Form 10-Q

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10-Q 1 d336485d10q.htm FORM 10-Q Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35385

PROVIDENT NEW YORK BANCORP

(Exact Name of Registrant as Specified in its Charter)


Delaware		80-0091851
(State or Other Jurisdiction of		(IRS Employer ID No.)
Incorporation or Organization)

400 Rella Boulevard, Montebello, New York		10901
(Address of Principal Executive Office)		(Zip Code)

(845) 369-8040

(Registrant’s Telephone Number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Classes of Common Stock		Shares Outstanding as of May 1, 2012
$0.01 per share		37,899,007

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

QUARTERLY PERIOD ENDED MARCH 31, 2012


	PART I. FINANCIAL INFORMATION
Item 1. 1.	Financial Statements

	Consolidated Statements of Financial Condition (unaudited) at March 31, 2012 and September 30, 2011	3
	Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2012 and 2011	4
	Consolidated Statements of Income (unaudited) for the Six Months Ended March 31, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011	5
	Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended March 31, 2012 and 2011	5
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Six Months Ended March 31,	6
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended March 31, 2012 and 2011	7
	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52

Item 4.	Controls and Procedures	53

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	54
	Signatures	55

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(In thousands, except share data)


	March 31, 2012			September 30, 2011
ASSETS
Cash and due from banks	$	89,019		$	281,512
Securities (including $799,798 and $644,910 pledged as collateral for borrowings and deposits at March 31, 2012 and September 30, 2011 respectively)
Available for Sale		852,717			739,844
Held to maturity, at amortized cost (fair value of $176,869 and $111,272 at March 31, 2012 and September 30, 2011, respectively)		174,824			110,040

Total securities		1,027,541			849,884

Loans held for sale		1,736			4,176
Gross loans:		1,799,112			1,703,799
Allowance for loan losses		(27,787	)		(27,917	)

Total loans, net		1,771,325			1,675,882

Federal Home Loan Bank (“FHLB”) stock, at cost		17,129			17,584
Accrued interest receivable		9,975			9,904
Premises and equipment, net		39,162			40,886
Goodwill		160,861			160,861
Core deposit and other intangible assets		4,001			4,629
Bank owned life insurance		57,987			56,967
Forclosed properties		5,828			5,391
Other assets		26,307			29,726

Total assets	$	3,210,871		$	3,137,402

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	2,368,988		$	2,296,695
FHLB borrowings (including repurchase agreements of $206,982 and $211,694 at March 31, 2012 and September 30, 2011, respectively)		313,849			323,522
Borrowings senior unsecured note (FDIC insured)		—			51,499
Mortgage escrow funds		15,210			9,701
Other liabilities		73,125			24,851

Total liabilities		2,771,172			2,706,268

Commitments and contingent liabilities		—			—
STOCKHOLDERS’ EQUITY :
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)		—			—
Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 issued; 37,899,007 and 37,864,008 shares outstanding at March 31, 2012 and September 30, 2011, respectively)		459			459
Additional paid-in capital		357,406			357,063
Unallocated common stock held by employee stock ownership plan (“ESOP”)		(5,888	)		(6,138	)
Treasury stock, at cost (8,030,545 and 8,065,544 shares at March 31, 2012 and September 30, 2011, respectively)		(90,328	)		(90,585	)
Retained earnings		172,065			165,199
Accumulated other comprehensive income, net of taxes		5,985			5,136

Total stockholders’ equity		439,699			431,134

Total liabilities and stockholders’ equity	$	3,210,871		$	3,137,402

See accompanying notes to unaudited consolidated financial statements

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollars in thousands, except share data)


	For the Three Months Ended March 31,						For the Six Months Ended March 31,
	2012			2011			2012			2011
Interest and dividend income:
Loans	$	22,153		$	22,039		$	44,302		$	45,244
Taxable securities		4,415			3,531			8,405			7,061
Non-taxable securities		1,599			1,901			3,373			3,826
Other earning assets		244			332			499			732

Total interest and dividend income		28,411			27,803			56,579			56,863
Interest expense:
Deposits		1,217			1,585			2,530			3,227
Borrowings		3,289			3,707			6,906			7,941

Total interest expense		4,506			5,292			9,436			11,168

Net interest income		23,905			22,511			47,143			45,695
Provision for loan losses		2,850			2,100			4,800			4,200

Net interest income after provision for loan losses		21,055			20,411			42,343			41,495
Non-interest income:
Deposit fees and service charges		2,706			2,643			5,496			5,410
Net gain on sale of securities		2,899			748			4,888			4,950
Other than temporary impairment on securities		—			—			(38	)		—
Title insurance fees		265			274			525			637
Bank owned life insurance		502			553			1,020			1,047
Gain on sale of loans		450			310			890			852
Investment management fees		800			789			1,565			1,532
Fair value gain (loss) on interest rate cap		(40	)		(2	)		(43	)		232
Other		389			480			844			1,018

Total non-interest income		7,971			5,795			15,147			15,678
Non-interest expense:
Compensation and employee benefits		11,395			11,183			22,320			22,411
Retirement benefit settlement charge		—			278			—			278
Stock-based compensation plans		284			296			559			575
Merger related expense		299			—			546			—
Occupancy and office operations		3,409			3,757			7,110			7,392
Advertising and promotion		427			843			1,040			1,796
Professional fees		1,056			1,043			1,983			2,105
Data and check processing		710			691			1,382			1,333
Amortization of intangible assets		305			371			628			783
Foreclosed property expense		412			117			617			33
FDIC insurance and regulatory assessments		743			919			1,471			1,687
ATM/debit card expense		425			366			836			759
Other		1,825			1,927			3,519			3,908

Total non-interest expense		21,290			21,791			42,011			43,060
Income before income tax expense		7,736			4,415			15,479			14,113
Income tax expense		2,035			842			4,061			3,820

Net Income	$	5,701		$	3,573		$	11,418		$	10,293

Weighted average common shares:
Basic		37,280,651			37,496,395			37,266,480			37,524,627
Diluted		37,316,778			37,497,467			37,275,633			37,524,950
Per common share
Basic	$	0.15		$	0.10		$	0.31		$	0.27
Diluted	$	0.15		$	0.10		$	0.31		$	0.27

See accompanying notes to unaudited consolidated financial statements

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(In thousands, except share data)


	For the Three Months Ended March 31,						For the Six Months Ended March 31,
	2012			2011			2012			2011
Net Income:	$	5,701		$	3,573		$	11,418		$	10,293
Other comprehensive income (loss) :
Net unrealized holding gains ( losses) on securities available for sale net of related tax expense (benefit) of $(220), $158 and $2,090 , ($8,772)		(320	)		229			3,056			(12,828	)

Less:
Reclassification adjustment for net unrealized gains included in net income, net of related income tax expense of $1,177, $304 and $1,985, $2,010		1,722			444			2,903			2,940

Reclassification adjustment for other than temporary impaired losses included in net income, net of related income tax benefit of $15		—			—			(23	)		—

		(2,042	)		(215	)		176			(15,768	)

Change in funded status of defined benefit plans, net of related income tax expense of $231, $306 and $460, $380		335			449			673			556

Comprehensive income		(1,707	)		234			849			(15,212	)


Total comprehensive income (loss)	$	3,994		$	3,807		$	12,267		$	(4,919	)

See accompanying notes to unaudited consolidated financial statements

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(In thousands, except share data)


	Number of Shares			Common Stock		Additional Paid-In Capital			Unallocated ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at October 1, 2011		37,864,008		$	459	$	357,063		$	(6,138	)	$	(90,585	)	$	165,199		$	5,136	$	431,134
Net income		—			—		—			—			—			11,418			—		11,418
Other comprehensive income		—			—		—			—			—			—			849		849

Total comprehensive income																					12,267
Deferred compensation transactions		—			—		138			—			—			—			—		138
Stock option transactions, net		—			—		252			—			—			—			—		252
ESOP shares allocated or committed to be released for allocation (24,966 shares)		—			—		89			250			—			—			—		339
RRP Awards		36,000			—		(277	)		—			267			—			—		(10	)
Vesting of RRP Awards		—			—		141			—			—			—			—		141
Other RRP Awards		(1,001	)		—		—			—			(10	)		—			—		(10	)
Purchase of treasury shares		—			—		—			—			—			—			—		—
Cash dividends paid ($0.12 per common share)		—			—		—			—			—			(4,552	)		—		(4,552	)

Balance at March 31, 2012		37,899,007		$	459	$	357,406		$	(5,888	)	$	(90,328	)	$	172,065		$	5,985	$	439,699

See accompanying notes to unaudited consolidated financial statements

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)


	For the Six Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	11,418		$	10,293
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		4,800			4,200
Loss on real estate owned		178			100
Depreciation of premises and equipment		2,505			2,860
Amortization of intangibles		628			783
Net gains on loans held for sale		(890	)		(852	)
Other than temporary impairment loss (credit loss)		38			—
Net gains on sale of securities		(4,888	)		(4,950	)
Fair value (gain) loss on interest rate cap		43			(232	)
Net amortization of premium on securities		1,466			4,714
Accretion (amortization) of premiums on borrowings		1			(32	)
Amortization of prepaid penalties on borrowings		727			338
ESOP and RRP expense		308			302
ESOP forfeitures		(1	)		(3	)
Retirement benefit settlement expense		—			278
Stock option compensation expense		252			278
Originations of loans held for sale		(35,935	)		(37,819	)
Proceeds from sales of loans held for sale		39,265			44,561
Increase in cash surrender value of bank owned life insurance		(1,020	)		(1,047	)
Deferred income tax benefit		(6,700	)		(1,225	)
Net changes in accrued interest receivable and payable		(329	)		(726	)
Other adjustments (principally net changes in other assets and other liabilities)		9,206			(8,692	)

Net cash provided by operating activities		21,072			13,129

Cash flows from investing activities
Purchases of available for sale securities		(261,775	)		(357,238	)
Purchases of held to maturity securities		(77,080	)		(8,005	)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale		52,149			131,361
Held to maturity		12,027			10,844
Proceeds from sales of securities available for sale and held to maturity		150,657			270,351
Loan originations		(362,282	)		(261,632	)
Loan principal payments		259,975			272,853
Proceeds from sales of other real estate owned		1,449			—
Purchase of FHLB stock, net		455			1,393
Purchases of premises and equipment		(781	)		(2,092	)

Net cash (used in) provided by investing activities		(225,206	)		57,835

(Continued)

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)


	For the Six Months Ended March 31,
	2012			2011
Cash flows from financing activities
Net increase (decrease) in transaction, savings and money market deposits		101,863			(23,967	)
Net decrease in time deposits		(29,570	)		(28,831	)
Net decrease in short-term borrowings		(10,000	)		(62,340	)
Gross repayments of long-term borrowings		(5,122	)		(57,756	)
Restructured debt		5,000			89,135
Payment of penalties on restructured borrowings		(278	)		(5,151	)
Net decrease in borrowings senior note		(51,500	)		—
Net increase in mortgage escrow funds		5,509			6,088
Treasury shares purchased		—			(1,941	)
Stock option transactions		153			4
Other stock-based compensation transactions		138			19
Cash dividends paid		(4,552	)		(4,426	)

Net cash used in financing activities		11,641			(89,166	)

Net decrease in cash and cash equivalents		(192,493	)		(18,202	)
Cash and cash equivalents at beginning of period		281,512			90,872

Cash and cash equivalents at end of period	$	89,019		$	72,670


Supplemental information:
Interest payments	$	9,695		$	15,899
Income tax payments		1,575			4,810
Net change in net unrealized gains recorded on securities available for sale		296			(9,320	)
Change in deferred taxes on net unrealized gains on securities available for sale		(121	)		3,783
Real estate acquired in settlement of loans		2,064			143
Trade day security accounting		49,955			—

See accompanying notes to unaudited consolidated financial statements

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

1. Basis of Presentation

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident Bancorp” or “the Company”), Hardenburgh Abstract Title Company, Inc., which provides title searches and insurance for residential and commercial real estate, Hudson Valley Investment Advisors, LLC (“HVIA”), a registered investment advisor, Provident Risk Management, (a captive insurance company), Provident Bank (“the Bank”), 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, (iv) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers, and (v) companies that hold foreclosed properties acquired by the Bank. Intercompany transactions and balances are eliminated in consolidation.

The Company’s off-balance sheet activities are limited to loan origination commitments, loan commitments pending sale, lines of credit extended to customers and letters of credit on behalf of customers, which all occur in the ordinary course of its lending activities. In addition, the Company purchased interest rate caps with a notional value of $50,000 during the first quarter of fiscal 2010. The Company does not engage in off-balance sheet financing transactions or other activities involving the use of special-purpose or variable interest entities.

The consolidated financial statements have been prepared by management without audit, but, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented clear. The results of operations for the three months and six months ended March 31, 2012 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2012. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2011.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. A material estimate that is particularly susceptible to near-term change is the allowance for loan loss (see note 4), which reflects the application of a critical accounting policy.

Certain loan amounts from prior periods have been reclassified to conform to the current fiscal year presentation.

2. Stock-Based Compensation

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $181, and $176, for the three months ending March 31, 2012 and 2011. There was no income tax benefit for the three months ending March 31, 2012 and 2011. Total compensation cost that has been charged against income for those plans was $373, and $339, for the six months ending March 31, 2012 and 2011. There was no income tax benefit for the six months ending March 31, 2012 and 2011.

Stock Option Plan

The Company’s shareholders approved the 2012 Employee Share Option Plan (stock option plan) on February 16, 2012. The plan, permits the grant of share options to employees for up to 2,890,000 shares of common stock as of March 31, 2012. The plan allows for the following type of stock based awards to be issued: options, stock appreciation rights, restricted stock awards, performance based restricted stock awards, restricted stock unit awards, deferred stock awards, performance unit awards or other stock based awards. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods ranging from 2 to 5 years and have 10 year contractual terms. The Company has a policy of using shares held as treasury stock to satisfy share option exercises. Currently, the Company has a sufficient number of treasury shares to satisfy expected share option exercises.

The Company’s 2004 Employee Share Option Plan (stock option plan), which is shareholder-approved, permits the grant of share options to its employees for up to 19,107 shares of common stock as of March 31, 2012. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods ranging from 2 to 5 years and have 10 year contractual terms. The Company has a policy of using shares held as treasury stock to satisfy share option exercises. Currently, the Company has a sufficient number of treasury shares to satisfy expected share option exercises.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

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


	Six months ended March 31,
	2012			2011
Risk-free interest rate ⁽¹⁾		1.5	%		—
Expected stock price volatility		39.8	%		—
Dividend yield ⁽²⁾		3.1	%		—
Expected term in years		5.8			—

The following table summarizes the Company’s stock option activity for the six months ended March 31, 2012:


	Number of Shares			Weighted Average Exercise Price

Outstanding at October 1, 2011		1,906,020		$	12.20

Granted		419,500			7.73
Exercised		—			—
Forfeited		(241,000	)		12.36


Outstanding at March 31, 2012		2,084,520		$	11.28


Exercisable at March 31, 2012		1,419,944		$	12.63


Weighted average estimated fair value of options granted during the period				$	2.27

Information related to the stock option plan during each year follows:


	2012		2011		2010
Intrinsic value of options exercised	$	—	$	—	$	1,615
Cash received from option exercises		—		—		984
Tax benefit realized from option exercises		—		—		—
Weighted average fair value of options granted		2.27		2.27		2.69

As of March 31, 2012, there was $1,216 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.6 years.

There were no modifications for the six months ending March 31, 2012 and 2011.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Share Award Plan

The Company’s 2004 Recognition and Retention Plan (“RRP”) provides for the issuance of shares to directors and officers. Compensation expense is recognized on a straight line basis over the vesting period of the awards based on the fair value of the stock at issue date. RRP shares vest annually on the anniversary of the grant date over the vesting period. Total shares remaining that are authorized and available for future grant under the RRP are 2,120 at March 31, 2012. Inducement shares of 41,370 were issued in July 2011.

The approval of the 2012 Employee Share Option Plan will provide for the Company to issue RRP shares.

A summary of restricted stock award activity for the six months ended March 31, 2012, is presented below:


	Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested shares at September 30, 2011		57,520		$	8.77

Granted		36,000			7.40
Vested		—			—
Forfeited		(1,000	)		9.85

Nonvested shares at March 31, 2012		92,520		$	8.23

As of March 31, 2012, there was $613 of total unrecognized compensation cost related to non-vested shares granted under the RRP. The cost is expected to be recognized over a weighted-average period of 2.69 years.

3. Recent Accounting Standards, Not Yet Adopted

Accounting standards update (ASU) 2011-11, Balance Sheet (Topic 210)—Disclosures about offsetting Assets and Liabilities has been issued to enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This standard is effective for the Company on January 1, 2013 and is not expected to have a material effect on the Company’s consolidated financial statements.

Adoption of New Accounting Standards

Accounting Standards Update (ASU) 2011-03, Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements has been issued, which is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This standard was effective for the Company on January 1, 2012 and did not have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820)-Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS has been issued, which will conform the meaning and disclosure requirements of fair value measurement between U.S. GAAP and IFRS. This standard was effective for the Company on January 1, 2012 and did not have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update (ASU) 2011-05- Presentation of Comprehensive Income (Topic 220) has been issued. This standard was issued to conform U.S. GAAP and IFRS as well as to increase the prominence of items reported in other comprehensive income. This standard was effective for the Company on January 1, 2012 and did not have a material effect on the Company’s consolidated financial statements.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

4. Loans

The components of the loan portfolio, excluding loans held for sale, were as follows:


	March 31, 2012			September 30, 2011
One- to four-family residential mortgage loans	$	366,675		$	389,765


Commercial real estate loans		854,661			703,356
Commercial business loans		198,547			209,923
Acquisition, development & construction loans		163,808			175,931

Total Commercial loans		1,217,016			1,089,210


Consumer loans:
Home equity lines of credit		168,603			174,521
Homeowner loans		38,092			40,969
Other consumer loans, including overdrafts		8,726			9,334

		215,421			224,824

Total loans		1,799,112			1,703,799
Allowance for loan losses		(27,787	)		(27,917	)

Total loans, net	$	1,771,325		$	1,675,882

Total loans include net deferred loan origination fees of $77 at March 31, 2012 and $308 net deferred loan origination costs at September 30, 2011.

Loans where management has the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Interest income on loans is accrued on the level yield method.

A loan is placed on non-accrual status when management has determined that the borrower may likely 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, while 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.

The allowance for loan losses (the “allowance”) is increased through provisions charged against current earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans. The allowance is reduced by charge-offs on loans, in accordance with established policies, when all efforts of collection have been exhausted. The allowance is maintained at a level estimated to absorb probable credit losses inherent in the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the performing loan portfolio, as well as reserves for impaired loans.

The Bank’s methodology for evaluating the appropriateness of the allowance includes grouping the performing loan portfolio into loan segments based on common risk characteristics, tracking the historical levels of classified loans and delinquencies, applying economic outlook factors, assigning specific incremental reserves where necessary, providing specific reserves on impaired loans, and assessing the nature and trend of loan charge-offs. Additionally, the volume of delinquencies and non-performing loans, loan trends, concentration risks by relationship, type, and , collateral adequacy, credit policies and procedures, staffing, underwriting consistency, loan review and economic conditions are taken into consideration.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The allowance for loan losses consists of the following elements: (i) specific reserves for individually impaired credits, (ii) reserves for other loans based on historical loss factors, (iii) reserves based on general economic conditions and other qualitative risk factors both internal and external to Provident Bank, including changes in loan portfolio volume and the composition and concentrations of credit.

The Credit and Risk Management Department individually evaluates non-accrual (non-homogeneous) loans and all troubled debt restructured loans to determine if an impairment reserve is needed. The Company considers a loan to be impaired when, based on current information and events, it is probable that the borrower will be unable to comply with contractual principal and interest payments due. Smaller-balance homogeneous loans are collectively evaluated for impairment, such as residential mortgage loans and consumer loans. The value of an impaired loan is measured based upon the underlying anticipated method of payment consisting of either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent, and its payment is expected solely based on the underlying collateral. If the value of an impaired loan is less than its carrying amount, impairment is recognized through a provision to the allowance for loan losses. Loans in the commercial real estate segment are re-appraised using a summary report every six to nine months, and segments for residential mortgages, ELOCs, and Homeowner loans are also re-appraised every six to nine months primarily using drive-by appraisals because of the limitations on entering the premises for a full evaluation. All loans in real estate secured segments are evaluated for impairment on a quarterly basis based on information obtained by following ASU-2010-10-50, Receivables (Topic 310) guidelines. If the book value exceeds the fair market value of the collateral the difference is charged in that quarter to the allowance. This quarterly evaluation of value continues until the loan is transferred to Other Real Estate Owned (OREO) or is paid-off. If the loan is transferred to OREO, the Allowance for Loan and Lease Losses is charged for any subsequent negative adjustments that occur within a reporting period or 90 days, whichever is less. Subsequent negative adjustments are charged to the Bank’s income account - All other segments that are not secured by real estate are written off to the allowance between 90 or 120 days of deliquency or sooner if deemed uncollectible such as in the case of a bankruptcy. Once charged off all subsequent collection and legal expenses are expensed.

Collateral dependent impaired loan balances are written down to the current fair value. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for loan losses. Accrual of interest is discontinued on an impaired loan when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of interest is doubtful. Cash collections on impaired loans are generally credited to the loan balance, and no interest income is recognized on these loans until the principal balance has been determined to be fully collectible.

A substantial portion of the Company’s loan portfolio is secured by residential and commercial real estate located primarily in Rockland and Orange Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam and Westchester Counties of New York, Bergen County, New Jersey and New York City. The ability of the Company’s borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company’s concentrated lending area. Commercial real estate and acquisition, development 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.

The allowances established for inherent losses on specific loans are based on a regular analysis and evaluation of the loans. Loans are evaluated based on an internal credit risk rating system for the commercial loan portfolio segments and non-performing loan status for the residential and consumer loan portfolio segments. Loans are risk-rated based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all loans, and reviewed by the Portfolio Risk Management Department. Loans with a grade that is below “Pass” grade are adversely classified. Any change in the credit risk grade of performing and/or non-performing loans affects the amount of the related allowance. Once a loan is adversely classified, the assigned relationship manager and/or a special assets officer in conjunction with the Credit and Portfolio Risk Management Department analyze the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. Loans identified as losses by management are charged-off. Loans are assessed for full or partial charge-off when they are between 90 and 120 days past due or sooner if deemed uncollectible. Furthermore, residential mortgage and consumer loan accounts are charged off in accordance with regulatory requirements.

The allowance allocations for other loans (i.e.; risk rated loans that are not adversely classified and loans that are not risk rated) are calculated by applying historical loss factors for each loan portfolio segment to the applicable outstanding loan portfolio balances. Loss factors are calculated using a historical loss analysis supplemented by management judgment of general economic conditions and other qualitative risk factors both internal and external to Provident Bank. The management analysis includes an evaluation of loan portfolio volumes, the composition and concentrations of credit, credit quality and current delinquency trends.

The allowance also contains reserves to cover inherent losses within each of Provident’s loan portfolio segments, which have not been otherwise reviewed or measured on an individual basis. Such reserves include management’s evaluation of national and local economic and business conditions, loan portfolio volumes, the composition and concentrations of credit, credit quality and delinquency trends. These reserves reflect management’s attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Activity in the allowance for loan losses and the recorded investments in loans by portfolio segment based on impairment method for March 31, 2012 are summarized below:


	For the Three Months ended March 31, 2012
	Beginning Allowance for loan losses		Charge-offs			Recoveries		Net Charge-offs			Provision for losses			Ending Allowance for Loan Losses
Loans by segment:
Real estate—residential mortgage	$	4,167	$	(677	)	$	1	$	(676	)	$	696		$	4,187
Real estate—commercial mortgage		4,772		(491	)		51		(440	)		1,408			5,740
Real estate—commercial mortgage (CBL)		750		(224	)		—		(224	)		200			726
Commercial business loans		1,209		(30	)		16		(14	)		(15	)		1,180
Commercial business loans (CBL)		4,412		(463	)		67		(396	)		(465	)		3,551
Acquisition Development & Construction		9,403		(1,021	)		—		(1,021	)		559			8,941
Consumer, including home equity		3,532		(566	)		29		(537	)		467			3,462

Total Loans	$	28,245	$	(3,472	)	$	164	$	(3,308	)	$	2,850		$	27,787

Net charge-offs to average gross loans annualized															0.74	%

	For the Six Months Ended March 31, 2012
	Beginning Allowance for loan losses		Charge-offs			Recoveries		Net Charge-offs			Provision for losses			Ending Allowance for Loan Losses
Loans by segment:
Real estate—residential mortgage	$	3,498	$	(1,466	)	$	120	$	(1,346	)	$	2,035		$	4,187
Real estate—commercial mortgage		4,533		(963	)		51		(912	)		2,119			5,740
Real estate—commercial mortgage (CBL)		1,035		(698	)		350		(348	)		39			726
Commercial business loans		1,331		(30	)		69		39			(190	)		1,180
Commercial business loans (CBL)		4,614		(671	)		560		(111	)		(952	)		3,551
Acquisition Development & Construction		9,895		(1,296	)		—		(1,296	)		342			8,941
Consumer, including home equity		3,011		(1,028	)		72		(956	)		1,407			3,462

Total Loans	$	27,917	$	(6,152	)	$	1,222	$	(4,930	)	$	4,800		$	27,787

Net charge-offs to average gross loans annualized															0.56	%

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table sets forth the loans evaluated for impairment by segment at March 31, 2012:


	March 31, 2012
	Individually evaluated for impairment		Collectively evaluated for impairment		Total ending loans balance
Loans by segment:
Real estate—residential mortgage	$	11,177	$	355,498	$	366,675
Real estate—commercial mortgage		13,078		751,999		765,077
Real estate—commercial mortgage (CBL)		3,748		85,836		89,584
Commercial business loans		549		126,426		126,975
Commercial business loans (CBL)		71		71,501		71,572
Acquisition Development & Construction		29,362		134,446		163,808
Consumer, including home equity		3,397		212,024		215,421

Total Loans	$	61,382	$	1,737,730	$	1,799,112

The following table sets forth the allowance evaluated for impairment by segment at March 31, 2012:


	March 31, 2012
	Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance balance
Ending allowance by segment:
Real estate—residential mortgage	$	768	$	3,419	$	4,187
Real estate—commercial mortgage		1,082		4,658		5,740
Real estate—commercial mortgage (CBL)		211		515		726
Commercial business loans		65		1,115		1,180
Commercial business loans (CBL)		3		3,548		3,551
Acquisition Development & Construction		1,212		7,729		8,941
Consumer, including home equity		320		3,142		3,462

Total allowance	$	3,661	$	24,126	$	27,787

Activity in the allowance for loan losses and the recorded investments in loans by portfolio segment based on impairment method for March 31, 2011 are summarized below:


	For the Three Months March 31, 2011
	Beginning Allowance for loan losses		Charge-offs			Recoveries		Net Charge-offs			Provision for losses			Ending Allowance for Loan Losses
Loans by segment:
Real estate—residential mortgage	$	2,837	$	(287	)	$	1	$	(286	)	$	988		$	3,539
Real estate—commercial mortgage		5,313		(364	)		—		(364	)		265			5,214
Real estate—commercial mortgage (CBL)		1,020		(295	)		—		(295	)		337			1,062
Commercial business loans		2,869		(181	)		11		(170	)		(7	)		2,692
Commercial business loans (CBL)		6,246		(1,740	)		87		(1,653	)		853			5,446
Acquisition Development & Construction		9,053		(125	)		—		(125	)		(200	)		8,728
Consumer, including home equity		3,698		(159	)		46		(113	)		(136	)		3,449

Total Loans	$	31,036	$	(3,151	)	$	145	$	(3,006	)	$	2,100		$	30,130

Net charge-offs to average gross loans outstanding annualized															0.71	%

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)


	For the Six Months March 31, 2011
	Beginning Allowance for loan losses		Charge-offs			Recoveries		Net Charge-offs			Provision for losses			Ending Allowance for Loan Losses
Loans by segment:
Real estate—residential mortgage	$	2,587	$	(440	)	$	1	$	(439	)	$	1,391		$	3,539
Real estate—commercial mortgage		5,068		(434	)		—		(434	)		580			5,214
Real estate—commercial mortgage (CBL)		845		(3,098	)		212		(2,886	)		3,103			1,062
Commercial business loans		3,172		(182	)		176		(6	)		(474	)		2,692
Commercial business loans (CBL)		5,505		(442	)		—		(442	)		383			5,446
Acquisition Development & Construction		10,231		(125	)		8		(117	)		(1,386	)		8,728
Consumer, including home equity		3,435		(665	)		76		(589	)		603			3,449

Total Loans	$	30,843	$	(5,386	)	$	473	$	(4,913	)	$	4,200		$	30,130

Net charge-offs to average gross loans outstanding annualized															0.58	%

The following table sets forth the loans evaluated for impairment by segment at September 30, 2011:


	September 30, 2011
	Individually evaluated for impairment		Collectively evaluated for impairment		Total ending loans balance
Loans by segment:
Real estate—residential mortgage	$	8,573	$	381,192	$	389,765
Real estate—commercial mortgage		10,653		599,726		610,379
Real estate—commercial mortgage (CBL)		4,477		88,500		92,977
Commercial business loans		531		133,868		134,399
Commercial business loans (CBL)		—		75,524		75,524
Acquisition Development & Construction		28,223		147,708		175,931
Consumer, including home equity		2,504		222,320		224,824

Total Loans	$	54,961	$	1,648,838	$	1,703,799

The following table sets forth the allowance evaluated for impairment by segment at September 30, 2011:


	September 30, 2011
	Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance balance
Ending allowance by segment:
Real estate—residential mortgage	$	1,069	$	2,429	$	3,498
Real estate—commercial mortgage		474		4,059		4,533
Real estate—commercial mortgage (CBL)		594		441		1,035
Commercial business loans		—		1,331		1,331
Commercial business loans (CBL)		—		4,614		4,614
Acquisition Development & Construction		1,409		8,486		9,895
Consumer, including home equity		260		2,751		3,011

Total allowance	$	3,806	$	24,111	$	27,917

A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans substantially consist of non-performing loans and accruing and performing troubled debt restructured loans. The recorded investment of an impaired loan includes the unpaid principal balance, negative escrow and any tax in arrears.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table presents loans individually evaluated for impairment by segment of loans as of March 31, 2012:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		YTD Average Impaired Loans		Interest Income Recognized		Cash-basis Interest Income Recognized
With no related allowance recorded:
Real estate—residential mortgage	$	4,406	$	4,614	$	—	$	4,244	$	126	$	57
Real estate—commercial mortgage		7,207		7,380		—		7,372		156		128
Real estate—commercial mortgage (CBL)		2,333		2,421		—		2,318		28		23
Acquisition, development and construction		19,852		20,251		—		21,715		344		229
Commercial business loans		456		456		—		785		20		20
Commercial business loans (CBL)		64		64		—		64		—		—
Consumer loans, including home equity		2,267		2,307		—		2,297		39		11

Subtotal		36,585		37,493		—		38,795		713		468

With an allowance recorded:
Real estate—residential mortgage		6,382		6,563		768		6,968		69		59
Real estate—commercial mortgage		5,637		5,698		1,082		6,042		66		47
Real estate—commercial mortgage (CBL)		1,201		1,327		211		1,357		—		—
Acquisition, development and construction		8,600		9,111		1,212		10,941		88		82
Commercial business loans		93		93		65		94		3		3
Commercial business loans (CBL)		7		7		3		2		—		—
Consumer loans, including home equity		1,081		1,090		320		1,085		4		4

Subtotal		23,001		23,889		3,661		26,489		230		195

Total	$	59,586	$	61,382	$	3,661	$	65,284	$	943	$	663

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table presents loans individually evaluated for impairment by segment of loans as of September 30, 2011:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		YTD Average Impaired Loans		Interest Income Recognized		Cash-basis Interest Income Recognized
With no related allowance recorded:
Real estate—residential mortgage	$	2,437	$	2,577	$	—	$	2,702	$	92	$	51
Real estate—commercial mortgage		6,753		6,823		—		6,769		332		146
Real estate—commercial mortgage (CBL)		2,012		2,050		—		2,148		165		102
Acquisition, development and construction		20,914		21,316		—		26,111		1,892		1,454
Commercial business loans		531		531		—		862		42		42
Commercial business loans (CBL)		—		—		—		—		—		—
Consumer loans, including home equity		1,879		1,885		—		1,860		61		13

Subtotal		34,526		35,182		—		40,452		2,584		1,808

With an allowance recorded:
Real estate—residential mortgage		5,836		5,996		1,069		6,319		159		159
Real estate—commercial mortgage		3,741		3,830		474		3,843		108		108
Real estate—commercial mortgage (CBL)		2,283		2,427		594		2,662		91		36
Acquisition, development and construction		6,900		6,907		1,409		6,963		114		96
Commercial business loans		—		—		—		—		—		—
Commercial business loans (CBL)		—		—		—		—		—		—
Consumer loans, including home equity		619		619		260		642		33		22

Subtotal		19,379		19,779		3,806		20,429		505		421

Total	$	53,905	$	54,961	$	3,806	$	60,881	$	3,089	$	2,229

Listed below is the interest income recognized during impairment and cash received for interest during impairment for the three months ended March 31, 2012 and March 31, 2011, respectively.


	March 31, 2012		March 31, 2011
Interest income recognized during impairment	$	437	$	223
Cash-basis interest income recognized		336		306

Listed below is the interest income recognized during impairment and cash received for interest during impairment for the six months ended March 31, 2012 and March 31, 2011, respectively.


	March 31, 2012		March 31, 2011
Interest income recognized during impairment	$	943	$	630
Cash-basis interest income recognized		663		541

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following tables set forth the amounts and status of the Company’s loans, troubled debt restructurings and other real estate owned at March 31, 2012 and September 30, 2011.


	March 31, 2012
	Current Loans		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non- Accrual			Total Loans
Non-performing loans:
Real estate—residential mortgage	$	356,132	$	1,020	$	207	$	1,888	$	7,428		$	366,675
Real estate—commercial mortgage		749,877		2,399		236		825		11,740			765,077
Real estate—commercial mortgage (CBL)		85,073		1,238		243		424		2,606			89,584
Commercial business loans		126,733		—		—		—		242			126,975
Commercial business loans (CBL)		71,263		209		29		—		71			71,572
Acquisition, development and construction loans		139,181		844		258		446		23,079			163,808
Consumer, including home equity loans		211,663		477		68		1,110		2,103			215,421

Total	$	1,739,922	$	6,187	$	1,041	$	4,693	$	47,269		$	1,799,112

Total troubled debt restructurings included above	$	7,681	$	—	$	258	$	—	$	10,374		$	18,313

Non Performing Assets:
Loans 90+ and still accruing									$	4,693
Nonaccrual loans										47,269

Total non performing loans										51,962

Other real estate owned:
Land										2,402
Commercial real estate										1,503
Acquisition, development & construction loans										991
One- to four-family										793
Consumer, including home equity loans										139

Total other real estate owned										5,828

Total non-performing assets									$	57,790


Ratios:
Non-performing loans to total loans										2.89	%
Non-performing assets to total assets										1.80	%
Allowance for loan losses to total non-performing loans										53.00	%
Allowance for loan losses to average loans										1.57	%

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)


	September 30, 2011
	Current Loans		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non- Accrual			Total Loans
Non-performing loans:
Real estate—residential mortgage	$	380,577	$	868	$	344	$	491	$	7,485		$	389,765
Real estate—commercial mortgage		599,619		768		337		1,639		8,016			610,379
Real estate—commercial mortgage (CBL)		89,418		—		—		350		3,209			92,977
Commercial business loans		133,741		490		—		—		168			134,399
Commercial business loans (CBL)		75,449		—		—		—		75			75,524
Acquisition, development and construction loans		154,682		3,859		406		446		16,538			175,931
Consumer, including home equity loans		221,880		494		300		1,164		986			224,824

Total	$	1,655,366	$	6,479	$	1,387	$	4,090	$	36,477		$	1,703,799

Total troubled debt restructurings included above	$	9,060	$	266	$	—	$	446	$	7,792		$	17,564

Non Performing Assets:
Loans 90+ and still accruing									$	4,090
Nonaccrual loans										36,477

Total non performing loans										40,567

Other real estate owned:
Land										1,926
Commercial real estate										2,163
Acquisition, development & construction loans										745
One- to four-family										557

Total other real estate owned										5,391

Total non-performing assets									$	45,958


Ratios:
Non-performing loans to total loans										2.38	%
Non-performing assets to total assets										1.46	%
Allowance for loan losses to total non-performing loans										69	%
Allowance for loan losses to average loans										1.68	%

Troubled Debt Restructurings:

Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of the loan were for period ranging from 3 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 3 months to 30 years. Restructured loans are recorded in accrual status when the loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items.

Not all loans that are restructured as a TDR are classified as non accrual before the restructuring occurs. If the subsequent TDR designation of these accruing loans has been assigned because of a below market interest rate or an extension of time, the new restructured loan will remain on accrual. As noted all other loan restructures requires a minimum of 6 months of performance in accordance with the regulatory guideline.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Troubled debt restructurings at March 31, 2012 were as follows:


	Current Loans		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non- Accrual		Total TDR’s
Real estate—residential mortgage	$	2,155	$	—	$	—	$	—	$	427	$	2,582
Real estate—commercial mortgage		585		—		—		—		1,004		1,589
Real estate—commercial mortgage (CBL)		273		—		—		—		—		273
Acquisition, development and construction		4,668		—		258		—		8,943		13,869
Consumer loans, including home equity		—		—		—		—		—		—

Total	$	7,681	$	—	$	258	$	—	$	10,374	$	18,313

Allowance	$	133	$	—	$	63	$	—	$	590	$	786

Troubled debt restructurings at September 30, 2011 were as follows:


	Current Loans		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non- Accrual		Total TDR’s
Real estate—residential mortgage	$	485	$	—	$	—	$	—	$	1,226	$	1,711
Real estate—commercial mortgage		1,439		—		—		—		—		1,439
Acquisition, development and construction		6,975		266		—		446		6,566		14,253
Consumer loans, including home equity		161		—		—				—		161

Total	$	9,060	$	266	$	—	$	446	$	7,792	$	17,564

Allowance	$	7	$	56	$	—	$	—	$	346	$	409

The Company has committed to lend additional amounts totaling up to $4,225 as of March 31, 2012, and September 30, 2011, to customers with outstanding loans that are classified as troubled debt restructurings. The commitments to lend on the restructured debt is contingent on clear title and a third party inspection to verify completion of work and is associated with loans that are considered to be performing.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ending March 31, 2012:


			Recorded Investment
	Number		Pre- Modification		Post - Modification
Restructured Loans:
Real estate—residential mortgage		4	$	1,009	$	995
Real estate—commercial mortgage		2		421		436

Total restructured loans		6	$	1,430	$	1,431

The troubled debt restructurings described above increased the allowance for loan losses by $0 for the three months ended March 31, 2012 and $134 for the six months ended March 31, 2012. There were no charge offs as a result of the above troubled debt restructurings.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

A loan is considered to be in default once it is 90 days contractually past due under the modified terms. The following table presents by class loans that were modified as troubled debt restructurings during the last twelve months that have subsequently defaulted during the three and six months ended March 31, 2012:


	Three Months Ended March 31, 2012				Six Months Ended March 31, 2012
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Acquisition Development & Construction		1	$	446		1	$	446
Real estate-commercial mortgage		—		—		1		850

Total		1	$	446		2	$	1,296

Credit Quality Indicators:

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed as of March 31, 2012 and September 30, 2011, the risk category of loans by segment of gross loans is as follows:


	March 31, 2012
	Special Mention		Substandard		Doubtful
Real estate—residential mortgage	$	957	$	10,793	$	—
Real estate—commercial mortgage		12,899		24,199		—
Real estate—commercial mortgage (CBL)		2,106		3,475		—
Acquisition, development and construction		6,377		44,321		—
Commercial business loans		14,271		2,715		—
Commercial business loans (CBL)		525		173		—
Consumer loans, including home equity loans		244		3,459		—

Total	$	37,379	$	89,135		$—

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)


	September 30, 2011
	Special Mention		Substandard		Doubtful
Real estate—residential mortgage	$	3,701	$	8,525	$	—
Real estate—commercial mortgage		10,175		25,952		—
Real estate—commercial mortgage (CBL)		897		4,044		—
Acquisition, development and construction		5,170		49,294		—
Commercial business loans		1,915		3,501		—
Commercial business loans (CBL)		557		150		—
Consumer loans, including home equity loans		611		2,523		—

Total	$	23,026	$	93,989	$	—

5. Fair value measurements

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

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

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

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

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

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

Investment securities available for sale

The majority of the Company’s available for sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. U.S. Treasuries are actively traded and therefore have been classified as Level 1 valuations. As of October 1, 2010 the company determined that government sponsored agencies totaling $346,019 previously reported as Level 1 securities were not classified based on the lowest level within the fair value hierarchy and deemed it appropriate to transfer the securities to Level 2.

The Company utilizes an outside vendor to obtain valuations for its traded securities as well as information received from a third party investment advisor. The majority of the Company’s available for sale investment securities (mortgage backed securities issued by US government corporations and government sponsored entities) have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable (Level 2). The Company utilizes prices from a leading provider of financial market data and compares them to dealer indicative bids from the Company’s external investment advisor. The Company does not make adjustments to these prices unless it is determined there is limited trading activity. For securities where there is limited trading activity (private label CMO’s) and less observable valuation inputs, the Company has classified such valuations as Level 3.

The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there has been a decline in the volume and level of activity in the market for its private label mortgage backed securities. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of privately issued residential mortgage backed securities as Level 3. As of March 31, 2012, these securities have an amortized cost of $5,014 and a fair value of $4,711. In determining the fair value of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that market participants would use in pricing these securities in an orderly market. Present value estimated cash flow models were used discounted at a rate that was reflective of similarly structured securities in an orderly market. The resultant prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of March 31, 2012. The Company’s Chief Financial Officer ultimately determines the fair value of level 3 investment securities. These securities have a weighted average coupon rate of 2.86%, a weighted average life of 5.6 years, a weighted average one month prepayment history of 15.1 years and a weighted average twelve month default rate of 3.38 CDR. It was determined that two of these securities with a carrying amount of $4,556 and an amortized cost of $4,259 had other than temporary losses which resulted in a $38 other than temporary impairment charge for the six months ending March 31, 2012. These two securities have a total of $113 in other than temporary charges.

The investment grades of these securities are as follows:


	Amortized Cost		Fair Value
Investment Rating:
Aa1	$	322	$	326
Ba1		136		125
B1		2,761		2,623
B3		1,795		1,637

Total private label CMOs	$	5,014	$	4,711

Derivatives

The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2). The Company’s derivatives consist of two interest rate caps and six interest rate swaps (see note 9).

Commitments to sell real estate loans

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

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

A summary of assets and liabilities at March 31, 2012 measured at estimated fair value on a recurring basis were as follows:


	Fair Value Measurements at March 31, 2012		Quoted Prices in Active markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Investment securities available for sale:
Mortgage-backed securities-residential
Fannie Mae	$	217,905	$	—	$	217,905	$	—
Freddie Mac		107,536		—		107,536		—
Ginnie Mae		5,141		—		5,141		—
CMO/Other MBS		120,924		—		120,924		—
Privately issued collateralized mortgage obligations		4,711		—		—		4,711

		456,217		—		451,506		4,711
Investment securities
Federal agencies		232,902		—		232,902		—
Obligations of states and political subdivisions		162,439		—		162,439		—
Equities		1,159		—		1,159		—

Total investment securities available for sale		396,500		—		396,500		—

Total available for sale securities		852,717		—		848,006		4,711


Interest rate caps and swaps		1,256		—		1,256		—

Total assets	$	853,973	$	—	$	849,262	$	4,711


Swaps	$	1,234	$	—	$	1,234	$	—

Total Liabilities	$	1,234	$	—	$	1,234	$	—

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

A summary of assets and liabilities at September 30, 2011 measured at estimated fair value on a recurring basis were as follows:


	Fair Value Measurements at September 30, 2011		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Investment securities available for sale:
Mortgage-backed securities-residential
Fannie Mae	$	139,991	$	—	$	139,991	$	—
Freddie Mac		100,675		—		100,675		—
Ginnie Mae		5,180		—		5,180		—
CMO/Other MBS		77,561		—		77,561		—
Privately issued collateralized mortgage obligations		4,851		—		—		4,851

		328,258		—		323,407		4,851
Investment securities
Federal agencies		204,648		—		204,648		—
Corporate debt securities		17,062		—		17,062		—
Obligations of states and political subdivisions		188,684		—		188,684		—
Equities		1,192		—		1,192		—

Total investment securities available for sale		411,586		—		411,586		—

Total available for sale securities		739,844		—		734,993		4,851


Interest rate caps and swaps		1,180		—		1,180		—

Total assets	$	741,024	$	—	$	736,173	$	4,851


Swaps	$	1,114	$	—	$	1,114	$	—

Total Liabilities	$	1,114	$	—	$	1,114	$	—

There were no transfers between Level 1 and Level 2 during the three and six months ended March 31, 2012 and 2011.

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending March 31, 2012:


	Fair Value Measurement Six months ended March 31, 2011 Using Significant Unobservable Inputs Level 3			Fair Value Measurement Six months ended March 31, 2012 Using Significant Unobservable Inputs Level 3
Private label CMO’s available for sale
Beginning Balance September 30	$	5,996		$	4,851
Pay downs		(216	)		(148	)
(Amortization) and accretion, net		—			3
Credit loss write down (OTTI)		—			(38	)
Change in fair value		156			7

Ending Balance December 31		5,936			4,675


Pay downs		(288	)		(178	)
(Amortization) and accretion, net		(1	)		3
Credit loss write down (OTTI)		—			—
Change in fair value		38			211

Ending Balance March 31,	$	5,685		$	4,711

Changes in fair value are included as part of net unrealized holding gains (losses) on securities available for sale net of related tax expense on the Consolidated Statements of Comprehensive Income (Loss).

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances:

Loans Held for Sale and Impaired Loans

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

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

The Company may record nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependant loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based upon recent comparable sales of similar properties or assumptions generally observable by market participants. Any fair value adjustments for loans categorized here are classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classified as Level 3. Impaired loans are evaluated on a quarterly basis for additional impairment and their carrying values are adjusted as needed. Loans subject to nonrecurring fair value measurements were $57,721 and $51,155 which equals the carrying value less the allowance for loan losses allocated to these loans at March 31, 2012 and September 30, 2011, respectively. Changes in fair value recognized on provisions on loans held by the Company were $2,359 and $864 for the six months ended March 31, 2012 and 2011, respectively.

When valuing impaired loans that are collateral dependent, the Company charges off the difference between the recorded investment in the loan and the appraised value, which is generally less than six months old, but any event no more than nine months old. In addition, an impairment reserve is established equal to 10% of the appraised value to take into account the inability of the Bank to dispose of the property at the appraised value, In addition, a reserve for estimated costs to dispose of the asset is established, in a range of 7% to 22%, depending on our analysis of individual properties. Loans that are cash flow dependent are charged of for the difference between the net present values calculated at the effective note rate of the probable cash flows to be received from the borrower. In general, we establish an impairment reserve for 10% of the present value to cover contingencies. Nearly all our impaired loans are considered collateral dependent.

A summary of impaired loans at March 31, 2012 measured at estimated fair value on a nonrecurring basis were as follows:


	Fair Value Measurements at March 31, 2012		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Real estate—residential mortgage	$	6,516	$	—	$	—	$	6,516
Real estate—commercial mortgage		6,115		—		—		6,115
Real estate—commercial mortgage (CBL)		1,583		—		—		1,583
Commercial business loans		28		—		—		28
Commercial business loans (CBL)		4		—		—		4
Acquisition, development and construction		7,936		—		—		7,936
Consumer loans		809		—		—		809

Total impaired loans with specific allowance allocations	$	22,991	$	—	$	—	$	22,991

A summary of impaired loans at September 30, 2011 measured at estimated fair value on a nonrecurring basis were as follows:


	Fair Value Measurements at September 30, 2011		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Real estate—residential mortgage	$	6,469	$	—	$	—	$	6,469
Real estate—commercial mortgage		3,741		—		—		3,741
Commercial business loans (CBL)		2,119		—		—		2,119
Acquisition, development and construction		2,126		—		—		2,126
Consumer loans		569		—		—		569

Total impaired loans with specific allowance allocations	$	15,024	$	—	$	—	$	15,024

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Mortgage servicing rights

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

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing asset. In accordance with FASB ASC Topic 860-Transfers and Servicing, the Company must record impairment charges on a nonrecurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights the Company utilizes a third party vendor, which on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights for impairment purposes is considered a Level 3 valuation. Changes in fair value of mortgage servicing rights, which required an impairment charge and were subsequently recognized in income, for the three months ended March 31, 2012 and 2011 were $32 and $0, respectively. Changes in fair value of mortgage servicing rights, which required an impairment charge and were subsequently recognized in income, for the six months ended March 31, 2012 and 2011, were $128 and $0, respectively. These amounts are considered immaterial for any previous periods.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes the new cost basis. These loans are subsequently accounted for at the lower of cost or fair value less costs to sell primarily comprised of commercial and residential real property and upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments have generally been classified as Level 3. Appraisals are reviewed and verified by the Chief Credit Officer and/or Chief Risk Officer. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $5,828 and $5,391 at March 31, 2012 and September 30, 2011, respectively. There were $208 and $100 changes in fair value recognized through income for those foreclosed assets held by the Company during the three months ending March 31, 2012 and 2011, respectively. There were $276 and $100 changes in fair value recognized through income for those foreclosed assets held by the Company during the six months ending March 31, 2012 and 2011, respectively.

Assets taken in foreclosure of loans of $5,828 were transferred between Level 2 and Level 3 as of March 31, 2012. The valuation of these properties involves judgments of the individual appraisers as well as adjustments for differences due to the availability of data on the properties, which classifies as Level 3.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Fair values of financial instruments

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

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

The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes) as of March 31, 2012:


	March 31, 2012
	Carrying amount			Level 1			Level 2			Level 3
Financial assets:
Cash and due from banks	$	89,019		$	89,019		$	—		$	—
Securities available for sale		852,717			—			848,006			4,711
Securities held to maturity		174,824			—			176,869			—
Loans		1,771,325			—			—			1,835,117
Loans held for sale		1,736			—			1,736			—
Accrued interest receivable		9,975			—			9,975			—
FHLB of New York stock		17,129			—			17,129			—
Financial liabilities:
Non-maturity deposits		(2,094,899	)		(2,094,899	)		—			—
Certificates of Deposit		(274,089	)		—			(275,742	)		—
FHLB and other borrowings		(313,849	)		—			(348,064	)		—
Mortgage escrow funds		(15,210	)		—			(15,208	)		—
Accrued interest payable		(1,558	)		—			(1,558	)		—

The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2011:


	September 30, 2011
	Carrying amount			Level 1			Level 2			Level 3
Financial assets:
Cash and due from banks	$	281,512		$	281,512		$	—		$	—
Securities available for sale		739,844			—			734,993			4,851
Securities held to maturity		110,040			—			111,272			—
Loans		1,675,882			—			—			1,718,372
Loans held for sale		4,176			—			4,176			—
Accrued interest receivable		9,904			—			9,904			—
FHLB of New York stock		17,584			—			17,584			—
Financial liabilities:
Non-maturity deposits		(1,993,036	)		(1,993,036	)					—
Certificates of Deposit		(303,659	)		—			(305,940	)		—
FHLB and other borrowings		(375,021	)		—			(417,879	)		—
Mortgage escrow funds		(9,701	)		—			(9,701	)		—
Accrued interest payable		(1,816	)		—			(1,816	)		—

The following paragraphs summarize the principal methods and assumptions, not previously presented, used by management to estimate the fair value of the Company’s financial instruments.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

(a) Cash and due from banks

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

(b) Loans held for sale

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

(c) Loans

Fair values were estimated for portfolios of loans with similar financial characteristics. For valuation purposes, the total loan portfolio was segregated into adjustable-rate and fixed-rate categories. Fixed-rate loans were further segmented by type, such as residential mortgage, commercial mortgage, commercial business and consumer loans. Loans were also segmented by maturity dates. Fair values were estimated by discounting scheduled future cash flows through estimated maturity using a discount rate equivalent to the current market rate on loans that are similar with regard to collateral, maturity and the type of borrower. The discounted value of the cash flows was reduced by a credit risk adjustment based on loan categories. Based on the current composition of the Company’s loan portfolio, as well as past experience and current economic conditions and trends, the future cash flows were adjusted by prepayment assumptions that shortened the estimated remaining time to maturity and therefore affected the fair value estimates resulting in a Level 3 classification. Valuation for impaired loans has been described previously. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.

(d) FHLB of New York Stock

The redeemable carrying amount of these securities with limited marketability approximates their fair value and as such are classified as Level 2

(e) Deposits and Mortgage Escrow Funds

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

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.

(f) Borrowings

Fair values of FHLB and other 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 on borrowings of similar type and maturity resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 classification.

(h) Other Financial Instruments

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

The fair values of the Company’s off-balance sheet financial instruments were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At March 31, 2012 and September 30, 2011, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

6. Securities

The following is a summary of securities available for sale:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2012
*Mortgage-backed securities-residential*
Fannie Mae	$	213,538	$	4,442	$	(75	)	$	217,905
Freddie Mac		104,881		2,655		—			107,536
Ginnie Mae		4,909		232		—			5,141
CMO/Other MBS		124,055		2,022		(442	)		125,635

		447,383		9,351		(517	)		456,217


*Investment securities*
Federal agencies		230,206		2,946		(250	)		232,902
Corporate bonds		—		—		—			—
State and municipal securities		150,732		11,708		(1	)		162,439
Equities		1,192		—		(33	)		1,159

		382,130		14,654		(284	)		396,500


Total available for sale	$	829,513	$	24,005	$	(801	)	$	852,717


September 30, 2011
*Mortgage-backed securities-residential*
Fannie Mae	$	136,699	$	3,292	$	—		$	139,991
Freddie Mac		98,511		2,205		(41	)		100,675
Ginnie Mae		4,973		207		—			5,180
CMO/Other MBS		81,170		1,764		(522	)		82,412

		321,353		7,468		(563	)		328,258


*Investment securities*
Federal agencies		199,741		4,986		(79	)		204,648
Corporate bonds		16,984		257		(179	)		17,062
State and municipal securities		177,666		11,018		—			188,684
Equities		1,192		—		—			1,192

		395,583		16,261		(258	)		411,586

Total available for sale	$	716,936	$	23,729	$	(821	)	$	739,844

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except 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.


	March 31, 2012
	Amortized Cost		Fair Value
Remaining period to contractual maturity
Less than one year	$	3,348	$	3,372
One to five years		83,052		86,562
Five to ten years		252,171		259,671
Greater than ten years		42,367		45,736

Total investment securities		380,938		395,341

Mortgage backed securities-residential		447,383		456,217
Equity securities		1,192		1,159

Total available for sale securities	$	829,513	$	852,717

Proceeds from sales of securities available for sale totaled $150,657 and $270,351 during the six months ending March 31, 2012 and 2011, respectively. These sales resulted in gross realized gains of $2,912 and $748 for the six months ending March 31, 2012 and 2011, respectively. There were gross realized losses of $13 and $0 for the three and six months ending March 31, 2012 and 2011, respectively.

Securities, including some held to maturity securities, with carrying amounts of $234,959 and $206,829 were pledged as collateral for borrowings at March 31, 2012 and September 30, 2011, respectively. Securities with carrying amounts of $564,839 and $438,081 were pledged as collateral for municipal deposits and other purposes at March 31, 2012 and September 30, 2011.

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
As of March 31, 2012	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Fannie Mae	$	19,915	$	(75	)	$	—	$	—		$	19,915	$	(75	)
CMO/Other MBS		9,582		(135	)		4,384		(307	)		13,966		(442	)

Total mortgage backed securities—residential		29,497		(210	)		4,384		(307	)		33,881		(517	)

Federal agencies		59,694		(250	)		—		—			59,694		(250	)
State and municipal securities		342		(1	)		—		—			342		(1	)
Equity		909		(33	)		—		—			909		(33	)

Total	$	90,442	$	(494	)	$	4,384	$	(307	)	$	94,826	$	(801	)


	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
As of September 30, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Freddie Mac	$	10,262	$	(41	)	$	-	$	—		$	10,262	$	(41	)
CMO/Other MBS		3,037		(257	)		1,813		(265	)		4,850		(522	)

Total mortgage backed securities—residential		13,299		(298	)		1,813		(265	)		15,112		(563	)

Federal agencies		9,914		(79	)		—		—			9,914		(79	)
Corporate bonds		1,886		(179	)		—		—			1,886		(179	)

Total	$	25,099	$	(556	)	$	1,813	$	(265	)	$	26,912	$	(821	)

The Company, as of June 30, 2009 adopted the provisions under FASB ASC Topic 320 – Investments- Debt and Equity Securities which requires a forecast of recovery of cost basis through cash flow collection on all debt securities with a fair value less than its amortized cost less any current period credit loss with an assertion on the lack of intent to sell (or requirement to sell

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

prior to recovery of cost basis). Based on a review of each of the securities in the investment portfolio in accordance with FASB ASC 320 at March 31, 2012, the Company concluded that it expects to recover the amortized cost basis of its investments on all but two private label collateralized mortgage-backed securities (“CMO’s”) which incurred impairment charges of $38 for the six months ended March 31, 2012. Total cumulative impairment charges on the two private label CMO’s total $113. As of March 31, 2012, the Company does not intend to sell nor is it more likely than not that it would be required to sell any of its securities with unrealized losses prior to recovery of its amortized cost basis less any current-period applicable credit losses.

The losses related to privately issued residential CMO’s were recognized in light of deterioration of housing values in the residential real estate market and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The Company uses a discounted cash flow (“DCF”) analysis to provide an estimate of an OTTI loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over collateralization tests, interest coverage tests and other factors. Expected default and deferral rates were weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate was based upon the yield expected from the related securities.

Substantially all of the unrealized losses at March 31, 2012 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase. A total of 19 available for sale securities were in a continuous unrealized loss position for less than 12 months and three 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.

Within the CMO category of the available for sale portfolio there are four individual private label CMO’s that have an amortized cost of $5,014 and a fair value (carrying value) of $4,711 as of March 31, 2012. Two of the four securities are considered to be other than temporarily impaired as noted above and are below investment grade. The impaired private label CMO’s have an amortized cost of $4,556 and a fair value of $4,260 at March 31, 2012. The remaining two securities are rated at or above Ba1 and are performing as of March 31, 2012 and are expected to perform based on current information.

In determining whether there existed other than temporary impairment on these securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit risk and liquidity risk, and determined that no losses are expected. The Company will continue to evaluate its portfolio in this manner on a quarterly basis.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Securities Held to Maturity

The following is a summary of securities held to maturity:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2012
*Mortgage-backed securities-residential*
Fannie Mae	$	31,127	$	387	$	—		$	31,514
Freddie Mac		54,269		453		—			54,722
CMO/Other MBS		29,710		248		(3	)		29,955

		115,106		1,088		(3	)		116,191

*Investment securities*
Federal agencies		40,746		24		(257	)		40,513
State and municipal securities		17,472		1,159		—			18,631
Other		1,500		34		—			1,534

		59,718		1,217		(257	)		60,678


Total held to maturity	$	174,824	$	2,305	$	(260	)	$	176,869


September 30, 2011
*Mortgage-backed securities-residential*
Fannie Mae	$	1,298	$	63	$	—		$	1,361
Freddie Mac		32,858		103		(120	)		32,841
CMO/Other MBS		25,828		155		—			25,983

		59,984		321		(120	)		60,185

*Investment securities*
Federal agencies		29,973		25		(141	)		29,857
State and municipal securities		18,583		1,108		—			19,691
Other		1,500		39		—			1,539

		50,056		1,172		(141	)		51,087


Total held to maturity	$	110,040	$	1,493	$	(261	)	$	111,272

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.


	March 31, 2012
	Amortized Cost		Fair Value
Remaining period to contractual maturity
Less than one year	$	8,037	$	8,098
One to five years		4,163		4,380
Five to ten years		44,031		44,258
Greater than ten years		3,487		3,942

Total investment securities		59,718		60,678

Mortgage backed securities-residential		115,106		116,191

Total held to maturity securities	$	174,824	$	176,869

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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
As of March 31, 2012	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
CMO other MBS	$	4,910	$	(3	)	$	—	$	—	$	4,910	$	(3	)

Total mortgage back securities		4,910		(3	)		—		—		4,910		(3	)

Federal agencies		35,490		(257	)		—		—		35,490		(257	)

Total	$	40,400	$	(260	)	$	—	$	—	$	40,400	$	(260	)


	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer				Total
As of September 30, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Freddie Mac MBS-residential	$	25,770	$	(120	)	$	—	$	—	$	25,770	$	(120	)
Federal Agencies		24,831		(141	)		—		—		24,831		(141	)

Total	$	50,601	$	(261	)	$	—	$	—	$	50,601	$	(261	)

All of the unrealized losses on held to maturity securities at March 31, 2012 are attributable to changes in market interest rates and credit risk spreads subsequent to purchase. There were no securities with unrealized losses that individually had significant dollar amounts at March 31, 2012. There were no held-to-maturity securities in a continuous unrealized loss position for more than 12 months and 6 securities in a continuous unrealized loss for less than 12 months. For securities with fixed maturities, the Company currently believes it is probable that it will collect all amounts due according to the contractual terms of the investment. As of March 31, 2012, the Company does not intend to sell nor is it more likely than not that it would be required to sell any of its securities with unrealized losses prior to recovery of its amortized cost basis less any current-period applicable credit losses.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

7. Deposits

Major classifications of deposits are summarized below:


	March 31, 2012		September 30, 2011
Demand Deposits
Retail	$	167,247	$	194,299
Business		314,177		296,505
Municipal		20,339		160,422
NOW Deposits
Retail		198,084		164,637
Business		34,407		37,092
Municipal		182,098		200,773

Total transaction accounts		916,352		1,053,728
Savings		479,648		429,825
Money market		698,899		509,483
Certificates of deposit		274,089		303,659

Total deposits	$	2,368,988	$	2,296,695

Municipal deposits of $607,158 and $614,834 were included in total deposits at March 31, 2012 and September 30, 2011, respectively. Deposits received for tax receipts were approximately $284,000 at September 30, 2011. Listed below are the Company’s brokered deposits included in the table above:


	March 31, 2012		September 30, 2011
Money market	$	31,984	$	5,725
Reciprocal CDAR’s¹		1,353		2,746
CDAR’s one way		762		3,366

Total brokered deposits	$	34,099	$	11,837

¹	Certificate of deposit account registry service

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

8. Borrowings

The Company’s FHLB and other borrowings and weighted average interest rates are summarized as follows:


	March 31, 2012					September 30, 2011
	Amount		Rate			Amount		Rate
By type of borrowing:
FHLB advances	$	106,867		3.97	%	$	111,828		3.83	%
FHLB Repurchase agreements		206,982		3.79			211,694		3.61
Senior Debt (FDIC insured)		—		—			51,499		2.75

Total borrowings	$	313,849		3.85	%	$	375,021		3.56	%

By remaining period to maturity:
Less than one year	$	—		—	%	$	61,500		2.96	%
One to two years		36,050		2.93			5,066		4.04
Two to three years		52,181		3.17			35,795		2.37
Three to four years		—		—			49,312		2.28
Four to five years		102,578		4.20			211		5.32
Greater than five years		123,040		4.12			223,137		4.18

Total borrowings	$	313,849		3.85	%	$	375,021		3.56	%

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 March 31, 2012 and September 30, 2011, the Bank had pledged mortgages totaling $575,323 and $464,900 respectively. The Bank had also pledged securities with carrying amounts of $234,958 and $206,829 as of March 31, 2012 and September 30, 2011, respectively, to secure borrowings. As of March 31, 2012, the Bank may increase its borrowing capacity by pledging securities and mortgages not required to be pledged for other purposes with a market value of $496,433. FHLB advances are subject to prepayment penalties, if repaid prior to maturity.

FHLB borrowings which are putable quarterly at the discretion of the FHLB (includes both advance and repurchase agreements) were $200,000 as of March 31, 2012 and September 30, 2011. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 5.05 years and 5.56 years and weighted average interest rates of 4.23 percent at March 31, 2012 and September 30, 2011. An additional $20,000 is putable on a one time basis after an initial lockout period beginning in February 2013 with an interest rate of 3.57 percent.

In November 2011, the Company restructured $5,000 of its FHLBNY advances which had a weighted average rate of 4.04 percent and a duration of 1.5 years, into new borrowings with a weighted average rate of 2.37 percent net of prepayment penalties, duration of 1.6 years. Prepayment penalties of $278 associated with the modifications are being amortized to maturity on a level yield basis.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

9. Derivatives

The Company purchased two interest rate caps in the first quarter of fiscal 2010 to assist in offsetting a portion of interest rate exposure should short term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.5 percent and 4.0 percent. These caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings; the amount for March 31, 2012 and 2011 is a fair value loss of $43 and a fair value gain of $232, respectively. The fair value of the interest rate caps at March 31, 2012 is reflected in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.

The Company acts as an interest rate swap counterparty with certain commercial customers and manages this risk by entering into corresponding and offsetting interest rate risk agreements with third parties. The swaps are considered a derivative instrument and must be carried at fair value. As the swaps are not a designated qualifying hedge, the change in fair value is recognized in current earnings, with no offset from any other instrument. There was no net gain or loss recorded in earnings during the six months ended March 31, 2012 and 2011. Interest rate swaps are recorded on our consolidated statements of financial condition as an other asset or other liability at estimated fair value.

At March 31, 2012 summary information regarding these derivatives is presented below:


	March 31, 2012
	Notional Amount			Average Maturity		Weighted Average Rate Fixed			Weighted Average Variable Rate			Fair Value
Interest Rate Caps	$	50,000			2.68		3.75	%		NA	%	$	22
3rd party interest rate swap		23,771			7.19		4.63			1 m Libor + 2.32	%		1,234
Customer interest rate swap		(23,771	)		7.19		4.63			1 m Libor + 2.32	%		(1,234	)

At September 30, 2011, summary information regarding these derivatives is presented below:


	September 30, 2011
	Notional Amount			Average Maturity		Weighted Average Rate Fixed			Weighted Average Variable Rate			Fair Value
Interest Rate Caps	$	50,000			3.18		3.75	%		NA	%	$	65
3rd party interest rate swap		12,009			10.23		5.28			1 m Libor + 2.15	%		1,114
Customer interest rate swap		(12,009	)		10.23		5.28			1 m Libor + 2.15	%		(1,114	)

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

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

10. Earnings Per Common Share

The number of shares used in the computation of basic earnings per share excludes unallocated ESOP shares, shares held to fund deferred compensation plans, and unvested shares of restricted stock that have not been released to participants.

Common stock equivalent shares are incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options and unvested RRP shares were exercised or became vested during the periods.

Basic earnings per common share are computed as follows:


	For the Three Months Ended March 31,				For the Six Months Ended March 31,
	2012		2011		2012		2011
Weighted average common shares outstanding (basic), in ‘000s		37,281		37,496		37,266		37,525
Net Income	$	5,701	$	3,573	$	11,418	$	10,293
Basic earnings per common share	$	0.15	$	0.10	$	0.31	$	0.27

Diluted earnings per common share are computed as follows:


	For the Three Months Ended March 31,				For the Six Months Ended March 31,
	2012		2011		2012		2011
Weighted average common shares outstanding (basic), in ‘000s		37,281		37,496		37,266		37,525
Effect of common stock equivalents		36		1		10		—

		37,317		37,497		37,276		37,525
Net Income	$	5,701	$	3,573	$	11,418	$	10,293
Diluted earnings per common share	$	0.15	$	0.10	$	0.31	$	0.27

As of March 31, 2012, 1,710,943 and 1,832,280 weighted average shares were anti-dilutive for the three month period and six month period, respectively. As of March 31, 2011, 1,891,341 and 1,904,163 weighted average shares were anti-dilutive for the three month period and six month period, respectively. Anti-dilutive shares are not included in the determination of diluted earnings per share.

11. Guarantor’s Obligations Under Guarantees

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

As of March 31, 2012, the Company had $18,500 in outstanding letters of credit, of which $5,371 are cash secured and $2,486 were secured by collateral. The carrying values of these obligations are considered immaterial.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

12. Pension and Other Post Retirement Plans

Net post-retirement cost, which is recorded within salaries and employee benefits expense in the consolidated statements of income, is comprised of the following:


	Pension Plan						Other Post Retirement Plans
	Three months Ended March 31,						Three months Ended March 31,
	2012			2011			2012			2011
Service Cost	$	—		$	—		$	9		$	7
Interest Cost		376			371			27			27
Expected return on plan assets		(532	)		(581	)		—			—
Amortization of net transition obligation		—			—			6			6
Amortization of prior service cost		—			—			12			12
Amortization of (gain) or loss		579			508			(15	)		(24	)

	$	423		$	298		$	39		$	28


	Pension Plan						Other Post Retirement Plans
	Six months Ended						Six months Ended
	March 31,						March 31,
		2012			2011			2012			2011

Service Cost	$	—		$	—		$	18		$	14
Interest Cost		751			749			54			54
Expected return on plan assets		(1,063	)		(1,079	)		—			—
Amortization of net transition obligation		—			—			12			12
Amortization of prior service cost		—			—			24			24
Amortization of (gain) or loss		1,158			1,017			(30	)		(48	)

	$	846		$	687		$	78		$	56

As of March 31, 2012, no contributions had been deposited into the pension plan during fiscal year 2012. The Company has not yet determined if additional contributions will be made during the fiscal year 2012.

The Company has also established a non-qualified Supplemental Executive Retirement Plan (“SERP”) to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $26 for the six months ended March 31, 2012 and $305 (including a settlement charge of $278) for the six months ended March 31, 2011. As of March 31, 2012, there was $84 in contributions to fund benefit payments related to the SERP.

13. Contingencies

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

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.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

•

legislative and regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our business including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;

•

a further deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended declines in the real estate market and constrained financial markets;

•

the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;

•

our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;

•

our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

•

computer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs;

•

changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees;

•

our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to complete merger and acquisition activities and realize expected strategic and operating efficiencies associated with such matters;

•

our success at managing the risks involved in the foregoing and managing our business; and

•

the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control.

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

Overview and Management Strategy

We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional, multi-state and international banks in our market area, which is the greater New York City market place. Additionally, the Company offers investment management services through its subsidiary, HVIA. 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.

We specialize in the delivery of service solutions to business owners, their families and consumers within our marketplace through a team based approach. We focus our efforts on core deposit generation, especially transaction accounts and quality loan growth with emphasis on growing commercial loan balances. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs. Going forward imperatives for the Company will be to grow revenue and earnings by expanding client acquisitions, and to improve credit metrics and efficiency levels. To achieve these goals we will continue to focus on high value client segments, expand delivery channels and distribution to increase client acquisitions, execute effectively by creating a highly productive performance culture, reduce operating costs, and proactively manage enterprise risk.

The Company’s results for the first six months year to date fiscal 2012 reflected the effects of the implementation of our strategies. During first six months of fiscal 2012 we restructured the organization around markets and have hired leadership to assume the roles of Market Presidents and a Chief Operating Officer. We also announced our expansion into New York City which follows through on our strategic objective of expanding our reach into the greater New York City marketplace. In line with our strategies, during the month of January, we entered into a definitive agreement to acquire Gotham Bank of New York. Gotham Bank provides an attractive platform in the New York City marketplace from which to grow our franchise. In addition we have hired 5 seasoned commercial banking teams for the New York City marketplace, all with proven track records of delivering superior service to their clients, as well as restructured the legacy market teams bringing the total teams to 13. Along with the restructuring we have introduced a measurement and accountability system for the teams that align incentives with shareholder objectives.

We continue to experience pressure on net interest income as low rates continue to cause many assets to prepay or to be called. Many of our liabilities are at rates that are either fixed or already very low, so maintaining net interest margin is a function of loan growth, growth in non-interest bearing deposits and certain core deposits, and continuation of our deposit pricing discipline. Current market interest rates remained low, and may have an affect on our reinvestment opportunities.

We continue to work through the criticized and classified portfolio seeking positive resolution on existing problem credits. The loan portfolio demonstrates an improving credit risk profile as nearly all originations are at the desirable internal risk rating of five or better. Our average portfolio risk rating improved to 5.459 at March 31, 2012 from 5.504 at September 30, 2011. The ADC portfolio continues to decline in size as we have deemphasized this business and repayments continue. The increase seen in non performing loans at March 31, 2012 was due primarily to negative migration in the ADC portfolio. This portfolio continues to be the focus of our efforts. We have active plans for resolution, and we believe that pursuing these plans, rather than selling the assets will produce better results for our stockholders. Virtually all of our non performing loans are real estate secured and are marked to current values every six to twelve months.

Comparison of Financial Condition at March 31, 2012 and September 30, 2011

Total assets as of March 31, 2012 increased $73.5 million or 2.3 percent from September 30, 2011 primarily due to increases in investment securities and gross loans. These increases were offset by a decrease in cash and due from banks, as of September 30, 2011 balances historically reflect deposits of municipal tax collections that are drawn down over time to fund government expenditures.

Net loans as of March 31, 2012 increased $95.4 million or 5.7 percent to $1.8 billion from September 30, 2011. Commercial real estate loans were the sole contributor with an increase of $151.3 million. Acquisition, Development and Construction loans (ADC) declined $12.1 million to $163.8 million compared to $175.9 million at September 30, 2011, a reflection of the Company’s de-emphasis on the originations of this type of loan. Consumer loans decreased by $9.4 million, and residential loans decreased by $23.1 million as of March 31, 2012. Total loan originations, including loans originated for sale were $398.2 million as of March 31, 2012, while repayments were $260.0 million. Loan loss reserves decreased $130,000 for the period ending March 31, 2012 to $27.8 million compared to September 30, 2011.

Total securities increased by $177.7 million, to $1.0 billion at March 31, 2012 from $849.9 million at September 30, 2011. Securities purchases were $388.8 million, sales of securities were $150.7 million, and maturities, calls, and repayments were $64.2 million. Carrying values of securities increased by $296,000 mainly due to unrealized gains. Securities gains and other than temporarily impaired losses were $4.9 million and net amortization of securities were $1.5 million the period ended March 31, 2012.

Deposits as of March 31, 2012 were $2.4 billion, an increase of $72.3 million, or 3.1 percent, from September 30, 2011. As of March 31, 2012 transaction accounts were 38.7 percent of deposits, or $916.4 million compared to $1.1 billion or 45.9 percent of deposits at September 30, 2011. Deposits received from municipalities for tax payments were approximately $284.0 million at September 30, 2011. As of March 31, 2012 savings deposits were $479.6 million, an increase of $49.8 million or 11.6 percent. Money market accounts increased $189.4 million or 37.2 percent to $698.9 million at March 31, 2012. Certificate of deposit accounts decreased by $29.6 million or 9.7 percent. As of March 31, 2012, the Company had $34.1 million in wholesale deposits.

Borrowings decreased by $61.2 million or 16.3 percent, from September 30, 2011, to $313.8 million primarily due to the Company’s FDIC guaranteed borrowing maturing during February 2012. The Company completed restructuring of $5.0 million of FHLBNY advances during the first quarter of fiscal 2012 which had a weighted average rate of 4.04 percent and duration of 1.5 years, into new borrowings with a weighted average rate of 2.37 percent, and a duration of 1.6 years. Prepayment penalties of $278,500 associated with the modifications are being amortized into interest expense over the modification period on a level yield basis

Stockholders’ equity increased $8.6 million from September 30, 2011 to $439.7 million at March 31, 2012. The increase was mainly due to an increase in retained earnings of $6.9 million and accumulated other comprehensive income of $849,000.

As of March 31, 2012 the Company had authorization to purchase up to additional 776,713 shares of common stock. Bank Tier I capital to assets was 8.3 percent at March 31, 2012. Tangible capital as a percentage of tangible assets at the consolidated company level was 9.02 percent.

Credit Quality (Also see Note 4 to the consolidated financial statements)

Our loan portfolio is growing with loans originated in one of our strongest portfolio segments, commercial real estate loans that are secured by income producing properties. That portfolio grew from $703.4 million at September 30, 2011 to $854.7 million at March 31, 2012. We continue to work with loans in the ADC category, however, March 31, 2012 NPLs in this category accounted for 45.3 percent of total NPLs, while comprising just 9.1 percent of the loan portfolio. Total NPLs increased from $40.6 million at September 30, 2011 to $52.0 million at March 31, 2012, while NPLs in the ADC category went from $17.0 million to $23.5 million. The increase was primarily caused by two new relationships falling into this category, the largest of which was about $3.6 million.

Our criticized loans increased from $23.0 million to $37.4 million at September 30, 2011 and March 31, 2012, respectively. The increase is primarily attributable to $10 million of upgrades from substandard combined with a downgrade from our pass portfolio of a loan on a delayed, but actively selling single family development project with a strong obligor. Classified loans decreased $4.9 million from $94.0 million at September 30, 2011 to $89.1 million at March 31, 2012. The previously mentioned upgrade was partially offset by downgrades in our CRE portfolio.

Net charge-offs fiscal year-to-date were $4.9 million, approximately the same as the prior year-to-date. Net charge-offs this year benefitted by approximately $1.0 million in recoveries recorded in the quarter ending December 31, 2011. We continue to incur charge-offs in our real estate secured portfolios from further write-downs based on new appraisals, as residential property in our market area has decreased in value year over year. Conversely, losses in our credit scored C&I loan portfolio have moderated, reflecting $160,000 in net recoveries year-to-date.

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

Net income for the three months ended March 31, 2012 was $5.7 million or $0.15 per diluted share, an increase of $2.1 million compared to $3.6 million or $0.10 per diluted share, for the same period in fiscal 2011. The primary factors accounting for the change were:

•

higher gains on sales of securities of $2.9 million in the second quarter of 2012 compared to $748,000 for the same period in 2011.

•

lower expenses of $501,000 primarily due to lower occupancy and marking costs.

•

an increase in net interest income after provision of $644,000. Higher volume driven income on securities and lower volume driven borrowing expense was offset in part by a higher provision.

Relevant performance measures follow:


	Three Months Ended March 31,
	2012			2011
Per common share:
Basic earnings	$	0.15		$	0.10
Diluted earnings		0.15			0.10
Dividends declared		0.06			0.06
Return on average (annualized):
Assets		0.73	%		0.49	%
Equity		5.22	%		3.45	%

The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).


	Three Months Ended March 31,
	2012									2011
	Average Outstanding Balance			Interest			Average Yield Rate			Average Outstanding Balance			Interest			Average Yield Rate
Interest earning assets:
Commercial and commercial mortgage loans	$	1,167,620		$	14,600			5.03	%	$	1,035,490		$	14,079			5.51	%
Consumer loans		223,988			2,459			4.42			234,326			2,571			4.45
Residential mortgage loans		378,851			5,094			5.41			385,232			5,389			5.67

Total net loans ¹		1,770,459			22,153			5.03			1,655,048			22,039			5.40

Securities-taxable		799,753			4,415			2.22			684,834			3,531			2.09
Securities-tax exempt ²		185,062			2,460			5.35			214,634			2,925			5.53
Federal Reserve balances		17,604			9			0.21			18,628			2			0.04
Other earning assets		19,164			235			4.92			20,987			330			6.38

Total securities and other earning assets		1,021,583			7,119			2.80			939,083			6,788			2.93

Total interest-earning assets		2,792,042			29,272			4.22			2,594,131			28,827			4.51

Non-interest-earning assets		339,812									346,168

Total assets	$	3,131,854								$	2,940,299

Interest bearing liabilities:
NOW Checking	$	389,846			106			0.11	%	$	338,503			171			0.20	%
Savings, clubs and escrow		463,971			66			0.06			416,777			113			0.11
Money market accounts		654,013			430			0.26			490,215			412			0.34
Certificate accounts		284,737			615			0.87			367,099			889			0.98

Total interest-bearing deposits		1,792,567			1,217			0.27			1,612,594			1,585			0.40
Borrowings		375,765			3,289			3.52			420,069			3,707			3.58

Total interest-bearing liabilities		2,168,332			4,506			0.84			2,032,663			5,292			1.06

Non- interest bearing deposits		503,539									468,031
Other non-interest-bearing liabilities		20,599									19,758

Total liabilities		2,692,470									2,520,452
Stockholders’ equity		439,384									419,847

Total liabilities and equity	$	3,131,854								$	2,940,299

Net interest rate spread								3.38	%								3.45	%

Net earning assets	$	623,710								$	561,468

Net interest margin					24,766			3.57	%					23,535			3.68	%

Less tax equivalent adjustment ²					(861	)								(1,024	)

Net interest income				$	23,905								$	22,511

Ratio of average interest-earning assets to average interest bearing liabilities		128.76	%								127.62	%

¹	Includes non-accrual loans

²	Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate

The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (dollars in thousands):


	Three Months Ended March 31, 2012 vs. 2011 Increase / (Decrease) Due to
	Volume¹			Rate¹			Total
Interest earning assets
Commercial and commercial mortgage loans	$	1,787		$	(1,266	)	$	521
Consumer loans		(97	)		(15	)		(112	)
Residential mortgage loans		(78	)		(217	)		(295	)
Securities-taxable		644			240			884
Securities-tax exempt²		(376	)		(89	)		(465	)
Federal Reserve excess reserves		—			7			7
Other earning assets		(21	)		(74	)		(95	)

Total interest income		1,859			(1,414	)		445

Interest-bearing liabilities
NOW checking		22			(87	)		(65	)
Savings		11			(58	)		(47	)
Money market		126			(108	)		18
Certificates of deposit		(183	)		(91	)		(274	)
Borrowings		(398	)		(20	)		(418	)

Total interest expense		(422	)		(364	)		(786	)

Net interest margin		2,281			(1,050	)		1,231
Less tax equivalent adjustment²		133			30			163

Net interest income	$	2,414		$	(1,020	)	$	1,394

¹	Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.

²	Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the three months ended March 31, 2012 was $23.9 million, an increase of $1.4 million, compared to the same quarter of fiscal 2011. Gross interest income on a tax-equivalent basis of $29.3 million increased $445,000 for the quarter ended March 31, 2012 compared to the same period in fiscal 2011. Interest expense declined by $786,000 with the decrease mainly in certificates of deposit of $274,000 and borrowings of $418,000, the average costs of borrowings decreased due to the Company’s guaranteed FDIC borrowing maturing in February 2012. Volume driven increase in net interest income with margin compression due to lower rates.

Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb incurred loan losses inherent in the existing portfolio. The Company recorded $2.9 million in loan loss provisions for the quarter ended March 31, 2012 compared to $2.1 million at March 31, 2011. Refer to the credit quality section for a discussion on net charge-offs and nonperforming loans. Net charge-offs for the quarter ended March 31, 2012 were $3.3 million, which included $1.7 million of specific reserves recorded in prior periods, compared to net charge-offs of $3.0 million for the same period in 2011.

Non-interest income for the three months ended March 31, 2012 increased by $2.2 million to $8.0 million over the second quarter of fiscal 2011. The primary drivers of the increase was higher gains on sales of securities of $2.9 million compared to $748,000 for the same period last year.

Non-interest expense for the three months ended March 31, 2012 decreased by 2.3 percent, to $21.3 million compared to the same period in 2011. The decrease was primarily due to lower marketing and office and occupancy cost of $416,000 and $348,000, respectively. These expense reductions were offset in part by increases in compensation and benefits of $212,000 primarily associated with the expansion into the New York City market and foreclosed property expense of $295,000. Merger related costs of $299,000 were incurred related to the acquisition of Gotham Bank in the second quarter of 2012.

Income Tax increased $1.2 million to $2.0 million for the three months ended March 31, 2012, compared to $842,000 for the period ended March 31, 2011. The effective tax rate was 26.3 percent and 19.1 percent for the periods ended March 31, 2012 and 2011, respectively. The increase is due to higher BOLI income and larger tax exempt municipal security interest related to pre-tax income fiscal 2011.

Comparison of Operating Results for the Six Months Ended March 31, 2012 and March 31, 2011

Net income for the six months ended March 31, 2012 was $11.4 million or $0.31 per diluted share, an increase of $1.1 million compared to $10.3 million or $0.27 per diluted share, for the same period in fiscal 2011. Primary factors accounting for the changes were:

•

higher net interest income in the six months ended 2012 of $1.4 million driven by lower interest expense on certificates of deposit and borrowings both due primarily to lower volumes.

•

lower non-interest expense primarily driven by lower compensation and benefits, occupancy and advertising costs. Also contributing to the reduced expense were lower stationary and supply expense and business development expenses, partially offset by higher foreclosed property expense which are included in the other expense category.

•

lower non-interest income in the six months ended March 31, 2012 was primary attributable to a gain on the fair value on interest rate caps in 2011 compared to a loss in 2012 as well as lower loan fees in 2012.

Relevant performance measures follow:


	Six Months Ended March 31,
	2012			2011
Per common share:
Basic earnings	$	0.31		$	0.27
Diluted earnings		0.31			0.27
Dividends declared		0.12			0.12
Return on average (annualized):
Assets		0.74	%		0.70	%
Equity		5.25	%		4.86	%


	Six Months Ended March 31,
	2012									2011
	Average Outstanding Balance			Interest			Average Yield Rate			Average Outstanding Balance			Interest			Average Yield Rate
Interest earning assets:
Commercial and commercial mortgage loans	$	1,132,356		$	28,845			5.09	%	$	1,037,801		$	28,943			5.59	%
Consumer loans		225,640			5,094			4.52			236,344			5,243			4.45
Residential mortgage loans		383,172			10,363			5.41			394,501			11,058			5.62

Total net loans ¹		1,741,168			44,302			5.09			1,668,646			45,244			5.44

Securities-taxable		747,741			8,405			2.25			688,631			7,061			2.06
Securities-tax exempt ²		195,269			5,189			5.31			218,258			5,886			5.41
Federal Reserve balances		50,198			72			0.29			13,488			18			0.27
Other earning assets		18,948			427			4.51			22,640			714			6.32

Total securities and other earning assets		1,012,156			14,093			2.78			943,017			13,679			2.91

Total interest-earning assets		2,753,324			58,395			4.24			2,611,663			58,923			4.52

Non-interest-earning assets		343,674									339,332

Total assets	$	3,096,998								$	2,950,995

Interest bearing liabilities:
NOW Checking	$	394,390			270			0.14	%	$	328,076			344			0.21	%
Savings, clubs and escrow		454,552			147			0.06			410,913			222			0.11
Money market accounts		615,491			827			0.27			461,730			751			0.33
Certificate accounts		293,775			1,286			0.88			386,885			1,910			0.99

Total interest-bearing deposits		1,758,208			2,530			0.29			1,587,604			3,227			0.41
Borrowings		384,321			6,906			3.59			451,344			7,941			3.53

Total interest-bearing liabilities		2,142,529			9,436			0.88			2,038,948			11,168			1.10

Non- interest bearing deposits		502,072									469,468
Other non-interest-bearing liabilities		17,163									18,156

Total liabilities		2,661,764									2,526,572
Stockholders’ equity		435,234									424,423

Total liabilities and equity	$	3,096,998								$	2,950,995

Net interest rate spread								3.36	%								3.42	%

Net earning assets	$	610,795								$	572,715

Net interest margin					48,959			3.56	%					47,755			3.67	%

Less tax equivalent adjustment ²					(1,816	)								(2,060	)

Net interest income				$	47,143								$	45,695

Ratio of average interest-earning assets to average interest bearing liabilities		128.51	%								128.09	%

¹	Includes non-accrual loans

²	Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate


	Six Months Ended March 31, 2012 vs. 2011 Increase / (Decrease) Due to
	Volume¹			Rate¹			Total
Interest earning assets
Commercial and commercial mortgage loans	$	2,569		$	(2,667	)	$	(98	)
Consumer loans		(234	)		85			(149	)
Residential mortgage loans		(302	)		(393	)		(695	)
Securities-taxable		648			696			1,344
Securities-tax exempt²		(593	)		(104	)		(697	)
Federal Reserve excess reserves		53			1			54
Other earning assets		(92	)		(195	)		(287	)

Total interest income		2,049			(2,577	)		(528	)

Interest-bearing liabilities
NOW checking		59			(133	)		(74	)
Savings		25			(100	)		(75	)
Money market		229			(153	)		76
Certificates of deposit		(427	)		(197	)		(624	)
Borrowings		(1,195	)		160			(1,035	)

Total interest expense		(1,309	)		(423	)		(1,732	)

Net interest margin		3,358			(2,154	)		1,204
Less tax equivalent adjustment²		212			32			244

Net interest income	$	3,570		$	(2,122	)	$	1,448

¹	Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.

²	Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the six months ended March 31, 2012 of $47.1 million an increase of $1.4 million, compared to the period ended March 31, 2011. Gross interest income on a tax-equivalent basis of $58.4 million decreased $528,000 when compared to the same period in fiscal 2011. Interest expense declined by $1.7 million with the decrease mainly in certificates of deposit of $624,000 and borrowings of $1.0 million. The average costs of borrowings decreased due to the Company’s FDIC guaranteed borrowing maturing February 2012.

Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable incurred loan losses inherent in the existing portfolio. The Company recorded $4.8 million in loan loss provisions for the six months ended March 31, 2012, compared to $4.2 million for 2011. Refer to the credit quality section for a discussion on net charge-offs and nonperforming loans. Net charge-offs for the six months ended March 31, 2012 were $4.9 million, which included $3.4 million of specific reserves recorded in prior periods.

Non-interest income for the six months ended March 31, 2012 decreased by $531,000 to $15.1 million. The decrease was mainly attributable to a higher fair value gain on interest rate caps in the prior year, six months ended March 31, 2011 and declines in other loan fees for the six months ended March 31, 2012 compared to the same period ending March 31, 2011.

Non-interest expense for the six months ended March 31, 2012 decreased by 2.4 percent, to $42.0 million, primarily due to lower occupancy and operations, marketing, consulting and FDIC costs declined by $282,000, $756,000, $504,000 and $216,000 respectively. These expense reductions were offset in part by merger-related costs related to the acquisition of Gotham Bank of $546,000 and an increase in foreclosed property expense of $584,000.

Income Tax increased $241,000 to $4.1 million for the six months ended March 31, 2012, compared to $3.8 million for the period ended March 31, 2011. The effective tax rate was relatively unchanged at 26.2 percent and 27.1 percent for the periods ended March 31, 2012 and 2011, respectively.

Liquidity and Capital Resources

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

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

Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial real estate and residential one- to four-family loans, and the purchase of investment securities and mortgage-backed securities. During the six months ended March 31, 2012 and 2011, our loan originations totaled $398.2 million and $299.5 million, respectively. Purchases of securities available for sale totaled $311.7 million and $357.2 million for the six months ended March 31, 2012 and 2011, respectively. Purchases of securities held to maturity totaled $77.1 million and $8.0 million for the six months ended March 31, 2012 and 2011, respectively. These activities were funded primarily by sales of securities, by borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $63.4 million at March 31, 2012, and consisted of $51.4 million at adjustable or variable rates and $12.0 million at fixed rates. Unused lines of credit granted to customers were $234.9 million at March 31, 2012. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit.

The Company’s investments in BOLI are considered illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. The recorded value of BOLI contracts totaled $58.0 million and $57.0 million at March 31, 2012 and September 30, 2011, 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 increase in total deposits was $72.3 million and decrease of $52.8 million for the six months ended March 31, 2012 and 2011, respectively. Based upon prior experience and our current pricing strategy, management believes that a significant portion of deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment.

Credit spreads narrowed steadily during the past year and many are very near historically low levels. Nevertheless, loan demand remains down, causing liquidity to remain high. Furthermore, the extremely low interest rate environment caused our deposits to remain at elevated levels which have also strengthened our liquidity position. Many banks are experiencing a situation similar to ours resulting in the industry liquidity to be at significantly elevated levels. However, much of this liquidity is held in the form of very short-term securities. The preference of depositors to stay short could lead to potential liquidity reductions in the future if we do not raise rates to retain these funds.

We generally remain fully invested and utilize additional sources of funds through Federal Home Loan Bank of New York (“FHLB”) advances and other sources of which $313.8 million was outstanding at March 31, 2012. At March 31, 2012, we had the ability to borrow an additional $253.0 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow up to an additional $211.0 million by pledging securities not required to be pledged for other purposes as of March 31, 2012. Further, at March 31, 2012 we had $34.1 million in Brokered Deposits (including certificates of deposit accounts registry service (CDAR’s) reciprocal CD’s of $1.4 million) and have relationships with several brokers to utilize these low cost sources of funding should conditions warrant further sources of funds.

The Company has an effective shelf registration covering $75 million of debt and equity securities that may be used, subject to Board authorization and market conditions, to issue equity or debt securities at our discretion. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms at any given time or at all.

The Bank provides supplemental reporting of Non-GAAP tangible equity ratios as management believes this information is useful to investors. As of March 31, 2012, the Company’s tangible capital as a percent of tangible assets increased 8 basis points to 9.02 percent, and its tangible book value increased $0.23 to $7.25 per share, compared to September 30, 2011. The following table shows the reconciliation of tangible equity and the tangible equity ratio:


	March 31, 2012			September 30, 2011
Total assets	$	3,210,871		$	3,137,402
Goodwill and other amortizable intangibles		(164,862	)		(165,490	)

Tangible assets	$	3,046,009		$	2,971,912


Stockholders’ equity	$	439,699		$	431,134
Goodwill and other amortizable intangibles		(164,862	)		(165,490	)

Tangible stockholders’ equity	$	274,837		$	265,644

Outstanding Shares		37,899,007			37,864,008
Tangible capital as a % of tangible assets (consolidated)		9.02	%		8.94	%
Tangible book value per share	$	7.25		$	7.02

The Company declared a dividend of $0.06 per share payable on May 17, 2012 to stockholders of record on May 7, 2012.

The following table sets forth the Bank’s regulatory capital position at March 31, 2012 and September 30, 2011, compared to OCC requirements:


						OCC requirements
	Bank actual					Minimum capital adequacy					Classification as well capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2012:
Tangible capital	$	252,586		8.3	%	$	45,629		1.5	%	$	—		—
Tier 1 (core) capital		252,586		8.3			121,676		4.0			152,096		5.0	%
Risk-based capital:
Tier 1		252,586		12.7			—		—			119,465		6.0
Total		277,512		13.9	%		159,286		8.0	%		199,108		10.0	%

September 30, 2011:
Tangible capital	$	241,196		8.1	%	$	44,460		1.5	%	$	—		—
Tier 1 (core) capital		241,196		8.1			118,559		4.0			148,199		5.0	%
Risk-based capital:
Tier 1		241,196		11.8			—		—			122,126		6.0
Total		265,307		13.0	%		162,835		8.0	%		203,544		10.0	%

The levels are well above current regulatory capital requirements to be considered well capitalized. Management is currently studying the impact on capital requirements resulting from the Basel III accords.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial mortgage loans, commercial 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 or securitize all, or a portion of such longer-term loans, generally on a servicing-retained basis. We also invest in shorter-term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.

Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NII”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Company and the Bank’s 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. The model assumes estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem reasonable, based on historical experience during prior interest rate changes.

Estimated Changes in NPV and NII. The table below sets forth, as of March 31, 2012, the estimated changes in our (1) NPV that would result from the designated instantaneous changes in the forward rate curves, and (2) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.


Interest Rates		Estimated		in NPV						Estimated		Estimated NII
(basis points)		NPV		Amount			Percent			NII		Amount			Percent
		(Dollars in thousands)
	+300	$	300,557	$	(81,557	)		-21.3	%	$	106,837	$	7,645			7.7	%
	+200		332,672		(49,442	)		-12.9	%		104,751		5,559			5.6	%
	+100		361,098		(21,016	)		-5.5	%		102,026		2,834			2.9	%
	0		382,114		0			0.0	%		99,192		0			0.0	%
	-100		389,083		7,269			1.9	%		93,412		(5,780	)		-5.8	%

The table set forth above indicates that at March 31, 2012, in the event of an immediate 200 basis point increase in interest rates, we would be expected to experience a 12.9 percent decrease in NPV and a 5.6 percent increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on NPV and NII beyond -100 basis points.

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

During the second quarter of fiscal year 2012, the federal funds target rate remained in a range of 0.00 – 0.25 percent as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities increased 8 basis points from 0.25 percent to 0.33 percent at the end of the second quarter of fiscal year 2012 while the yield on U.S. Treasury 10 year notes increased 34 basis points from 1.89 percent to 2.23 percent over the same six month period. The disproportionate increase in yield on longer term maturities resulted in the 2-10 year treasury yield curve being steeper at the end of the second quarter of fiscal 2012 than it was when the year began. To fight the economic downturn the FOMC declared a willingness to keep the federal funds target low for an “extended period”. Furthermore, during the second quarter of the current fiscal year the FOMC stated that it anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. However, should economic conditions improve, the FOMC could reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionably more than the longer end thereby resulting in margin compression.

Item 4.

Controls and Procedures

The Company’s management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is properly recorded, processed, summarized and reported within the time frames specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is not involved in any pending legal proceedings which, in the aggregate, management believes to be material to the consolidated financial condition and operations of the Company.

Item 1A.

Risk Factors

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A of the Company’s most recent annual report on Form 10-K. See also Part I, Item 2 (Forward-Looking Statements) of this quarterly report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in the Company’s most recent annual report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not applicable.

(b)	Not applicable

(c)	Issuer Purchases of Equity Securities—NONE

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Not Applicable

Item 5.

Other Information

None

Item 6.

Exhibits


Exhibit Number		Description
31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-
		Oxley Act of 2002

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-
		Oxley Act of 2002

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document ^{1(filed herewith)}

101.SCH		XBRL Taxonomy Extension Schema Document ^{1(filed herewith)}

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document ^{1(filed herewith)}

101.LAB		XBRL Taxonomy Extension Label Linkbase Document ^{1(filed herewith)}

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document ^{1(filed herewith)}

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document ^{1(filed herewith)}

¹	In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed “not filed” for purposes of section 18 of the exchange act, and otherwise are not subject to liability under that section.

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: May 10, 2012	By:	/s/ Jack Kopnisky
		Jack Kopnisky
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date: May 10, 2012	By:	/s/ Stephen V. Masterson
		Stephen V. Masterson
		Executive Vice President
		Chief Financial Officer
		Principal Accounting Officer
		(Principal Financial Officer)