PBNY-2012 12.31 Master 10Q (1) (1)

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10-Q 1 pbny-20121231master10q11.htm 10-Q PBNY-2012 12.31 Master 10Q (1) (1)

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 December 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 February 7, 2013
$0.01 per share		44,348,787

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

QUARTERLY PERIOD ENDED DECEMBER 31, 2012



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

	Consolidated Statements of Financial Condition (unaudited) at December 31, 2012 and September 30, 2012	3
	Consolidated Statements of Income (unaudited) for the Three Months Ended December 31, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2012 and 2011	5
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three Months Ended December 31, 2012	6
	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended December 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	44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	54

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3.	Defaults Upon Senior Securities	55

Item 4.	Mine Safety Disclosures	55

Item 5.	Other Information	55

Item 6.	Exhibits	56
	Signatures	57

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(In thousands, except share data)



	December 31, 2012			September 30, 2012
ASSETS
Cash and due from banks	$	160,241		$	437,982
Securities:
Available for sale	991,298			1,010,872
Held to maturity, at amortized cost (fair value of $143,089 and $146,324 at December 31, 2012 and September 30, 2012, respectively)	139,874			142,376
Total securities	1,131,172			1,153,248
Assets held for sale	—			4,550
Loans held for sale	5,423			7,505
Gross loans	2,193,129			2,119,472
Allowance for loan losses	(28,114		)	(28,282		)
Total loans, net	2,165,015			2,091,190
Federal Home Loan Bank (“FHLB”) stock, at cost	19,246			19,249
Accrued interest receivable	10,429			10,513
Premises and equipment, net	38,086			38,483
Goodwill	163,247			163,247
Core deposit and other intangible assets	6,926			7,164
Bank owned life insurance (“BOLI”)	59,526			59,017
Foreclosed properties	7,053			6,403
Other assets	23,150			24,431
Total assets	$	3,789,514		$	4,022,982
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	2,904,384		$	3,111,151
FHLB and other borrowings	345,411			345,176
Mortgage escrow funds	19,577			11,919
Other liabilities	26,259			63,614
Total liabilities	3,295,631			3,531,860
Commitment and contingent liabilities
STOCKHOLDERS’ EQUITY
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)	—			—
Common stock (par value $0.01 per share; 75,000,000 shares authorized; 52,188,056 issued; 44,348,787 and 44,173,470 shares outstanding at December 31, 2012 and September 30, 2012, respectively)	522			522
Additional paid-in capital	402,450			403,541
Unallocated common stock held by employee stock ownership plan (“ESOP”)	(5,513		)	(5,638		)
Treasury stock, at cost (7,839,269 and 8,014,586 shares at December 31, 2012 and September 30, 2012, respectively)	(88,573		)	(90,173		)
Retained earnings	180,332			175,971
Accumulated other comprehensive income, net of taxes	4,665			6,899
Total stockholders’ equity	493,883			491,122
Total liabilities and stockholders’ equity	$	3,789,514		$	4,022,982

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share data)



	For the three months ended December 31,
	2012			2011
Interest and dividend income:
Loans	$	27,071		$	22,149
Taxable securities	4,284			3,990
Non-taxable securities	1,457			1,774
Other earning assets	333			255
Total interest and dividend income	33,145			28,168
Interest expense:
Deposits	2,097			1,313
Borrowings	3,125			3,617
Total interest expense	5,222			4,930
Net interest income	27,923			23,238
Provision for loan losses	2,950			1,950
Net interest income after provision for loan losses	24,973			21,288
Non-interest income:
Deposit fees and service charges	2,778			2,790
Net gain on sale of securities	1,416			1,989
Other than temporary impairment on securities	(66		)	(536		)
Loss recognized in other comprehensive income	41			498
Net impairment loss in earnings	(25		)	(38		)
Bank owned life insurance	509			518
Gain on sale of loans	746			440
Investment management fees	705			765
Other	1,530			712
Total non-interest income	7,659			7,176
Non-interest expense:
Compensation and employee benefits	12,299			10,925
Stock-based compensation	500			275
Occupancy and office operations	3,810			3,701
Advertising and promotion	244			613
Professional fees	1,215			927
Data and check processing	649			672
Foreclosed property expense	285			205
Other	3,544			3,403
Total non-interest expense	22,546			20,721
Income before income tax expense	10,086			7,743
Income tax expense	3,066			2,026
Net income	$	7,020		$	5,717
Weighted average common shares basic	43,637,315			37,252,464
Weighted average common shares diluted	43,721,091			37,252,464
Per common share basic	$	0.16		$	0.15
Per common share diluted	$	0.16		$	0.15

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(In thousands, except share data)



	For the three months ended December 31,
	2012			2011
Net income	$	7,020		$	5,717
Other comprehensive (loss) income:
Net unrealized holding (losses) gains on securities available for sale net of related (benefit) tax expense of ($1,154) and $2,310	(1,693		)	3,376
Less:
Reclassification adjustment for net realized gains included in net income, net of related income tax expense of $575 and $808	841			1,181
Reclassification adjustment for other than temporary impaired losses included in net income, net of related income tax benefit of ($10) and ($15)	(15		)	(23		)
	(2,519		)	2,218
Change in funded status of defined benefit plans, net of related income tax expense of $195 and $229	285			338
Other comprehensive (loss) income	(2,234		)	2,556
Total comprehensive income	$	4,786		$	8,273

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS 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, 2012	44,173,470		$	522	$	403,541		$	(5,638	)	$	(90,173	)	$	175,971		$	6,899		$	491,122
Net income	—													7,020			—			7,020
Other comprehensive income	—																(2,234		)	(2,234		)
Deferred compensation transactions	—		—		13			—			—			—			—			13
Stock option transactions, net	—		—		160			—			—			—			—			160
ESOP shares allocated or committed to be released for allocation (12,483 shares)	—		—		133			125			—			—			—			258
Recognition and Retention Plan (“RRP”) Awards	186,900		—		(1,688		)	—			1,688			—			—			—
Vesting of RRP Awards	—		—		291			—			—			—			—			291
Other RRP Awards	(9,300	)	—		—			—			(67		)	—			—			(67		)
Purchase of treasury shares	(2,283	)	—		—			—			(21		)	—			—			(21		)
Cash dividends paid ($0.06 per common share)	—		—		—			—			—			(2,659		)	—			(2,659		)
Balance at December 31, 2012	44,348,787		$	522	$	402,450		$	(5,513	)	$	(88,573	)	$	180,332		$	4,665		$	493,883

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)



	For the three months ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	7,020		$	5,717
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,950			1,950
Loss on real estate owned	155			56
Depreciation of premises and equipment	1,158			1,255
Amortization of intangibles	238			323
Net gain on loans held for sale	(746		)	(440		)
Other than temporary impairment loss recorded in earnings	25			38
Net gain on sale of securities	(1,416		)	(1,989		)
Fair value loss on interest rate cap	1			3
Net gain on sale of premises and equipment	(5		)	—
Net amortization of premium on securities	765			677
(Amortization) accretion on borrowings	(69		)	1
Accretion of early extinguishment fees on borrowings	367			360
ESOP and RRP expense	340			143
ESOP forfeitures	—			(1		)
Stock option compensation expense	160			133
Originations of loans held for sale	(24,701		)	(15,204		)
Proceeds from sales of loans held for sale	27,529			17,678
Increase in cash surrender value of bank owned life insurance	(509		)	(518		)
Net changes in accrued interest receivable and payable	(53		)	786
Other adjustments (principally net changes in other assets and other liabilities)	(29,519		)	3,378
Net cash (used in) provided by operating activities	(16,310		)	14,346
Cash flows from investing activities:
Purchases of available for sale securities	(87,084		)	(151,185		)
Purchases of held to maturity securities	(21,926		)	(76,832		)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale	61,352			27,083
Held to maturity	24,157			4,710
Proceeds from sales of securities available for sale	41,965			83,579
Loan originations	(266,435		)	(216,422		)
Loan principal payments	188,279			141,718
Proceeds from sales of other real estate owned	711			695
Sale (purchase) of FHLB stock, net	3			(4,205		)
Purchases of premises and equipment	(756		)	(229		)
Net cash used in investing activities	(59,734		)	(191,088		)

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)



	For the three months ended December 31,
	2012			2011
Cash flows from financing activities:
Net decrease in transaction, savings and money market deposits	(183,991		)	(168,515		)
Net (decrease) increase in time deposits	(22,776		)	7,375
Net increase in short-term borrowings	—			93,499
Gross repayments of long-term borrowings	(63		)	(60		)
Payment of penalties on restructured borrowings	—			(278		)
Net increase in mortgage escrow funds	7,658			8,896
Treasury shares purchased	(21		)	—
Stock option transactions	142			154
Other stock-based compensation transactions	13			125
Cash dividends paid	(2,659		)	(2,279		)
Net cash used in financing activities	(201,697		)	(61,083		)
Net decrease in cash and cash equivalents	(277,741		)	(237,825		)
Cash and cash equivalents at beginning of period	437,982			281,512
Cash and cash equivalents at end of period	$	160,241		$	43,687
Supplemental information:
Interest payments	$	5,359		$	4,618
Income tax payments	117			36
Change in net unrealized gains recorded on securities available for sale	(4,238		)	3,735
Change in deferred taxes on net unrealized gains on securities available for sale	1,723			(1,517		)
Real estate acquired in settlement of loans	1,381			988

See accompanying notes to unaudited consolidated financial statements

Table of Contents

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 Company, Inc., a title insurance agency, which provides title searches and title insurance for residential and commercial real estate, Hudson Valley Investment Advisors, LLC (“HVIA”), a registered investment advisor, the assets of which were sold in November 2012, with modest results from operations included in the Company’s financial statements for fiscal 2013, Provident Risk Management, (a Vermont 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 Bank’s market area, (ii) Provident REIT, Inc. and WSB Funding, Inc. which are real estate investment trusts that hold a portion of the Bank’s real estate mortgage loans, (iii) Provest Services Corp. I, which has invested in a low-income housing partnership, (iv) Provest Services Corp. II, a New York licensed insurance agent, 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 has interest rate caps with a notional value of $50,000 outstanding at December 31, 2012 and September 30, 2012. 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 its operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented clear. The results of operations for the three months ended December 31, 2012 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2013. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2012.

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

2. Securities

Securities available for sale

The following is a summary of securities available for sale:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
December 31, 2012
Residential mortgage-backed securities:
Fannie Mae	$	128,825	$	4,248	$	(21	)	$	133,052
Freddie Mac	66,203		2,852		—			69,055
Ginnie Mae	4,153		280		—			4,433
CMO/Other MBS	185,510		1,981		(89		)	187,402
Total residential mortgage-backed securities	384,691		9,361		(110		)	393,942
Other securities:
Federal agencies	426,633		3,208		(225		)	429,616
Obligations of states and political subdivisions	157,772		9,117		(225		)	166,664
Equities	1,076		—		—			1,076
Total other securities	585,481		12,325		(450		)	597,356
Total securities available for sale	$	970,172	$	21,686	$	(560	)	$	991,298
September 30, 2012
Residential mortgage-backed securities:
Fannie Mae	$	155,601	$	5,806	$	—		$	161,407
Freddie Mac	81,509		3,751		—			85,260
Ginnie Mae	4,488		290		—			4,778
CMO/Other MBS	191,867		1,787		(590		)	193,064
Total residential mortgage-backed securities	433,465		11,634		(590		)	444,509
Other securities:
Federal agencies	404,820		4,013		(10		)	408,823
Obligations of states and political subdivisions	146,136		10,349		(4		)	156,481
Equities	1,087		—		(28		)	1,059
Total other securities	552,043		14,362		(42		)	566,363
Total securities available for sale	$	985,508	$	25,996	$	(632	)	$	1,010,872

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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, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or prepay their obligations.



	December 31, 2012
	Amortized cost		Fair value
Remaining period to contractual maturity:
One year or less	$	2,521	$	2,545
One to five years	123,495		126,080
Five to ten years	416,728		423,904
Greater than ten years	41,661		43,751
Total other securities	584,405		596,280
Residential mortgage-backed securities	384,691		393,942
Equities	1,076		1,076
Total securities available for sale	$	970,172	$	991,298

Proceeds from sales of securities available for sale totaled $41,965 and $83,579 during the three months ending December 31, 2012 and 2011, respectively. These sales resulted in gross realized gains of $1,416 and $1,989 for the three months ended December 31, 2012 and 2011, respectively.

Securities, including some held to maturity securities, with carrying amounts of $248,025 and $245,989 were pledged as collateral for borrowings at December 31, 2012 and September 30, 2012, respectively. Securities with carrying amounts of $494,543 and $506,079 were pledged as collateral for municipal deposits and other purposes at December 31, 2012 and September 30, 2012.

The following table summarizes those securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position:



	Continuous unrealized loss position
	Less than 12 Months					12 months or longer				Total
	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
December 31, 2012
Agency-backed	$	10,117	$	(21	)	$	—	$	—	$	10,117	$	(21	)
CMO/Other MBS	31,323		(89		)	—		—		31,323		(89		)
Total residential mortgage-backed securities	41,440		(110		)	—		—		41,440		(110		)
Federal agencies	69,464		(225		)	—		—		69,464		(225		)
Obligations of states and political subdivisions	15,233		(225		)	—		—		15,233		(225		)
Total	$	126,137	$	(560	)	$	—	$	—	$	126,137	$	(560	)

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)



	Continuous unrealized loss position
	Less Than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
September 30, 2012
CMO/Other MBS	$	64,065	$	(590	)	$	—	$	—		$	64,065	$	(590	)
Federal agencies	4,993		(10		)	—		—			4,993		(10		)
Obligations of states and political subdivisions	716		(4		)	—		—			716		(4		)
Equities	—		—			809		(28		)	809		(28		)
Total	$	69,774	$	(604	)	$	809	$	(28	)	$	70,583	$	(632	)

The Company follows the guidance of 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 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 December 31, 2012, the Company concluded that it expects to recover the amortized cost basis of all of its debt securities, on all but two private label collateralized mortgage-backed securities (“CMOs”). Impairment charges on these securities totaled $14 and $38 for the three months ended December 31, 2012 and December 31, 2011, respectively. At December 31, 2012 total cumulative impairment charges on two private label CMOs total $136. As of December 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 debt securities with unrealized losses prior to recovery of its amortized cost basis less any accumulated other than current-period applicable credit losses.

The losses related to privately issued residential CMOs 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 other than temporary impairment (“OTTI”) loss. Inputs to the DCF 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 December 31, 2012 relate to investment grade debt securities and are attributable to changes in market interest rates subsequent to purchase. At December 31, 2012, a total of 80 available for sale securities were in a continuous unrealized loss position for less than 12 months and no securities for 12 months or longer. For debt securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.

Within the CMO category of the available for sale portfolio there are four individual private label CMOs that had an amortized cost of $4,333 and a fair value (carrying value) of $4,360 as of December 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 CMOs had an amortized cost of $3,935 and a fair value of $3,953 at December 31, 2012. The remaining two securities are rated at or above Ba1 and were performing as of December 31, 2012 and are expected to perform based on current information. In determining whether OTTI existed on these particular debt securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit risk and liquidity risk, and determined that no losses were expected. The Company will continue to evaluate its investment securities portfolio for OTTI on at least a quarterly basis.

Excluding FHLB and New York Business Development Corporation stock, the Company owned one equity security with a balance of $826 and $809 at December 31, 2012 and September 30, 2012, respectively. During the three months ended December 31, 2012 and December 31, 2011 the Company incurred an OTTI charge on this equity security of $11 and $0, respectively. At December 31, 2012, accumulated OTTI charge on this security was $215. The Company may not hold this equity security until the unrealized loss position of the security is recovered; therefore, in accordance with FASB ASC 320 the security was determined to be OTTI.

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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
December 31, 2012
Residential mortgage-backed securities:
Fannie Mae	$	25,886	$	916	$	—		$	26,802
Freddie Mac	37,025		975		—			38,000
CMO/Other MBS	26,252		306		(8		)	26,550
Total residential mortgage-backed securities	89,163		2,197		(8		)	91,352
Other securities:
Federal agencies	34,988		65		(57		)	34,996
Obligations of states and political subdivisions	14,223		997		—			15,220
Other	1,500		21		—			1,521
Total other securities	50,711		1,083		(57		)	51,737
Total held to maturity	$	139,874	$	3,280	$	(65	)	$	143,089
September 30, 2012
Residential mortgage-backed securities:
Fannie Mae	$	28,637	$	1,212	$	—		$	29,849
Freddie Mac	42,706		1,347		—			44,053
CMO/Other MBS	27,921		226		(28		)	28,119
Total residential mortgage-backed securities	99,264		2,785		(28		)	102,021
Other securities:
Federal agencies	22,236		106		—			22,342
Obligations of states and political subdivisions	19,376		1,059		—			20,435
Other	1,500		26		—			1,526
Total other securities	43,112		1,191		—			44,303
Total held to maturity	$	142,376	$	3,976	$	(28	)	$	146,324

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.



	December 31, 2012
	Amortized cost		Fair value
Remaining period to contractual maturity:
One year or less	$	5,100	$	5,127
One to five years	3,158		3,295
Five to ten years	38,564		39,028
Greater than ten years	3,889		4,287
Total other securities	50,711		51,737
Residential mortgage-backed securities	89,163		91,352
Total held to maturity securities	$	139,874	$	143,089

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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
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
December 31, 2012
CMO/Other MBS	$	—	$	—		$	4,472	$	(8	)	$	4,472	$	(8	)
Federal agencies	9,936		(57		)	—		—			9,936		(57		)
Total	$	9,936	$	(57	)	$	4,472	$	(8	)	$	14,408	$	(65	)



	Continuous unrealized loss position
	Less than 12 Months					12 Months or longer				Total
	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
September 30, 2012
CMO/Other MBS	$	13,189	$	(28	)	$	—	$	—	$	13,189	$	(28	)
Total	$	13,189	$	(28	)	$	—	$	—	$	13,189	$	(28	)

All of the unrealized losses on held to maturity securities at December 31, 2012 were 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 December 31, 2012. There was one held-to-maturity security in a continuous unrealized loss position for more than 12 months and two securities in a continuous unrealized loss position 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 December 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.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

3. Loans

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



	December 31, 2012			September 30, 2012
One-to four-family residential	$	352,014		$	350,022
Commercial:
Commercial real estate	1,136,965			1,072,504
Commercial & industrial	376,052			343,307
Acquisition, development & construction	122,518			144,061
Total commercial	1,635,535			1,559,872
Consumer:
Home equity lines of credit	163,313			165,200
Homeowner	33,226			34,999
Other consumer loans	9,041			9,379
Total consumer	205,580			209,578
Total loans	2,193,129			2,119,472
Allowance for loan losses	(28,114		)	(28,282		)
Total loans, net	$	2,165,015		$	2,091,190

Total loans include net deferred loan origination costs of $109 at December 31, 2012 and net deferred loan origination fees of ($310) at September 30, 2012.

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 non-refundable 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. Generally, commercial loans that are unsecured are charged off when the Bank determines the borrower is incapable of servicing the debt and there is little or no prospect for near term improvement, or earlier in the case of bankruptcy. In the case of secured loans, loans are charged-off when the the borrower is incapable of servicing the debt and the amount due from the borrower is in excess of the calculated current fair value of the collateral. Consumer loans are generally charged-off based on the number of days the loan is delinquent in accordance with regulatory guidelines or earlier in the case of bankruptcy. 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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, loan review and economic conditions are taken into consideration.

The allowance 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 the 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 Bank 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 less costs to sell, 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. Loans in the commercial real estate segment are re-appraised using a summary report every six to nine months, and segments for residential mortgages, HELOCs, 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 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 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 loan segments that are not secured by real estate are written off to the allowance between 90 or 120 days of delinquency or sooner if deemed uncollectible such as in the case of a bankruptcy. Once charged-off all subsequent collection and legal fees are expensed as incurred.

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 other loan types such as loans to fund the purchase of a primary residence due to the generally larger loan amounts and dependency on income production or sale of the real estate.

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 criticized loans (loans graded special mention) or classified loans (loans graded substandard or doubtful), and reviewed by the Portfolio Risk Management Department. A 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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

rating of the loan and economic conditions affecting the borrower’s industry, among other things. Loans identified as losses by management are charged-off.

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 the Bank. Management’s 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 the Bank’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, historical losses, 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.

Included in the Company’s loan portfolio are loans acquired from Gotham Bank. These loans were recorded at fair value at acquisition. These loans carried a balance of $188,110 and $205,764 at December 31, 2012 and September 30, 2012, respectively. The discount associated with these loans which includes adjustments associated with market interest rates and anticipated credit losses, was $3,387 and $3,924 at December 31, 2012 and September 30, 2012, respectively. We evaluate Gotham Bank acquired loans for impairment collectively. None of the Gotham Bank acquired loans were identified as purchase credit impaired at acquisition.

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



	For the three months ended December 31, 2012
	Beginning allowance for loan losses		Charge-offs			Recoveries		Net charge-offs			Provision for losses		Ending allowance for loan losses
One-to four-family residential	$	4,359	$	(950	)	$	51	$	(899	)	$	908	$	4,368
Commercial real estate	7,230		(228		)	81		(147		)	533		7,616
Commercial & industrial	4,603		(159		)	120		(39		)	969		5,533
Acquisition, development & construction	8,526		(1,594		)	5		(1,589		)	89		7,026
Consumer	3,564		(483		)	39		(444		)	451		3,571
Total loans	$	28,282	$	(3,414	)	$	296	$	(3,118	)	$	2,950	$	28,114

Annualized net charge-offs to average gross loans								0.58		%

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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 December 31, 2011 are summarized below:



	For the three months ended December 31, 2011
	Beginning allowance for loan losses		Charge-offs			Recoveries		Net charge-offs			Provision for losses			Ending allowance for loan losses
One-to four-family residential	$	3,498	$	(789	)	$	119	$	(670	)	$	1,339		$	4,167
Commercial real estate	5,568		(946		)	350		(596		)	550			5,522
Commercial & industrial	5,945		(208		)	546		338			(662		)	5,621
Acquisition, development & construction	9,895		(275		)	—		(275		)	(217		)	9,403
Consumer	3,011		(462		)	43		(419		)	940			3,532
Total loans	$	27,917	$	(2,680	)	$	1,058	$	(1,622	)	$	1,950		$	28,245

Annualized net charge-offs to average gross loans outstanding								0.37		%

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




	Individually evaluated for impairment		Collectively evaluated for impairment		Total loans
One-to four-family residential	$	12,269	$	339,745	$	352,014
Commercial real estate	17,243		1,119,722		1,136,965
Commercial & industrial	2,592		373,460		376,052
Acquisition, development & construction	16,565		105,953		122,518
Consumer	3,238		202,342		205,580
Total loans	$	51,907	$	2,141,222	$	2,193,129

The following table sets forth the loans evaluated for impairment by segment at September 30, 2012:




	Individually evaluated for impairment		Collectively evaluated for impairment		Total loans
One-to four-family residential	$	12,739	$	337,283	$	350,022
Commercial real estate	13,017		1,059,487		1,072,504
Commercial & industrial	357		342,950		343,307
Acquisition, development & construction	24,880		119,181		144,061
Consumer	2,299		207,279		209,578
Total loans	$	53,292	$	2,066,180	$	2,119,472

The acquired Gotham loans are collectively evaluated for impairment.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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




	Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance for loan losses
One-to four-family residential	$	611	$	3,757	$	4,368
Commercial real estate	700		6,916		7,616
Commercial & industrial	946		4,587		5,533
Acquisition, development & construction	289		6,737		7,026
Consumer	176		3,395		3,571
Total allowance	$	2,722	$	25,392	$	28,114

The following table sets forth the allowance evaluated for impairment by segment at September 30, 2012:




	Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance for loan losses
One-to four-family residential	$	871	$	3,488	$	4,359
Commercial real estate	1,036		6,194		7,230
Commercial & industrial	48		4,555		4,603
Acquisition, development & construction	996		7,530		8,526
Consumer	263		3,301		3,564
Total allowance	$	3,214	$	25,068	$	28,282

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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 at December 31, 2012:



	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
One-to four-family residential	$	8,395	$	6,890	$	—
Commercial real estate	13,633		12,238		—
Commercial & industrial	225		225		—
Acquisition, development & construction	14,557		13,646		—
Consumer	2,601		2,456		—
Subtotal	39,411		35,455		—
With an allowance recorded:
One-to four-family residential	6,959		5,379		611
Commercial real estate	6,260		5,005		700
Commercial & industrial	3,361		2,367		946
Acquisition, development & construction	3,275		2,919		289
Consumer	958		782		176
Subtotal	20,813		16,452		2,722
Total	$	60,224	$	51,907	$	2,722

The following table presents loans individually evaluated for impairment by segment of loans at September 30, 2012:



	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
One-to four-family residential	$	6,193	$	5,413	$	—
Commercial real estate	9,296		7,837		—
Commercial & industrial	262		262		—
Acquisition, development & construction	24,144		20,597		—
Consumer	1,146		1,122		—
Subtotal	41,041		35,231		—
With an allowance recorded:
One-to four-family residential	8,485		7,326		871
Commercial real estate	5,942		5,180		1,036
Commercial & industrial	95		95		48
Acquisition, development & construction	7,159		4,283		996
Consumer	1,400		1,177		263
Subtotal	23,081		18,061		3,214
Total	$	64,122	$	53,292	$	3,214

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table presents average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment at December 31, 2012:



	QTD average recorded investment		Interest income recognized		Cash-basis interest income recognized
With no related allowance recorded:
One-to four-family residential	$	7,237	$	43	$	31
Commercial real estate	12,458		58		54
Commercial & industrial	225		2		4
Acquisition, development & construction	13,760		87		48
Consumer	2,477		8		1
Subtotal	36,157		198		134
With an allowance recorded:
One-to four-family residential	5,484		17		18
Commercial real estate	5,025		14		—
Commercial & industrial	2,410		21		6
Acquisition, development & construction	2,919		40		—
Consumer	784		—		—
Subtotal	16,622		92		24
Total	$	52,779	$	290	$	158

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table presents average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment at December 31, 2011:



	QTD average recorded investment		Interest income recognized		Cash-basis interest income recognized
With no related allowance recorded:
One-to four-family residential	$	2,729	$	30	$	12
Commercial real estate	9,244		107		69
Commercial & industrial	673		5		4
Acquisition, development & construction	22,660		201		108
Consumer	1,697		15		4
Subtotal	37,003		358		197
With an allowance recorded:
One-to four-family residential	5,595		32		31
Commercial real estate	5,051		19		10
Commercial & industrial	118		3		2
Acquisition, development & construction	11,750		85		81
Consumer	842		9		6
Subtotal	23,356		148		130
Total	$	60,359	$	506	$	327

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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, and troubled debt restructurings at December 31, 2012 and September 30, 2012:



	December 31, 2012
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
Loans by segment:
One-to four-family residential	$	338,168	$	1,826	$	947	$	2,461	$	8,612	$	352,014
Commercial real estate	1,120,878		2,020		178		2,178		11,711		1,136,965
Commercial & industrial	368,618		3,183		3,161		483		607		376,052
Acquisition, development & construction loans	115,805		—		2,450		—		4,263		122,518
Consumer	201,765		520		57		701		2,537		205,580
Total	$	2,145,234	$	7,549	$	6,793	$	5,823	$	27,730	$	2,193,129
Total TDRs included above	$	15,401	$	269	$	2,717	$	—	$	2,592	$	20,979
Non-performing assets:
Loans 90+ days past due and still accruing									$	5,823
Non-accrual loans									27,730
Total non-performing loans									$	33,553



	September 30, 2012
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
Loans by segment:
One-to four-family residential	$	337,356	$	855	$	497	$	2,263	$	9,051	$	350,022
Commercial real estate	1,060,176		902		973		1,638		8,815		1,072,504
Commercial & industrial	342,726		96		141		—		344		343,307
Acquisition, development & construction loans	121,590		7,067		—		—		15,404		144,061
Consumer	205,463		1,551		265		469		1,830		209,578
Total	$	2,067,311	$	10,471	$	1,876	$	4,370	$	35,444	$	2,119,472
Total TDRs included above	$	13,543	$	270	$	264	$	—	$	10,870	$	24,947
Non-performing assets:
Loans 90+ days past due and still accruing									$	4,370
Non-accrual loans									35,444
Total non-performing loans									$	39,814

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Troubled Debt Restructuring:

Troubled debt restructurings (“TDRs”) are renegotiated loans for which concessions have been granted to borrowers that are experiencing financial difficulty and which would not have been otherwise granted by the Bank. 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 Bank’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 6 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 TDRs 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 regulatory guidelines.

The following tables set forth the amounts of the Company’s TDRs at December 31, 2012 and September 30, 2012:



	December 31, 2012
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
One-to four-family residential	$	930	$	—	$	267	$	—	$	2,396	$	3,593
Commercial real estate	3,086		269		—		—		—		3,355
Commercial & industrial	1,500		—		—		—		—		1,500
Acquisition, development & construction	9,885		—		2,450		—		196		12,531
Total	$	15,401	$	269	$	2,717	$	—	$	2,592	$	20,979
Allowance for loan losses	$	269	$	—	$	20	$	—	$	198	$	487



	September 30, 2012
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
One-to four-family residential	$	1,226	$	—	$	264	$	—	$	2,178	$	3,668
Commercial real estate	2,640		270		—		—		—		2,910
Acquisition, development & construction	9,677		—		—		—		8,692		18,369
Total	$	13,543	$	270	$	264	$	—	$	10,870	$	24,947
Allowance for loan losses	$	—	$	—	$	41	$	—	$	955	$	996

The Company has outstanding commitments to lend additional amounts totaling up to $0 and $4,225 as of December 31, 2012, and September 30, 2012, to customers with outstanding loans that are classified as TDRs.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table presents loans by segment modified as TDRs that occurred during the three months ended December 31, 2012:



		Recorded investment
	Number of loans	Pre- modification		Post- modification
Restructured loans:
One-to four-family residential	1	$	275	$	275
Commercial real estate	1	450		450
Commercial & industrial	1	1,500		1,500
Acquisition, development & construction	2	2,723		2,723
Total restructured loans	5	$	4,948	$	4,948

The following table presents loans by segment modified as TDRs that occurred during the three months ended December 31, 2011:



		Recorded investment
	Number of loans	Pre- modification		Post- modification
Restructured loans:
One-to four-family residential	2	$	328	$	314
Commercial real estate	1	159		159
Total restructured loans	3	$	487	$	473

The TDRs described above increased the allowance for loan losses by $218 and $134 for the three months ended December 31, 2012 and 2011, respectively. There were $0 and $11 in charge-offs as a result of the above TDRs, for the respective periods.

There were no loans that were modified as TDRs during the last twelve months that had subsequently defaulted during the three months ended December 31, 2012.

Credit Quality Indicators

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

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

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

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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 December 31, 2012 and September 30, 2012, the risk category of loans by segment of gross loans is as follows:



	December 31, 2012
	Special mention		Substandard		Doubtful
One-to four-family residential	$	1,620	$	10,608	$	—
Commercial real estate	11,099		31,046		—
Acquisition, development & construction	2,831		29,766		—
Commercial & industrial	14,183		7,961		254
Consumer	22		3,474		—
Total	$	29,755	$	82,855	$	254



	September 30, 2012
	Special mention		Substandard		Doubtful
One-to four-family residential	$	830	$	11,314	$	—
Commercial real estate	20,729		27,674		—
Acquisition, development & construction	5,669		42,871		—
Commercial & industrial	14,920		3,995		338
Consumer	274		2,482		—
Total	$	42,422	$	88,336	$	338

4. Deposits

Major classifications of deposits are summarized below:



	December 31, 2012		September 30, 2012
Demand Deposits:
Retail	$	167,369	$	167,050
Business	501,667		412,630
Municipal	15,779		367,624
NOW Deposits:
Retail	250,345		213,755
Business	41,164		38,486
Municipal	168,771		195,882
Total transaction accounts	1,145,095		1,395,427
Savings	560,039		506,538
Money market	834,544		821,704
Certificates of deposit	364,706		387,482
Total deposits	$	2,904,384	$	3,111,151

Municipal deposits of $538,212 and $901,739 were included in total deposits at December 31, 2012 and September 30, 2012, respectively. Deposits received for tax receipts were approximately $425,000 at September 30, 2012. See Note 2, for the amount of securities that are pledged as collateral for municipal deposits and other purposes.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Listed below are the Company’s brokered deposits included in the table above:



	December 31, 2012		September 30, 2012
Savings	$	—	$	13,344
Money market	29,145		46,566
Reciprocal CDARs⁽¹⁾	1,354		1,354
CDARs one way	764		764
Total brokered deposits	$	31,263	$	62,028

^{(1) Certificate of deposit account registry service}

5. Borrowings

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



	December 31, 2012				September 30, 2012
	Amount		Rate		Amount		Rate
By type of borrowing:
Advances	$	106,921	3.66	%	$	106,904	3.89	%
Repurchase agreements	238,490		3.10	%	238,272		3.49	%
Total borrowings	$	345,411	3.28	%	$	345,176	3.61	%
By remaining period to maturity:
One year or less	$	46,402	1.82	%	$	10,136	1.88	%
One to two years	30,239		1.99	%	56,819		2.44	%
Two to three years	43,289		1.18	%	52,693		2.89	%
Three to four years	2,592		1.32	%	201		5.32	%
Four to five years	200,000		4.23	%	202,386		4.21	%
Greater than five years	22,889		3.74	%	22,941		3.74	%
Total borrowings	$	345,411	3.28	%	$	345,176	3.61	%

As a member of the FHLB, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of December 31, 2012 and September 30, 2012, the Bank had pledged mortgage loans totaling $641,596 and $613,554 respectively. The Bank had also pledged securities to secure borrowings with carrying amounts of $248,025 and $245,989 as of December 31, 2012 and September 30, 2012, respectively. As of December 31, 2012, the Bank may increase its borrowing capacity by pledging securities and mortgage loans not required to be pledged for other purposes with a market value of $518,581. FHLB advances are subject to prepayment fees, 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 December 31, 2012 and September 30, 2012. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 4.31 years and 4.56 years and weighted average interest rates of 4.23% at December 31, 2012 and September 30, 2012. 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%.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

6. Guarantor’s Obligations Under Guarantees

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

As of December 31, 2012, the Company had $26,383 in outstanding letters of credit, of which $6,631 are cash secured and $4,524 were secured by collateral. The carrying values of these obligations are not considered material.

7. Contingencies

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

Litigation

The Company 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.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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

Basic earnings per common share are computed as follows:



	For the three months ended December 31,
	2012		2011
Weighted average common shares outstanding (basic)	43,637,315		37,252,464
Net income	$	7,020	$	5,717
Basic earnings per common share	$	0.16	$	0.15

Diluted earnings per common share are computed as follows:



	For the three months ended December 31,
	2012		2011
Weighted average common shares outstanding (basic)	43,637,315		37,252,464
Effect of common stock equivalents	83,776		—
Weighted average common shares outstanding (diluted)	43,721,091		37,252,464
Net income	$	7,020	$	5,717
Diluted earnings per common share	$	0.16	$	0.15

As of December 31, 2012 and December 31, 2011, 1,358,812 and 1,935,830 weighted average shares were anti-dilutive for the three month period, respectively. Anti-dilutive shares are not included in the determination of diluted earnings per share.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

9. Stock-Based Compensation

The Company has three active stock-based compensation plans as described below. Total compensation expense that was charged against income for those plans was $384, and $192, for the three months ended December 31, 2012 and 2011, respectively. There was no income tax benefit realized for the three months ended December 31, 2012 and 2011.

Active Stock-Based Compensation Plans

The Company has three active stock-based compensation plans. The Company’s shareholders approved the 2012 Stock Incentive Plan (the “2012 Plan”) on February 16, 2012. The 2012 Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, performance units, deferred stock and other stock-based awards for up to 1,992,140 shares of common stock as of December 31, 2012. Awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those awards have vesting periods ranging from 2 to 5 years and have 10 year contractual terms. The Company has a policy of using shares held as treasury stock to satisfy its stock-based compensation stock issuances. Currently, the Company has a sufficient number of treasury shares to satisfy expected stock-based compensation issuances.

The Company’s 2004 Stock Incentive Plan (the “2004 Plan”), which is shareholder approved, permits the grant of stock options to its employees for up to 52,357 shares of common stock as of December 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 its stock-based compensation stock issuances. Currently, the Company has a sufficient number of treasury shares to satisfy expected stock-based compensation issuances.

The Company’s 2004 restricted stock plan, which historically has been referred to as the Recognition and Retention Plan (“RRP”)provides for the issuance of shares to directors and officers. Compensation expense is recognized on a straight-line basis over the vesting period of the awards based on the fair value of the stock at issue date. RRP shares vest annually on the anniversary of the grant date over the vesting period. Total shares remaining that are authorized and available for future grant under the RRP are 7,120 at December 31, 2012.

Under the 2004 Plan and the RRP each grant of stock or restricted stock counts as one share against the number of shares available for grant. Under the 2012 Plan each share of restricted stock, (or non-vested stock awards), will be counted as 3.6 shares against the number of shares available for grant. Under the 2012 Plan other grants, including stock options, stock appreciation rights, performance units, deferred stock and other stock awards will be counted as one share against the number of shares available for grant.

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

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



	For the three months ended December 31,
	2012		2011
Risk-free interest rate	0.96	%	1.70	%
Expected stock price volatility	40.8	%	39.1	%
Dividend yield ⁽¹⁾	2.61	%	3.20	%
Expected term in years	5.75		5.90

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table summarizes the combined activity in the Company’s active stock-based compensation plans for the three months ended December 31, 2012:



			Non-vested stock
			awards/stock units				Stock options
			outstanding				outstanding
					Weighted				Weighted
	Shares				average				average
	available		Number		grant date		Number		exercise
	for grant		of shares		fair value		of shares		price
Balance at October 1, 2012	2,875,877		97,817		$	8.31	1,972,480		$	11.04
Granted ⁽¹⁾	(898,340	)	186,900		9.03		355,500		9.03
Stock awards vested	—		(28,333	)	8.54		—		—
Forfeited	15,280		(9,300	)	7.35		(45,800	)	7.69
Canceled/expired	58,800		—		—		(13,000	)	11.54
Balance at December 31, 2012	2,051,617		247,084		$	8.86	2,269,180		$	10.79
Exercisable at December 31, 2012							1,376,535		$	12.27

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

The weighted average fair value of options granted was $2.74 and $2.09 for the three months ended December 31, 2012 and 2011 respectively. For the three months ended December 31, 2012 and 2011 there were no stock options exercised.

As of December 31, 2012, there was $1,923 of total unrecognized compensation expense related to non-vested stock options granted under the Company’s stock-based compensation plans. The expense is expected to be recognized over a weighted-average period of 2.67 years.

As of December 31, 2012, there was $2,062 of total unrecognized compensation expense related to non-vested shares granted under the 2012 Plan and the RRP. The expense is expected to be recognized over a weighted average period of 2.48 years.

There were no modifications for the three months ended December 31, 2012 and 2011.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

10. Pension and Other Post Retirement Plans

Net pension and post-retirement expense, 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
	For the three months ended December 31,						For the three months ended December 31,
	2012			2011			2012			2011
Service cost	$	—		$	—		$	11		$	9
Interest cost	363			375			31			27
Expected return on plan assets	(616		)	(531		)	—			—
Amortization of net transition obligation	—			—			6			6
Amortization of prior service cost	—			—			12			12
Amortization of (gain) or loss	516			579			(6		)	(15		)
Total cost	$	263		$	423		$	54		$	39

As of December 31, 2012, no contributions had been deposited into the pension plan during fiscal year 2013. The Company has not yet determined if additional contributions will be made during the fiscal year 2013.

The Company has also established a non-qualified Supplemental Executive Retirement Plan (“SERP”) to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $12 for the three months ended December 31, 2012 and $13 for the three months ended December 31, 2011. As of December 31, 2012, there was $9 in contributions to fund benefit payments related to the SERP.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

11. Derivatives

The Company purchased two interest rate caps in fiscal 2010 to assist in offsetting a portion of interest rate exposure should short- term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.50% and 4.00%. These caps are stand-alone derivatives and therefore changes in fair value are reported in current period earnings; the amount for the quarter ended December 31, 2012 and 2011 is a fair value loss of $1 and a fair value loss of $3, respectively. The fair value of the interest rate caps at December 31, 2012 is included in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.

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

The Company pledged collateral to derivative counterparties in the form of securities with an amortized cost of $3,982 and a fair value of $4,160 as of December 31, 2012. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is written into the ISDA and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

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



	December 31, 2012
	Notional amount			Weighted average maturity (in years)	Weighted average fixed rate		Weighted average variable rate	Fair value
Interest rate caps	$	50,000		1.92	3.75	%	NA	$	1
Third-party interest rate swaps	55,682			6.51	4.22		1 m Libor + 2.45	2,523
Customer interest rate swaps	(55,682		)	6.51	4.22		1 m Libor + 2.45	(2,523		)

At September 30, 2012, summary information regarding these derivatives is presented below:



	September 30, 2012
	Notional amount			Weighted average maturity (in years)	Weighted average fixed rate		Weighted average variable rate	Fair value
Interest rate caps	$	50,000		2.18	3.75	%	NA	$	2
Third-party interest rate swaps	42,332			7.30	4.29		1 m Libor + 2.28	2,485
Customer interest rate swaps	(42,332		)	7.30	4.29		1 m Libor + 2.28	(2,485		)

The Company enters into various commitments to sell real estate loans 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.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

12. Fair Value Measurements

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

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

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

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

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

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

Investment Securities Available for Sale

The majority of the Company’s available for sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. U.S. Treasuries are actively traded and therefore have been classified as Level 1.

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

The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there continues to be a decline in the volume and level of activity in the market for its private label mortgage-backed securities as compared to prior periods. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual security level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of private label residential mortgage-backed securities as Level 3. As of December 31, 2012, these securities have an amortized cost of $4,333 and a fair value of $4,360. 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. Significant increases (decreases) in any of the unobservable inputs would result in a significantly lower (higher) fair value measurement of the securities. Present value estimated cash flow models were used to discount expected cash flows at the interest rate reflective of similarly structured securities in an orderly market. The resultant prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of December 31, 2012. Management ultimately determines the fair value of level 3 investment securities. These securities have a weighted average coupon rate of 3.08%, a weighted average life of 4.28 years, a weighted average 1 month constant prepayment rate history of 20.46 and a weighted average twelve month constant default rate of 3.00%. It was determined that two of these securities with a carrying amount of $3,953 and an amortized cost of $3,935 had OTTI which resulted in a $14 OTTI charge through earnings for the three months ended December 31, 2012. These securities have an accumulated OTTI of $136 at December 31, 2012. The calculation of the OTTI was determined by performing a present value of credit loss using the underlying security book yields of 3.12% and 3.40%.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The credit ratings of private label CMOs securities at December 31, 2012 were as follows:



	Amortized cost		Fair value
Credit rating:
Aa3	$	274	$	285
Ba1	124		122
B1	2,337		2,353
B3	1,598		1,600
Total private label CMOs	$	4,333	$	4,360

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 11).

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.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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



	December 31, 2012
	Fair value measurements		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets:
Investment securities available for sale:
Residential mortgage-backed securities:
Fannie Mae	$	133,052	$	—	$	133,052	$	—
Freddie Mac	69,055		—		69,055		—
Ginnie Mae	4,433		—		4,433		—
CMO/Other MBS	183,042		—		183,042		—
Private label CMOs	4,360		—		—		4,360
Total residential mortgage-backed securities	393,942		—		389,582		4,360
Other securities:
Federal agencies	429,616		—		429,616		—
Obligations of states and political subdivisions	166,664		—		166,664		—
Equities	1,076		—		1,076		—
Total other securities	597,356		—		597,356		—
Total investment securities available for sale	991,298		—		986,938		4,360
Interest rate caps and swaps	2,524		—		2,524		—
Total assets measured at estimated fair value on a recurring basis	$	993,822	$	—	$	989,462	$	4,360
Liabilities:
Interest rate swaps	$	2,523	$	—	$	2,523	$	—
Total liabilities measured at estimated fair value on a recurring basis	$	2,523	$	—	$	2,523	$	—

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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, 2012 measured at estimated fair value on a recurring basis were as follows:



	September 30, 2012
	Fair value measurements		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets:
Investment securities available for sale:
Residential mortgage-backed securities:
Fannie Mae	$	161,407	$	—	$	161,407	$	—
Freddie Mac	85,260		—		85,260		—
Ginnie Mae	4,778		—		4,778		—
CMO/Other MBS	188,434		—		188,434		—
Private label CMOs	4,630		—		—		4,630
Total residential mortgage-backed securities	444,509		—		439,879		4,630
Other securities:
Federal agencies	408,823		—		408,823		—
Obligations of states and political subdivisions	156,481		—		156,481		—
Equities	1,059		—		1,059		—
Total other securities	566,363		—		566,363		—
Total investment securities available for sale	1,010,872		—		1,006,242		4,630
Interest rate caps and swaps	2,488		—		2,488		—
Total assets measured at estimated fair value on a recurring basis	$	1,013,360	$	—	$	1,008,730	$	4,630
Liabilities:
Interest rate swaps	$	2,485	$	—	$	2,485	$	—
Total liabilities measured at estimated fair value on a recurring basis	$	2,485	$	—	$	2,485	$	—

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the three months ended December 31, 2012 and 2011:



	Fair value measurement for the three months ended December 31, 2012 using significant unobservable inputs Level 3			Fair value measurement for the three months ended December 31, 2011 using significant unobservable inputs Level 3
Balance at September 30,	$	4,630		$	4,851
Pay-downs	(325		)	(148		)
Amortization, net	6			3
OTTI	(14		)	(38		)
Change in fair value	63			7
Balance at December 31,	$	4,360		$	4,675

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

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

Loans Held for Sale and Impaired Loans

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

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

The Company may record adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based upon recent comparable sales of similar properties or assumptions generally observable by market participants. Any fair value adjustments for loans categorized here are classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classified as Level 3. Impaired loans are evaluated on at least a quarterly basis for additional impairment and their carrying values are adjusted as needed. Loans subject to non-recurring fair value measurements were $49,185 and $50,078 which equals the carrying value less the allowance for loan losses allocated to these loans at December 31, 2012 and September 30, 2012, respectively. Changes in fair value recognized on provisions on loans held by the Company were $1,815 and $1,648 for the three months ended December 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 12 months old. A discount for estimated costs to dispose of the asset is used when evaluating the impaired loans. Nearly all of our impaired loans are considered collateral dependent.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

A summary of impaired loans at December 31, 2012 measured at estimated fair value on a non-recurring basis were as follows:



	December 31, 2012
	Fair value measurements		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
One-to four-family residential	$	8,353	$	—	$	—	$	8,353
Commercial real estate	6,767		—		—		6,767
Commercial & industrial	2,367		—		—		2,367
Acquisition, development & construction	5,977		—		—		5,977
Consumer	1,222		—		—		1,222
Total impaired loans with specific allowance allocations	$	24,686	$	—	$	—	$	24,686

A summary of impaired loans at September 30, 2012 measured at estimated fair value on a non-recurring basis were as follows:



	September 30, 2012
	Fair value measurements		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
One-to four-family residential	$	8,628	$	—	$	—	$	8,628
Commercial real estate	6,537		—		—		6,537
Commercial & industrial	95		—		—		95
Acquisition, development & construction	8,232		—		—		8,232
Consumer loans	1,215		—		—		1,215
Total impaired loans with specific allowance allocations	$	24,707	$	—	$	—	$	24,707

Mortgage Servicing Rights

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

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with FASB ASC Topic 860 - Transfers and Servicing, the Company must record impairment charges on a non-recurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights the Company utilizes a third-party vendor, which on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights for impairment purposes is considered a Level 3 valuation. The fair value of mortgage servicing rights at December 31, 2012 and 2011 was $1,803 and $1,485.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Assets Taken in Foreclosure of Defaulted Loans

Assets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes a new cost basis. These loans are subsequently accounted for at the lower of cost or fair value less costs to sell and are primarily comprised of commercial and residential real property and upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments have been classified as Level 3. Appraisals are reviewed by our credit department, our external loan review consultant and verified by officers in our credit administration area. Assets taken in foreclosure of defaulted loans subject to non-recurring fair value measurement were $7,053 and $6,403 at December 31, 2012 and September 30, 2012, respectively. There were $158 and $68 changes in fair value recognized through income for those foreclosed assets held by the Company during the three months ending December 31, 2012 and 2011, respectively.

Significant Unobservable Inputs to Level 3 Measurements

The following table presents quantitative information about significant unobservable inputs that are utilized to determine the estimated fair value of Level 3 assets that are presented at fair value on a non-recurring basis at December 31, 2012:



Non-recurring fair value measurements	Fair value		Valuation technique	Unobservable input / assumptions	Range⁽¹⁾
Loans:
One-to four-family residential (impaired)	$	8,353	Appraisal	Adjustments for comparable properties	18.0% - 23.0%
Commercial real estate (impaired)	6,767		Appraisal	Adjustments for comparable properties	22.0% - 32.0%
Commercial & industrial (impaired)	2,367		Appraisal	Adjustments for comparable properties	18.0% - 32.0%
Acquisition, development & construction (impaired)	5,977		Appraisal	Adjustments for comparable properties	22.0% - 32.0%
Consumer loans (impaired)	1,222		Appraisal	Adjustments for comparable properties	17.0% - 23.0%
Assets taken in foreclosure:
One-to four-family residential (impaired)	954		Appraisal	Adjustments by management to reflect current conditions/selling costs	18.0% - 23.0%
Commercial real estate (impaired)	1,883		Appraisal	Adjustments by management to reflect current conditions/selling costs	22.0% - 32.0%
Acquisition, development & construction	4,216		Appraisal	Adjustments by management to reflect current conditions/selling costs	22.0% - 32.0%
Mortgage servicing rights	1,803		Third-party valuation	Discount rate	9.3% - 12.8%
			Third-party valuation	Prepayment speed	100 - 968 (weighted average of 224)

⁽¹⁾ Represents range of discount factors applied to the appraisal to determine fair value. The amounts used for mortgage servicing rights are discounts applied by a third-party valuation provider which the Company believes are appropriate.

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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 December 31, 2012:



	December 31, 2012
	Carrying amount			Quoted prices in active markets for identical assets Level 1			Significant other observable inputs Level 2			Significant unobservable inputs Level 3
Financial assets:
Cash and due from banks	$	160,241		$	160,241		$	—		$	—
Securities available for sale	991,298			—			986,938			4,360
Securities held to maturity	139,874			—			143,089			—
Loans, net	2,165,015			—			—			2,197,213
Loans held for sale	5,423			—			5,423
Accrued interest receivable on securities	4,001			—			4,001			—
Accrued interest receivable on loans	6,428			—			—			6,428
FHLB stock	19,246			—			19,246			—
Financial liabilities:
Non-maturity deposits	(2,539,678		)	(2,539,678		)	—			—
Certificates of deposit	(364,706		)	—			(365,857		)	—
FHLB and other borrowings	(345,411		)	—			(377,691		)	—
Mortgage escrow funds	(19,577		)	—			(19,574		)	—
Accrued interest payable on deposits including escrow	(404		)	—			(404		)	—
Accrued interest payable on borrowings	(1,401		)	—			(1,401		)	—

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2012:



	September 30, 2012
	Carrying amount			Quoted prices in active markets for identical assets Level 1			Significant other observable inputs Level 2			Significant unobservable inputs Level 3
Financial assets:
Cash and due from banks	$	437,982		$	437,982		$	—		$	—
Securities available for sale	1,010,872			—			1,006,242			4,630
Securities held to maturity	142,376			—			146,324			—
Loans, net	2,091,190			—			—			2,157,133
Loans held for sale	7,505			—			7,505			—
Accrued interest receivable on securities	4,011			—			4,011			—
Accrued interest receivable on loans	6,502			—			—			6,502
FHLB stock	19,249			—			19,249			—
Financial liabilities:
Non-maturity deposits	(2,723,669		)	(2,723,669		)	—			—
Certificates of deposit	(387,482		)	—			(389,031		)	—
FHLB and other borrowings	(345,176		)	—			(377,906		)	—
Mortgage escrow funds	(11,919		)	—			(11,917		)	—
Accrued interest payable on deposits including escrow	(500		)	—			(500		)	—
Accrued interest payable on borrowings	(1,442		)	—			(1,442		)	—

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

(a) Cash and due from banks

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

(b) Securities

The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, live trading levels, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other items. For certain securities, for which the inputs used by independent pricing services were derived from unobservable market information, the Company evaluated the appropriateness of each price. In accordance with adoption of FASB Codification Topic 820, the Company reviewed the volume and level of activity for its different classes of securities to determine whether transactions were not considered orderly. For these securities, the quoted prices received from independent pricing services may be adjusted, as necessary, to estimate fair value in accordance with FASB Codification Topic 820. If applicable, adjustments to fair value were based on averaging present value cash flow model projections with prices obtained from independent pricing services.

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

(d) Loans

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

(e) FHLB stock

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

(f) Deposits and mortgage escrow funds

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

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

(g) Borrowings

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

(h) Accrued interest receivable/payable

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

(i) Other financial instruments

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

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

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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 collectivity 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.

The following commentary presents management’s discussion and analysis of financial condition and results of operations and is intended to assist the reader in understanding the financial conditions and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto

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appearing in Part I, Item I of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2012 Annual Report on Form 10-K. Operating results discussed herein are not necessarily indicative of the results of any future period. Tax-equivalent adjustments are the result of increasing income from tax-exempt securities by an amount equal to the Federal taxes that would be paid if the income were fully taxable based on a 35.0% marginal effective income tax rate.

Overview and Management Strategy

Provident New York Bancorp is headquartered in Montebello, New York. With $3.8 billion in assets, the Company is a growing financial services firm that specializes in the delivery of services and solutions to business owners, their families and consumers in communities within the greater New York City area through teams of dedicated and experienced relationship managers. The Company offers a complete line of commercial, business, and consumer banking products and services. The financial condition and results of operations of the Company 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 focus our efforts on generating core deposits, especially transaction accounts, and originating high quality loans with an emphasis on growing our commercial loan balances. We seek to maintain a disciplined pricing strategy on deposits that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs. The Company’s strategic objectives include growing revenues and earnings by expanding client acquisitions, improving asset quality and increasing efficiency. To achieve these goals we are focusing on high value client segments, expanding our delivery and distribution channels, creating a high productivity performance culture, reducing operating costs, and proactively managing enterprise risk.

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

The key highlights as of and for the three months ended December 31, 2012 included the following:


•	Net income of $7.0 million and earnings per share of $0.16.


•	Loan originations of $291.1 million.


•	Total loans reached $2.2 billion, representing growth of $73.7 million compared to September 30, 2012.


•	The allowance for loan losses to non-performing loans increased to 83.8% at December 31, 2012 from 71.0% at September 30, 2012.


•	Deposits declined $206.8 million at December 31, 2012 compared to September 30, 2012, due to elevated levels of municipal deposits at the Company’s fiscal year end.


•	Return on tangible equity, a non-GAAP measure, was 8.71% for the three months ended December 31, 2012 compared to 8.53% for the three months ended December 31, 2011 (see page 52 for non-GAAP reconciliation of return on tangible equity).


•	Return on average assets was 0.73% for the three months ended December 31, 2012 compared to 0.74% for the three months ended December 31, 2011.


•	The efficiency ratio, a non-GAAP measure, declined to 62.9% for the three months ended December 31, 2012 compared to 67.8% for the three months ended December 31, 2011.

The Company’s primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations, and its asset-liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company’s results of operations and financial condition.

Although management endeavors to minimize the credit risk inherent in the Company’s loan portfolio, it must necessarily make various assumptions and judgments about the collectibility of the loan portfolio based on its experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income. We continue to work through the criticized and classified loan portfolio, seeking positive resolution on existing problem credits.

There is significant competition in all areas in which the Company conducts its business. The Company competes with banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions. Many of these competitors have substantially greater resources and lending limits and provide a wider array of banking services. To a limited extent, the Company also competes with other providers of financial services, such as money market mutual funds, brokerage

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firms, consumer finance companies and insurance companies. Competition is based on a number of factors, including prices, interest rates, service, availability of products and geographic location.

The Company regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions, and in some cases negotiations, regularly take place and future acquisitions could occur.

Comparison of Financial Condition at December 31, 2012 and September 30, 2012

Total assets as of December 31, 2012 decreased $233.5 million or 5.80% from September 30, 2012 mainly related to decreases in our cash balance of $277.7 million. Our cash balance at September 30, 2012 was elevated due to municipal tax collections that were subsequently drawn down during the quarter.

Total securities decreased by $22.1 million, to $1.1 billion at December 31, 2012 as compared to September 30, 2012. Securities represented 29.9% of total assets at December 31, 2012 compared to 28.7% of total assets at September 30, 2012. Over time we expect securities will decline as a percentage of total assets as our relationship teams add loans to our portfolio. For the three months ended December 31, 2012, securities purchases were $109.0 million, sales of securities were $42.0 million, and maturities, calls, and repayments were $85.5 million. Unrealized gains decreased the carrying values of securities by $4.2 million. Securities gains net of OTTI losses were $1.4 million and net amortization of securities was $765,000 for the period ended December 31, 2012.

Net loans as of December 31, 2012 increased $73.8 million or 3.53% to $2.2 billion from September 30, 2012. Commercial real estate and commercial & industrial loans were the main driver with an increase of $97.2 million. The Company has organized relationship teams to serve targeted commercial segments. These teams have expanded our market reach in the greater New York metropolitan area. The success of our team based approach is driving our loan growth. The Company originated, including loans originated for sale, $291.1 million loans for the three months ended December 31, 2012, while repayments were $215.8 million.

Acquisition, Development and Construction loans (“ADC”) declined $21.5 million to $122.5 million compared to $144.1 million at September 30, 2012, a reflection of the Company’s de-emphasis on originations of this type of loan. Consumer loans decreased by $4.0 million, and residential loans increased by $2.0 million as of December 31, 2012.

Deposits as of December 31, 2012 were $2.9 billion, a decrease of $206.8 million, or 6.65%, from September 30, 2012. As of December 31, 2012 transaction accounts were 39.4% of deposits, or $1.1 billion compared to $1.4 billion or 44.9% of deposits at September 30, 2012. Municipal transaction accounts totaled $563.5 million at September 30, 2012 compared to $184.6 million at December 31, 2012. As of December 31, 2012, savings deposits were $560.0 million, an increase of $53.5 million or 10.6% from September 30, 2012. Money market accounts increased $12.8 million or 1.56% to $834.5 million at December 31, 2012. Certificate of deposit accounts decreased by $22.8 million or 5.88%. As of December 31, 2012, the Company had $31.3 million in non-core wholesale deposits.

Borrowings increased by $235,000 or 0.07%, from September 30, 2012 to $345.4 million, due to accretion of discount on advances and repurchase agreements from the FHLB. At December 31, 2012 the balance of discount on FHLB borrowings that will accrete as additional interest expense over the remaining term of the instruments was $2.6 million.

Stockholders’ equity increased $2.8 million from September 30, 2012 to $493.9 million at December 31, 2012. The change was mainly due to retained earnings of $4.4 million, capital contributed from stock-based compensation plans of $642,000 and a decrease in accumulated other comprehensive income of $2.2 million.

As of December 31, 2012, the Company had authorization to purchase up to an additional 776,713 shares of common stock. The Bank’s Tier 1 leverage ratio was 8.23% at December 31, 2012. The Company’s tangible equity as a percentage of tangible assets was 8.94% at December 31, 2012 (see non-GAAP reconciliation of tangible equity as a percentage of tangible assets on page 52).

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

Loans acquired in connection with the acquisition of Gotham Bank in August 2012 were recorded at fair value at the date of acquisition. These loans totaled $188.1 million at December 31, 2012 compared to $205.8 million at September 30, 2012. Factors that went into the determination of fair value included discounts related to interest rates and inherent losses on the acquired loans. There had been no amounts charged-off against this discount for the three months ended December 31, 2012. None of the Gotham Bank acquired loans were considered purchased credit impaired loans.

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Our non-performing loans decreased $6.3 million in the three months ended December 31, 2012 to $33.6 million. The decrease was mainly driven by declines in ADC non-performing loans of $11.1 million, principally the result of the resolution of one significant relationship. Partially offsetting this decline was an increase in non-performing commercial real estate loans of $3.4 million.

Classified loans are loans rated substandard or lower in the Company’s risk rating system. Classified loans declined $5.6 million to $83.1 million at December 31, 2012 compared to $88.7 million at September 30, 2012. This represents 3.79% of the loan portfolio at December 31, 2012 compared to 4.18% of the loan portfolio at September 30, 2012.

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

The allowance for loan losses was $28.1 million at December 31, 2012 compared to $28.3 million at September 30, 2012. The allowance equaled 1.28% of total loans at December 31, 2012 compared to 1.33% of total loans at September 30, 2012. The allowance as a percentage of the loan portfolio for the last two reporting periods is lower than it was previously due to the acquisition of loans from Gotham that were recorded at fair value and for which there continues to be no allowance for loan losses.

The allowance for loan losses to non-performing loans equaled 83.8% at December 31, 2012, compared to 71.0% at September 30, 2012. Net charge-offs for the quarter ended December 31, 2012 were $3.1 million. The majority of charge-offs were due to write-downs on ADC loans, which totaled $1.6 million for the period, and one-to-four-family residential mortgage charge-offs which totaled $899,000. The ADC charge-offs were mainly related to the resolution of one significant relationship and the one-to-four-family residential mortgage charge-offs were the result of updated appraisal information on certain loans.

In addition, $1.4 million of previously non-performing loans were transferred to foreclosed properties. This was partially offset by sales and write-downs of $731,000 and resulted in a foreclosed properties balance of $7.1 million at December 30, 2012, compared to $6.4 million at September 30, 2012.

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

Net income for the three months ended December 31, 2012 was $7.0 million or $0.16 per diluted share, an increase of $1.3 million compared to $5.7 million or $0.15 per diluted share, for the three months ended December 31, 2011. The primary factors contributing to the increase in earnings for the current period were higher net interest income of $4.7 million or 20.2% and an increase in non-interest income of $483,000 or 6.73% resulting mainly from net gain on sales of loans and other loan fee income. These increases were partially offset by a $1.0 million increase in the provision for loan losses and an increase in non-interest expense of $1.8 million or 8.81% driven by increases in compensation and employee benefits associated with the hiring of our new banking teams. Per share data were affected by the increase in weighted average shares outstanding due to shares issued in the Company’s August 2012 common equity offering.

Select operating performance measures are as follows:



	For the three months ended December 31,
	2012			2011
Per common share:
Basic earnings	$	0.16		$	0.15
Diluted earnings	0.16			0.15
Dividends declared	0.06			0.06
Return on average (annualized):
Assets	0.73		%	0.74		%
Tangible equity (see non-GAAP reconciliation below)	8.71		%	8.53		%

The Company believes that return on average tangible stockholders’ equity is useful as a tool to measure and assess a company’s use of equity. A reconciliation of the non-GAAP financial measure is as follows:



	For the three months ended December 31,
	2012			2011
Average stockholders’ equity	$	492,506		$	431,129
Average goodwill and other amortizable intangible assets	(172,723		)	(165,360		)
Average tangible stockholders’ equity	$	319,783		$	265,769
Net income	$	7,020		$	5,717
Net income, if annualized	27,851			22,682
Return on average tangible equity	8.71		%	8.53		%

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



	For the three months ended December 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	$	1,565,259		$	20,348		5.16	%	$	1,097,476		$	14,245		5.15	%
Consumer loans	212,863			2,325			4.33		227,274			2,635			4.60
One-to four-family residential loans	351,778			4,398			4.96		387,446			5,269			5.40
Total net loans⁽¹⁾	2,129,900			27,071			5.04		1,712,196			22,149			5.13
Securities-taxable	954,372			4,284			1.78		696,293			3,990			2.27
Securities-tax exempt⁽²⁾	174,201			2,242			5.11		205,366			2,729			5.27
Federal Reserve balances	103,125			103			0.40		82,437			63			0.30
Other earning assets	19,277			230			4.73		18,735			192			4.07
Total securities and other earning assets	1,250,975			6,859			2.18		1,002,831			6,974			2.76
Total interest earning assets	3,380,875			33,930			3.98		2,715,027			29,123			4.26
Non-interest earning assets	411,326								347,493
Total assets	$	3,792,201							$	3,062,520
Interest bearing liabilities:
NOW deposits	$	469,180		126			0.11	%	$	398,885		164			0.16	%
Savings, club and escrow deposits	531,107			197			0.15		445,236			81			0.07
Money market deposits	908,262			931			0.41		577,387			397			0.27
Certificates of deposit	380,244			843			0.88		302,713			671			0.88
Total interest bearing deposits	2,288,793			2,097			0.36		1,724,221			1,313			0.30
Borrowings	345,951			3,125			3.58		392,785			3,617			3.65
Total interest bearing liabilities	2,634,744			5,222			0.79		2,117,006			4,930			0.92
Non-interest bearing deposits	649,077								500,621
Other non-interest bearing liabilities	15,874								13,764
Total liabilities	3,299,695								2,631,391
Stockholders’ equity	492,506								431,129
Total liabilities and equity	$	3,792,201							$	3,062,520
Net interest rate spread							3.19	%							3.34	%
Net earning assets	$	746,131							$	598,021
Net interest margin				28,708			3.37	%				24,193			3.54	%
Less tax equivalent adjustment ⁽²⁾				(785		)						(955		)
Net interest income				$	27,923							$	23,238
Ratio of average interest-earning assets to average interest bearing liabilities	128.3		%						128.2		%



⁽¹⁾	Includes non-accrual loans.
⁽²⁾	Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate.

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



	For the three months ended December 31, 2012 vs. 2011 Increase / (Decrease) due to
	Volume⁽¹⁾			Rate⁽¹⁾			Total
Interest earning assets
Commercial and commercial mortgage loans	$	6,076		$	27		$	6,103
Consumer loans	(161		)	(149		)	(310		)
One-to four-family residential	(462		)	(409		)	(871		)
Securities-taxable	1,264			(970		)	294
Securities-tax exempt⁽²⁾	(406		)	(81		)	(487		)
Federal Reserve excess reserves	17			23			40
Other earning assets	4			34			38
Total interest income	6,332			(1,525		)	4,807
Interest-bearing liabilities
NOW deposits	22			(60		)	(38		)
Savings, club and escrow deposits	17			99			116
Money market deposits	280			254			534
Certificates of deposit	172			—			172
Borrowings	(208		)	(284		)	(492		)
Total interest expense	283			9			292
Net interest margin	6,049			(1,534		)	4,515
Less tax equivalent adjustment⁽²⁾	(144		)	(26		)	(170		)
Net interest income	$	6,193		$	(1,508	)	$	4,685



⁽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 December 31, 2012 was $27.9 million, an increase of $4.7 million or 20.2%, compared to the same quarter of fiscal 2012. Gross interest income on a tax-equivalent basis of $33.9 million increased $4.8 million for the quarter ended December 31, 2012 compared to the same period in fiscal 2012. The increase in interest income on a tax-equivalent basis was principally the result of an increase in the average daily balance of commercial and commercial real estate loans, the result of the loans acquired from Gotham Bank that were outstanding for the full quarter and new loans originated by our banking teams. Interest expense increased by $292,000, primarily the result of increased levels of municipal deposits that were held at September 30, 2012 in transaction accounts and then were subsequently moved to interest bearing accounts. By December 31, 2012 a substantial portion of these deposits had been withdrawn; however, this increase did impact average deposit balances for the period.

The Company’s net interest margin declined 17 basis points to 3.37% for the three months ended December 31, 2012 compared to 3.54% for the three months ended December 31, 2011. Total interest earning assets on a tax-equivalent basis yielded 3.98% for the first three months of fiscal 2013 compared to 4.26% for the first three months of fiscal 2012, mainly driven by a decrease of 67 basis points in the weighted average yield on our investment securities. The cost of interest bearing deposits increased six basis points to 36 basis points for the first three months of fiscal 2013 compared to 30 basis points for the first three months of fiscal 2012. The increase was mainly the result of higher average cost of deposits associated with the Gotham transaction.

Provision for loan losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable and estimable incurred loan losses inherent in the existing portfolio as of period end. The provision for loan losses and resulting level of the allowance for loan losses is a critical accounting estimate, which is subject to substantial fluctuation from period to period. The Company recorded $3.0 million in loan loss

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provisions for the quarter ended December 31, 2012 compared to $2.0 million at December 31, 2011 an increase of $1.0 million. Please see the “Credit Quality” section for a discussion of the metrics associated with our loan portfolio.

Non-interest income for the three months ended December 31, 2012 increased by $483,000 or 6.73% to $7.7 million compared to the first quarter of fiscal 2012. Net gain on sale of loans increased by $306,000 given increased volume in sales of one-to four-family residential loans, and other loan fees included in other non-interest income increased by approximately $700,000 due to higher loan transaction volumes and loan prepayments. Offsetting these increases was a decline in net gain on sale of securities of $573,000 for the three months ended December 31, 2012 compared to the three months ended December 31, 2011.

Non-interest expense for the three months ended December 31, 2012 increased by 8.81% or $1.8 million, to $22.5 million compared to the same period in 2011. The increase in non-interest expense was principally the result of additional compensation and benefits expense of $1.4 million due to the hiring of additional banking teams. Higher professional fees and other expenses incurred in connection with business development also contributed to this increase.

Income tax expense increased $1.0 million to $3.1 million for the three months ended December 31, 2012, compared to $2.0 for the period ended December 31, 2011. The effective tax rate was 30.4% for the period ended December 31, 2012 compared to 26.2% for the period ended December 31, 2011. The increase in the effective tax rate is attributable to higher pre-tax earnings and a reduction in the proportion of tax-exempt earnings from investment securities and bank owned life insurance.

Liquidity and Capital Resources

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

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

Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial loans and residential one-to four-family loans, and the purchase of investment securities. During the three months ended December 31, 2012 and 2011, our loan originations totaled $291.1 million and $231.6 million, respectively. Purchases of securities available for sale totaled $87.1 million and $151.2 million for the three months ended December 31, 2012 and 2011, respectively. Purchases of securities held to maturity totaled $21.9 million and $76.8 million for the three months ended December 31, 2012 and 2011, respectively. These activities were funded primarily by sales of securities, deposit growth, borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $262.4 million at December 31, 2012 and unused lines of credit granted to customers were $109.1 million at December 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 bank owned life insurance (“BOLI”) policies are considered illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. The recorded value of BOLI contracts totaled $59.5 million and $59.0 million at December 31, 2012 and September 30, 2012, respectively.

Deposit flows are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, seasonal fluctuations related to municipal deposits and other factors. The net decrease in total deposits was $206.8 million and $161.1 million for the three months ended December 31, 2012 and 2011, respectively. The decline in the first three months of the fiscal year for both periods is principally related to seasonal fluctuations in municipal deposits, which generally peak in September time frame and are subsequently withdrawn. Based upon prior experience and our current pricing strategy, management believes that a majority of our deposits are core deposits and as such these deposits are expected to remain with us. Our relationship based banking teams provide all services to our clients, and a high emphasis is placed on the generation and retention of core deposits. We do compete in a highly competitive financial services marketplace, and we may be required to compete for certain deposits based on the interest rate we offer in addition to the quality of our services. The Bank has substantial liquidity. This is a function of the competitiveness for quality investments and loans available in the marketplace as well as the high level of liquidity of our customers. The preference of depositors to invest their funds in deposit products subject

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to immediate withdrawal could lead to potential liquidity reductions in the future if we do not raise interest rates to retain these funds.

In addition to the liquidity on our Statement of Condition, we access additional sources of funds through the FHLB. Borrowings from FHLB and other borrowings totaled $345.4 million at December 31, 2012. At December 31, 2012, we had the ability to borrow an additional $518.6 million under our credit facilities with the FHLB. The Bank may borrow up to an additional $370.5 million by pledging securities not required to be pledged for other purposes as of December 31, 2012. Further, at December 31, 2012 we had $31.3 million in brokered deposits 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 statement covering $29 million of debt and equity securities that may be used, subject to Board authorization and market conditions, to issue equity or debt securities 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 capital ratios as management believes this information is useful to stockholders. As of December 31, 2012, the Company’s tangible capital as a percent of tangible assets was to 8.94%, and its tangible book value per share increased $0.04 to $7.30, compared to September 30, 2012.

The Company believes that tangible equity is useful as a tool to assess a company’s capital position. The following table shows the non-GAAP reconciliation of tangible equity and the tangible equity ratio:



	December 31, 2012			September 30, 2012
Total assets	$	3,789,514		$	4,022,982
Goodwill and other amortizable intangibles	(170,173		)	(170,411		)
Tangible assets	$	3,619,341		$	3,852,571
Stockholders’ equity	$	493,883		$	491,122
Goodwill and other amortizable intangibles	(170,173		)	(170,411		)
Tangible stockholders’ equity	$	323,710		$	320,711

Tangible capital as a % of tangible assets	8.94		%	8.32		%

Outstanding Shares	44,348,787			44,173,470
Tangible book value per share	$	7.30		$	7.26

The Company declared a dividend of $0.06 per share payable on February 14, 2013 to stockholders of record on February 4, 2013.

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



					OCC requirements
	Bank actual				Minimum capital adequacy				Classification as well-capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2012:
Tangible capital	$	297,089	8.23	%	$	54,169	1.50	%	$	—	—	%
Tier 1 (core) capital	297,089		8.23		144,450		4.00	%	180,562		5.00
Risk-based capital:
Tier 1	297,089		12.28		—		—		145,172		6.00
Total	$	325,410	13.45	%	$	193,563	8.00	%	$	241,954	10.0	%
September 30, 2012:
Tangible capital	$	289,441	7.50	%	$	57,551	1.50	%	$	—	—
Tier 1 (core) capital	289,441		7.50		153,469		4.00		191,836		5.00
Risk-based capital:
Tier 1	289,441		12.10		—		—		143,085		6.00
Total	$	317,929	13.30	%	$	190,780	8.00	%	$	238,475	10.0	%

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



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 and industrial loans, and residential fixed-rate mortgage loans that are repaid monthly and bi-weekly, adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell or securitize all, or a portion of such longer-term loans, generally on a servicing-retained basis. We also invest in shorter-term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.

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

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



Interest rates	Estimated		Estimated change in EVE					Estimated		Estimated change in NII
(basis points)	EVE		Amount			Percent		NII		Amount			Percent
	(Dollars in thousands)
+300	$	438,288	$	(18,986	)	-4.2	%	$	122,130	$	11,166		10.1	%
+200	454,701		(2,573		)	-0.6	%	118,308		7,344			6.6	%
+100	476,356		19,082			4.2	%	114,670		3,706			3.3	%
0	457,274		—			—	%	110,964		—			—	%
-100	432,627		(24,647		)	-5.4	%	103,600		(7,364		)	-6.6	%

The table set forth above indicates that at December 31, 2012, in the event of an immediate 200 basis point increase in interest rates, we would expect to experience a 0.6% decrease in EVE and a 6.6% increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on EVE and NII beyond -100 basis points

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

During the first quarter of fiscal year 2013, the federal funds target rate remained in a range of 0.00 - 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities increased 2 basis points from 0.23% to 0.25% at the end of the first quarter of fiscal year 2013 while the yield on U.S. Treasury 10 year notes increased 13 basis points from 1.65% to 1.78% over the same three month period. The greater increase in yield on longer term maturities resulted in the 2-10 year treasury yield curve being steeper at the end of the first quarter of fiscal 2013 than it was when the fiscal year began. To fight the economic downturn the FOMC declared a willingness to keep the federal funds target low for an “extended period” and subsequently stated that it anticipates that exceptionally low levels for the federal funds rate would likely be warranted at least through mid-2015. During the first quarter of the current fiscal year the FOMC reaffirmed its willingness to maintain an accommodative stance, however it modified its position by stating that it intends to do so until the unemployment rate and inflation expectations reach certain thresholds. The FOMC further stated that it viewed these thresholds as consistent with its earlier date-based guidance. However, should economic conditions improve, the FOMC could reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionately more than the longer end thereby resulting in margin compression. We hold a notional amount of $50 million in interest rate caps to help mitigate this risk.



Item 4.	Controls and Procedures

The Company’s management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the “Exchange Act”) as of the end of the period covered by this report. Based on management’s identification of two previously reported deficiencies in internal control over financial reporting that it considers to be material weaknesses, management has concluded that disclosure controls and procedures were not effective at December 31, 2012. Steps being undertaken to remediate these weaknesses are discussed below.

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Changes in Internal Controls

On December 5, 2012, the Company appointed a new Principal Financial Officer. On January 2, 2013 the Company appointed a new Chief Accounting Officer and Controller. The Company has engaged an independent nationally known public accounting firm to assist the Company in implementing a systematic process and procedures that will enable the Company to maintain effective internal controls over the provision for income taxes and deferred taxes, which gave rise to the material weaknesses discussed above. The Company has also commenced implementation of enhancements to its internal controls over financial reporting related to pension accounting in fiscal 2013. The Company believes the steps taken to remediate these weaknesses are appropriate and the Company expects them to be fully remediated before the end of the Company’s fiscal year.

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



	Total number of shares (or units) Purchased ⁽¹⁾	Average price paid per share (or Unit)		Total number of shares (or units) purchased as part of publicly announced plans or programs ⁽²⁾	Maximum number (or approximate dollar value) of Shares (or Units) that may yet be purchased under the plans or programs ⁽²⁾
Period (2013)
October 1 - October 31	1,382	$	9.13	—	776,713
November 1 - November 30	901	9.06		—	776,713
December 1 - December 31	—	—		—	776,713
Total	2,283	$	9.10	—



(1	)	The total number of shares purchased includes shares received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes as is permitted under the Company’s stock benefit plans.



(2	)	The Company announced its fifth repurchase program on December 17, 2009 authorizing the repurchase of 2,000,000 shares of which 776,713 remain available for repurchase.



Item 3.	Defaults Upon Senior Securities

None



Item 4.	Not Applicable



Item 5.	Other Information

None

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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.

Table of Contents

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:	February 8, 2013	By:	/s/ Jack Kopnisky
			Jack Kopnisky
			President, Chief Executive Officer and Director
			(Principal Executive Officer)

Date:	February 8, 2013	By:	/s/ Luis Massiani
			Luis Massiani
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)