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10-Q 1 pbny-20130331master10q.htm 10-Q PBNY-2013 03.31 Master 10Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

______________________________



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

For the quarterly period ended March 31, 2013



¨	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 check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

Yes ¨ No x

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



Classes of Common Stock		Shares Outstanding as of May 7, 2013
$0.01 per share		44,353,276

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

QUARTERLY PERIOD ENDED MARCH 31, 2013



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

	Consolidated Statements of Financial Condition (unaudited) at March 31, 2013 and September 30, 2012	3
	Consolidated Statements of Income (unaudited) for the three and six months ended March 31, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March 31, 2013 and 2012	5
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended March 31, 2013	6
	Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2013 and 2012	7
	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	58

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	59

Item 1A.	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62
	Signatures	63

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(Dollars in thousands, except per share data)



	March 31, 2013			September 30, 2012
ASSETS
Cash and due from banks	$	73,396		$	437,982
Securities:
Available for sale	945,678			1,010,872
Held to maturity, at amortized cost (fair value of $186,078 and $146,324 at March 31, 2013 and September 30, 2012, respectively)	183,535			142,376
Total securities	1,129,213			1,153,248
Assets held for sale	—			4,550
Loans held for sale	1,040			7,505
Gross loans	2,204,555			2,119,472
Allowance for loan losses	(27,544		)	(28,282		)
Total loans, net	2,177,011			2,091,190
Federal Home Loan Bank (“FHLB”) stock, at cost	20,251			19,249
Accrued interest receivable	11,819			10,513
Premises and equipment, net	37,617			38,483
Goodwill	163,117			163,247
Core deposit and other intangible assets	6,538			7,164
Bank owned life insurance (“BOLI”)	59,916			59,017
Foreclosed properties	5,486			6,403
Other assets	25,036			24,431
Total assets	$	3,710,440		$	4,022,982
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	2,799,658		$	3,111,151
FHLB and other borrowings	367,976			345,176
Mortgage escrow funds	17,582			11,919
Other liabilities	30,513			63,614
Total liabilities	3,215,729			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; 44,353,276 and 44,173,470 shares outstanding at March 31, 2013 and September 30, 2012, respectively)	522			522
Additional paid-in capital	403,005			403,541
Unallocated common stock held by employee stock ownership plan (“ESOP”)	(5,389		)	(5,638		)
Treasury stock, at cost (7,834,780 and 8,014,586 shares at March 31, 2013 and September 30, 2012, respectively)	(88,517		)	(90,173		)
Retained earnings	184,171			175,971
Accumulated other comprehensive income, net of taxes	919			6,899
Total stockholders’ equity	494,711			491,122
Total liabilities and stockholders’ equity	$	3,710,440		$	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)

(Dollars in thousands, except per share data)



	For the three months ended March 31,					For the six months ended March 31,
	2013			2012		2013			2012
Interest and dividend income:
Loans	$	26,378		$	22,153	$	53,449		$	44,302
Taxable securities	4,288			4,415		8,572			8,405
Non-taxable securities	1,490			1,599		2,947			3,373
Other earning assets	264			244		597			499
Total interest and dividend income	32,420			28,411		65,565			56,579
Interest expense:
Deposits	1,624			1,217		3,721			2,530
Borrowings	2,977			3,289		6,102			6,906
Total interest expense	4,601			4,506		9,823			9,436
Net interest income	27,819			23,905		55,742			47,143
Provision for loan losses	2,600			2,850		5,550			4,800
Net interest income after provision for loan losses	25,219			21,055		50,192			42,343
Non-interest income:
Deposit fees and service charges	2,736			2,706		5,514			5,496
Net gain on sale of securities	2,229			2,899		3,645			4,888
Other than temporary impairment on securities	(7		)	—		(73		)	(536		)
Loss recognized in other comprehensive income	—			—		41			498
Net impairment loss in earnings	(7		)	—		(32		)	(38		)
Bank owned life insurance	491			502		1,000			1,020
Gain on sale of loans	507			450		1,253			890
Investment management fees	422			800		1,127			1,565
Other	474			614		2,004			1,326
Total non-interest income	6,852			7,971		14,511			15,147
Non-interest expense:
Compensation and employee benefits	11,805			11,395		24,104			22,320
Stock-based compensation	679			284		1,179			559
Merger-related expense	542			299		542			546
Occupancy and office operations	3,954			3,409		7,764			7,110
Advertising and promotion	535			427		779			1,040
Professional fees	912			1,056		2,127			1,983
Data and check processing	823			710		1,472			1,382
Foreclosed property expense	915			412		1,200			617
Other	3,174			3,298		6,718			6,454
Total non-interest expense	23,339			21,290		45,885			42,011
Income before income tax expense	8,732			7,736		18,818			15,479
Income tax expense	2,203			2,035		5,269			4,061
Net income	$	6,529		$	5,701	$	13,549		$	11,418
Weighted average common shares basic	43,743,640			37,280,651		43,704,163			37,266,480
Weighted average common shares diluted	43,848,486			37,316,778		43,790,915			37,275,633
Per common share basic	$	0.15		$	0.15	$	0.31		$	0.31
Per common share diluted	$	0.15		$	0.15	$	0.31		$	0.31

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)

(Dollars in thousands, except per share data)



	For the three months ended March 31,						For the six months ended March 31,
	2013			2012			2013			2012
Net income	$	6,529		$	5,701		$	13,549		$	11,418
Other comprehensive (loss) income:
Net unrealized holding (losses) gains on securities available for sale net of related tax (benefit) expense of ($1,885), ($220) and ($3,039) $2,090	(2,753		)	(320		)	(4,446		)	3,056
Less:
Reclassification adjustment for net realized gains included in net income, net of related income tax expense of $905, $1,177 and $1,480, $1,985	1,324			1,722			2,165			2,903
Reclassification adjustment for other than temporary impaired losses included in net income, net of related income tax benefit of $3, $0 and $13, $15	(4		)	—			(19		)	(23		)
	(4,073		)	(2,042		)	(6,592		)	176
Change in funded status of defined benefit plans, net of related income tax expense of $224, $231 and $419, $460	327			335			612			673
Other comprehensive (loss) income	(3,746		)	(1,707		)	(5,980		)	849
Total comprehensive income	$	2,783		$	3,994		$	7,569		$	12,267

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)

(Dollars in thousands, except per 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 September 30, 2012	44,173,470	$	522	$	403,541		$	(5,638	)	$	(90,173	)	$	175,971		$	6,899		$	491,122
Net income	—												13,549			—			13,549
Other comprehensive loss	—															(5,980		)	(5,980		)
Deferred compensation transactions	—	—		13			—			—			—			—			13
Stock option transactions, net	6,250	—		347			—			72			(29		)	—			390
ESOP shares allocated or committed to be released for allocation (24,966 shares)	—	—		122			249			—			—			—			371
Recognition and Retention Plan ( “RRP”) Awards, net	173,556	—		(1,018		)	—			1,584			—			—			566
Cash dividends paid ($0.12 per common share)	—	—		—			—			—			(5,320		)	—			(5,320		)
Balance at March 31, 2013	44,353,276	$	522	$	403,005		$	(5,389	)	$	(88,517	)	$	184,171		$	919		$	494,711

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands, except per share data)



	For the six months ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	13,549		$	11,418
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	5,550			4,800
Loss on sales of real estate owned	34			178
Depreciation of premises and equipment	2,342			2,505
Amortization of intangibles	626			628
Net gain on loans held for sale	(1,253		)	(890		)
Other than temporary impairment loss recorded in earnings	32			38
Net gain on sale of securities	(3,645		)	(4,888		)
Fair value loss on interest rate cap	1			43
Net gain on sale of premises and equipment	(5		)	—
Net amortization of premium on securities	1,768			1,466
(Amortization) accretion on borrowings	(192		)	1
Accretion of early extinguishment fees on borrowings	733			727
ESOP and RRP expense	832			308
ESOP forfeitures	—			(1		)
Stock option compensation expense	347			252
Originations of loans held for sale	(48,642		)	(35,935		)
Proceeds from sales of loans held for sale	56,360			39,265
Increase in cash surrender value of bank owned life insurance	(899		)	(1,020		)
Net changes in accrued interest receivable and payable	(1,579		)	(329		)
Other adjustments (principally net changes in other assets and other liabilities)	(22,855		)	2,506
Net cash provided by operating activities	3,104			21,072
Cash flows from investing activities:
Purchases of available for sale securities	(209,010		)	(261,775		)
Purchases of held to maturity securities	(81,838		)	(77,080		)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale	128,589			52,149
Held to maturity	39,003			12,027
Proceeds from sales of securities available for sale	136,804			150,657
Proceeds from sales of securities held to maturity	1,234			—
Loan originations	(495,649		)	(362,282		)
Loan principal payments	402,295			259,975
Proceeds from sales of other real estate owned	2,085			1,449
(Purchase) sale of FHLB stock, net	(1,002		)	455
Purchases of premises and equipment	(1,471		)	(781		)
Net cash used in investing activities	(78,960		)	(225,206		)
Cash flows from financing activities:
Net (decrease) increase in transaction, savings and money market deposits	(271,387		)	101,863
Net (decrease) in time deposits	(40,106		)	(29,570		)
Net increase (decrease) in short-term borrowings	32,385			(10,000		)

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands, except per share data)



	For the six months ended March 31,
	2013			2012
Gross repayments of long-term borrowings	(10,126		)	(5,122		)
Restructured debt	—			5,000
Payment of penalties on restructured borrowings	—			(278		)
Net decrease in senior note borrowings	—			(51,500		)
Net increase in mortgage escrow funds	5,663			5,509
Stock option transactions	148			153
Other stock-based compensation transactions	13			138
Cash dividends paid	(5,320		)	(4,552		)
Net cash (used in) provided by financing activities	(288,730		)	11,641
Net decrease in cash and cash equivalents	(364,586		)	(192,493		)
Cash and cash equivalents at beginning of period	437,982			281,512
Cash and cash equivalents at end of period	$	73,396		$	89,019
Supplemental information:
Interest payments	$	10,096		$	9,695
Income tax payments	4,603			1,575
Real estate acquired in settlement of loans	1,983			2,064
Unsettled securities transactions	4,823			49,955

See accompanying notes to unaudited consolidated financial statements

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

1. Basis of Presentation

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident” or the “Company”) and its consolidated subsidiaries. Provident Bank (the “Bank”) is the Company’s principal subsidiary and accounts for substantially all of the Company’s assets and results from operations. The Company’s other subsidiaries include:


•	PB Madison Holding, Inc., a holding company for the Company’s 50% joint venture in PB Madison Title Agency, L.P., a title insurance agency, which provides title searches and title insurance for residential and commercial real estate;


•	LandSave Development, LLC an inactive entity formally known as Hudson Valley Investment Advisors, LLC, the assets of which were sold in November 2012, with modest results from operations included in the Company’s financial statements for fiscal 2013; and


•	Provident Risk Management, Inc. (a Vermont captive insurance company).

The Bank’s wholly-owned subsidiaries include:


•	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;


•	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;


•	Provest Services Corp. I, which has an investment in a low-income housing partnership;


•	Provest Services Corp. II, a New York licensed insurance agent, which has engaged a third-party provider to sell mutual funds, annuities and insurance to the Bank’s customers; and


•	Subsidiaries that hold foreclosed properties acquired by the Bank.

Intercompany transactions and balances are eliminated in consolidation.

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 six months ended March 31, 2013 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)

(Dollars in thousands, except per share data)

2. Securities

A summary of the amortized cost and estimated fair value of securities, is presented below.



	March 31, 2013									September 30, 2012
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Available for Sale
Residential mortgage-backed securities:
Fannie Mae	$	130,113	$	2,552	$	(566	)	$	132,099	$	155,601	$	5,806	$	—		$	161,407
Freddie Mac	53,518		2,214		—			55,732		81,509		3,751		—			85,260
Ginnie Mae	3,946		248		—			4,194		4,488		290		—			4,778
CMO/Other MBS	184,017		1,680		(496		)	185,201		191,867		1,787		(590		)	193,064
Total residential mortgage-backed securities	371,594		6,694		(1,062		)	377,226		433,465		11,634		(590		)	444,509
Other securities:
Federal agencies	368,576		1,302		(602		)	369,276		404,820		4,013		(10		)	408,823
Corporate bonds	25,890		11		(22		)	25,879		—		—		—			—
Obligations of states and political subdivisions	164,534		8,432		(487		)	172,479		146,136		10,349		(4		)	156,481
Equities	818		—		—			818		1,087		—		(28		)	1,059
Total other securities	559,818		9,745		(1,111		)	568,452		552,043		14,362		(42		)	566,363
Total securities available for sale	$	931,412	$	16,439	$	(2,173	)	$	945,678	$	985,508	$	25,996	$	(632	)	$	1,010,872



	March 31, 2013									September 30, 2012
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Held to Maturity
Residential mortgage-backed securities:
Fannie Mae	$	23,307	$	790	$	—		$	24,097	$	28,637	$	1,212	$	—		$	29,849
Freddie Mac	32,212		785		—			32,997		42,706		1,347		—			44,053
CMO/Other MBS	29,113		217		(40		)	29,290		27,921		226		(28		)	28,119
Total residential mortgage-backed securities	84,632		1,792		(40		)	86,384		99,264		2,785		(28		)	102,021
Other securities:
Federal agencies	77,319		88		(129		)	77,278		22,236		106		—			22,342
Obligations of states and political subdivisions	20,084		881		(67		)	20,898		19,376		1,059		—			20,435
Other	1,500		18		—			1,518		1,500		26		—			1,526
Total other securities	98,903		987		(196		)	99,694		43,112		1,191		—			44,303
Total held to maturity	$	183,535	$	2,779	$	(236	)	$	186,078	$	142,376	$	3,976	$	(28	)	$	146,324

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The amortized cost and estimated fair value of securities at March 31, 2013 are presented below by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities are shown separately since they are not due at a single maturity date. Equities are shown separately since there is no maturity date.



	March 31, 2013
	Available for sale				Held to maturity
	Amortized cost		Fair value		Amortized cost		Fair value
Remaining period to contractual maturity:
One year or less	$	2,000	$	2,013	$	3,854	$	3,866
One to five years	86,072		87,687		3,028		3,158
Five to ten years	427,202		432,688		84,462		84,825
Greater than ten years	43,726		45,246		7,559		7,845
Total other securities	559,000		567,634		98,903		99,694
Residential mortgage-backed securities	371,594		377,226		84,632		86,384
Equities	818		818		—		—
Total securities available for sale	$	931,412	$	945,678	$	183,535	$	186,078

Sales of securities were as follows:



	For the three months ended March 31,						For the six months ended March 31,
	2013			2012			2013			2012
Available for sale securities:
Proceeds from sales	$	94,839		$	67,078		$	136,804		$	150,657
Gross realized gains	2,202			2,912			3,618			4,901
Gross realized losses	(10		)	(13		)	(10		)	(13		)
Tax expense of securities gains	(552		)	(763		)	(1,010		)	(1,282		)
Held to maturity securities: ⁽¹⁾
Proceeds from sales	1,234			—			1,234			—
Gross realized gains	37			—			37			—
Tax expense of securities gains	(9		)	—			(10		)	—

⁽¹⁾ The Company sold eight held to maturity securities after the Company had already collected at least 85% of the principal outstanding at acquisition.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The following table summarizes those securities 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
Available for Sale	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
March 31, 2013
Residential mortgage-backed securities:
Federal agencies	$	53,011	$	(566	)	$	—	$	—	$	53,011	$	(566	)
CMO/Other MBS	62,165		(496		)	—		—		62,165		(496		)
Total residential mortgage-backed securities	115,176		(1,062		)	—		—		115,176		(1,062		)
Federal agencies	145,726		(602		)	—		—		145,726		(602		)
Obligations of states and political subdivisions	23,664		(487		)	—		—		23,664		(487		)
Corporate bonds	13,100		(22		)	—		—		13,100		(22		)
Total	$	297,666	$	(2,173	)	$	—	$	—	$	297,666	$	(2,173	)



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	)



	Continuous unrealized loss position
	Less than 12 Months					12 Months or longer				Total
Held to Maturity	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
March 31, 2013
CMO/Other MBS	$	4,911	$	(40	)	$	—	$	—	$	4,911	$	(40	)
Federal agencies	37,211		(129		)	—		—		37,211		(129		)
Obligations of states and political subdivisions	5,294		(67		)	—		$	—	5,294		(67		)
Total	$	47,416	$	(236	)	$	—	$	—	$	47,416	$	(236	)



September 30, 2012
CMO/Other MBS	$	13,189	$	(28	)	$	—	$	—	$	13,189	$	(28	)
Total	$	13,189	$	(28	)	$	—	$	—	$	13,189	$	(28	)

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

Declines in the fair value of available for sale and held to maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses (“OTTI”), management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Substantially all of the unrealized losses at March 31, 2013 relate to investment grade debt securities and are attributable to changes in market interest rates subsequent to purchase. At March 31, 2013, a total of 148 available for sale securities were in a continuous unrealized loss position for less than 12 months and no securities were in that position 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 private label CMOs that had an amortized cost of $4,142 and a fair value (carrying value) of $4,216 as of March 31, 2013. Two of the four securities are considered to be other than temporarily impaired and are below investment grade. The impaired private label CMOs had an amortized cost of $3,764 and a fair value of $3,825 at March 31, 2013. There were no impairment charges on these securities for the three months ended March 31, 2013 and March 31, 2012, respectively. Impairment charges on these securities totaled $14 and $38 for the six months ended March 31, 2013 and March 31, 2012, respectively. At March 31, 2013 total cumulative impairment charges on these two private label CMOs totaled $136. The remaining two securities are rated at or above Ba1 and were performing as of March 31, 2013 and are expected to perform based on current information. In determining whether OTTI existed on these 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 $818 and $809 at March 31, 2013 and September 30, 2012, respectively. During the three months ended March 31, 2013 and March 31, 2012, the Company incurred an OTTI charge on this equity security of $7 and $0, respectively. For the six months ended March 31, 2013 and 2012, the Company incurred an OTTI charge on this security of $18 and $0, respectively. At March 31, 2013, accumulated OTTI charge on this security was $222. The Company may not hold this equity security until the unrealized loss position of the security is recovered; therefore, the security was determined to be OTTI.

Securities pledged for borrowings at FHLB and other borrowings, and securities pledged for municipal deposits and other purposes were as follows:



	Securities pledged at
	March 31, 2013		September 30, 2012
Available for sale securities pledged for borrowings, at fair value	$	206,073	$	144,041
Available for sale securities pledged for municipal deposits, at fair value	473,443		703,261
Held to maturity securities pledged for borrowings, at amortized cost	51,286		46,538
Held to maturity securities pledged for municipal deposits, at amortized cost	92,958		138,855

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

3. Loans

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



	March 31, 2013			September 30, 2012
Residential mortgage	$	365,485		$	350,022
Commercial:
Commercial real estate	1,149,463			1,072,504
Commercial & industrial	370,246			343,307
Acquisition, development & construction	118,115			144,061
Total commercial	1,637,824			1,559,872
Consumer:
Home equity lines of credit	161,646			165,200
Homeowner	31,683			34,999
Other consumer loans	7,917			9,379
Total consumer	201,246			209,578
Total loans	2,204,555			2,119,472
Allowance for loan losses	(27,544		)	(28,282		)
Total loans, net	$	2,177,011		$	2,091,190

Total loans include net deferred loan origination costs of $797 at March 31, 2013 and net deferred loan origination fees of ($310) at September 30, 2012.

A substantial portion of the Company’s loan portfolio is secured by residential and commercial real estate located in the Company’s primary market area, 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 loans, and acquisition, development and construction loans in particular, 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.

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 $176,383 and $205,764 at March 31, 2013 and September 30, 2012, respectively. The discount associated with these loans which includes adjustments associated with market interest rates and anticipated credit losses, was $3,032 and $3,924 at March 31, 2013 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.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The following tables set forth the amounts and status of the Company’s loans and troubled debt restructurings (“TDRs”) at March 31, 2013 and September 30, 2012:



	March 31, 2013
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
Loans by segment:
Residential mortgage	$	353,107	$	1,053	$	603	$	2,368	$	8,354	$	365,485
Commercial real estate	1,130,964		6,073		339		1,132		10,955		1,149,463
Commercial & industrial	365,071		2,164		1,867		341		803		370,246
Acquisition, development & construction	112,885		973		—		—		4,257		118,115
Consumer	197,744		430		6		416		2,650		201,246
Total	$	2,159,771	$	10,693	$	2,815	$	4,257	$	27,019	$	2,204,555
Total TDRs included above	$	21,318	$	543	$	—	$	—	$	1,706	$	23,567
Non-performing loans:
Loans 90+ days past due and still accruing									$	4,257
Non-accrual loans									27,019
Total non-performing loans									$	31,276



	September 30, 2012
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
Loans by segment:
Residential mortgage	$	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	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 loans:
Loans 90+ days past due and still accruing									$	4,370
Non-accrual loans									35,444
Total non-performing loans									$	39,814

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

Activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 is summarized below:



	For the three months ended March 31, 2013
	Beginning allowance for loan losses		Charge-offs			Recoveries		Net charge-offs			Provision for loan losses			Ending allowance for loan losses
Residential mortgage	$	4,368	$	(959	)	$	9	$	(950	)	$	1,025		$	4,443
Commercial real estate	7,616		(1,199		)	331		(868		)	2,401			9,149
Commercial & industrial	5,533		(359		)	127		(232		)	(930		)	4,371
Acquisition, development & construction	7,026		(567		)	164		(403		)	(521		)	6,102
Consumer	3,571		(748		)	31		(717		)	625			3,479
Total	$	28,114	$	(3,832	)	$	662	$	(3,170	)	$	2,600		$	27,544

Annualized net charge-offs to average gross loans outstanding								0.58		%



	For the three months ended March 31, 2012
	Beginning allowance for loan losses		Charge-offs			Recoveries		Net charge-offs			Provision for loan losses			Ending allowance for loan losses
Residential mortgage	$	4,167	$	(677	)	$	1	$	(676	)	$	696		$	4,187
Commercial real estate	5,522		(715		)	51		(664		)	1,608			6,466
Commercial & industrial	5,621		(493		)	83		(410		)	(480		)	4,731
Acquisition, development & construction	9,403		(1,021		)	—		(1,021		)	559			8,941
Consumer	3,532		(566		)	29		(537		)	467			3,462
Total	$	28,245	$	(3,472	)	$	164	$	(3,308	)	$	2,850		$	27,787

Annualized net charge-offs to average gross loans outstanding								0.74		%

Activity in the allowance for loan losses for the six months ended March 31, 2013 and 2012 is summarized below:



	For the six months ended March 31, 2013
	Beginning allowance for loan losses		Charge-offs			Recoveries		Net charge-offs			Provision for loan losses			Ending allowance for loan losses
Residential mortgage	$	4,359	$	(1,909	)	$	60	$	(1,849	)	$	1,933		$	4,443
Commercial real estate	7,230		(1,427		)	412		(1,015		)	2,934			9,149
Commercial & industrial	4,603		(518		)	247		(271		)	39			4,371
Acquisition, development & construction	8,526		(2,161		)	169		(1,992		)	(432		)	6,102
Consumer	3,564		(1,231		)	70		(1,161		)	1,076			3,479
Total	$	28,282	$	(7,246	)	$	958	$	(6,288	)	$	5,550		$	27,544

Annualized net charge-offs to average gross loans outstanding								0.58		%

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)



	For the six months ended March 31, 2012
	Beginning allowance for loan losses		Charge-offs			Recoveries		Net charge-offs			Provision for loan losses			Ending allowance for loan losses
Residential mortgage	$	3,498	$	(1,466	)	$	120	$	(1,346	)	$	2,035		$	4,187
Commercial real estate	5,568		(1,661		)	401		(1,260		)	2,158			6,466
Commercial & industrial	5,945		(701		)	629		(72		)	(1,142		)	4,731
Acquisition, development & construction	9,895		(1,296		)	—		(1,296		)	342			8,941
Consumer	3,011		(1,028		)	72		(956		)	1,407			3,462
Total	$	27,917	$	(6,152	)	$	1,222	$	(4,930	)	$	4,800		$	27,787

Annualized net charge-offs to average gross loans outstanding								0.56		%

The following table sets forth the loans evaluated for impairment by segment and the allowance evaluated by segment at March 31, 2013:



	Loans evaluated by segment						Allowance evaluated by segment
	Individually evaluated for impairment		Collectively evaluated for impairment		Total loans		Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance for loan losses
Residential mortgage	$	12,480	$	353,005	$	365,485	$	305	$	4,138	$	4,443
Commercial real estate	15,434		1,134,029		1,149,463		2,155		6,994		9,149
Commercial & industrial	2,813		367,433		370,246		179		4,192		4,371
Acquisition, development & construction	19,315		98,800		118,115		144		5,958		6,102
Consumer	3,066		198,180		201,246		149		3,330		3,479
Total	$	53,108	$	2,151,447	$	2,204,555	$	2,932	$	24,612	$	27,544

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



	Loans evaluated by segment						Allowance evaluated by segment
	Individually evaluated for impairment		Collectively evaluated for impairment		Total loans		Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance for loan losses
Residential mortgage	$	12,739	$	337,283	$	350,022	$	871	$	3,488	$	4,359
Commercial real estate	13,017		1,059,487		1,072,504		1,036		6,194		7,230
Commercial & industrial	357		342,950		343,307		48		4,555		4,603
Acquisition, development & construction	24,880		119,181		144,061		996		7,530		8,526
Consumer	2,299		207,279		209,578		263		3,301		3,564
Total	$	53,292	$	2,066,180	$	2,119,472	$	3,214	$	25,068	$	28,282

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The following table presents loans individually evaluated for impairment by segment of loans at March 31, 2013 and September 30, 2012:



	March 31, 2013						September 30, 2012
	Unpaid principal balance		Recorded investment		Related allowance		Unpaid principal balance		Recorded investment		Related allowance
With no related allowance recorded:
Residential mortgage	$	10,665	$	8,539	$	—	$	6,193	$	5,413	$	—
Commercial real estate	10,440		9,229		—		9,296		7,837		—
Commercial & industrial	2,498		2,455		—		262		262		—
Acquisition, development & construction	19,986		18,645		—		24,144		20,597		—
Consumer	2,577		2,341		—		1,146		1,122		—
Subtotal	46,166		41,209		—		41,041		35,231		—
With an allowance recorded:
Residential mortgage	5,303		3,941		305		8,485		7,326		871
Commercial real estate	8,988		6,205		2,155		5,942		5,180		1,036
Commercial & industrial	538		358		179		95		95		48
Acquisition, development & construction	814		670		144		7,159		4,283		996
Consumer	1,197		725		149		1,400		1,177		263
Subtotal	16,840		11,899		2,932		23,081		18,061		3,214
Total	$	63,006	$	53,108	$	2,932	$	64,122	$	53,292	$	3,214

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the three months ended March 31, 2013 and 2012:



	March 31, 2013						March 31, 2012
	QTD average recorded investment		Interest income recognized		Cash-basis interest income recognized		QTD average recorded investment		Interest income recognized		Cash-basis interest income recognized
With no related allowance recorded:
Residential mortgage	$	7,978	$	100	$	52	$	4,182	$	63	$	28
Commercial real estate	9,248		99		53		9,525		95		75
Commercial & industrial	1,873		45		21		798		10		10
Acquisition, development & construction	15,582		313		161		21,442		166		114
Consumer	2,127		7		3		2,290		20		5
Subtotal	36,808		564		290		38,237		354		232
With an allowance recorded:
Residential mortgage	3,857		14		6		6,790		35		30
Commercial real estate	6,265		13		9		7,256		33		24
Commercial & industrial	368		3		3		97		2		2
Acquisition, development & construction	649		—		—		10,640		44		41
Consumer	700		4		2		1,099		3		2
Subtotal	11,839		34		20		25,882		117		99
Total	$	48,647	$	598	$	310	$	64,119	$	471	$	331

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the six months ended March 31, 2013 and 2012:



	March 31, 2013						March 31, 2012
	YTD average recorded investment		Interest income recognized		Cash-basis interest income recognized		YTD average recorded investment		Interest income recognized		Cash-basis interest income recognized
With no related allowance recorded:
Residential mortgage	$	8,165	$	201	$	104	$	4,244	$	126	$	57
Commercial real estate	9,241		199		105		9,690		184		151
Commercial & industrial	2,067		90		42		849		20		20
Acquisition, development & construction	16,603		630		321		21,715		344		229
Consumer	2,198		14		6		2,297		39		11
Subtotal	38,274		1,134		578		38,795		713		468
With an allowance recorded:
Residential mortgage	3,885		27		12		6,968		69		59
Commercial real estate	6,245		27		19		7,399		66		47
Commercial & industrial	365		6		6		96		3		3
Acquisition, development & construction	656		—		—		10,941		88		82
Consumer	709		8		4		1,085		4		4
Subtotal	11,860		68		41		26,489		230		195
Total	$	50,134	$	1,202	$	619	$	65,284	$	943	$	663

Troubled Debt Restructuring:

The following tables set forth the amounts of the Company’s TDRs at March 31, 2013 and September 30, 2012:



	March 31, 2013
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
Residential mortgage	$	1,560	$	198	$	—	$	—	$	1,558	$	3,316
Commercial real estate	3,347		—		—		—		—		3,347
Commercial & industrial	1,669		—		—		—		—		1,669
Acquisition, development & construction	14,742		345		—		—		148		15,235
Total	$	21,318	$	543	$	—	$	—	$	1,706	$	23,567
Allowance for loan losses	$	—	$	—	$	—	$	—	$	4	$	4

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)



	September 30, 2012
	Current		30-59 Days past due		60-89 Days past due		90+ Days past due		Non- accrual		Total
Residential mortgage	$	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 March 31, 2013, and September 30, 2012, respectively, to customers with outstanding loans that are classified as TDRs.

The following table presents loans by segment modified as TDRs that occurred during the three months ended March 31, 2013 and 2012:



	March 31, 2013					March 31, 2012
		Recorded investment					Recorded investment
	Number of loans	Pre- modification		Post- modification		Number of loans	Pre- modification		Post- modification
Commercial & industrial	2	$	169	$	169	—	$	—	$	—
Acquisition, development & construction	5	3,049		3,049		1	446		446
Total restructured loans	7	$	3,218	$	3,218	1	$	446	$	446

The following table presents loans by segment modified as TDRs that occurred during the six months ended March 31, 2013 and 2012:



	March 31, 2013					March 31, 2012
		Recorded investment					Recorded investment
	Number of loans	Pre- modification		Post- modification		Number of loans	Pre- modification		Post- modification
Residential mortgage	1	$	275	$	275	1	$	446	$	446
Commercial real estate	1	450		450		1	850		850
Commercial & industrial	3	1,669		1,669		—	—		—
Acquisition, development & construction	7	5,772		5,772		—	—		—
Total restructured loans	12	$	8,166	$	8,166	2	$	1,296	$	1,296

The TDRs presented above increased the allowance for loan losses by $0 for the three months ended March 31, 2013 and 2012. There were no charge-offs as a result of the above TDRs, for the respective periods.

The TDRs presented above increased the allowance for loan losses by $0 and $134 for the six months ended March 31, 2013 and 2012, respectively. There were $40 and $134 in charge-offs as a result of the above TDRs, for the respective periods.

There were 4 residential mortgage loans totaling $1,100 that were modified as TDRs during the last twelve months that had subsequently defaulted during the six months ended March 31, 2013.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

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 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.

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 analysis performed as of March 31, 2013 and September 30, 2012, the risk category of loans by segment of gross loans is as follows:



	March 31, 2013						September 30, 2012
	Special mention		Substandard		Doubtful		Special mention		Substandard		Doubtful
Residential mortgage	$	1,200	$	10,763	$	—	$	830	$	11,314	$	—
Commercial real estate	18,531		27,212		—		20,729		27,674		—
Acquisition, development & construction	9,054		23,298		—		5,669		42,871		—
Commercial & industrial	12,973		5,836		330		14,920		3,995		338
Consumer	20		3,249		—		274		2,482		—
Total	$	41,778	$	70,358	$	330	$	42,422	$	88,336	$	338

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

4. Deposits

Major classifications of deposits are summarized below:



	March 31, 2013		September 30, 2012
Transaction accounts:
Demand deposits:
Retail	$	170,102	$	167,050
Business	426,783		412,630
Municipal	26,889		367,624
NOW deposits:
Retail	235,658		213,755
Business	43,389		38,486
Municipal	166,812		195,882
Total transaction accounts	1,069,633		1,395,427
Savings	549,440		506,538
Money market	833,209		821,704
Certificates of deposit	347,376		387,482
Total deposits	$	2,799,658	$	3,111,151

Municipal deposits of $537,070 and $901,739 were included in total deposits at March 31, 2013 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.

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



	March 31, 2013		September 30, 2012
Savings	$	—	$	13,344
Money market	34,641		46,566
Reciprocal CDARs⁽¹⁾	1,356		1,354
CDARs one way	766		764
Total brokered deposits	$	36,763	$	62,028

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

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

5. Borrowings

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



	March 31, 2013				September 30, 2012
	Amount		Rate		Amount		Rate
By type of borrowing:
Advances	$	139,323	2.95	%	$	106,904	3.89	%
Repurchase agreements	228,653		3.24		238,272		3.49
Total borrowings	$	367,976	3.13	%	$	345,176	3.61	%
By remaining period to maturity:
One year or less	$	68,810	1.27	%	$	10,136	1.88	%
One to two years	73,731		1.75		56,819		2.44
Two to three years	—		—		52,693		2.89
Three to four years	102,597		4.19		201		5.32
Four to five years	120,000		4.10		202,386		4.21
Greater than five years	2,838		4.92		22,941		3.74
Total borrowings	$	367,976	3.13	%	$	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 March 31, 2013 and September 30, 2012, the Bank had pledged mortgage loans totaling $645,488 and $613,554, respectively. The Bank had also pledged securities to secure borrowings, which are disclosed in Note 2. Securities. As of March 31, 2013, 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 $486,394.

FHLB borrowings which are putable quarterly at the discretion of the FHLB (includes both advance and repurchase agreements) were $200,000 as of March 31, 2013 and September 30, 2012. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 4.06 years and 4.56 years and weighted average interest rates of 4.23% at March 31, 2013 and September 30, 2012.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per 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 March 31, 2013, the Company had $26,942 in outstanding letters of credit, of which $6,546 are cash secured and $4,524 were secured by other 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.

8. Earnings Per Common Share

The number of shares used in the computation of basic earnings per share excludes unallocated ESOP shares and unvested shares of restricted stock that are not participating securities.

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 March 31,				For the six months ended March 31,
	2013		2012		2013		2012
Weighted average common shares outstanding (basic)	43,743,640		37,280,651		43,704,163		37,266,480
Net income	$	6,529	$	5,701	$	13,549	$	11,418
Basic earnings per common share	0.15		0.15		0.31		0.31

Diluted earnings per common share are computed as follows:



	For the three months ended March 31,				For the six months ended March 31,
	2013		2012		2013		2012
Weighted average common shares outstanding (basic)	43,743,640		37,280,651		43,704,163		37,266,480
Effect of common stock equivalents	104,846		36,127		86,752		9,153
Weighted average common shares outstanding (diluted)	43,848,486		37,316,778		43,790,915		37,275,633
Net income	$	6,529	$	5,701	$	13,549	$	11,418
Diluted earnings per common share	0.15		0.15		0.31		0.31

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

As of March 31, 2013 and March 31, 2012, 1,332,619 and 1,710,943 weighted average shares were anti-dilutive for the three month period, respectively. As of March 31, 2013 and March 31, 2012, 1,344,024 and 1,832,280 weighted average shares were anti-dilutive for the six month period, respectively. Anti-dilutive shares are not included in the determination of diluted earnings per share.

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 $566, and $181, for the three months ended March 31, 2013 and 2012, respectively. There was no income tax benefit realized for the three months ended March 31, 2013 and 2012.

Total compensation expense that was charged against income for those plans was $950, and $373, for the six months ended March 31, 2013 and 2012, respectively. There was no income tax benefit realized for the six months ended March 31, 2013 and 2012.

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 1,867,340 shares of common stock as of March 31, 2013. 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 119,457 shares of common stock as of March 31, 2013. 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.

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 March 31, 2013.

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), is 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.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

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



	For the six months ended March 31,
	2013		2012
Risk-free interest rate	0.96	%	1.50	%
Expected stock price volatility	40.8	%	39.8	%
Dividend yield ⁽¹⁾	2.61	%	3.10	%
Expected term in years	5.75		5.80

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

The following table summarizes the combined activity in the Company’s active stock-based compensation plans for the six months ended March 31, 2013:



			Non-vested stock awards/stock units outstanding				Stock options outstanding
	Shares available for grant		Number of shares		Weighted average grant date fair value		Number of shares		Weighted average exercise price
Balance at October 1, 2012	2,875,877		97,817		$	8.31	1,972,480		$	11.04
Granted ⁽¹⁾	(1,028,140	)	186,900		9.04		360,500		9.04
Stock awards vested	—		(32,166	)	8.73		—		—
Exercised	—		—		—		(6,250	)	6.71
Forfeited	153,234		(9,300	)	7.28		(130,900	)	10.23
Canceled/expired	(7,054	)	—		—		(7,054	)	13.97
Balance at March 31, 2013	1,993,917		243,251		$	8.85	2,188,776		$	10.76
Exercisable at March 31, 2013							1,392,338		$	12.08

^{(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 $2.27 for the six months ended March 31, 2013 and 2012, respectively.

As of March 31, 2013, there was $1,726 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 2.49 years.

As of March 31, 2013, there was $1,683 of total unrecognized compensation expense related to non-vested restricted shares granted under the 2012 Plan and the RRP. The expense is expected to be recognized over a weighted average period of 2.24 years.

There were no modifications for the six months ended March 31, 2013 and 2012.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

10. Pension and Other Post Retirement Plans

Net pension and post-retirement expense, which is recorded within compensation 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 March 31,						For the three months ended March 31,
	2013			2012			2013			2012
Service cost	$	—		$	—		$	11		$	9
Interest cost	363			376			31			27
Expected return on plan assets	(615		)	(532		)	—			—
Amortization of net transition obligation	—			—			6			6
Amortization of prior service cost	—			—			12			12
Amortization of (gain) or loss	515			579			(6		)	(15		)
Total cost	$	263		$	423		$	54		$	39



	Pension plan						Other post retirement plans
	For the six months ended March 31,						For the six months ended March 31,
	2013			2012			2013			2012
Service cost	$	—		$	—		$	23		$	18
Interest cost	726			751			63			54
Expected return on plan assets	(1,231		)	(1,063		)	—			—
Amortization of net transition obligation	—			—			12			12
Amortization of prior service cost	—			—			23			24
Amortization of (gain) or loss	1,031			1,158			(13		)	(30		)
Total cost	$	526		$	846		$	108		$	78

As of March 31, 2013, no contributions had been made 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 March 31, 2013 and $14 for the three months ended March 31, 2012.

The periodic pension expense for the supplemental plan amounted to $24 for the six months ended March 31, 2013 and $26 for the six months ended March 31, 2012.

For the three months ended March 31, 2013 and 2012 there was $9 and $75, respectively, in contributions to fund benefit payments related to the SERP. For the six months ended March 31, 2013 and 2012, there was $18 and $84, respectively, 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)

(Dollars in thousands, except per 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 March 31, 2013 and 2012 is a fair value loss of $0 and a fair value loss of $40, respectively. For the six months ended March 31, 2013 and 2012 the fair value loss was $1 and $43, respectively. The fair value of the interest rate caps and interest rate swaps discussed below at March 31, 2013 and September 30, 2012 are 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 and six months ended March 31, 2013 and 2012.

The Company pledged collateral to derivative counterparties in the form of securities with an amortized cost of $5,042 and a fair value of $5,044 as of March 31, 2013. 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 March 31, 2013 summary information regarding these derivatives is presented below:



	March 31, 2013
	Notional amount			Weighted average maturity (in years)	Weighted average fixed rate		Weighted average variable rate	Fair value
Interest rate caps	$	50,000		1.68	3.75	%	NA	$	1
Third-party interest rate swaps	55,190			6.26	4.22		1 m Libor + 2.45	2,198
Customer interest rate swaps	(55,190		)	6.26	4.22		1 m Libor + 2.45	(2,198		)

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 in the secondary market. Such commitments are considered to be derivative financial instruments and are carried at estimated fair value on the consolidated balance sheets. The fair values of these commitments are not considered material.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per 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.

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 March 31, 2013, these securities have an amortized cost of $4,142 and a fair value of $4,216. 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 March 31, 2013. Management ultimately determines the fair value of Level 3 investment securities. These securities have a weighted average coupon rate of 3.80%, a weighted average life of 4.05 years, a weighted average one month constant prepayment rate history of 12.06 and a weighted average twelve month constant default rate of 3.19%. It was determined that two of these securities with a carrying value of $3,825 and an amortized cost of $3,764 had OTTI which resulted in a $0 and $14 OTTI charge through earnings for the three and six months ended March 31, 2013. These securities have an accumulated OTTI of $136 at March 31, 2013. The calculation of the OTTI was determined by performing a present value of estimated credit loss using the underlying security book yields of 3.12% and 3.39%.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The credit ratings of private label CMO securities at March 31, 2013 were as follows:



	Amortized cost		Fair value
Credit rating:
Aa3	$	270	$	282
Ba1	108		109
B1	2,230		2,267
B3	1,534		1,558
Total private label CMOs	$	4,142	$	4,216

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 twelve interest rate swaps (see note 11).

Commitments to Sell Real Estate Loans

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

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

A summary of assets and liabilities at March 31, 2013 measured at estimated fair value on a recurring basis were as follows:



	March 31, 2013
	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	$	132,099	$	—	$	132,099	$	—
Freddie Mac	55,732		—		55,732		—
Ginnie Mae	4,194		—		4,194		—
CMO/Other MBS	180,985		—		180,985		—
Private label CMOs	4,216		—		—		4,216
Total residential mortgage-backed securities	377,226		—		373,010		4,216
Other securities:
Federal agencies	369,276		—		369,276		—
Corporate bonds	25,879		—		25,879		—
Obligations of states and political subdivisions	172,479		—		172,479		—
Equities	818		—		818		—
Total other securities	568,452		—		568,452		—
Total investment securities available for sale	945,678		—		941,462		4,216
Interest rate caps and swaps	2,199		—		2,199		—
Total assets measured at estimated fair value on a recurring basis	$	947,877	$	—	$	943,661	$	4,216
Liabilities:
Interest rate swaps	$	2,198	$	—	$	2,198	$	—
Total liabilities measured at estimated fair value on a recurring basis	$	2,198	$	—	$	2,198	$	—

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per 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	2,487		—		2,487		—
Total assets measured at estimated fair value on a recurring basis	$	1,013,359	$	—	$	1,008,729	$	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 six months ended March 31, 2013 and 2012.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the three and six months ended March 31, 2013 and 2012:



	Fair value measurement for the three and six months ended March 31, 2013 using significant unobservable inputs Level 3			Fair value measurement for the three and six months ended March 31, 2012 using significant unobservable inputs Level 3
Balance at September 30,	$	4,630		$	4,851
Paydowns	(325		)	(148		)
Accretion, net	6			3
OTTI	(14		)	(38		)
Change in fair value	63			7
Balance at December 31,	4,360			4,675
Paydowns	(196		)	(178		)
Accretion, net	5			3
OTTI	—			—
Change in fair value	47			211
Balance at March 31,	$	4,216		$	4,711

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

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 $50,176 and $50,078 which equals the carrying value less the allowance for loan losses allocated to these loans at March 31, 2013 and September 30, 2012, respectively. Changes in fair value recognized on provisions on loans held by the Company were $3,947 and $2,359 for the six months ended March 31, 2013 and 2012, respectively.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

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.

Impaired loans at March 31, 2013 measured at estimated fair value on a non-recurring basis were as follows:



	March 31, 2013
	Fair value measurements		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Residential mortgage	$	8,664	$	—	$	—	$	8,664
Commercial real estate	7,216		—		—		7,216
Commercial & industrial	358		—		—		358
Acquisition, development & construction	3,896		—		—		3,896
Consumer	1,008		—		—		1,008
Total impaired loans measured at fair value	$	21,142	$	—	$	—	$	21,142

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
Residential mortgage	$	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 measured at fair value	$	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 March 31, 2013 and 2012 was $1,886 and $1,433.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per 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 $5,486 and $6,403 at March 31, 2013 and September 30, 2012, respectively. There were $606 and $208 changes in fair value recognized through income for those foreclosed assets held by the Company during the three months ending March 31, 2013 and 2012, respectively.

There were $815 and $276 changes in fair value recognized through income for those foreclosed assets held by the Company during the six months ending March 31, 2013 and 2012, 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 March 31, 2013:



Non-recurring fair value measurements	Fair value		Valuation technique	Unobservable input / assumptions	Range⁽¹⁾
Impaired loans:
Residential mortgage	$	8,664	Appraisal	Adjustments for comparable properties	18.0% - 23.0%
Commercial real estate	7,216		Appraisal	Adjustments for comparable properties	18.0% - 23.0%
Commercial & industrial	358		Appraisal	Adjustments for comparable properties	18.0% - 32.0%
Acquisition, development & construction	3,896		Appraisal	Adjustments for comparable properties	22.0% - 32.0%
Consumer loans	1,008		Appraisal	Adjustments for comparable properties	18.0% - 23.0%
Assets taken in foreclosure:
Residential mortgage	1,207		Appraisal	Adjustments by management to reflect current conditions/selling costs	18.0% - 23.0%
Commercial real estate	1,239		Appraisal	Adjustments by management to reflect current conditions/selling costs	18.0% - 23.0%
Acquisition, development & construction	3,040		Appraisal	Adjustments by management to reflect current conditions/selling costs	22.0% - 32.0%
Mortgage servicing rights	1,886		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)

(Dollars in thousands, except per share data)

Fair Values of Financial Instruments

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

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

The following is a summary of the carrying amounts and estimated fair values of financial assets and liabilities (none of which were held for trading purposes) as of March 31, 2013:



	March 31, 2013
	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	$	73,396		$	73,396		$	—		$	—
Securities available for sale	945,678			—			941,462			4,216
Securities held to maturity	183,535			—			186,078			—
Loans, net	2,177,011			—			—			2,207,571
Loans held for sale	1,040			—			1,040
Accrued interest receivable on securities	4,597			—			4,597			—
Accrued interest receivable on loans	7,222			—			—			7,222
FHLB stock	20,251			NA			NA			NA
Interest rate caps and swaps	2,199			—			2,199			—
Financial liabilities:
Non-maturity deposits	(2,452,282		)	(2,452,282		)	—			—
Certificates of deposit	(347,376		)	—			(348,076		)	—
FHLB and other borrowings	(367,976		)	—			(400,019		)	—
Mortgage escrow funds	(17,582		)	—			(17,579		)	—
Accrued interest payable on deposits including escrow	(308		)	—			(308		)	—
Accrued interest payable on borrowings	(1,361		)	—			(1,361		)	—
Interest rate caps and swaps	2,198			—			2,198			—

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per 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			NA			NA			NA
Interest rate caps and swaps	2,487			—			2,487			—
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		)	—
Interest rate caps and swaps	2,485			—			2,485			—

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. 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. 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)

(Dollars in thousands, except per 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

It is not practical to determine the fair value of FHLB stock due to the restrictions on transfer of their securities.

(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 March 31, 2013 and September 30, 2012, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

13. Adoption of New Accounting Standards

Update Number 2013-02 - Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments would require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective for reporting periods beginning after December 15, 2012. See Note 15 for the impact of this standard.

14. Subsequent Events

On April 4, 2013 Provident announced it had entered into a merger agreement with Sterling Bancorp (NYSE: STL). In the merger, which is a stock-for-stock transaction valued at $344 million based on the closing price of Provident common stock on April 3, 2013, Sterling Bancorp shareholders will receive a fixed ratio of 1.2625 shares of Provident common stock for each share of Sterling Bancorp common stock. Upon closing, Provident shareholders will own approximately 53% of stock in the combined company and Sterling Bancorp shareholders will own approximately 47%. On a pro forma combined basis, for the twelve months ended September 30, 2012, the companies had revenue of $253 million and $33 million in net income. Upon completion of the merger the combined company is expected to have approximately $6.5 billion in assets. The transaction, which has been approved by the boards of directors of both companies, is expected to close in the fourth calendar quarter of 2013. The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions.

15. Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the six month period ended March 31, 2013 and 2012, was as follows:



	Unrealized gains(losses) on securities			Unrealized gains (losses) for pension and other post-retirement obligations			Total
Balance at September 30, 2011	$	13,604		$	(8,468	)	$	5,136
Period change	176			673			849
Balance at March 31, 2012	$	13,780		$	(7,795	)	$	5,985

Balance at September 30, 2012	$	15,066		$	(8,167	)	$	6,899
Other comprehensive income before reclassifications	(4,446		)	—			(4,446		)
Amounts reclassified from AOCI	(2,146		)	612			(1,534		)
Period change	(6,592		)	612			(5,980		)
Balance at March 31, 2013	$	8,474		$	(7,555	)	$	919

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Dollars in thousands, except per share data)

The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the income statement for the six months ended March 31, 2013:



Components of AOCI	Amount reclassified from AOCI⁽¹⁾			Affected line item in the statement where net income is presented

Unrealized gains (losses) on available for sale securities
	$	3,645		Non-interest income - net gain on sale of securities
	(32		)	Non-interest income - net impairment loss in earnings
	3,613			Net change before tax
	(1,467		)	Tax expense
	$	2,146		Net change after tax

Amortization of defined benefit pension items
Actuarial loss	$	(1,031	)	Non-interest expense - compensation and employee benefits ⁽²⁾
	(1,031		)	Total change before tax
	419			Tax benefit
	$	(612	)	Net change after tax

⁽¹⁾Amounts in parentheses indicate debits in profit/loss.

⁽²⁾ These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 10 - Pensions and Other Post Retirement Benefits for additional details).

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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 New York Bancorp that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions or future or conditional verbs such as “will,” “should,” “would,” “could,” or “may.” These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared.

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

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


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


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


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

•

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


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


•	ability to obtain regulatory approvals and meet other closing conditions to the merger (the “Merger”) between the Company and Sterling Bancorp ( “Sterling”), including approval by the Company and Sterling shareholders, on the expected terms and schedule;


•	delay in closing the Merger;


•	difficulties and delays in integrating the Company and Sterling businesses or fully realizing cost savings and other benefits;


•	business disruption following the proposed Merger;


•	changes in the Company’s stock price before completion of the Merger, including as a result of the financial performance of Sterling prior to closing;


•	the reaction to the Merger of the companies’ customers, employees and counterparties;


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


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


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

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


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


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

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

The following commentary presents management’s discussion and analysis of financial condition and results of operations and is intended to assist the reader in understanding our financial condition and results of operations. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes included in Part I, Item I of this document and with our consolidated financial statements and the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2012 Annual Report on Form 10-K. Operating results discussed herein are not necessarily indicative of the results of any future period. Tax-equivalent adjustments are the result of increasing income from tax-exempt securities by an amount equal to the federal taxes that would be paid if the income were fully taxable based on a 35.0% marginal effective income tax rate.

Critical Accounting Policies

Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by the Company to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, and review their risk components as a part of that evaluation. See our Annual Report on Form 10-K, Note 1, “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in our “Notes to Consolidated Financial Statements” for a discussion of the risk components. We consistently review the risk components to identify any changes in trends.

Goodwill and Other Intangible Assets. The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

We also use judgment in the valuation of other intangible assets. A core deposit intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we determine these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired.

Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and

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assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.

Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless the Company considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when we have determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful.

Overview and Management Strategy

Provident New York Bancorp is headquartered in Montebello, New York. With $3.7 billion in assets, we are a growing financial services firm that specializes in the delivery of services and solutions to business owners, their families and consumers in communities within the greater New York metropolitan area through teams of dedicated and experienced relationship managers. We offer a complete line of commercial, business and consumer banking products and services. Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank. References to Provident New York Bancorp, we, us, or the Company may signify the Bank, depending on the context.

We focus our efforts on generating core deposits, especially transaction accounts, and originating high quality loans with an emphasis on growing our commercial loan balances. We seek to maintain a disciplined pricing strategy on deposits that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs. Our strategic objectives include growing revenues and earnings by expanding client acquisitions, improving asset quality and increasing efficiency. To achieve these goals we are focusing on high value client segments, expanding our delivery and distribution channels, creating a high productivity performance culture, closely monitoring operating costs and proactively managing enterprise risk.

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

On April 4, 2013 we announced a merger agreement with Sterling Bancorp (NYSE: STL). This merger presents an opportunity to continue building a high performing institution and is a significant step in our strategy of expanding within the greater New York metropolitan area. We expect the merger will create a larger, more diversified company and will allow us to accelerate the build-out of our differentiated strategy targeting small-to-middle market commercial and consumer clients.

In the merger, which is a stock-for-stock transaction valued at approximately $344 million based on the closing price of Provident common stock on April 3, 2013, Sterling Bancorp shareholders will receive a fixed ratio of 1.2625 shares of Provident common stock for each share of Sterling Bancorp common stock. Upon closing, Provident shareholders will own approximately 53% of stock in the combined company, and Sterling Bancorp shareholders will own approximately 47%. On a pro forma combined basis, for the twelve months ended September 30, 2012, the companies had revenue of $253 million and $33 million in net income. Upon completion of the merger the combined company is expected to have approximately $6.5 billion in assets. The merger is expected to generate approximately $34 million in fully phased-in annual cost savings or approximately 18% of the expected combined expense total. The merger is expected to be accretive to Provident earnings per share in 2014, excluding the impact of the potential revenue enhancement opportunities. The transaction, which has been approved by the boards of directors of both companies, is expected to close in the fourth calendar quarter of 2013. The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions.

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

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

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Summary

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


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


•	Loan originations of $544.3 million.


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


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


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


•	Deposits declined $311.5 million at March 31, 2013 compared to September 30, 2012, due to a decline in municipal deposits given elevated levels of municipal deposits at the Company’s fiscal year end as a result of seasonal factors.


•	Return on average tangible equity, a non-GAAP measure, was 8.46% for the six months ended March 31, 2013 compared to 8.46% for the six months ended March 31, 2012 (see page 55 for non-GAAP reconciliation of return on tangible equity).


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


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

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

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

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

Net loans as of March 31, 2013 were $2.2 billion, which represented an $85.8 million increase relative to September 30, 2012. Growth in commercial real estate and commercial & industrial loans was the main driver, as the balance in these loan categories increased $103.9 million. The Company has expanded its market reach in the greater New York metropolitan area by deploying a team-based relationship and distribution strategy. The success of our team-based approach is allowing us to better serve our small to middle market commercial clients and is driving our loan growth. Including loans originated for sale, the Company originated $544.3 million loans for the six months ended March 31, 2013, while repayments were $458.7 million.

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

Loans acquired in connection with the acquisition of Gotham Bank in August 2012 were recorded at fair value at the date of acquisition. These loans totaled $176.4 million at March 31, 2013 compared to $205.8 million at September 30, 2012. Factors that went into the determination of fair value of the acquired loans included adjustments related to interest rates and expected credit losses. There had been no amounts charged-off against this discount for the six months ended March 31, 2013. None of the Gotham Bank acquired loans were considered purchased credit impaired loans.

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

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

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

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

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

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

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

Deposits as of March 31, 2013 were $2.8 billion, a decrease of $311.5 million, or 10.0%, from September 30, 2012. As of March 31, 2013 transaction accounts were 38.2% of deposits, or $1.1 billion compared to $1.4 billion or 44.9% of deposits at September 30, 2012. As of March 31, 2013, savings deposits were $549.4 million, an increase of $42.9 million or 8.47% from September 30, 2012. Money market accounts increased $11.5 million or 1.40% to $833.2 million at March 31, 2013. Certificates of deposit accounts decreased by $40.1 million or 10.4%. Municipal deposits were $537.1 million at March 31, 2013 compared to $901.7 million at September 30, 2012. Municipal deposits reach peak volumes in connection with tax payments collected during the month of September. Excluding municipal deposits, deposits increased $53.2 million during the six months ended March 31, 2013. Our banking teams are driving our core deposit growth.

Borrowings increased by $22.8 million or 6.61%, from September 30, 2012 to $368.0 million, due primarily to an increase in short-term advances from the FHLB. The new short-term advances were utilized principally to fund a portion of the decline in municipal deposits. At March 31, 2013, the balance of the discount associated with our long-term FHLB borrowings that will accrete as additional interest expense over the remaining term of the instruments was $2.2 million.

Stockholders’ equity increased $3.6 million from September 30, 2012 to $494.7 million at March 31, 2013. The change was mainly due to retained earnings of $8.2 million and treasury stock transactions of $1.7 million. This was partially offset by a decrease in accumulated other comprehensive income of $6.0 million.

As of March 31, 2013, the Company had authorization to purchase up to an additional 776,713 shares of common stock; however, at this time the Company has no plans to acquire any of its shares for the remainder of this fiscal year. The Bank’s Tier 1 leverage ratio was 8.62% at March 31, 2013. The Company’s tangible equity as a percentage of tangible assets was 9.18% at March 31, 2013 (see non-GAAP reconciliation of tangible equity as a percentage of tangible assets on page 55).

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Comparison of Operating Results for the Three Months Ended March 31, 2013 and March 31, 2012

Net income for the three months ended March 31, 2013 was $6.5 million or $0.15 per diluted share, an increase of $828 thousand compared to $5.7 million or $0.15 per diluted share, for the three months ended March 31, 2012. Diluted earnings per share was unchanged between the periods due primarily to an increase in common shares outstanding as a result of the 6.3 million common shares the Company issued in August 2012 in connection with the Gotham acquisition. The primary factors contributing to the increase in net income for the current period were higher net interest income of $3.9 million or 16.4%. Also contributing to the increase in net income for the period was a reduction of $250 thousand in the provision for loan losses due to the continued improvement in asset quality. Partially offsetting these increases were a decline of $1.1 million, or 14.0%, in non-interest income and an increase of $2.0 million, or 9.6% in non-interest expense. The decline in non-interest income was the result of lower net gains on sale of securities of $670 thousand and lower investment management fees of $378 thousand. The increase in non-interest expense was the result of an increase in compensation and employee benefits, and related occupancy and office expense of $955 thousand associated with the hiring of new commercial banking teams; an increase of $503 thousand in foreclosed property expense as we exited several non-performing assets; and a $243 thousand increase in merger-related expense due to our pending merger with Sterling Bancorp.

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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 March 31,
	2013								2012
	Average outstanding balance			Interest			Average yield/ rate		Average outstanding balance			Interest			Average yield/ rate
Interest earning assets:
Commercial loans	$	1,593,003		$	19,801		5.04	%	$	1,167,620		$	14,600		5.03	%
Consumer loans	208,672			2,230			4.33		223,988			2,459			4.42
Residential mortgage loans	366,224			4,347			4.81		378,851			5,094			5.41
Total net loans⁽¹⁾	2,167,899			26,378			4.93		1,770,459			22,153			5.03
Securities-taxable	967,889			4,288			1.80		799,753			4,415			2.22
Securities-tax exempt⁽²⁾	181,803			2,292			5.11		185,062			2,460			5.35
Federal Reserve balances	66,096			39			0.24		17,604			9			0.21
Other earning assets	19,522			225			4.67		19,164			235			4.92
Total securities and other earning assets	1,235,310			6,844			2.25		1,021,583			7,119			2.80
Total interest earning assets	3,403,209			33,222			3.96		2,792,042			29,272			4.22
Non-interest earning assets	401,451								339,812
Total assets	$	3,804,660							$	3,131,854
Interest bearing liabilities:
NOW deposits	$	508,129		124			0.10	%	$	389,846		106			0.11	%
Savings, club and escrow deposits	575,380			314			0.22		463,971			66			0.06
Money market deposits	877,101			652			0.30		654,013			430			0.26
Certificates of deposit	355,917			534			0.61		284,737			615			0.87
Total interest bearing deposits	2,316,527			1,624			0.28		1,792,567			1,217			0.27
Borrowings	345,717			2,977			3.49		375,765			3,289			3.52
Total interest bearing liabilities	2,662,244			4,601			0.70		2,168,332			4,506			0.84
Non-interest bearing deposits	641,194								503,539
Other non-interest bearing liabilities	8,497								20,599
Total liabilities	3,311,935								2,692,470
Stockholders’ equity	492,725								439,384
Total liabilities and equity	$	3,804,660							$	3,131,854
Net interest rate spread							3.26	%							3.38	%
Net earning assets	$	740,965							$	623,710
Net interest margin				28,621			3.41	%				24,766			3.57	%
Less tax equivalent adjustment⁽²⁾				(802		)						(861		)
Net interest income				$	27,819							$	23,905
Ratio of average interest earning assets to average interest bearing liabilities	127.8		%						128.8		%



⁽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 March 31, 2013 vs. 2012 Increase / (decrease) due to
	Volume⁽¹⁾			Rate⁽¹⁾			Total
Interest earning assets:
Commercial loans	$	5,173		$	28		$	5,201
Consumer loans	(177		)	(52		)	(229		)
Residential mortgage loans	(173		)	(574		)	(747		)
Securities-taxable	817			(944		)	(127		)
Securities-tax exempt⁽²⁾	(48		)	(120		)	(168		)
Federal Reserve excess reserves	29			1			30
Other earning assets	4			(14		)	(10		)
Total interest income	5,625			(1,675		)	3,950
Interest-bearing liabilities:
NOW deposits	29			(11		)	18
Savings, club and escrow deposits	21			227			248
Money market deposits	153			69			222
Certificates of deposit	132			(213		)	(81		)
Borrowings	(188		)	(124		)	(312		)
Total interest expense	147			(52		)	95
Net interest margin	5,478			(1,623		)	3,855
Less tax equivalent adjustment⁽²⁾	(17		)	(42		)	(59		)
Net interest income	$	5,495		$	(1,581	)	$	3,914



⁽¹⁾	Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.
⁽²⁾	Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the three months ended March 31, 2013 was $27.8 million , an increase of $3.9 million or 16.4%, compared to the same quarter of fiscal 2012. Gross interest income on a tax-equivalent basis of $33.2 million increased $4.0 million for the quarter ended March 31, 2013 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 loans due to a combination of the loans acquired from Gotham Bank and new loans originated by our commercial banking teams. Interest expense increased by $95 thousand, primarily the result of increased levels of average interest bearing liabilities assumed in the Gotham acquisition and the deposits generated by our commercial banking teams.

The Company’s net interest margin declined 16 basis points to 3.41% for the three months ended March 31, 2013 compared to 3.57% for the three months ended March 31, 2012. Total interest earning assets on a tax-equivalent basis yielded 3.96% for the second fiscal quarter of 2013 compared to 4.22% for the second fiscal quarter of 2012. The decline in net interest margin was due to a decline in the yield on total loans of 10 basis points, to 4.93% for the three months ended March 31, 2013, and a 55 basis points decline in the yield on total securities and other earning assets, which was 2.25% for the three months ended March 31, 2013. The decline in interest earning asset yields is reflective of the current interest rate environment. The cost of interest bearing liabilities declined 14 basis points to 70 basis points for the second fiscal quarter of 2013 compared to 84 basis points for the second fiscal quarter of 2012. The decline was due mainly to maturities of higher cost certificates of deposit repricing to current market rates and a reduction in the average balance of borrowings.

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

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estimate, which is subject to substantial fluctuation from period to period. The Company recorded $2.6 million in loan loss provisions for the quarter ended March 31, 2013 compared to $2.9 million at March 31, 2012, a decrease of $250 thousand. 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 March 31, 2013 decreased by $1.1 million or 14.0% to $6.9 million compared to second quarter of fiscal 2012. The decline in non interest income was primarily the result of lower net gain on sale of securities of $670 thousand and lower investment management fees of $378 thousand. During the second fiscal quarter of 2013, we have reinvested in a new title insurance joint venture which was launched in January 2013. We have also deployed a new wealth management strategy. We expect both of these initiatives will allow us to drive growth in non-interest income.

Non-interest expense for the three months ended March 31, 2013 increased $2.0 million to $23.3 million, which represented a 9.62% increase compared to the same period in 2012. The increase in non-interest expense was the result of additional compensation and benefits expense of $410 thousand due to the hiring of additional banking teams. Our occupancy expense increased $545 thousand, also associated with the increase in the number of our new banking teams. Foreclosed property expense increased $503 thousand to $915 thousand for the three months ended March 31, 2013. Foreclosed property expense was comprised of $688 thousand in write-downs on four properties and and $227 thousand in expenses associated with owning properties. Merger-related expenses increased $243 thousand to $542 thousand for the three months ended March 31, 2013; these increased expenses were incurred in connection with our pending merger with Sterling Bancorp.

Income tax expense increased $168 thousand to $2.2 million for the three months ended March 31, 2013, compared to $2.0 million for the period ended March 31, 2012. The effective tax rate was 25.2% for the three months ended March 31, 2013 compared to 26.3% for the three months ended March 31, 2012. Our effective tax rate for the three months ended March 31, 2013 reflects our expectation of an increase in current and anticipated merger-related expense as well as the proportion of tax-exempt earnings to total earnings.

Comparison of Operating Results for the Six Months Ended March 31, 2013 and March 31, 2012

Net income for the six months ended March 31, 2013 was $13.5 million or $0.31 per diluted share, an increase of $2.1 million compared to $11.4 million or $0.31 per diluted share, for the six months ended March 31, 2012. Diluted earnings per share was unchanged between the periods due primarily to an increase in common shares outstanding as a result of the 6.3 million common shares the Company issued in August 2012 in connection with the Gotham acquisition. The primary factor contributing to the increase in earnings for the current period was higher net interest income of $8.6 million or 18.2%. Partially offsetting the increase in net interest income was a $750 thousand increase in the provision for loan losses, a $636 thousand reduction in non-interest income and a $3.9 million increase in non-interest income expense. The increase in provision for loan losses was based on our assessment of the adequacy of the allowance for loan losses and was impacted by a provision for a large ADC loan in the first fiscal quarter of 2013 that allowed us to exit a significant non-performing loan. Non-interest income declined $636 thousand due mainly to a $1.2 million reduction in net gain on sale of securities and partially offset by an increase in gain on sale of loans. The increase in non-interest expense was the result of an increase in compensation and employee benefits of $1.8 million; $654 thousand increase of occupancy and office expense both of which are related to the hiring of new banking teams; an increase of $583 thousand in foreclosed property expense as we exited several non-performing assets; and a $620 thousand increase in stock-based compensation expense.

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	For the six months ended March 31,
	2013								2012
	Average outstanding balance			Interest			Average yield/ rate		Average outstanding balance			Interest			Average yield/ rate
Interest earning assets:
Commercial loans	$	1,578,976		$	40,149		5.10	%	$	1,132,356		$	28,845		5.09	%
Consumer loans	210,790			4,555			4.33		225,640			5,094			4.52
Residential mortgage loans	358,922			8,745			4.89		383,172			10,363			5.41
Total net loans⁽¹⁾	2,148,688			53,449			4.99		1,741,168			44,302			5.09
Securities-taxable	961,057			8,572			1.79		747,741			8,405			2.25
Securities-tax exempt⁽²⁾	177,960			4,534			5.11		195,269			5,189			5.31
Federal Reserve balances	84,814			142			0.34		50,198			72			0.29
Other earning assets	19,399			455			4.70		18,948			427			4.51
Total securities and other earning assets	1,243,230			13,703			2.21		1,012,156			14,093			2.78
Total interest earning assets	3,391,918			67,152			3.97		2,753,324			58,395			4.24
Non-interest earning assets	406,444								343,674
Total assets	$	3,798,362							$	3,096,998
Interest bearing liabilities:
NOW deposits	$	488,441		249			0.10	%	$	394,390		270			0.14	%
Savings, club and escrow deposits	553,000			511			0.19		454,552			147			0.06
Money market deposits	892,853			1,583			0.36		615,491			827			0.27
Certificates of deposit	368,214			1,378			0.75		293,775			1,286			0.88
Total interest bearing deposits	2,302,508			3,721			0.32		1,758,208			2,530			0.29
Borrowings	345,836			6,102			3.54		384,321			6,906			3.59
Total interest bearing liabilities	2,648,344			9,823			0.74		2,142,529			9,436			0.88
Non-interest bearing deposits	645,179								502,072
Other non-interest bearing liabilities	12,225								17,163
Total liabilities	3,305,748								2,661,764
Stockholders’ equity	492,614								435,234
Total liabilities and equity	$	3,798,362							$	3,096,998
Net interest rate spread							3.23	%							3.36	%
Net earning assets	$	743,574							$	610,795
Net interest margin				57,329			3.39	%				48,959			3.56	%
Less tax equivalent adjustment ⁽²⁾				(1,587		)						(1,816		)
Net interest income				$	55,742							$	47,143
Ratio of average interest-earning assets to average interest bearing liabilities	128.1		%						128.5		%



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

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	For the six months ended March 31, 2013 vs. 2012 Increase / (decrease) due to
	Volume⁽¹⁾			Rate⁽¹⁾			Total
Interest earning assets:
Commercial loans	$	11,248		$	56		$	11,304
Consumer loans	(329		)	(210		)	(539		)
Residential mortgage loans	(642		)	(976		)	(1,618		)
Securities-taxable	2,101			(1,934		)	167
Securities-tax exempt⁽²⁾	(460		)	(195		)	(655		)
Federal Reserve excess reserves	56			14			70
Other earning assets	8			20			28
Total interest income	11,982			(3,225		)	8,757
Interest-bearing liabilities:
NOW deposits	62			(83		)	(21		)
Savings, club and escrow deposits	34			330			364
Money market deposits	434			322			756
Certificates of deposit	300			(208		)	92
Borrowings	(381		)	(423		)	(804		)
Total interest expense	449			(62		)	387
Net interest margin	11,533			(3,163		)	8,370
Less tax equivalent adjustment⁽²⁾	(161		)	(68		)	(229		)
Net interest income	$	11,694		$	(3,095	)	$	8,599



⁽¹⁾	Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.
⁽²⁾	Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the six months ended March 31, 2013 was $55.7 million, an increase of $8.6 million or 18.2% compared to the six months ended March 31, 2012. Gross interest income on a tax-equivalent basis of $67.2 million increased $8.8 million for the six months ended March 31, 2013 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 loans, driven by our acquisition of Gotham Bank and new loans originated by our banking teams. Interest expense increased by $387 thousand primarily the result of increased levels of municipal money market deposits. Municipal deposits reach their peak volume in September, which results in increased average balances outstanding that were held at September 30, 2012 in transaction accounts and then were subsequently moved to interest bearing accounts. By March 31, 2013, a substantial portion of these deposits had been withdrawn; however, this increase had an impact on average deposit balances for the period.

The Company’s net interest margin declined 17 basis points to 3.39% for the six months ended March 31, 2013 compared to 3.56% for the six months ended March 31, 2012. Total interest earning assets on a tax-equivalent basis yielded 3.97% for the first six months of fiscal 2013 compared to 4.24% for the first six months of fiscal 2012, principally due to a decrease of 57 basis points in the weighted average yield on our investment securities. The cost of interest bearing deposits increased 3 basis points to 0.32 basis points for the first six months of fiscal 2013 compared to 0.29 basis points for the first six months of fiscal 2012. The increase was mainly the result of an increase in the average volume of higher cost deposits including certificates of deposit and money market accounts.

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 Company recorded $5.6 million in loan loss provisions for the six month period ended March 31,

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2013 compared to $4.8 million for the six month period ended March 31, 2012, an increase of $750 thousand. Please see the “Credit Quality” section for a discussion of the metrics associated with our loan portfolio.

Non-interest income for the six months ended March 31, 2013 decreased by $636 thousand; this represented a 4.20% decrease to $14.5 million compared to the six months ended March 31, 2012. Non-interest income declined mainly due to a $1.2 million reduction in net gain on sale of securities. Also contributing to the decline for the first six months of fiscal 2013 was $438 thousand in lower investment management fees, which was discussed above in “Comparison of Operating Results for the three months ended March 31, 2013 and March 2012 - Non-interest income. Partially offsetting these declines were higher gain on sale of loans of $363 thousand and other loan fees included in other non-interest income, which increased by approximately $621 thousand due to higher loan transaction volumes.

Non-interest expense for the six months ended March 31, 2013 increased by 9.22% or $3.9 million, to $45.9 million compared to the same period in 2012. The increase in non-interest expense was principally the result of additional compensation and benefits expense of $1.8 million and a $654 thousand increase in occupancy and office operation expense both of which are related to the hiring of new banking teams; an increase of $583 thousand in foreclosed property expense as we exited non-performing assets; and a $620 thousand increase in stock-based compensation expense due to grants awarded to management and directors.

Income tax expense increased $1.2 million to $5.3 million for the six months ended March 31, 2013, compared to $4.1 million for the six month period ended March 31, 2012. The effective tax rate was 28.0% for the first half of fiscal 2013 compared to 26.2% for the first half of fiscal 2012. 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.

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The Company provides supplemental reporting of non-GAAP measures as management believes this information is useful to investors.



	As of or for the three months ended March 31,						As of or for the six months ended March 31,
	2013			2012			2013			2012
Reconciliation of return on average tangible equity (dollars in thousands):
Average stockholders’ equity	$	492,725		$	439,384		$	492,614		$	435,234
Average goodwill and other amortizable intangibles	(170,042		)	(165,045		)	(171,396		)	(165,203		)
Average tangible stockholders’ equity	322,683			274,339			321,218			270,031
Net income	6,529			5,701			13,549			11,418
Net income (annualized)	26,479			22,929			27,172			22,836
Return on average tangible equity	8.21		%	8.36		%	8.46		%	8.46		%

Reconciliation of the core operating efficiency ratio (dollars in thousands) :
Net interest income	$	27,819		$	23,905		$	55,742		$	47,143
Non-interest income	6,852			7,971			14,511			15,147
Total net revenues	34,671			31,876			70,253			62,290
Tax equivalent adjustment on securities interest income	802			861			1,587			1,816
Net gain on sale of securities	(2,229		)	(2,899		)	(3,645		)	(4,888		)
Net gain on sale of fixed assets	—			—			(5		)	—
Other than temporary loss on securities	7			—			32			38
Other (other gains and fair value loss on interest rate caps)	—			40			1			43
Core total revenues	33,251			29,878			68,223			59,299
Non-interest expense	23,339			21,290			45,885			42,011
Merger-related expense	(542		)	(299		)	(542		)	(546		)
Foreclosed property expense	(915		)	(412		)	(1,200		)	(617		)
Amortization of intangible assets	(388		)	(305		)	(649		)	(628		)
Core non-interest expense	21,494			20,274			43,494			40,220
Core operating efficiency ratio	64.6		%	67.9		%	63.8		%	67.8		%
The core operating efficiency ratio reflects total revenues inclusive of the tax equivalent adjustment on municipal securities and excludes securities gains, other than temporary impairments and other adjustments shown above. Core non-interest expense is adjusted to exclude the effect of foreclosed property expense and amortization of intangible assets.
Reconciliation of stockholders’ equity to tangible equity and the tangible equity ratio (dollars in thousands):
Total assets							$	3,710,440		$	3,210,871
Goodwill and other amortizable intangibles							(169,655		)	(164,862		)
Tangible assets							3,540,785			3,046,009
Stockholders’ equity							494,711			439,699
Goodwill and other intangible assets							(169,655		)	(164,862		)
Tangible stockholders’ equity							325,056			274,837
Shares of common stock outstanding at period end							44,353,276			37,899,007
Tangible equity as a % of tangible assets							9.18		%	9.02		%
Tangible book value per share							$	7.33		$	7.25

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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 mortgage loans, and the purchase of investment securities. During the six months ended March 31, 2013 and 2012, our loan originations totaled $544.3 million and $398.2 million, respectively. Purchases of securities available for sale totaled $209.0 million and $261.8 million for the six months ended March 31, 2013 and 2012, respectively. Purchases of securities held to maturity totaled $81.8 million and $77.1 million for the six months ended March 31, 2013 and 2012, 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 $219.8 million at March 31, 2013 and unused lines of credit granted to customers were $105.5 million at March 31, 2013. 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 $59.9 million and $59.0 million at March 31, 2013 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 change in total deposits was a decrease of $311.5 million and an increase of $72.3 million for the six months ended March 31, 2013 and 2012, respectively. The decline in the first six months of the 2013 fiscal year is principally related to seasonal fluctuations in municipal deposits, which generally peak in September 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 a full range of services to our clients, and a high emphasis is placed on the generation and retention of core deposits. We 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 preference of depositors to invest their funds in deposit products subject to immediate withdrawal could lead to potential liquidity reductions in the future if we do not raise interest rates to retain these funds.

The Bank has substantial liquidity. In addition to the liquidity on our Statement of Condition, Provident Bank has access to additional sources of funds through the FHLB. Borrowings from FHLB and other borrowings totaled $368.0 million at March 31, 2013. At March 31, 2013, we had the ability to borrow an additional $486.4 million million under our credit facilities with the FHLB. The Bank may borrow up to an additional $369.5 million by pledging securities not required to be pledged for other purposes as of March 31, 2013. Further, at March 31, 2013 we had $36.8 million in brokered deposits and have relationships with several brokers to access these low cost sources of funding should conditions warrant.

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 in an expedited manner. In addition, the Board has authorized management to file a new replacement shelf registration statement covering $150 million of debt and equity securities. 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 Company declared a dividend of $0.06 per share payable on May 16, 2013 to stockholders of record on May 6, 2013.

The following table sets forth the Bank’s regulatory capital position at March 31, 2013 and September 30, 2012, compared to OCC requirements:

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					OCC requirements
	Bank actual				Minimum capital adequacy				Classification as well-capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2013
Tier 1 (core) capital	$	304,696	8.62	%	$	141,440	4.00	%	$	176,800	5.00	%
Risk-based capital:
Tier 1	304,696		12.41		—		—		147,268		6.00
Total	$	332,447	13.54	%	$	196,358	8.00	%	$	245,447	10.00	%
September 30, 2012
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.

We expect to raise approximately $80 million through a debt offering prior to the closing of the merger with Sterling and we anticipate using the net proceeds to fund a capital contribution to the Bank, redeem Sterling’ s trust preferred securities and for general corporate purposes.



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 & 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 March 31, 2013, 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	$	417,719	$	(48,728	)	-10.4	%	$	120,690	$	9,960		9.0	%
+200	439,626		(26,821		)	--5.8		117,217		6,487			5.9
+100	474,052		7,605			1.6		114,128		3,398			3.1
0	466,447		—			—		110,730		—			—
-100	450,311		(16,136		)	--3.5		103,566		(7,164		)	--6.5

The table set forth above indicates that at March 31, 2013, in the event of an immediate 200 basis point increase in interest rates, we would expect to experience a 5.8% decrease in EVE and a 5.9% 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 two quarters 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 second quarter of fiscal year 2013 while the yield on U.S. Treasury 10 year notes increased 22 basis points from 1.65% to 1.87% over the same six month period. The greater increase in yield on longer term maturities resulted in the 2-10 year treasury yield curve steepening at the end of the second quarter of fiscal 2013 relative to the beginning of the fiscal year. 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 second quarter of the current fiscal year the FOMC reaffirmed its willingness to maintain an accommodative stance 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 relative to the longer end, thereby resulting in short-term 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 March 31, 2013. 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 resulted in 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 2013 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.

On April 4, 2013, the company announced it had entered into a merger agreement with Sterling Bancorp. In connection with the execution of that agreement, the Company has supplemented the risk factors previously disclosed in the Company’s most recent annual report on Form 10-K as follows:

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.

Before the merger and the bank merger may be completed, Provident and Sterling must obtain approvals from the Federal Reserve Board and the Office of the Comptroller of the Currency. Other approvals, waivers or consents from regulators may also be required. These regulators may impose conditions on the completion of the merger or the bank merger or require changes to the terms of the merger or the bank merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or the bank merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger.

Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.

Provident and Sterling have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on Provident’s ability to successfully combine the businesses of Provident and Sterling. To realize these anticipated benefits and cost savings, after the completion of the merger, Provident expects to integrate Sterling’s business into its own. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect Provident’s ability to successfully conduct its business in the markets in which Sterling now operates, which could have an adverse effect on Provident’s financial results and the value of its common stock. If Provident experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause Provident and/or Sterling to lose customers or cause customers to remove their accounts from Provident and/or Sterling and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Sterling and Provident during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated.

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Termination of the merger agreement could negatively impact Provident.

If the merger agreement is terminated, there may be various consequences. For example, Provident’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of Provident’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, Provident may be required to pay to the other party a termination fee of $13.25 million.

Sterling and Provident will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Sterling or Provident as well as the combined organization. These uncertainties may impair Sterling’s or Provident’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with Sterling or Provident to seek to change existing business relationships with Sterling or Provident. Retention of certain employees by Sterling or Provident may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with Sterling or Provident. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Sterling or Provident, Sterling’s business or Provident’s business could be harmed. In addition, subject to certain exceptions, each of Sterling and Provident has agreed to operate its business in the ordinary course prior to closing.

If the merger is not completed, Provident will have incurred substantial expenses without realizing the expected benefits of the merger.

Provident has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing and mailing a joint proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the merger. If the merger is not completed, Provident would have to recognize these expenses without realizing the expected benefits of the merger.

The merger agreement limits Provident’s and Sterling’s ability to pursue acquisition proposals and requires Provident to pay a termination fee of $13.25 million under limited circumstances, including circumstances relating to acquisition proposals.

The merger agreement prohibits Provident from initiating, soliciting, knowingly encouraging or knowingly facilitating certain third party acquisition proposals, subject to exceptions set forth in the merger agreement. The merger agreement also provides that Provident must pay a termination fee in the amount of $13.25 million in the event that the merger agreement is terminated under certain circumstances, including involving its failure to abide by certain obligations not to solicit acquisition proposals. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Provident from considering or proposing such an acquisition.



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)
January 1 - January 31	—	$	—	—	776,713
February 1 - February 28	—	—		—	776,713
March 1 - March 31	1,761	9.02		—	776,713
Total	1,761	$	9.02	—

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(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.

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Provident New York Bancorp has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

Provident New York Bancorp





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

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