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EX-32.1 - EXHIBIT 32.1 - STERLING BANCORPex32_1.htm
EX-31.1 - EXHIBIT 31.1 - STERLING BANCORPex31_1.htm
EX-31.2 - EXHIBIT 31.2 - STERLING BANCORPex31_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
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to __________

Commission File Number: 0-25233

PROVIDENT NEW YORK BANCORP
(Exact Name of Registrant as Specified in its Charter)

Delaware
80-0091851
(State or Other Jurisdiction of 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
 
     
 
3
     
  4
   
 
 
5
     
 
6
     
 
8
     
 
9
     
Item 2.
28
     
Item 3.
35
     
Item 4.
37
     
PART II.  OTHER INFORMATION
Item 1.
37
     
Item 1.A. 
37
     
Item 2.
37
     
Item 3.
37
     
Item 4.
37
     
Item 5.
37
     
Item 6.
38
     
 
39


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


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


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


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


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


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


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.

3.
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  



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.


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  


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:


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  


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.


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
2
Swaps


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
2
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.


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  


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.


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.


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  


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 )