STERLING BANCORP - FORM 10-Q - February 8, 2011

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - STERLING BANCORP	ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - STERLING BANCORP	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - STERLING BANCORP	ex31_2.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

£ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to __________

Commission File Number: 0-25233

PROVIDENT NEW YORK BANCORP

(Exact Name of Registrant as Specified in its Charter)

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

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 T No £

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

Yes £ 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):

Large Accelerated Filer £

Accelerated Filer T

Non-Accelerated Filer £

Smaller Reporting Company £

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

Yes £ No T

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

Classes of Common Stock		Shares Outstanding as of February 1 , 2011

$0.01 per share		38,198,686

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

QUARTERLY PERIOD ENDED DECEMBER 31, 2010

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition (unaudited) at December 31, 2010 and September 30, 2010	3

	Consolidated Statements of Income (unaudited) for the Three Months Ended December 31, 2010 and December 31, 2009	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three Months Ended December 31, 2010	5

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended December 31, 2010 and 2009	6

	Consolidated Statements of Comprehensive Income (loss) (unaudited) for the Three Months Ended December 31, 2010 and 2009	8

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	37

Item 1.A.	Risk Factors	37

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	(Removed and reserved).	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

	Signatures	39

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(In thousands, except share data)

	December 31,			September 30,
ASSETS	2010			2010
Cash and due from banks	$	34,844		$	90,872
Securities (note 6) (including $487,315 and $719,172 pledged as collateral for borrowings and deposits at December 31, 2010 and September 30, 2010 respectively)
Available for Sale		869,996			901,012
Held to maturity, at amortized cost (fair value of $31,255 and $35,062 at December 31, 2010 and September 30, 2010, respectively)		30,425			33,848
Total securities		900,421			934,860
Loans held for sale		3,051			5,890
Loans (notes 3 and 4):
Gross loans		1,699,502			1,701,541
Allowance for loan losses		(31,036	)		(30,843	)
Total loans, net		1,668,466			1,670,698
Federal Home Loan Bank ("FHLB") stock, at cost		23,275			19,572
Accrued interest receivable		10,838			11,069
Premises and equipment, net		43,495			43,598
Goodwill		160,861			160,861
Core deposit and other intangible assets		3,229			3,640
Bank owned life insurance		51,433			50,938
Other assets		40,600			29,027
Total assets	$	2,940,513		$	3,021,025
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (note 7)	$	1,980,068		$	2,142,702
FHLB borrowings (including repurchase agreements of $221,803 and $222,500 at December 31, 2010 and September 30, 2010, respectively) (note 8)		444,286			363,751
Borrowings senior debt (FDIC insured) (note 8)		51,497			51,496
Mortgage escrow funds		17,090			8,198
Other liabilities		27,930			23,923
Total liabilities		2,520,871			2,590,070

Commitments and contingent liabilities		-			-

STOCKHOLDERS' EQUITY :
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)		-			-
Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 issued; 38,198,686 and 38,262,288 shares outstanding at December 31, 2010 and September 30, 2010, respectively)		459			459
Additional paid-in capital		356,904			356,912
Unallocated common stock held by employee stock ownership plan ("ESOP")		(6,512	)		(6,637	)
Treasury stock, at cost (7,730,866 and 7,667,264 shares at December 31, 2010 and September 30, 2010, respectively)		(87,906	)		(87,336	)
Retained earnings		167,019			162,433
Accumulated other comprehensive income (loss), net of taxes		(10,322	)		5,124
Total stockholders' equity		419,642			430,955
Total liabilities and stockholders' equity	$	2,940,513		$	3,021,025

See accompanying notes to unaudited consolidated financial statements

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollars in thousands, except share data)

	For the Three Months
	Ended December 31,
	2010		2009
Interest and dividend income:
Loans	$	23,205	$	23,400
Taxable securities		3,530		4,752
Non-taxable securities		1,925		1,895
Other earning assets		400		371
Total interest and dividend income		29,060		30,418
Interest expense:
Deposits		1,642		2,790
Borrowings		4,234		4,742
Total interest expense		5,876		7,532
Net interest income		23,184		22,886
Provision for loan losses ( note 4)		2,100		2,500
Net interest income after provision for loan losses		21,084		20,386
Non-interest income:
Deposit fees and service charges		2,767		2,993
Net gain on sale of securities		4,202		2,388
Title insurance fees		363		311
Bank owned life insurance		494		554
Gain on sale of loans		542		283
Investment management fees		743		779
Fair value gain on interest rate cap		234		380
Other		538		405
Total non-interest income		9,883		8,093
Non-interest expense:
Compensation and employee benefits (note 12)		11,228		10,264
Stock-based compensation plans		279		452
Occupancy and office operations		3,635		3,326
Advertising and promotion		953		742
Professional fees		1,062		834
Data and check processing		642		550
Amortization of intangible assets		412		493
FDIC insurance and regulatory assessments		768		784
ATM/debit card expense		393		554
Other		1,897		1,895
Total non-interest expense		21,269		19,894
Income before income tax expense		9,698		8,585
Income tax expense		2,978		2,419
Net Income	$	6,720	$	6,166
Weighted average common shares:
Basic		37,552,245		38,575,909
Diluted		37,552,245		38,649,174
Per common share (note 10)
Basic	$	0.18	$	0.16
Diluted	$	0.18	$	0.16

See accompanying notes to unaudited consolidated financial statements

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(In thousands, except share data)

	Number of Shares			Common Stock		Additional Paid-In Capital			Unallocated ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Stockholders’ Equity
Balance at September 30, 2010		38,262,288		$	459	$	356,912		$	(6,637	)	$	(87,336	)	$	162,433		$	5,124		$	430,955
Net income		−			−		−			−			−			6,720			−			6,720
Other comprehensive loss		−			−		−			−			−			−			(15,446	)		(15,446	)
Total comprehensive loss																						(8,726	)
Deferred compensation transactions		−			−		22			−			−			−			−			22
Stock option transactions, net		−			−		138			−			−			−			−			138
ESOP shares allocated or committed to be released for allocation (12,483 shares)		−			−		(6	)		125			−			−			−			119
RRP Awards		19,000			−		(187	)		−			187			−			−			−
Vesting of RRP Awards		−			−		25			−			−			−			−			25
Other RRP transactions		−			−		−			−			−			−			−			−
Purchase of treasury shares		(82,602	)		−		−			−			(757	)		−			−			(757	)
Cash dividends paid ($0.06 per common share)		−			−		−			−			−			(2,134	)		−			(2,134	)
Balance at December 31, 2010		38,198,686		$	459	$	356,904		$	(6,512	)	$	(87,906	)	$	167,019		$	(10,322	)	$	419,642

See accompanying notes to unaudited consolidated financial statements

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)

	For the Three Months
	Ended December 31,
	2010			2009
Cash flows from operating activities:
Net income	$	6,720		$	6,166
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		2,100			2,500
Depreciation and amortization of premises and equipment		1,413			1,218
Amortization of intangibles		412			493
Net gain on sales of loans held for sale		(542	)		(283	)
Net realized gain on sale of securities available for sale		(4,202	)		(2,388	)
Fair value income on interest rate cap		(234	)		(380	)
Loss on sales of fixed assets		-			44
Net amortization of premium on securities		4,024			771
Amortization of premiums on borrowings		(11	)		(82	)
Amortization of prepaid penalties on borrowings		1			-
ESOP and RRP expense		144			504
ESOP forfeitures		(3	)		(2	)
Stock option compensation expense		138			(50	)
Originations of loans held for sale		(30,028	)		(15,901	)
Proceeds from sales of loans held for sale		33,409			15,816
(Increase) decrease in cash surrender value of bank owned life insurance		(495	)		163
Deferred income tax expense		(6,069	)		(5,857	)
Net changes in accrued interest receivable and payable		247			555
Other adjustments (principally net changes in other assets and other liabilities)		9,689			(248	)
Net cash provided by operating activities		16,713			3,039
Cash flows from investing activities
Purchases of available for sale securities		(301,065	)		(234,862	)
Purchases of held to maturity securities		(3,986	)		(11,536	)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale		81,275			66,742
Held to maturity		7,407			9,646
Proceeds from sales of securities available for sale and held to maturity		224,797			139,237
Loan originations		(151,989	)		(98,375	)
Loan principal payments		151,895			122,300
Purchase of interest rate derivative		-			(1,368	)
Purchase of FHLB stock, net		(3,703	)		(4,620	)
Purchases of premises and equipment		(1,310	)		(1,603	)
Proceeds from the sale of premises		-			48
Net cash (used) / provided by investing activities		3,321			(14,391	)

See accompanying notes to unaudited consolidated financial statements

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)

	For the Three Months
	Ended December 31,
	2010			2009
Cash flows from financing activities
Net decrease in transaction, savings and money market deposits		(192,620	)		(164,689	)
Net increase (decrease) in time deposits		29,986			(47,950	)
Net increase in short-term borrowings		85,360			103,700
Gross repayments of long-term borrowings		(3,063	)		(1,023	)
Gross proceeds from long-term borrowings		-			-
Payment of penalties on restrucrured borrowings		(1,751	)
Net increase in mortgage escrow funds		8,892			7,537
Treasury shares purchased		(757	)		(5,055	)
Stock option transactions		3			462
Other stock-based compensation transactions		22			-
Cash dividends paid		(2,134	)		(2,219	)
Net cash used in financing activities		(76,062	)		(109,237	)
Net decrease in cash and cash equivalents		(56,028	)		(120,589	)
Cash and cash equivalents at beginning of period		90,872			160,408
Cash and cash equivalents at end of period	$	34,844		$	39,819

Supplemental information:
Interest payments	$	5,861		$	8,654
Income tax payments		36			33
Net change in net unrealized gains recorded on securities available for sale		(26,189	)		(12,058	)
Change in deferred taxes on net unrealized gains on securities available for sale		10,636			4,898
Real estate acquired in settlement of loans		226			619

See accompanying notes to unaudited consolidated financial statements

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(unaudited)

(In thousands, except share data)

	For the Three Months
	Ended December 31,
	2010			2009

Net Income:	$	6,720		$	6,166
Other Comprehensive income (loss) :
Net unrealized holding losses on securities available for sale net of related tax benefit of $8,930 and $3,928		(13,057	)		(5,742	)

Less:
Reclassification adjustment for net unrealized gains included in net income, net of related income tax expense of $1,706 and $970		2,496			1,418
		(15,553	)		(7,160	)

Change in funded status of defined benefit plans, net of related income tax expense of $74 and $154		107			224
		(15,446	)		(6,936	)

Total Comprehensive loss	$	(8,726	)	$	(770	)

See accompanying notes to unaudited consolidated financial statements

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

1.	Basis of Presentation

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident Bancorp” or “the Company”), Hardenburgh Abstract Title Company, Inc., which provides title searches and insurance for residential and commercial real estate, Hudson Valley Investment Advisors, LLC (“HVIA”), a registered investment advisor, Provident Risk Management, (a captive insurance company), Provident Bank (“the Bank”), and the Bank’s wholly owned subsidiaries. These subsidiaries are (i) Provident Municipal Bank (“PMB”) which is a limited-purpose, New York State-chartered commercial bank formed to accept deposits from municipalities in the Company’s market area, (ii) Provident REIT, Inc. and WSB Funding, Inc. which are real estate investment trusts that hold a portion of the Company’s real estate loans, (iii) Provest Services Corp. I, which has invested in a low-income housing partnership, (iv) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers, and (v) Companies which hold foreclosed properties acquired by the Bank. Intercompany transactions and balances are eliminated in consolidation.

The Company’s off-balance sheet activities are limited to loan origination commitments, loan commitments pending sale, lines of credit extended to customers and for letters of credit, on behalf of customers, which all are in the ordinary course of its lending activities. In addition, the Company purchased interest rate caps with a notional value of $50.0 million during the first quarter of fiscal 2010. The Company does not engage in off-balance sheet financing transactions or other activities involving the use of special-purpose or variable interest entities.

The consolidated financial statements have been prepared by management without audit, but, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s financial position and results of operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented clear. The results of operations for the three months ended December 31, 2010 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2011. 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, 2010.

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

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

2.	Recent Accounting Standards, Not Yet Adopted

There were no new recent accounting standards applicable to the Company for the first quarter of fiscal year 2011.

Loans

Major classifications of loans, excluding loans held for sale, are summarized below:

	December 31, 2010		September 30, 2010
Real estate - residential mortgage	$	393,799	$	414,213
Real estate - residential mortgage guaranteed by FHLMC		3,021		-
Real estate - commercial mortgage		612,583		579,261
Acquisition, development & construction loans		223,866		229,193
Commercial business loans		233,614		240,650
Consumer loans		232,619		238,224
Total	$	1,699,502	$	1,701,541

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

4.	Allowance for Loan Losses and Non-Performing Assets

The allowance for loan losses is established through provisions for losses charged to earnings. Loan losses are charged against the allowance when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized. The allowance for loan losses is the amount that management has determined to be necessary to absorb probable incurred loan losses inherent in the existing portfolio. Management’s evaluations, which are subject to periodic review by the Company’s regulators, are made using a consistently applied methodology that takes into consideration such factors as the Company’s past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions. Modifications to the methodology used in the allowance for loan losses evaluation may be necessary in the future based on further deterioration in economic and real estate market conditions, new information obtained regarding known problem loans, regulatory guidelines and examinations, the identification of additional problem loans, and other factors. Activity in the allowance for loan losses for the periods indicated is summarized below:

	Three Months Ended
	December 31,
	2010			2009
Balance at beginning of period	$	30,843		$	30,050
Charge-offs		(2,236	)		(2,777	)
Recoveries		329			194
Net charge-offs		(1,907	)		(2,583	)
Provision for loan losses		2,100			2,500
Balance at end of period	$	31,036		$	29,967
Net charge-offs to average loans outstanding (annualized)		0.45	%		0.61	%

The following table presents the balance in the allowance for loan losses and the recorded investments in loans by portfolio segment and based on impairment method as of December 31, 2010:

	1- 4 Family Residential		Commercial Real Estate		Commercial Business		Acquisition Development & Construction		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	889	$	545	$	205	$	415	$	569	$	2,623
Collectively evaluated for impairment		1,925		5,739		9,011		8,566		3,172		28,413
Total ending allowance	$	2,814	$	6,284	$	9,216	$	8,981	$	3,741	$	31,036

Loans:
Individually evaluated for impairment	$	8,139	$	11,022	$	1,826	$	29,415	$	1,800	$	52,202
Collectively evaluated for impairment		388,681		600,340		231,787		195,673		230,819		1,647,300
Total ending loans balance	$	396,820	$	611,362	$	233,613	$	225,088	$	232,619	$	1,699,502

A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans substantially consist of nonperforming loans and accruing and performing troubled debt restructured loans.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Impaired loans were as follows:

	December 31,		September 30,
	2010		2010
Loans with no allocated allowance for loan losses	$	37,512	$	10,319
Loans with allocated allowance for loan losses		14,690		31,763
Total Impaired loans	$	52,202	$	42,082

Amount of the allowance for loan losses allocated	$	2,623	$	3,046
Average of individually impaired loans during the year		33,678		27,032

	December 31,		December 31,
	2010		2009
Interest income recognized during impairment	$	407	$	494
Cash-basis interest income recognized		235		289

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Real estate - residential mortgage	$	3,157	$	3,311	$	-
Real estate - commercial mortgage		4,768		4,984		-
Acquisition, development and construction		27,612		27,924		-
Commercial business loans		784		783		-
Consumer loans		510		510		-
Subtotal		36,831		37,512		-

With an allowance recorded:
Real estate - residential mortgage		4,747		4,828		889
Real estate - commercial mortgage		5,938		6,038		545
Acquisition, development and construction		1,479		1,491		415
Commercial business loans		1,043		1,043		206
Consumer loans		1,290		1,290		568
Subtotal		14,497		14,690		2,623

Total	$	51,328	$	52,202	$	2,623

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table sets forth the amounts and categories of the Company's non-performing assets and troubled debt restructures at the dates indicated.

	December 31, 2010					September 30, 2010

	90 days past due Still accruing		Non- Accrual			90 days past due Still accruing		Non- Accrual
Non-performing loans:
One- to four- family	$	2,078	$	6,064		$	1,953	$	6,080
Commercial real estate		2,848		8,294			2,971		6,886
Commercial business		118		1,273			-		1,376
Acquisition, development and construction loans		-		13,712			-		5,730
Consumer		492		1,347			503		1,341
Total non-performing loans	$	5,536	$	30,690		$	5,427	$	21,413

Real estate owned:
Land				2,029					2,029
Commercial real estate				1,108					1,507
One- to four-family				448					355
Total real estate owned				3,585					3,891

Total non-performing assets			$	39,811				$	30,731

Troubled Debt Restructures still accruing and not included above			$	17,581				$	16,047

Ratios:
Non-performing loans to total loans				2.13	%				1.58	%
Non-performing assets to total assets				1.35	%				1.02	%
Allowance for loan losses to total non-performing loans				86	%				115	%
Allowance for loan losses to average loans				1.82	%				1.82	%

Troubled Debt Restructurings:

Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty. Restructured loans are recorded in accrual status when said loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items. Total troubled debt restructurings were $21,038 and $21,504 at December 31, 2010 and September 30, 2010, respectively. There were $3,457 and $5,457 in troubled debt restructurings included in non performing loans at December 31, 2010 and September 30, 2010, respectively. Troubled debt restructurings still accruing and considered to be performing were $17,581 and $16,047 at December 31, 2010 and September 30, 2010, respectively. The Company has allocated $249 and $673 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010 and September 30, 2010 respectively.

The Company has committed to lend additional amounts totaling up to $4,132 and $3,957 as of December 31, 2010 and September 30, 2010 to customers with outstanding loans that are classified as troubled debt restructurings. The commitments to lend on the restructured debt is contingent on clear title and a third party inspection to verify completion of work and is associated with loans that are considered to be performing.

Credit Quality Indicators:

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

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of gross loans is as follows:

	Special Mention		Substandard		Doubtful
Real estate - residential mortgage	$	1,390	$	8,139	$	-
Real estate - commercial mortgage		15,458		24,328		-
Acquisition, development and construction		39,110		62,129		-
Commercial business loans		7,432		18,337		118
Consumer loans		198		1,804		-

Total	$	63,588	$	114,737	$	118

The following table is made up of pass gross loans as of December 31, 2010:

	Current Loans		30 - 59 days Delinquent		60 - 89 days Delinquent
Real estate - residential mortgage	$	385,657	$	1,163	$	471
Real estate - commercial mortgage		570,565		2,232		-
Acquisition, development and construction		121,449		1,178		-
Commercial business loans		207,631		-		96
Consumer loans		229,851		396		370

Total	$	1,515,153	$	4,969	$	937

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

5.	Fair value measurements

Effective October 1, 2008, the Company adopted provisions of FASB Codification Topic 820: Fair Value Measurements and Disclosure. This topic establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

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. Certain investments are actively traded and therefore have been classified as Level 1 valuations (U.S. Treasuries and certain government sponsored agencies).

The Company utilizes an outside vendor to obtain valuations for its traded securities as well as information received from a third party investment advisor. The majority of the Company’s available for sale investment securities (mortgage backed securities issued by US government corporations and government sponsored entities) have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable (Level 2). The Company utilizes prices from a leading provider of market data information and compares them to dealer indicative bids from the Company’s external investment advisor. For securities where there is limited trading activity (private label CMO’s) and less observable valuation inputs, the Company has classified such valuations as Level 3.

The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there has been a decline in the volume and level of activity in the market for its private label mortgage backed securities. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of privately issued residential mortgage backed securities as Level 3 as of April 1, 2009 with at a fair value of $9,534. As of December 31, 2010, these securities have an amortized cost of $6,138 and a fair value of $5,936. In determining the fair value of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that market participants would use in pricing these securities in an orderly market. Present value estimated cash flow models were used discounted at a rate that was reflective of similarly structured securities in an orderly market. The resultant prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of December 31, 2010. These securities have a weighted average coupon rate of 2.96%, a weighted average life of 4.78 years, a weighted average 1 month prepayment history of 5.29 years and a weighted average twelve month default rate of 3.02 CDR. One of the four securities is below investment grade and has an amortized cost of $2,233 and a fair value of $2,011 at December 31, 2010. The remaining three securities are rated at or above Aa3.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Derivatives

The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Commitments to sell real estate loans

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments and, therefore are carried at estimated fair value on the consolidated balance sheets. 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.

A summary of assets and liabilities at December 31, 2010 measured at estimated fair value on a recurring basis were as follows:

	Fair Value Measurements at December 31, 2010		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury	$	65,530	$	65,530	$	-	$	-
Federal agencies		396,983		-		396,983		-
Obligations of states and political subdivisions		191,984		-		191,984		-
Government issued or guaranteed mortgage-backed securities		179,113		-		179,113		-
Privately issued collateralized mortgage obligation		5,936		-		-		5,936
Corporate debt securities		29,564		-		29,564		-
Equities		886		-		886		-
Total investment securities available for sale		869,996		65,530		798,530		5,936

Other assets 1		570		-		570		-

Total assets	$	870,566	$	65,530	$	799,100	$	5,936

Other liabilities2	$	75	$	-	$	75	$	-

Total Liabilities	$	75	$	-	$	75	$	-

1	Interest rate caps and swaps

Swaps

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

A summary of assets and liabilities at September 30, 2010 measured at estimated fair value on a recurring basis were as follows:

	Fair Value Measurements at September 30, 2010		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury and federal agencies	$	418,312	$	418,312	$	-	$	-
Obligations of states and political subdivisions		191,657		-		191,657		-
Government issued or guaranteed mortgage-backed securities		253,618		-		253,618		-
Privately issued collateralized mortgage obligation		5,996		-		-		5,996
Corporate debt securities		30,540		-		30,540		-
Equities		889		-		889		-
Total investment securities available for sale		901,012		418,312		476,704		5,996

Other assets 1		435		-		435		-

Total assets	$	901,447	$	418,312	$	477,139	$	5,996

Other liabilities2	$	173	$	-	$	173	$	-

Total Liabilities	$	173	$	-	$	173	$	-

1	Interest rate caps and swaps

Swaps

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending December 31, 2010:

	Privately issued CMOS
Balance at September 30, 2010	$	5,996
Pay downs		(216	)
(Amortization) and accretion		-
Change in fair value		156
Balance at December 31, 2010	$	5,936

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 and Loans Held for Sale

Loans held for sale are recorded at the lower of cost or fair value in accordance with GAAP.

The Company may record nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependant loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for credit 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 2. 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. Loans subject to nonrecurring fair value measurements were $12,067 and $28,717 which equals the carrying value less the allowance for loan losses allocated to these loans at December 31, 2010 and September 30, 2010, respectively. Loans subject to nonrecurring fair value measurements have been transferred from Level 2 to Level 3 as of September 30, 2010. Changes in fair value recognized on provisions on loans held by the Company were $864 and $848 for three months ended December 31, 2010 and 2009, respectively.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Mortgage servicing rights

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing asset. In accordance with FASB ASC Topic 860-Transfers and Servicing, the Company must record impairment charges on a nonrecurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights the Company utilizes a third party vendor, which 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 is considered a Level 3 valuation. Changes in fair value of mortgage servicing rights recognized for the three months ended December 31, 2010 was an increase of $305. A valuation allowance of $0 and $54 was recorded at December 31, 2010 and September 30, 2010, respectively, reflecting the lower of amortized cost or fair market value.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans 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, and the related nonrecurring fair value measurements adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $3,585 and $3,891 at December 31, 2010 and September 30, 2010, respectively. There were no changes in fair value recognized through income for those foreclosed assets held by the Company during the three months ending December 31, 2010 and 2009, respectively.

A summary of assets and liabilities at December 31, 2010 measured at estimated fair value on a nonrecurring basis were as follows:

	Fair Value Measurements at December 31, 2010		Level 1		Level 2		Level 3

Impaired loans with specific allowance allocations	$	12,067	$	-	$	-	$	12,067

Total		12,067		-		-		12,067

A summary of assets and liabilities at September 30, 2010 measured at estimated fair value on a nonrecurring basis were as follows:

	Fair Value Measurements at September 30, 2010		Level 1		Level 2		Level 3

Impaired loans with specific allowance allocations	$	28,717	$	-	$	-	$	28,717
Mortgage servicing rights		1,172		-		-		1,172
Total		29,889		-		-		29,889

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Fair values of financial instruments

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

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

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

	December 31						September 30
	2010						2010
	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value
Financial assets:
Cash and due from banks	$	34,844		$	34,844		$	90,872		$	90,872
Securities available for sale		869,996			869,996			901,012			901,012
Securities held to maturity		30,425			31,255			33,848			35,062
Loans		1,668,466			1,672,750			1,670,698			1,680,939
Loans held for sale		3,051			3,051			5,890			5,934
Accrued interest receivable		10,838			10,838			11,069			11,069
FHLB of New York stock		23,275			23,275			19,572			19,572
Financial liabilities:
Non-maturity deposits		(1,572,509	)		(1,572,509	)		(1,765,129	)		(1,765,129	)
Certificates of Deposit		(407,559	)		(409,882	)		(377,573	)		(380,744	)
FHLB and other borrowings		(495,783	)		(552,197	)		(415,247	)		(473,785	)
Mortgage escrow funds		(17,090	)		(17,087	)		(8,198	)		(8,198	)
Accrued interest payable		(2,323	)		(2,323	)		(2,307	)		(2,307	)

The following paragraphs summarize the principal methods and assumptions used by management to estimate the fair value of the Company’s financial instruments.

(a)

Securities

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

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

(b)

Loans

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

(c)

FHLB of New York Stock

The redeemable carrying amount of these securities with limited marketability approximates their fair value.

(d)

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. Certificates of deposit and mortgage escrow funds were segregated by account type and original term, and fair values were estimated by discounting the contractual cash flows. The discount rate for each account grouping was equivalent to the current market rates for deposits of similar type and maturity.

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.

(e)

Borrowings

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

(f)

Other Financial Instruments

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

The fair values of the Company’s off –balance-sheet financial instruments were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At December 31, 2010 and September 30, 2010, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

6.	Securities

The following is a summary of securities available for sale:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2010
Mortgage-backed securities-residential
Fannie Mae	$	79,310	$	764	$	(878	)	$	79,196
Freddie Mac		31,058		446		(444	)		31,060
Ginnie Mae		38		3		-			41
CMO/Other MBS		77,137		342		(2,727	)		74,752
		187,543		1,555		(4,049	)		185,049
Investment securities
U.S. Government securities		65,830		325		(625	)		65,530
Federal agencies		400,928		651		(4,596	)		396,983
Corporate bonds		29,167		567		(170	)		29,564
State and municipal securities		190,316		3,133		(1,465	)		191,984
Equities		1,146		-		(260	)		886
		687,387		4,676		(7,116	)		684,947

Total available for sale	$	874,930	$	6,231	$	(11,165	)	$	869,996

September 30, 2010
Mortgage-backed securities-residential
Fannie Mae	$	149,084	$	4,105	$	(1	)	$	153,188
Freddie Mac		56,632		1,820		-			58,452
Ginnie Mae		9,047		268		-			9,315
CMO/Other MBS		38,338		680		(359	)		38,659
		253,101		6,873		(360	)		259,614
Investment securities
U.S. Government securities		71,071		1,222		-			72,293
Federal agencies		344,154		1,919		(54	)		346,019
Corporate bonds		29,406		1,134		-			30,540
State and municipal securities		180,879		10,798		(20	)		191,657
Equities		1,146		-		(257	)		889
		626,656		15,073		(331	)		641,398

Total available for sale	$	879,757	$	21,946	$	(691	)	$	901,012

Table of Contents

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following is a summary of the amortized cost and fair value of investment securities available for sale (other than equity securities), by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or prepay their obligations.

	December 31, 2010
	Amortized Cost		Fair Value
Remaining period to contractual maturity
Less than one year	$	5,906	$	5,962
One to five years		474,444		471,460
Five to ten years		144,691		145,656
Greater than ten years		61,200		60,983
Total	$	686,241	$	684,061

Proceeds from sales of securities available for sale totaled $224,797 and $139,237, for the first quarters ending December 31, 2010 and 2009, respectively. These sales resulted in gross realized gains of $4,202 and $2,524 for the first quarter ending December 31, 2010 and 2009 respectively, and gross realized losses of $0 and $136 for the first quarter ending December 31, 2010 and 2009 respectively.

Securities, including held to maturity securities, with carrying amounts of $227,062 and $228,442 were pledged as collateral for borrowings at December 31, 2010 and September 30, 2010, respectively. Securities with carrying amounts of $260,253 and $490,730 were pledged as collateral for municipal deposits and other purposes at December 31, 2010 and September 30, 2010, respectively.

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

	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
As of December 31, 2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Mortgage-backed securities-residential	$	115,542	$	(3,817	)	$	2,186	$	(232	)	$	117,728	$	(4,049	)
U.S. Government and agency securities		353,288		(5,221	)		-		-			353,288		(5,221	)
Corporate bonds		14,662		(170	)		-		-			14,662		(170	)
State and municipal securities		68,100		(1,465	)		-		-			68,100		(1,465	)
Equity securities		96		(9	)		790		(251	)		886		(260	)
Total	$	551,688	$	(10,682	)	$	2,976	$	(483	)	$	554,664	$	(11,165	)