during the years ended September 30, 2006, 2005 and 2004. The following table summarizes those securities held to maturity with unrealized losses, segregated by the length of time in a continuous unrealized loss position:

Continuous Unrealized Loss Position ---------------------------------------------------------- Less Than 12 Months 12 Months or Longer Total ----------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized As of September 30, 2006 Value Losses Value Losses Value Losses -------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 1,121 $ (3) $ 10,090 $ (291) $ 11,211 $ (294) State and municipal securities 18,998 (89) 4,424 (199) 23,422 (288) Other securities 100 (1) 100 (1) ------------ ------------ ------------ ------------ ------------ ------------ Total $ 20,119 $ (92) $ 14,614 $ (491) $ 34,733 $ (583) ============ ============ ============ ============ ============ ============

77 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data)

Continuous Unrealized Loss Position ---------------------------------------------------------- Less Than 12 Months 12 Months or Longer Total ----------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized As of September 30, 2005 Value Losses Value Losses Value Losses -------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 7,336 $ (175) $ 5,595 $ (120) $ 12,931 $ (295) State and municipal securities 24,504 (161) 3,037 (160) 27,541 (321) Other securities -- -- 100 (4) 100 (4) ------------ ------------ ------------ ------------ ------------ ------------ Total $ 31,840 $ (336) $ 8,732 $ (284) $ 40,572 $ (620) ============ ============ ============ ============ ============ ============

Substantially all of the unrealized losses on held to maturity securities at September 30, 2006 relate to investment grade securities or local municipal general obligation bonds and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2006. A total of 58 held-to-maturity securities were in a continuous unrealized loss position for less than 12 months, and 32 securities for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold securities with unrealized losses until maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2006. (See Recent Accounting Standards for discussion of a new accounting pronouncement that will provide additional guidance with respect to impairment evaluations). 78 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (6) Loans The components of the loan portfolio, excluding loans held for sale, were as follows: September 30, -------------------------- 2006 2005 ----------- ----------- One- to four-family residential mortgage loans: Fixed rate $ 406,139 $ 395,463 Adjustable rate 56,857 61,331 ----------- ----------- 462,996 456,794 ----------- ----------- Commercial real estate loans 529,607 497,936 Commercial business loans 160,823 148,825 Construction loans 96,656 66,710 ----------- ----------- 787,086 713,471 ----------- ----------- Consumer loans: Home equity lines of credit 149,862 134,997 Homeowner loans 55,968 40,221 Other consumer loans 17,646 16,590 ----------- ----------- 223,476 191,808 ----------- ----------- Total loans 1,473,558 1,362,073 Allowance for loan losses (20,373) (21,047) ----------- ----------- Total loans, net $ 1,453,185 $ 1,341,026 =========== =========== Total loans include net deferred loan origination costs of $2,853 and $2,110 at September 30, 2006 and September 30, 2005, respectively. A substantial portion of the Company's loan portfolio is secured by residential and commercial real estate located in Rockland and Orange Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam Counties of New York and Bergen County, New Jersey. The ability of the Company's borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company's concentrated lending area. Commercial real estate and construction loans are considered by management to be of somewhat greater credit risk than loans to fund the purchase of a primary residence due to the generally larger loan amounts and dependency on income production or sale of the real estate. Substantially all of these loans are collateralized by real estate located in the Company's primary market area. 79 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The principal balances of non-performing loans were as follows:

2006 2005 ------------------------------------------- ------------------------------------------- 90 days past due 90 days past due and still accruing Non-Accrual and still accruing Non-Accrual -------------------- -------------------- -------------------- -------------------- One- to four-family residential mortgage loans $ 629 $ 472 $ 1,337 $ 65 Commercial real estate loans 613 2,367 92 -- Commercial business loans 30 459 -- 120 Consumer loans 310 144 -- 27 -------------------- -------------------- -------------------- -------------------- Total non-performing loans 1,582 3,442 $ 1,429 $ 212 ==================== ==================== ==================== ====================

Gross interest income that would have been recorded if the foregoing non-accrual loans had remained current in accordance with their contractual terms totaled $372, $8, and $163, for the years ended September 30, 2006, 2005 and 2004, respectively, compared to interest income actually recognized (including income recognized on a cash basis) of $127, $7, and $119, respectively. The Company had no recorded investment in impaired loans, as defined by SFAS No. 114, at September 30, 2006 or September 30, 2005. Substantially all of these loans were collateral-dependent loans measured based on the fair value of the collateral. The Company determines the need for an allowance for loan impairment under SFAS No. 114 on a loan-by-loan basis. An impairment allowance was not required at September 30, 2006 and 2005 due to the adequacy of collateral values. The Company's average recorded investment in impaired loans was $0 and $116 during the years ended September 30, 2006 and 2005, respectively. Activity in the allowance for loan losses is summarized as follows: Year ended September 30, -------------------------------- 2006 2005 2004 -------- -------- -------- Balance at beginning of year $ 21,047 $ 16,648 $ 10,698 Transfer to reserve for contingent loan commitments (395) (256) (334) Provision for loan losses 1,200 750 800 Charge-offs (1,836) (1,153) (484) Recoveries 357 178 218 Allowance recorded in acquisitions -- 4,880 5,750 -------- -------- -------- Balance at end of year $ 20,373 $ 21,047 $ 16,648 ======== ======== ======== 80 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Provisions for losses and other activity in the allowance for losses on real estate owned were insignificant during the years ended September 30, 2006, 2005 and 2004. Certain residential mortgage loans originated by the Company are sold in the secondary market. Other non-interest income includes net gains on such sales of $115 in fiscal 2006, $206 in fiscal 2005, and $320 in fiscal 2004. At September 30, 2006 and 2005 there was $7,473 (student loans) and $0 in loans held for sale, respectively. Other intangible assets at September 30, 2006 and 2005 include capitalized mortgage servicing rights with an amortized cost of $877 and $836, respectively, which are recorded at the lower of cost or fair market value. The Company generally retains the servicing rights on mortgage loans sold. Servicing loans for others involves collecting payments, maintaining escrow accounts, making remittances to investors and, if necessary, processing foreclosures. Mortgage loans serviced for others, including loan participations, totaled approximately $131,291, $131,825 and $128,794 at September 30, 2006, 2005 and 2004, respectively. Mortgage escrow funds include balances of $507 and $554 at September 30, 2006 and 2005, respectively, related to loans serviced for others. (7) Accrued Interest Receivable The components of accrued interest receivable were as follows: September 30, ----------------- 2006 2005 ------- ------- Loans $ 5,803 $ 4,908 Securities 7,425 5,686 ------- ------- Total accrued interest receivable $13,228 $10,594 ======= ======= (8) Premises and Equipment, Net Premises and equipment are summarized as follows: September 30, -------------------- 2006 2005 -------- -------- Land and land improvements $ 3,986 $ 3,867 Buildings 20,012 21,146 Leasehold improvements 8,733 7,784 Furniture, fixtures, and equipment 22,848 19,328 -------- -------- 55,579 52,125 Accumulated depreciation and amortization (23,840) (20,024) -------- -------- Total premises and equipment, net $ 31,739 $ 32,101 ======== ======== 81 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (9) Deposits Deposit balances and weighted average interest rates are summarized as follows: September 30, ------------------------------------- 2006 2005 ----------------- ---------------- Amount Rate Amount Rate ---------- ---- ---------- ---- Demand deposits: Retail $ 163,582 --% $ 170,434 --% Commercial 203,265 -- 214,647 -- Business NOW deposits 50,546 0.50 60,214 0.44 Personal NOW deposits 103,186 0.22 105,730 0.29 Savings deposits 378,337 0.52 481,674 0.53 Money market deposits 238,977 2.24 222,091 1.27 Certificates of deposit 591,766 4.36 471,611 2.94 ---------- ---------- Total deposits $1,729,659 1.93% $1,726,401 1.15% ========== ========== Municipal deposits held by PMB totaled $147.6 million and $116.9 million at September 30, 2006 and September 30, 2005, respectively. See Note 4, "Securities Available for Sale," for the amount of securities that are pledged as collateral for municipal deposits and other purposes. Certificates of deposit had remaining periods to contractual maturity as follows: September 30, ------------------- 2006 2005 -------- -------- Remaining period to contractual maturity: Less than one year $552,598 $406,181 One to two years 21,353 40,947 Two to three years 12,816 10,131 Greater than three years 4,999 14,352 -------- -------- Total certificates of deposit $591,766 $471,611 ======== ======== Certificate of deposit accounts with a denomination of $100 or more totaled $202,683 and $131,687 at September 30, 2006 and 2005, respectively. The FDIC generally insures depositor accounts up to $100 as defined in the applicable regulations. 82 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Interest expense on deposits is summarized as follows: Years ended September 30, --------------------------- 2006 2005 2004 ------- ------- ------- Savings deposits $ 2,258 $ 3,070 $ 1,570 Money market and NOW deposits 4,689 3,155 1,048 Certificates of deposit 19,855 9,851 5,283 ------- ------- ------- Total interest expense $26,802 $16,076 $ 7,901 ======= ======= ======= (10) FHLB and Other Borrowings The Company's FHLB and other borrowings and weighted average interest rates are summarized as follows:

September 30, ------------------------------------------ 2006 2005 ------------------- ------------------- Amount Rate Amount Rate -------- -------- -------- -------- By type of borrowing: Advances $350,163 5.18% $296,636 3.86% Repurchase agreements 332,576 5.04% 145,567 3.62% Total borrowings $682,739 5.11% $442,203 3.78% ======== ======== By remaining period to maturity: Less than one year$ 565,555 5.40% $235,212 3.84% One to two years 32,180 3.28% 18,115 3.62% Two to three years 38,266 3.80% 51,719 3.62% Three to four years 21,337 3.84% 52,450 3.73% Four to five years 21,560 3.82% 16,313 3.78% Greater than five years 3,841 4.89% 68,394 3.73% -------- -------- Total borrowings $682,739 5.11% $442,203 3.78% ======== ========

As a member of the FHLB of New York, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 2006 and September 30, 2005, the Bank had pledged mortgages totaling $354,720 and $301,154, respectively. The Bank had also pledged securities with carrying amounts of $427,905 and $162,580 as of September 30, 2006 and September 30, 2005, respectively, to secure borrowings. Based on total outstanding borrowings with the FHLB which totaled $670,091 and $426,656 as of September 30, 2006 and September 30, 2005, the bank had unused borrowing capacity under the FHLB of New York Line of Credit of $102,592 and $31,625, respectively. The Bank may borrow an additional amount by pledging securities not required to be pledged for other purposes with a market value of $406,143 as of September 30, 2006. 83 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Securities repurchase agreements had weighted average remaining terms to maturity of approximately 0.6 years and 3.4 years at September 30, 2006 and 2005, respectively. Average borrowings under securities repurchase agreements were $180,744 and $164,541 during the years ended September 30, 2006 and 2005, respectively, and the maximum outstanding month-end balance was $321,200 and $167,062, respectively. FHLB borrowings of $85.7 million and $122.1 at September 30, 2006 and 2005 respectively are callable quarterly, at the discretion of the FHLB. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 0.6 years and 3.3 years and weighted average interest rates of 5.15% and 4.71% at September 30, 2006 and 2005, respectively. For the year ended September 30, 2006 FHLB called $51.4 million in borrowings assumed in acquisitions and wrote off $1.5 million in associated premiums reducing interest expense on borrowings by $3.7 million on an annualized basis. No borrowings with associated premiums were called in prior years. The remaining premium on assumed callable borrowings is $3.1 million at September 30, 2006. Interest expense on borrowings consists principally of overnight and short-term advances, repurchase agreements from FHLB, and was $26.9 million, $15.7 million, and $5.1 million for years ending September 30, 2006, 2005, and 2004, respectively. (11) Income Taxes Income tax expense consists of the following: Years ended September 30, ----------------------------- 2006 2005 2004 -------- -------- -------- Current tax expense: Federal $ 6,647 $ 7,340 $ 5,556 State 725 603 656 -------- -------- -------- 7,372 7,943 6,212 -------- -------- -------- Deferred tax expense (benefit): Federal 1,526 2,634 (789) State 360 627 (287) -------- -------- -------- 1,886 3,261 (1,076) -------- -------- -------- Total income tax expense $ 9,258 $ 11,204 $ 5,136 ======== ======== ======== 84 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate, for the following reasons: Years ended September 30, ---------------------------------- 2006 2005 2004 -------- -------- -------- Tax at Federal statutory rate $ 10,309 $ 11,356 $ 5,654 State income taxes, net of Federal tax benefit 705 800 240 Tax-exempt interest (1,372) (653) (460) Nondeductible portion of ESOP expense 578 416 408 BOLI income (574) (627) (193) Low-income housing tax credits (72) (72) (72) Other, net (316) (16) (441) -------- -------- -------- Actual income tax expense $ 9,258 $ 11,204 $ 5,136 ======== ======== ======== Effective income tax rate 31.4% 34.5% 31.8% ======== ======== ======== 85 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized below. The net amount is reported in other assets or other liabilities in the consolidated statements of financial condition.

September 30, ----------------------- 2006 2005 ---------- ---------- Deferred tax assets: Allowance for loan losses $ 8,326 $ 8,601 Deferred compensation 3,952 3,194 Purchase accounting adjustments 1,509 2,663 Contribution carryforward 388 1,343 Net unrealized loss on securities available for sale 5,096 5,483 Goodwill 764 893 Accrued post retirement expense 990 1,072 LOC reserve 554 393 Other 983 984 ---------- ---------- Total deferred tax assets 22,562 24,626 ---------- ---------- Deferred tax liabilities: Undistributed earnings of subsidiary not consolidated for tax returns purposes (REIT income) 6,909 6,455 Prepaid pension costs 1,564 1,222 Core deposit intangibles 2,766 3,821 Purchase accounting fair value adjustments 639 883 Depreciation of premises and equipment 491 406 Other 1,667 1,243 ---------- ---------- Total deferred tax liabilities 14,036 14,030 ---------- ---------- Net deferred tax asset $ 8,526 $ 10,596 ========== ==========

86 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Based on management's consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at September 30, 2006 and 2005. The Bank is subject to special provisions in the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. Tax bad debt reserves consist of a defined "base-year" amount, plus additional amounts accumulated after the base year. Deferred tax liabilities are recognized with respect to reserves accumulated after the base year, as well as any portion of the base-year amount that is expected to become taxable (or recaptured) in the foreseeable future. The Bank's base-year tax bad debt reserves for Federal tax purposes were $9,313 at both September 30, 2006 and 2005. The Bank's tax bad debt reserves for NY State purposes were $44,509 and $46,478 at September 30, 2006 and 2005, respectively. Associated deferred tax liabilities of $5,872 and $5,988 have not been recognized at those dates since the Company does not expect that the Federal base-year reserves ($3,260) and New York State bad debt reserves ($2,612, net of federal benefit) will become taxable in the foreseeable future. Under the tax laws, events that would result in taxation of certain of these reserves include (i) redemptions of the Bank's stock or certain excess distributions by the Bank to Provident New York Bancorp and (ii) failure of the Bank to maintain a specified qualifying-assets ratio or meet other thrift definition tests for New York State tax purposes. (12) Employee Benefit Plans and Stock-Based Compensation Plans (a) Pension Plan The Company has a noncontributory defined benefit pension plan covering substantially all of its employees. Employees who are twenty-one years of age or older and have worked for the Company for one year are eligible to participate in the plan. The Company's funding policy is to contribute annually an amount sufficient to meet statutory minimum funding requirements, but not in excess of the maximum amount deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future. As part of the acquisitions of ENB and WSB the Company assumed the ENB and WSB Pension Plans, both of which were defined benefit plans. The ENB plan was frozen in connection with the merger of ENB into the Company. The WSB Pension Plan, which was already frozen at the time of acquisition, has also been assumed by the Company. In April, 2006 the Company approved merging both the ENB and WSB pension plans into the Provident Bank Pension Plan, effective April 30, 2006. As a result, the discount rate to determine the accumulated pension obligation was increased from 5.75% to 6.25%. This reduced unrecognized loss on plan assets from $3.8 million to $1.8 million. As the unrecognized loss fell to below 10% of the projected benefit obligation or plan assets, amortization of the unrecognized loss was discontinued as of April 30, 2006. In July, 2006 the Board of Directors of the Company approved a curtailment to the Provident Bank Defined Benefit Pension Plan ("the Plan") as of September 30, 2006. At that time all benefit accruals for future service ceased and no new participants may enter the plan. The purpose of the Plan curtailment was to afford flexibility in the retirement benefits the Company provides, while preserving all retirement plan participants' earned and vested benefits, and to manage the increasing costs associated with the defined benefit pension plan. The Company recorded a curtailment gain, which reduced the unrecognized net losses in the Plan by $1.6 million with no gain or loss recognized in the financial statements of the Company. 87 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) In addition, the Board approved amending the Provident Bank 401(k) and Profit Sharing Plan, a 401(k) plan available to all employees who are age 21 or older. The amendment to the 401(k) plan will add a profit sharing contribution for employees, which is expected to be 3% of eligible compensation for fiscal 2007. The following is a summary of changes in the projected benefit obligation and fair value of plan assets, together with a reconciliation of the funded status to the amount of prepaid pension costs reported in other assets in the consolidated statements of financial condition: Changes in projected benefit obligation: Beginning of year $ 30,263 $ 20,904 Service cost 1,232 1,291 Interest cost 1,716 1,606 Actuarial (gain)loss (259) 492 Acquisition of WSB plan -- 6,902 Curtailments (1,642) -- Benefits paid (3,046) (932) ---------- ---------- End of year 28,264 30,263 ---------- ---------- Changes in fair value of plan assets: Beginning of year 29,738 19,644 Actual gain on plan assets 1,794 2,444 Employer contributions 1,631 2,774 Acquisition of WSB plan -- 5,843 Benefits and distributions paid (3,047) (967) ---------- ---------- End of year 30,116 29,738 ---------- ---------- Funded status at end of year 1,852 (525) Unrecognized net actuarial loss 2,076 3,690 Unrecognized prior service cost -- (32) ---------- ---------- Prepaid pension costs $ 3,928 $ 3,133 ========== ==========

2006 2005 ------- ------- Amounts recognized in the consolidated balance sheet were: Prepaid benefit cost (asset) $ 3,928 $ 4,964 Accrued benefit cost (liability) -- (1,911) Pre-tax charge to accumulated other comprehensive income -- 80 ------- ------- $ 3,928 $ 3,133 ======= =======

88 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) A discount rate of 6.0% and a rate of increase in future compensation levels of 0% were used in determining the actuarial present value of the projected benefit obligation at September 30, 2006 (5.75% and 4.0%, respectively, at September 30, 2005). The weighted average long-term rate of return on plan assets was 7.75% for fiscal 2006 and 7.21% for fiscal 2005. The discount rate, long-term rate of return on plan assets and future compensation increase assumptions for the WSB and ENB Plan at the dates of acquisition were 6.0%, 7.0% and 0.0%, respectively, for the year ended September 30, 2005. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: 2007 $1,221 2008 1,335 2009 1,507 2010 1,711 2011 1,826 2012-2016 11,548 The components of the net periodic pension expense were as follows: Years ended September 30, 2006 2005 2004 ------- ------- ------- Service cost $ 1,232 $ 1,291 $ 787 Interest cost 1,716 1,606 990 Expected return on plan assets (2,209) (1,789) (1,068) Amortization of prior service cost (11) (11) (13) Amortization of net transition obligation -- 10 26 Recognized net actuarial loss 129 283 194 ------- ------- ------- Net periodic pension expense $ 857 $ 1,390 $ 916 ======= ======= ======= Weighted-average pension plan asset allocations based on the fair value of such assets at September 30, 2006, and target allocations for 2007, by asset category, are as follows: Target September 30, 2006 Allocation 2007 ------------------ --------------- Equity securities 55% 40-60% Fixed income 42 20-40 Cash 3 0-20 Real Estate 0 0 89 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The expected long-term rate of return assumption as of each measurement date was determined by taking into consideration asset allocations as of each such date, historical returns on the types of assets held, and current economic factors. The Company's investment policy for determining the asset allocation targets was developed based on the desire to maximize total return while placing a strong emphasis on preservation of capital. In general, it is hoped that, in the aggregate, changes in the fair value of plan assets will be less volatile than similar changes in appropriate market indices. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns. There were no pension plan assets consisting of Provident New York Bancorp equity securities (common stock) at September 30, 2006 and at September 30, 2005. The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. At this time, the Company cannot reasonably estimate the contributions it will make in 2007. The Company has also established a non-qualified Supplemental Executive Retirement Plan to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan, due to amounts limited by the Internal Revenue Code of 1986, as amended ("IRS Code"). The periodic pension expense for the supplemental plan amounted to $181,172, and $113 for the years ended September 30, 2006, 2005 and 2004, respectively. The actuarial present value of the projected benefit obligation was $1,376 and $1,373 at September 30, 2006 and 2005, respectively, and the vested benefit obligation was $1,376 and $1,338 for the same periods, respectively, all of which is unfunded. (b) Other Postretirement Benefits Plan The Company's postretirement health care plan, which is unfunded, provides optional medical, dental and life insurance benefits to retirees. In accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," the cost of postretirement benefits is accrued over the years in which employees provide services to the date of their full eligibility for such benefits. As permitted by SFAS No. 106, the Company has elected to amortize the transition obligation for accumulated benefits as an expense over a 20-year period. 90 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Data relating to the postretirement benefit plan follows: September 30, ------------------ 2006 2005 ------- ------- Change in accumulated postretirement benefit obligation: Beginning of year $ 1,363 $ 377 Service cost 26 74 Interest cost 60 116 Actuarial (gain) (378) (1,263) Plan participants' contributions 27 -- Business combinations -- 2,158 Amendments 38 Benefits paid (73) (99) ------- ------- End of year 1,063 1,363 ------- ------- Changes in fair value of plan assets: Beginning of year -- -- Employer contributions 47 99 Plan participants' contributions 27 -- Benefits paid (74) (99) ------- ------- End of year -- -- ------- ------- Funded status 1,063 1,330 Unrecognized net actuarial gain (1,491) (1,296) Unrecognized service cost 39 11 Unrecognized transition obligation 91 101 ------- ------- Accrued benefit obligation $ 2,424 $ 2,514 ======= ======= The components of the net postretirement benefit expense were as follows: For years ended September 30, 2006 2005 2004 ------- ------- ------- Service cost $ 26 $ 74 $ 8 Interest cost $ 60 $ 116 $ 23 Amortization of transition obligation $ 10 $ 10 $ 10 Amortization of prior service cost $ 10 $ 5 $ 5 Amortization of actuarial gain $ (143) $ (48) $ (3) ------- ------- ------- Total $ (37) $ 157 $ 43 ======= ======= ======= Estimated Future Benefit Payments The following benefit payments are expected to be paid in future years: 2006 $ 67 2007 64 2008 67 2009 70 2010 72 2011-2015 459 91 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Assumptions used for plan 2006 2005 --------------------------------------------------- ---- ---- Medical trend rate next year 4.50% 4.50% Ultimate trend rate 4.50% 4.50% Discount rate 6.00% 6.00% Discount rate used to value periodic cost 5.75% 6.00% There is no impact of a 1% increase or decrease in health care trend rate due to the Company's cap on cost. (c) Employee Savings Plan The Company also sponsors a defined contribution plan established under Section 401(k) of the Internal Revenue Code. Eligible employees may elect to contribute up to 50% of their compensation to the plan. The Company currently makes matching contributions equal to 50% of a participant's contributions up to a maximum matching contribution of 3% of eligible compensation. Voluntary and matching contributions are invested, in accordance with the participant's direction, in one or a number of investment options. Savings plan expense was $458, $493, and $294 for the years ended September 30, 2006, 2005 and 2004, respectively. Effective after September 30, 2006 the Bank amended the plan to include a profit sharing component expected to be an additional 3% of eligible compensation, in addition to the matching contributions. (d) Employee Stock Ownership Plan In connection with the Reorganization and Offering in 1999, Provident Federal established an ESOP for eligible employees who meet certain age and service requirements. The ESOP borrowed $3,760 from Provident Federal and used the funds to purchase 1,370,112 shares of common stock in the open market subsequent to the Offering. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan which will effectively mature December 31, 2007 and bears interest at the prime rate. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan. In connection with the Second-Step Stock Conversion and Offering in January 2004, the Company established an additional ESOP loan for eligible employees. The ESOP borrowed $9,987 from Provident New York Bancorp and used the funds to purchase 998,650 shares of common stock in the offering. The term of the second ESOP loan is twenty years. ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years. Any forfeited shares are allocated to other participants in the same proportion as contributions. ESOP expense was $2,595, $1,993, and $1,896 for the years ended September 30, 2006, 2005 and 2004, respectively. Through September 30, 2006 and 2005, a cumulative total of 1,332,958 shares and 1,120,336 shares, respectively, have been allocated to participants or committed to be released for allocation, respectively. The cost of ESOP shares that have not yet been allocated to participants or 92 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) committed to be released for allocation is deducted from stockholders' equity (1,035,810 shares with a cost of $9,099 and a fair value of approximately $14,170 at September 30, 2006 and 1,248,427 shares with a cost of $10,045 and a fair value of approximately $14,569 at September 30, 2005, respectively). The Company's ESOP is funded by two loans, in which 186,943 shares are released each year. The first loan, initiated in connection with the first public offering, will be paid off in December 2007 and is expected to result in the release of 137,011 shares annually. The second loan, initiated in connection with the second step public offering, matures in December 2023 and is expected to result in the release of 49,932 shares annually. For the year ended September 30, 2006, the ESOP expense for the shares released under the first and second loans totaled $1.7 million and $0.9 million, respectively. Therefore, the Company expects a substantial decrease in ESOP expense once the first ESOP loan is paid off, and the related shares are fully released, in December 2007. A supplemental savings plan has also been established for certain senior officers to compensate executives for benefits provided under the Bank's tax qualified plans (employees savings plan and ESOP) that are limited by the IRS Code. Expense recognized for this plan was $270, $157, and $198 for the years ended September 30, 2006, 2005 and 2004, respectively. Amounts accrued and recorded in other liabilities at September 30, 2006 and 2005 were $2.2 million and $2.1 million respectively. (e) Recognition and Retention Plan In February 2000, the Company's stockholders approved the Provident Bank 2000 Recognition and Retention Plan (the RRP). The principal purpose of the RRP is to provide executive officers and directors a proprietary interest in the Company in a manner designed to encourage their continued performance and service. A total of 856,320 shares were awarded under the RRP in February 2000, and the grant-date fair value of these shares of $2,995 was charged to stockholders' equity. The awards vest at a rate of 20% on each of five annual vesting dates, the first of which was September 30, 2000. In 2003, 27,413 shares were forfeited and returned to the plan as available for future grant. In January 2005, the Company's stockholders approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the terms of which the Company is authorized to issue up to 798,920 shares of common stock as restricted stock awards. On March 10, 2005 a total of 762,400 shares were awarded under the RRP, and the grant-date fair value $12.84 per share of the shares of $(9,789) was charged to stockholders' equity. The awards vested 10% on September 30, 2005. The remainder will vest 20% on each of four annual vesting dates beginning on September 30, 2006 and 10% on March 10, 2010. Employees who retire under circumstances in accordance with the terms of the Plan may be entitled to accelerate the vesting of individual awards. Such acceleration would require a charge to earnings for the award shares that would then vest. As of September 30, 2006 400,860 shares were potentially subject to accelerated vesting. The Company granted an additional 24,000 shares in 2006 at an average grant date fair value of $12.98, vesting 20% each year. Under the restricted stock plan, 74,357 shares of authorized but un-issued shares were reserved for issuance as of September 30, 2006. The Company also can fund the restricted stock plan with treasury stock. The fair market value of the shares awarded under the restricted stock plan is being 93 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) amortized to expense on a straight-line basis over the five year vesting period of the underlying shares. Compensation expense related to the restricted stock plan was $2.2 million, $1.0 million and $0.5 million for the year ended September 30, 2006, 2005 and 2004, respectively. The remaining unearned compensation cost is $6.5 million as of September 30, 2006. On grant date, shares awarded under the restricted stock plan were transferred from treasury stock at cost with the difference between the fair market value on the grant and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. Upon adoption of SFAS No.123R the balance of unearned compensation as of October 1, 2006 was transferred to additional paid-in capital. The fair value of the shares awarded, measured as of the grant date continues to be recognized and amortized on a straight-line basis to compensation expense over the vesting period of the awards. A summary of restricted stock award activity under the plan for the years ended September 30, 2006, 2005 and 2004 is presented below:

Weighted Average Number Grant-Date of Shares Fair Value ------------ ------------ Nonvested shares at October 1, 2003 35,548 $ 15.51 Additional shares from 4.43 stock split January 2004 122,007 3.50 Granted -- -- Vested (157,555) 3.50 Forfeited -- -- ------------ ------------ Nonvested shares at September 30, 2004 -- -- Granted 762,400 12.84 Vested (76,240) 12.84 Forfeited -- -- ------------ ------------ Nonvested shares at September 30, 2005 686,160 $ 12.84 Granted 24,000 12.98 Vested (169,980) 12.84 Forfeited (34,700) 12.84 ------------ ------------ Nonvested shares at September 30, 2006 505,480 $ 12.85 ============ ============

The total value of restricted stock vested for fiscal year ended September 30, 2006, 2005 and 2004 was $2.2 million, $1.0 million and $0.5 million, respectively. 94 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (f) Stock Option Plan The Company's stockholders approved the Provident Bank 2000 Stock Option Plan (the Stock Option Plan) in February 2000. A total of 1,712,640 shares of authorized but unissued common stock was reserved for issuance under the Stock Option Plan, although the Company may also fund option exercises using treasury shares. The Company's stockholders also approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan. In February 2005 under terms of the plan, a total of 1,997,300 shares of authorized but un-issued common stock was reserved for issuance under the Stock Option Plan. In March, 2005, 1,718,300 options were granted. Under both plans, options have a ten-year term and may be either non-qualified stock options or incentive stock options. Reload options may be granted under the terms of the 2000 Stock Option Plan and provide for the automatic grant of a new option at the then-current market price in exchange for each previously owned share tendered by an employee in a stock-for-stock exercise. The 2004 Plan options do not contain reload options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date. Employees who retire under circumstance, in accordance with the terms of the Plan, may be entitled to accelerate the vesting of individual awards. As of September 30, 2006 383,824 shares were potentially subject to accelerated vesting. The following is a summary of activity in the Stock Option Plan: Weighted Shares subject average to option exercise price ------------ ------------ Outstanding at October 1, 2003 1,213,504 $ 3.92 Granted 191,418 11.77 Exercised (82,059) 3.70 Forfeited -- -- ------------ ------------ Outstanding at September 30, 2004 1,322,863 5.05 ------------ ------------ Granted 1,741,341 12.84 Exercised (96,521) 4.13 Forfeited (45,377) 12.24 ------------ ------------ Outstanding at September 30, 2005 2,922,306 9.61 ------------ ------------ Granted 178,629 12.06 Exercised (181,457) 4.67 Forfeited (239,515) 12.73 ------------ ------------ Outstanding at September 30, 2006 2,679,963 $ 9.86 ============ ============ At September 30, 2006 and 2005, respectively, there were 411,358 and 312,843 shares available for future grant. The aggregate intrinsic value of options outstanding as of September 30, 2006 was $10.2 million. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading date of the year ended September 30, 2006 and the exercise price, multiplied by the number of in the money options). 95 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) A summary of stock options at September 30, 2006 follows:

Outstanding Exercisable --------------------------------------------- --------------------------------------------- Weighted-Average Weighted-Average ----------------------------- ----------------------------- Number of Exercise Life Number of Exercise Life Stock Options Price (in Years) Stock Options Price (in Years) ------------- ------------- ------------- ------------- ------------- ------------- Range of Exercise Price $3.50 to $5.59 804,019 $ 3.65 3.4 804,019 $ 3.65 3.4 $6.09 to $11.85 248,806 10.29 7.3 173,806 9.74 7.1 $12.42 to $13.40 1,627,128 12.87 8.6 616,258 12.84 8.5 ------------- ------------- ------------- ------------- ------------- ------------- 2,679,963 $ 9.86 6.9 1,594,083 $ 7.86 5.8 ============= =============

The aggregate intrinsic value of options currently exercisable as of September 30, 2006 was $9.3 million. The Company used an option pricing model to estimate the grant date present value of stock options granted. The weighted-average estimated value per option granted was $4.08 in 2006, $3.07 in 2005 and $2.71 in 2004. The values were calculated using the following weighted-average assumptions: an option term of 10 years (representing the estimated period between grant date and exercise date based on historical data); a risk-free interest rate of 4.9% in 2006, 5.0% in 2005 and 2.7% in 2004 (representing the yield on a U.S. Treasury security with a remaining term equal to the expected option term); expected volatility of 25% in 2006, 19% in 2005 and 20% in 2004 and estimated dividend yields of 1.6% in 2006, 1.4% in 2005 and 1.4% in 2004 (representing the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date). (13) Comprehensive Income Comprehensive income represents the sum of net income and items of other comprehensive income or loss that are reported directly in stockholders' equity, such as the change during the period in the after-tax net unrealized gain or loss on securities available for sale. The Company has reported its comprehensive income in the consolidated statements of changes in stockholders' equity. 96 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The components of other comprehensive income (loss) are summarized as follows:

Year ended September 30, ----------------------------- 2006 2005 2004 ------- ------- ------- Net unrealized holding gain (loss) rising during the year on securities available for sale, net of related income taxes of $466, $5,185 and $1,463, respectively $ 652 $(7,777) $(2,195) Reclassification adjustment for net realized gains included in net income, net of related income taxes of $0 , $148 and $982 , respectively -- (221) (1,473) ------- ------- ------- 652 (7,998) (3,668) Minimum liability on retirement plans, net of related income taxes of $75, $48 and $76 113 (72) (111) ------- ------- ------- $ 765 $(8,070) $(3,779) ======= ======= =======

The Company's accumulated other comprehensive loss included in stockholders' equity at September 30, 2006 and 2005 consists of the after-tax net unrealized loss of $7,532 and $8,184 respectively and minimum liability for retirement plans of $70 and $183 at September 30, 2006, and 2005, respectively. 97 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (14) Earnings Per Common Share The following is a summary of the calculation of earnings per share (EPS): Years ended September 30, ------------------------------------ 2006 2005 2004 ---------- ---------- ---------- Net income $ 20,195 $ 21,242 $ 11,017 ========== ========== ========== Weighted average common shares outstanding for computation of basic EPS(1) (2) 40,953 43,033 36,809 Common-equivalent shares due to the dilutive effect of stock options and RRP awards(2) (3) 489 670 635 ---------- ---------- ---------- Weighted average common shares for computation of diluted EPS 41,442 43,703 37,444 ========== ========== ========== Earnings per common share:(2) Basic $ 0.49 $ 0.49 $ 0.30 ========== ========== ========== Diluted 0.49 0.49 0.29 ========== ========== ========= (1) Includes all shares issued to the Mutual Holding Company (2004, up until January 14, 2004), but excludes unallocated ESOP shares. (2) Prior period share information has been adjusted to reflect the 4.4323-to-one exchange ratio in connection with the Company's second-step conversion in January 2004. (3) Represents incremental shares computed using the treasury stock method. As of September 30, 2006 and 2005 there were 1,657,080 and 966,325 stock options, respectively, that were considered anti-dilutive for these periods. (15) Stockholders' Equity (a) Regulatory Capital Requirements OTS regulations require banks to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%. Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution's financial statements. 98 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The regulations establish a framework for the classification of banks into five categories: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 (core) capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based, in part, on specific quantitative measures of assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. These capital requirements apply only to the Bank, and do not consider additional capital retained by Provident New York Bancorp. Management believes that, as of September 30, 2006 and 2005 the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. The following is a summary of the Bank's actual regulatory capital amounts and ratios at September 30, 2006 and 2005, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution. PMB is also subject to certain regulatory capital requirements, which it satisfied as of September 30, 2006 and 2005.

OTS requirements -------------------------------------------------- Minimum capital Classification as well Bank actual adequacy capitalized ----------------------- ----------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ---------- ---------- ---------- ---------- ---------- September 30, 2006: Tangible capital $ 208,820 7.8% $ 40,080 1.5% $ -- -- Tier 1 (core) capital 208,820 7.8 106,879 4.0 133,599 5.0% Risk-based capital: Tier 1 208,820 11.6 -- 107,947 6.0 Total 229,193 12.7 143,929 8.0 179,912 10.0 ========== ========== ========== September 30, 2005: Tangible capital $ 198,828 8.2% $ 36,389 1.5% $ -- -- Tier 1 (core) capital 198,828 8.2 97,038 4.0 121,298 5.0% Risk-based capital: Tier 1 198,828 11.7 -- -- 102,223 6.0 Total 220,122 12.9 136,298 8.0 170,373 10.0 ========== ========== ==========

Tangible and Tier 1 capital amounts represent the stockholder's equity of the Bank, less intangible assets and after-tax net unrealized gains (losses) on securities available for sale and any other disallowed assets, such as deferred income taxes. Total capital represents Tier 1 capital plus the allowance for loan losses up to a maximum amount equal to 1.25% of risk-weighted assets. 99 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The following is a reconciliation of the Bank's total stockholder's equity under accounting principles generally accepted in the United States of America ("GAAP") and its regulatory capital:

September 30, ---------------------- 2006 2005 --------- --------- Total GAAP stockholder's equity (Provident Bank) $ 373,530 $ 367,230 Goodwill and certain intangible assets (167,035) (169,704) Other disallowed assets (deferred income taxes) (5,207) (6,882) Unrealized losses on securities available for sale included in other comprehensive losses 7,532 8,184 --------- --------- Tangible, tier 1 core and Tier 1 risk-based capital 208,820 198,828 Allowance for loan losses 20,373 21,294 --------- --------- Total risk-based capital $ 229,193 $ 220,122 ========= =========

(b) Dividend Payments Under OTS regulations, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to the sum of net income for the current year and net income retained for the two preceding years. Dividend payments in excess of this amount require OTS approval. After September 30, 2006 the amount that can be paid to Provident New York Bancorp by Provident Bank is $22,939 plus net income in fiscal 2007 for Provident Bank. The Bank paid $20 million dividends to Provident New York Bancorp during the year ended September 30, 2006 ($0 during the year ended September 30, 2005 and $15 million during the year ended September 30, 2004). Unlike the Bank, Provident New York Bancorp is not subject to OTS regulatory limitations on the payment of dividends to its stockholders. (c) Stock Repurchase Programs The Company announced its second stock repurchase program in the second quarter of 2005, which authorized the repurchase up to of 2,200,000 shares, of which 177,129 shares remain to be repurchased. The total number of shares repurchased under repurchase programs during the fiscal year ended September 30, 2006, was 1,161,894 at a total cost of $13.3 million. In February 2006, the Company announced its third stock repurchase program, authorizing the purchase of 2,100,000 shares. As of September 30, 2006 the Company had authorization to repurchase 2.3 million shares of common stock. 100 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (d) Liquidation Rights Upon completion of the second-step conversion in January 2004, the Bank established a special "liquidation account" in accordance with OTS regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company's ownership interest in the retained earnings of Provident Federal as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The liquidation account is reduced annually on December 31 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases in deposits do not restore such account holder's interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder's equity below the amount of the liquidation account. (16) Off-Balance-Sheet Financial Instruments In the normal course of business, the Company is a party to off-balance-sheet financial instruments that involve, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated financial statements. The contractual or notional amounts of these instruments, which reflect the extent of the Company's involvement in particular classes of off-balance-sheet financial instruments, are summarized as follows: September 30, ----------------- 2006 2005 ------- ------- Lending-related instruments: Loan origination commitments 62,147 26,150 Unused lines of credit 362,584 229,957 Letters of credit 20,884 17,141 The contractual amounts of loan origination commitments, unused lines of credit and standby letters of credit represent the Company's maximum potential exposure to credit loss, assuming (i) the instruments are fully funded at a later date, (ii) the borrowers do not meet the contractual payment obligations, and (iii) any collateral or other security proves to be worthless. The contractual amounts of these instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. Substantially all of these lending-related instruments have been entered into with customers located in the Company's primary market area described in Note 6 ("Loans".) 101 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Loan origination commitments are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments have fixed expiration dates (generally ranging up to 60 days) or other termination clauses, and may require payment of a fee by the customer. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral, if any, obtained by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral varies but may include mortgages on residential and commercial real estate, deposit accounts with the Company, and other property. The Company's loan origination commitments at September 30, 2006 provide for interest rates ranging principally from 5.63% to 9.00%. Unused lines of credit are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses. The amount of collateral obtained, if deemed necessary by the Company, is based on management's credit evaluation of the borrower. Standby letters of credit are commitments issued by the Company on behalf of its customer in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary's compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor's completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of September 30, 2006, the Company had $20,884 in outstanding letters of credit, of which $8,221 were secured by cash collateral. (17) Commitments and Contingencies Certain premises and equipment are leased under operating leases with terms expiring through 2025. The Company has the option to renew certain of these leases for terms of up to five years. Future minimum rental payments due under non-cancelable operating leases with initial or remaining terms of more than one year at September 30, 2006 are $1,954 for fiscal 2007, $1,986 for fiscal 2008, $1,915 for fiscal 2009, $1,632 for fiscal 2010, $1,578 for fiscal 2011 and a total of $13,438 for later years. Occupancy and office operations expense includes net rent expense of $1,892, $1,666, and $1,435, for the years ended September 30, 2006, 2005 and 2004, respectively. The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management, after consultation with legal counsel, does not anticipate losses on any of these claims or actions that would have a material adverse effect on the consolidated financial statements. (18) Fair Values of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information for those financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized in the consolidated statements of financial condition. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. 102 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Quoted market prices are used to estimate fair values when those prices are available, although active markets do not exist for many types of financial instruments. Fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs. The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes):

September 30, -------------------------------------------------------- 2006 2005 -------------------------- --------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------ ------------ ------------ ------------ Financial assets: Cash and due from banks $ 57,293 $ 57,293 $ 64,117 $ 64,117 Securities available for sale 951,729 951,729 822,952 822,952 Securities held to maturity 60,987 60,876 70,949 71,151 Loans 1,460,658 1,462,463 1,340,065 1,333,200 Accrued interest receivable 13,228 13,183 10,954 10,954 FHLB stock 33,518 33,518 21,333 21,333 Financial liabilities: Deposits 1,729,659 1,727,403 1,726,401 1,722,712 FHLB borrowings 682,739 681,972 442,203 441,750 Mortgage escrow funds 4,612 4,603 4,122 4,115

The following paragraphs summarize the principal methods and assumptions used by management to estimate the fair value of the Company's financial instruments. (a) Securities The estimated fair values of securities were based on quoted market prices. (b) Loans Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into adjustable-rate and fixed-rate categories. Fixed-rate loans were further segmented by type, such as residential mortgage, commercial mortgage, commercial business and consumer loans. Loans were also segmented by maturity dates. 103 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Fair values were estimated by discounting scheduled future cash flows through estimated maturity using a discount rate equivalent to the current market rate on loans that are similar with regard to collateral, maturity and the type of borrower. The discounted value of the cash flows was reduced by a credit risk adjustment based on loan categories. Based on the current composition of the Company' s loan portfolio, as well as past experience and current economic conditions and trends, the future cash flows were adjusted by prepayment assumptions that shortened the estimated remaining time to maturity and therefore affected the fair value estimates. (c) Deposits In accordance with SFAS No. 107, deposits with no stated maturity (such as savings, demand and money market deposits) were assigned fair values equal to the carrying amounts payable on demand. Certificates of deposit were segregated by account type and original term, and fair values were estimated by discounting the contractual cash flows. The discount rate for each account grouping was equivalent to the current market rates for deposits of similar type and maturity. These fair values do not include the value of core deposit relationships that comprise a significant portion of the Company's deposit base. Management believes that the Company's core deposit relationships provide a relatively stable, low-cost funding source that has a substantial value separate from the deposit balances. (d) FHLB Borrowings Fair values of FHLB borrowings were estimated by discounting the contractual cash flows. A discount rate was utilized for each outstanding borrowing equivalent to the then-current rate offered by the FHLB on borrowings of similar type and maturity. (e) Other Financial Instruments The other financial assets and liabilities listed in the preceding table have estimated fair values that approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk. The fair values of the Company's off-balance-sheet financial instruments described in Note 16 ("Off Balance Sheet Financial Instruments") were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At September 30, 2006 and 2005, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant. (19) Recent Accounting Standards and Interpretations In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 158, Employers' Accounting for Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158"). For defined benefit post-retirement plans, SFAS 158 requires that the funded status be recognized in the statement of financial position, that assets and obligations that determine funded status be measured as of the end of the employer's fiscal year, and that changes in funded status be recognized in comprehensive income in the year the changes 104 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) occur. SFAS 158 does not change the amount of net periodic benefit cost included in net income or address measurement issues related to defined benefit post-retirement plans. The requirement to recognize funded status is effective for fiscal years ending after December 15, 2006. The requirement to measure assets and obligations as of the end of the employer's fiscal year is effective for fiscal years ending after December 15, 2008. The unrecognized components of defined benefit pension plans and retiree medical plans will be recorded on the balance sheet at September 30, 2007. If such amounts were recorded as of September 30, 2006, accumulated other comprehensive loss would be increased by $605. The adoption of SFAS 158 is not expected to have a material impact on the consolidated earnings or financial position of the Company. In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements ("SFAS 157"). This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2006. The adoption of SFAS 157 is not expected to have a material impact on the consolidated earnings or financial position of the Company. In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108 to require quantification of financial statement misstatements under both the "rollover approach" and the "iron curtain approach". The "rollover approach" quantifies a misstatement based on the amount of the error originating in the current year income statement, but ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The "iron curtain approach" quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement's year(s) of origination. The provisions of SAB No. 108 must be applied to financial statements for fiscal years ending after November 15, 2006. The Company does not anticipate that the quantification of financial statement misstatements pursuant to the provisions of SAB No. 108 will result in any material impact to the Company's financial statements at December 31, 2006. At its September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue 06-04, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or Accounting Principles Board Opinion ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The provisions of Issue 06-04 should be applied through either a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption or retrospective application. The Company has endorsement split-dollar life insurance policies that it inherited through certain acquisitions that are associated with employees who are no longer active, which it is currently in the process of evaluating to determine the impact of adoption of Issue 06-04. The Company is currently assessing the financial statement impact of implementing EITF 06-04. In July 2006, the FASB issued FIN 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") which attempts to set out a consistent framework for preparers to use to determine the appropriate level of tax 105 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) reserves to maintain for "uncertain tax positions." This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit which is greater than fifty percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of a Company's tax reserves. FIN 48 is effective January 1, 2007. We are currently assessing the financial statement impact of implementing FIN 48. In July 2006, the FASB adopted FASB Staff Position No. 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction" ("FSP 13-2"). FSP 13-2 requires that a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease shall be accounted for in accordance with the guidance in paragraph 46 of SFAS No. 13, "Accounting for Leases." That is, the projected timing of income tax cash flows generated by a leveraged lease transaction shall be reviewed annually or more frequently if events or changes in circumstances indicate that a change in timing has occurred or is projected to occur. If, during the lease term, the projected timing of income tax cash flows generated by a leveraged lease is revised, the rate of return and the allocation of income to positive investment years shall be recalculated from inception of the lease following the method described in paragraph 44 of SFAS No. 13. The guidance in FSP 13-2 shall be applied to fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions of FSP 13-2 shall be reported as an adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. The Company does not expect that the adoption of FSP 13-2 will have a material effect on its financial position or results of operations. In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 ("SFAS 156"), "Accounting for Servicing of Financial Assets," an amendment of FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 156 requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS 156 is effective for the fiscal year beginning after September 15, 2006. We are currently assessing the financial statement impact of implementing SFAS156. In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140, ("SFAS 155"). SFAS 155 amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and SFAS 140. SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives, or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140") to eliminate the prohibition securities available for sale with unrealized losses securities available for sale with unrealized losses qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial 106 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected to have a material impact on the consolidated earnings or financial position of the Company. In May 2005, the FASB Issued Statement of Financial Accounting Standards No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections," replacing APB Opinion No. 20 and FASB Statement No.3, which changes the treatment and reporting requirements for both accounting errors and changes of accounting principles, and provides guidance on determining the treatment of the retrospective application of a change. This Statement applies to all voluntary changes in accounting principles. At this time management believes this statement will have no impact on the reporting of our operations or financial condition. In December 2004, the FASB Issued Statement of Financial Accounting Standards No. 123R (Statement 123R), "Share-Based Payments," the provisions of which become effective for the corporation in fiscal 2006. This Statement eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. Statement 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. While the fair-value-based method prescribed by Statement 123R is similar to the fair-value-based method disclosed under the provisions of Statement 123 in most respects, there some differences. The Company began using the Black-Scholes method beginning in fiscal 2006 and recorded an expense of $1.1 million or $0.7 million after tax and the diluted earnings per share impact was $0.02. This impact includes the effect of reload options or forfeitures or options accelerations due to termination or retirement of personnel, the effect of which could not be previously estimated with any degree of certainty. Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1") was issued. EITF 03-1 provides guidance for determining the meaning of "other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates ("other than temporary impairment") must be recorded for as are loans under the AICPA's Statement of Position 03-3 ("SOP 03-3") on purchased loans, which provides guidance on the treatment of potential credit losses (unrecoverable principle) and decreased, or lower then expected yields. On March 9, 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to Loan Commitments." SAB No. 105 requires that when a company is recognizing and valuing a loan commitment at fair value, only differences between the guaranteed interest rate in the loan commitment and a market interest rate should be included. Any expected future cash flows related to the customer relationships or loan servicing should be excluded from the fair value measurement. The expected future cash flows that are excluded from the fair-value determination include anticipated fees for servicing the funded loan, late-payment charges, other ancillary fees, or other cash flows from servicing rights. The guidance in SAB No. 105 is effective for mortgage-loan commitments that are accounted for as derivatives and are entered into after March 31, 2004. The adoption of the provisions of this standard did not have a material impact on the results of operations. In December 2003, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer. " The SOP is 107 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) effective for loans acquired in fiscal years beginning after December 15, 2004. The SOP addresses accountingfor differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. The SOP applies to loans acquired in business combinations but does not apply to loans originated by the Company. Management does not believe the provision of this standard will have a material impact on the results of future operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effects of the method used on reported results. The provisions of this statement did not have a material impact on the consolidated financial statements. (20) Condensed Parent Company Financial Statements Set forth below are the condensed statements of financial condition of Provident New York Bancorp and the related condensed statements of income and cash flows: ------------------- 2006 2005 -------- -------- Assets: Cash $ 13,077 $ 10,544 Loan receivable from ESOP 10,054 10,779 Investment in Provident Bank 373,734 366,836 Non-bank subsidiaries 6,747 1,408 Other assets 2,932 6,473 -------- -------- Total assets $406,544 $396,040 ======== ======== Liabilities $ 1,258 $ 883 Stockholders' equity 405,286 395,157 -------- -------- Total liabilities and stockholders' equity $406,544 $396,040 ======== ======== 108 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data)

Year ended September 30, -------------------------------- 2006 2005 2004 -------- -------- -------- Condensed statements of income Interest income 847 $ 777 $ 919 Dividends from Provident Bank 20,000 -- 15,000 Dividends from non-bank subsidiaries 600 -- -- Gain on sale of securities available for sale -- -- 471 Non-interest expense (3,724) (1,485) (5,207) Income tax expense 924 232 1,311 -------- -------- -------- Income before equity in undistributed earnings of subsidiaries 18,647 (476) 12,494 Equity in undistributed earnings of: Provident Bank 1,598 21,341 (1,477) Non-bank subsidiaries (50) 377 -- -------- -------- -------- Net income $ 20,195 $ 21,242 $ 11,017 ======== ======== ========

109 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data)

Year ended September 30, ----------------------------------- 2006 2005 2004 --------- --------- --------- Condensed statements of cash flows Cash flows from operating activities: Net income $ 20,195 $ 21,242 $ 11,017 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of Provident Bank (1,598) (21,341) 1,477 Non-bank subsidiaries 50 (377) -- Net gain on sales of securities -- -- 471 Other adjustments, net 5,324 (1,377) 4,295 --------- --------- --------- Net cash provided by (used in) operating activities 23,971 (1,853) 17,260 --------- --------- --------- Cash flows from investing activities: Acquisitions 2,740 74,593 39,697 Purchases of securities available for sale -- -- (41,021) Proceeds from sales of securities available for sale -- -- 42,847 Origination of ESOP loan -- -- (9,987) ESOP loan principal repayments 725 711 376 --------- --------- --------- Net cash provided by investing activities 3,465 75,304 31,912 --------- --------- --------- Cash flows from financing activities: Common stock offering proceeds net -- -- 192,363 Capital contribution to subsidiaries (5,390) (92,549) (160,404) Treasury shares purchased (13,336) (38,261) (432) Cash dividends paid (8,363) (7,467) (5,008) Stock option transactions including RRP 2,247 103 125 Shares purchased for ESOP plan -- -- (9,987) Formation of Charitable Foundation -- -- 4,000 Other equity transactions (61) 541 1,257 --------- --------- --------- Net cash (used in) provided by financing activities (24,903) (137,633) 21,914 --------- --------- --------- Net increase (decrease) in cash 2,533 (64,182) 71,086 Cash at beginning of year 10,544 74,726 3,640 --------- --------- --------- Cash at end of year $ 13,077 $ 10,544 $ 74,726 ========= ========= =========

110 PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (21) Quarterly Results of Operations (Unaudited) The following is a condensed summary of quarterly results of operations for the years ended September 30, 2006 and 2005:

First Second Third Fourth quarter quarter quarter quarter ---------- ---------- ---------- ---------- Year ended September 30, 2006 Interest and dividend income $ 31,404 32,742 $ 34,946 $ 36,524 Interest expense 10,054 11,739 13,262 15,804 ---------- ---------- ---------- ---------- Net interest income 21,350 21,003 21,684 20,720 Provision for loan losses 300 300 300 300 Non-interest income 4,071 3,964 4,361 4,756 Non-interest expense 17,417 18,144 18,041 17,654 ---------- ---------- ---------- ---------- Income before income tax expense 7,704 6,523 7,704 7,522 Income tax expense 2,545 2,118 2,143 2,452 ---------- ---------- ---------- ---------- Net income $ 5,159 $ 4,405 $ 5,561 $ 5,070 ========== ========== ========== ========== Earnings per common share: Basic $ 0.13 $ 0.11 $ 0.14 $ 0.12 Diluted 0.12 0.11 0.13 0.12 ========== ========== ========== ========== Year ended September 30, 2005 Interest and dividend income $ 28,214 28,420 $ 29,166 $ 30,369 Interest expense 6,310 6,863 7,643 8,584 ---------- ---------- ---------- ---------- Net interest income 21,904 21,557 21,523 21,785 Provision for loan losses 150 150 225 225 Non-interest income 3,823 3,705 5,178 4,303 Non-interest expense 17,709 17,068 18,141 17,665 ---------- ---------- ---------- ---------- Income before income tax expense 7,868 8,044 8,335 8,198 Income tax expense 2,853 2,864 2,676 2,810 ---------- ---------- ---------- ---------- Net income $ 5,015 $ 5,180 $ 5,659 $ 5,388 ========== ========== ========== ========== Earnings per common share: Basic $ 0.11 $ 0.12 $ 0.13 $ 0.13 Diluted 0.11 0.12 0.13 0.13 ========== ========== ========== ==========

111 ITEM 9. Changes in and Disagreements with Accountants on Accounting and -------------------------------------------------------------------------------- Financial Disclosure -------------------- None ITEM 9A. Controls and Procedures. --------------------------------- Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule l3a-15(e) and l5d-l5(e) under the Exchange Act) as of the end of the period covered by this annual report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in our internal control over financial reporting during fourth fiscal quarter or, to our knowledge, in other factors, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. ITEM 9B. Other Information --------------------------- Not applicable. PART III ITEM 10. Directors and Executive Officers of the Registrant ------------------------------------------------------------ The "Proposal I -- Election of Directors" section of Provident Bancorp's Proxy Statement for the Annual Meeting of Stockholders to be held in February 2007 (the "Proxy Statement") is incorporated herein by reference. ITEM 11. Executive Compensation -------------------------------- The "Proposal I -- Election of Directors" section of the Proxy Statement is incorporated herein by reference. 112 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and -------------------------------------------------------------------------------- Related Stockholder Matters --------------------------- Provident Bancorp does not have any equity compensation programs that were not approved by stockholders, other than its employee stock ownership plan. Set forth below is certain information as of September 30, 2006, regarding equity compensation that has been approved by stockholders.

-------------------------------------------------------------------------------------------------------------------- Equity compensation plans Number of securities to be Number of securities remaining approved by issued upon exercise of Weighted average available for issuance stockholders outstanding options and rights Exercise price under plan -------------------------------------------------------------------------------------------------------------------- Stock Option Plans 2,679,963 $ 9.86 411,358 -------------------------------------------------------------------------------------------------------------------- Recognition and Retention Plan (1) 505,480 N/A 74,357 -------------------------------------------------------------------------------------------------------------------- Total (2) 3,177,043 $ 9.86 507,096 --------------------------------------------------------------------------------------------------------------------

(1) Represents shares that have been granted but have not yet vested. (2) Weighted average exercise price represents Stock Option Plan only, since RRP shares have no exercise price. The "Proposal I -- Election of Directors" section of the Proxy Statement is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions ------------------------------------------------------- The "Transactions with Certain Related Persons" section of the Proxy Statement is incorporated herein by reference. ITEM 14. Principal Accountant Fees and Services ----------------------------------------------- The "Independent Registered Public Accounting Firm" section of the proxy statement is incorporated herein by reference. 113 PART IV ITEM 15. Exhibits and Financial Statement Schedules --------------------------------------------------- (1) Financial Statements -------------------- The financial statements filed in Item 8 of this Form 10-K are as follows: (A) Report of Independent Registered Public Accounting Firm (B) Consolidated Statements of Financial Condition as of September 30, 2006 and 2005 (C) Consolidated Statements of Income for the years ended September 30, 2006, 2005 and 2004 (D) Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2006, 2005, and 2004 (E) Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005 and 2004 (F) Notes to Consolidated Financial Statements (2) Financial Statement Schedules ----------------------------- All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. 114 3) Exhibits -------- 3.1 Certificate of Incorporation of Provident New York Bancorp(1) 3.2 Bylaws of Provident New York Bancorp(1) 4 Form of Common Stock Certificate of Provident New York Bancorp(1) 10.1 Employee Stock Ownership Plan(2) 10.2 Employment Agreement with George Strayton 10.3 Employment Agreement with Daniel Rothstein 10.4 Deferred Compensation Agreement, as amended and restated(1) 10.5 Supplemental Executive Retirement Plan, as amended(2) 10.6 Management Incentive Program(2) 10.7 1996 Long-Term Incentive Plan for Officers and Directors, as amended(2) 10.8 Provident Bank 2000 Stock Option Plan(3) 10.9 Provident Bank 2000 Recognition and Retention Plan(3) 10.10 Employment Agreement with Paul A. Maisch 10.11 Provident Bancorp, Inc. 2004 Stock Incentive Plan(5) 10.12 Provident Bank Executive Officer Incentive Plan(6) 10.13 Employment Agreement with Stephen Dormer 10.14 Employment Agreement with Richard Jones 14 Code of Ethics(4) 21 Subsidiaries of Registrant 23 Consent of KPMG LLP 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. Section 1350, as amended by Section 906 of the Sarbanes-Oxley Act of 2002 (1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-108795), originally filed with the Commission on September 15, 2003 and amended on October 31, 2003 and November 10, 2003. (2) Incorporated by reference to the Registration Statement on Form S-1 of Provident Bancorp, Inc., a federal corporation (File No. 333-63593), originally filed with the Commission on September 17, 1998 and amended on November 6, 1998 and November 12, 1998. (3) Incorporated by reference from the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp, Inc., a federal corporation (File No. 0-25233), filed with the Commission on January 18, 2000. (4) The Code of Ethics is available on Provident bank's website at www.providentbanking.com ------------------------ (5) Incorporated by reference to Appendix A to the proxy statement for the Company's 2005 Annual Meeting of Stockholders (File No. 0-25233), filed with the Commission on January 19, 2005. (6) Incorporated by reference to Exhibit 10 to the Current Report on Form 8-K (Commission File No. 0- 25233), filed with the Commission on December 5, 2005. 115 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Provident New York Bancorp has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized. Provident New York Bancorp Date: December 11, 2006 By: /s/ George Strayton ------------------- George Strayton President, Chief Executive Officer and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By: /s/ George Strayton By: /s/ Paul A. Maisch ------------------- ------------------ George Strayton Paul A. Maisch President, Executive Vice President, Chief Executive Officer and Director Chief Financial Officer (Principal Executive Officer) Principal Accounting Officer Date: December 11, 2006 (and Principal Financial Officer) Date: December 11, 2006 By: /s/ William F. Helmer By: /s/ Dennis L. Coyle --------------------- ------------------- William F. Helmer Dennis L. Coyle Chairman of the Board Vice Chairman Date: December 11, 2006 Date: December 11, 2006

By: /s/ Judith Hershaft By: /s/ Thomas F. Jauntig, Jr. By: /s/ Thomas G. Kahn ------------------- -------------------------- ------------------ Judith Hershaft, Thomas F. Jauntig, Jr. Thomas G. Kahn, Director Director Director Date: December 11, 2006 Date: December 11, 2006 Date: December 11, 2006 By: /s/ R. Michael Kennedy By: /s/ Victoria Kossover By: /s/ Donald T. McNelis ---------------------- --------------------- --------------------- R. Michael Kennedy, Victoria Kossover, Donald T. McNelis, Director Director Director Date: December 11, 2006 Date: December 11, 2006 Date: December 11, 2006 By: /s/ Richard A. Nozell By: /s/ Carl Rosenstock By: /s/ William Sichol, Jr. --------------------- ------------------- ----------------------- Richard A. Nozell, Carl Rosenstock, William Sichol Jr., Director Director Director Date: December 11, 2006 Date: December 11, 2006 Date: December 11, 2006 By: /s/ Burt Steinberg ------------------ Burt Steinberg, Director Date: December 11, 2006

116