Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________________
FORM 10-K

T
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2010
OR
£TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________________
2013 Commission File Number: 0-25233001-35385

________________________
STERLING BANCORP
(Exact name of Registrant as Specified in its Charter)
PROVIDENT NEW YORK BANCORP
(Exact name of Registrant as Specified in its Charter)

Delaware 80-0091851
(State or Other Jurisdiction of
Incorporation onor Organization)
 
(IRS Employer
Identification Number)
   
400 Rella Blvd., Montebello, New York 10901
(Address of Principal Executive Office) (Zip Code)

(845) 369-8040
(845) 369-8040
(Registrant’s Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of ClassName of Each Exchange On Which Registered
Common Stock, par value $0.01 per shareThe NASDAQ Global Select MarketNew York Stock Exchange
Cumulative Trust Preferred Securities 8.375% (Liquidation Amount $10 per Preferred Security) of Sterling Bancorp Trust I and Guarantee of Sterling Bancorp with respect theretoNew York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:None

None
____________________________
Indicate by check mark if the Registrant is a well-known seasonalseasoned issuer, as defined in Rule 405 of the Securities Act    YES  ¨    NO  ý
YES £ NO T

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
YES  £¨     NO  Tý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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  ý    NO  ¨
YES T NO £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files)
YES  £ý     NO  £¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.
T

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

Large Accelerated Filer£
o
Accelerated FilerT
x
Non-Accelerated Filer£
o
Smaller Reporting Company£o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  £¨     NO  Tý

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of March 31, 20102013 was $364,281,125.

$294,182,103
As of December 3, 20105, 2013 there were 83,867,873 outstanding 38,184,086 shares of the Registrant’s common stock.

DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s fiscal year ended September 30, 2010.
2013.

Table of Contents

PROVIDENT NEW YORKSTERLING BANCORP

FORM 10-K TABLE OF CONTENTS

September 30, 20102013

PART I 1
ITEM 1.
Business
1
ITEM 1A.
Risk Factors
33
27
ITEM 1B.
Unresolved Staff Comments
37
32
ITEM 2.
Properties
37
32
ITEM 3.
Legal Proceedings
37
32
ITEM 4.
Submission of Matters to a Vote of Security HoldersMine Safety Disclosures
37
32
PART II  
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
38
33
ITEM 6.
Selected Financial Data
41
36
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
39
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
59
51
ITEM 8.
Financial Statements and Supplementary Data
60
52
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
113
115
ITEM 9A.
Controls and Procedures
113
115
ITEM 9B.
Other Information
113
115
PART III  
ITEM 10.
Directors, and Executive Officers, of the Registrantand Corporate Governance
113
116
ITEM 11.
Executive Compensation
113
116
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
114
116
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
114
116
ITEM 14.
Principal Accountant Fees and Services
114
116
PART IV  
ITEM 15.
Exhibits and Financial Statement Schedules
114
117
SIGNATURES 
SIGNATURES120
117

Table of Contents

PART I
ITEM 1.Business

ITEM 1.  Business

Provident New YorkSterling Bancorp

Provident New YorkSterling Bancorp (“Provident Bancorp”Sterling” or the “Company”) is a Delaware corporation that owns all of the outstanding shares of common stock of ProvidentSterling National Bank (the “Bank”). At September 30, 2010, Provident Bancorp2013, the Company had, on a consolidated basis, $4.0 billion in assets, of $3.0$3.0 billion in deposits of $2.1 billion and stockholders’ equity of $431.0 million.$482.9 million. As of September 30, 2010, Provident Bancorp2013, the Company had 38,262,28844,351,046 shares of common stock outstanding. Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank.

Merger with Sterling Bancorp
On October 31, 2013, Provident BankNew York Bancorp completed its acquisition of Sterling Bancorp (“Legacy Sterling”). In connection with the merger, Provident New York Bancorp completed the following corporate actions:

Legacy Sterling merged with and into Provident New York Bancorp. Provident New York Bancorp was the accounting acquirer and the surviving entity.
Provident New York Bancorp changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended.
Provident Bank an independent,converted to a national bank charter.
Sterling National Bank merged into Provident Bank.
Provident Bank changed its legal entity name to Sterling National Bank.
Provident Municipal Bank merged into Sterling National Bank.

We refer to the transactions detailed above collectively as the “Merger”.

The Merger was a stock-for-stock transaction valued at $457.8 million based on the closing price of Provident New York Bancorp common stock on October 31, 2013. Under the terms of the Merger, each share of Legacy Sterling was converted into the right to receive 1.2625 shares of Provident New York Bancorp common stock. Consistent with our strategy of expanding in the greater New York metropolitan region, we believe the Merger creates a larger, more diversified company that will accelerate the build-out of our differentiated strategy targeting small-to-middle market commercial clients and consumers. See additional disclosure regarding the Merger with Sterling Bancorp in Note 22. Subsequent Events to the consolidated financial statements.

As of June 30, 2013, the date of Legacy Sterling’s last publicly available financial statements, Legacy Sterling had total assets of $2.7 billion, total loans including loans held for sale of $1.8 billion, and total deposits of $2.2 billion.

Sterling National Bank
The Bank is a growing full-service community bank founded in 1888, is headquartered1888. Headquartered in Montebello, New York, andthe Bank is the principal bank subsidiary of Provident Bancorp. With $3.0 billion in assetsthe Company and 554 full-time equivalent employees, Provident Bank accounts for substantially all of Provident Bancorp’sthe Company’s consolidated assets and net income. We operate 35 branches which serveAs of September 30, 2013, the Hudson Valley region, including 34 branches locatedBank had $4.0 billion in Rockland, Orange, Sullivan, Ulster, Westchesterassets, $3.0 billion in deposits and Putnam Counties477 full-time equivalent employees. The Bank specializes in the delivery of services and solutions to business owners, their families and consumers in communities within the greater New York metropolitan region through 16 teams of dedicated relationship managers and one branch in Bergen County, New Jersey which operates under the name Towncenter Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, community business (small business) and retail banking products and services.34 full-service financial centers.

We also offer deposit services to municipalities located inSubsidiaries
The Company and the StateBank maintain a number of New York through Provident Bank’s wholly-owned subsidiary, Provident Municipal Bank.

Provest Services Corporation I is a wholly-owned subsidiary of Provident Bank, holding an investment in a limited partnership that operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident Bank that has engaged a third-party provider to sell annuities, life and health insurance products to Provident Bank’s customers. Through September 30, 2010, the activities of these subsidiaries, have had an insignificant effect on our consolidated financial condition and results of operations. Provident REIT, Inc. and WSB Funding are subsidiaries in the form ofincluding two real estate investment trusts andthat hold both residential and commercial real estate loans.   Also, the Bank maintainsmortgage loans, several Corporations whichsubsidiaries that hold fo reclosedforeclosed properties acquired by Providentthe Bank, a Vermont captive insurance company and other subsidiaries that have an immaterial impact on the financial condition or results of operations of the Company.

Provident Bank’sSenior Notes Capital Raise
In connection with the Merger, the Company completed the offering of $100 million of its senior notes due 2018 (the “Senior Notes”) on July 2, 2013. The Senior Notes, which bear interest at 5.50% annually, were issued under an indenture dated July 2, 2013 (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Senior Notes were sold in a private placement and resold by the initial purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”).

The Senior Notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries. Interest on the Senior Notes will be payable on January 2 and July 2 beginning on January 2, 2014. Interest will be calculated on the basis of a 360-day year of twelve 30-day months. The Senior Notes will mature on July 2, 2018.

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Table of Contents


Additional Information
Sterling’s website (www.providentbanking.com)(www.sterlingbancorp.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission (“SEC”), including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings, registration statements on Form S-4, as well as ownership reports on Forms 3, 4 and 5 filed by the Company’s directors and executive officers. Copies may also be obtained, without charge, by written request to Provident New YorkSterling Bancorp, Investor Relations, 400 Rella Boulevard, Montebello, New York 10901, Attention: Miranda Grimm.  Provident Bank’sInvestor Relations. Sterling’s website is not part of this Annual Report on Form 10-K.

Non-Bank Subsidiaries

In addition to Provident Bank, the Company owns Hardenburgh Abstract Company, Inc. (“Hardenburgh”) that was acquired in connection with the acquisition of Warwick Community Bancorp (“WSB”) and Hudson Valley Investment Advisors, LLC, an investment advisory firm that generates investment management fees.  Hardenburgh had gross revenue from title insurance policies and abstracts of $1.2 million and net income of $214,000 in 2010, Hudson Valley Investment Advisors, LLC generated $2.4 million in fee income in 2010 and net income of $369,000 and Provident Risk Management, Inc. a captive insurance company generated $441,000 in intercompany revenues and $353,000 in net income.

1

Provident Municipal Bank

Provident Municipal Bank, a wholly-owned subsidiary of Provident Bank, is a New York State-chartered commercial bank which is engaged in the business of accepting deposits from municipalities in our market area. New York State law requires municipalities located in the State of New York to deposit funds with commercial banks, effectively forbidding these municipalities from depositing funds with savings banks, including federally chartered savings associations, such as Provident Bank.

Forward-Looking Statements

From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Riskrisk Factors discussion in Item 1A. Risk Factors and our Cautionary Statement Regarding Forward-Looking Information included in Item 7.

Market AreaStrategy
The Company operates as a regional bank providing a broad offering of deposit, lending and wealth management products to commercial, consumer and municipal clients in its market area. The Company seeks to differentiate itself by focusing on the following principles:
Prioritize client relationships over transactions.
Compete on service experience versus price superiority.
Deploy a single point of contact, holistic view of the client relationship.
Focus on defined customer segments and geographic markets.
Maximize efficiency through a technology enabled low-cost operating platform.
Maintain strong risk management systems.

Provident Bank is an independent community bank offeringOur strategic objectives include generating sustainable growth in revenues and earnings by expanding client acquisitions, improving asset quality and increasing operating efficiency. To achieve these goals we are: 1) focusing on high value client segments; 2) expanding our delivery and distribution channels; 3) creating a broad range of financialhigh productivity performance culture; 4) closely monitoring operating costs; and 5) proactively managing enterprise risk.
We focus on delivering products and services to small-to-middle market commercial businesses and individuals as an alternative to large regional, multi-state, and international banksaffluent consumers.  We believe that this is a client segment that is undeserved by larger bank competitors in our market area. At September 30, 2010, our 35 full-service banking offices consisted of 12 offices in Rockland County,

The Bank targets the following geographic markets: the New York 14 officesMetro Market, which includes Manhattan and Long Island; and the New York Suburban Market, which consists of Rockland, Orange, Sullivan, Ulster, Putnam and Westchester counties in Orange County, New York and 8 officesBergen County in contiguous Ulster, Putnam, Westchester and Sullivan Counties, New York.  There is one office located in Lodi, New Jersey operating as Towncenter Bank, a division of Provident Bank, New York.  Our primary market for deposits is currently concentrated around the areas where our full-service banking offices are located.

Our primary lending area consists of Rockland and Orange Counties as well as contiguous counties. Rockland and Orange Counties represent a suburban area with a broad employment base. These counties also serve as bedroom communities for nearby New York City and other suburban areas including Westchester County and northern New Jersey. AccordingWe believe the Bank operates in an attractive footprint that presents us with significant opportunities to execute our strategy. Based on data published byfrom Oxxford Information Technology, we estimate the Federal Deposit Insurance Corporation (“FDIC”) astotal number of June 30, 2010, Provident Bank holds the #2 share of depositssmall-to-middle market businesses in Rockland County and #3 share of deposits in Orange County, and overall has the combined #2 share of deposits in Rockland and Orange Counties, New York.

Management Strategyour footprint exceeds 550 thousand.

We operate as an independent community bankdeploy a team-based distribution strategy in which clients are served by a focused and experienced group of relationship managers that offers a broad rangeare responsible for all aspects of customer-focused financial services as an alternativethe client relationship and delivery of our products and services. A significant portion of the Bank’s growth in 2013 was driven by the recruitment of new teams. As of September 30, 2013, the Bank had 16 commercial banking teams. We expect to large regional, multi-state,continue to grow deposits and international banks in our market area. Management has invested inloan balances through the infrastructure and staffing to support our strategyaddition of serving the financial needs of businesses, individuals and municipalities in our market area focusing on core deposit generation and quality loan growth which provides a favorable platform for long-term sustainable growth. Highlights of management’s business strategy are as follows:new teams.

Operating as a CommunityThe Bank. As an independent community bank, we emphasize the local nature of our decision-making to respond more effectively to the needs of our customers while providing a full range of financial services to the businesses, individuals, and municipalities in our market area. We offer a focuses on building broad range of financial products to meet the changing needs of the marketplace, including internet banking, cash management services and, on a selective basis, sweep accounts. In addition, we offer asset management services to meet the investing needs of individuals, corporations and not-for-profit entities. As a result, we are able to provide, at the local level, the financial services required to me et the needs of the majority of existing and potential customers in our market.

Enhancing Customer Service. We are committed toclient relationships by providing superior customer service asallowing us to gather low cost, core deposits and originate high quality loans. The Bank maintains a waydisciplined pricing strategy on deposits that allows us to differentiate us from our competition. As part of our commitment to service, we have been engaged in Sunday banking since 1995. In addition, we offer multiple access channels to our customers, including our branch and ATM network, internet banking, our Customer Care Telephone Center and our Automated Voice Response system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards. Initiated in 2006, our Service Excellence Program iscompete for loans while maintaining an active part of the culture of the bank, designed to maintain the highest level of servi ce to our customer base.

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Growing and maintaining a Diversified Loan Portfolio. appropriate spread over funding costs. We offer a broad range ofdiverse loan products to commercial businesses, real estate owners, developers and individuals. To support this activity,consumers. In 2013, we maintain commercial, consumer and residential loan departments staffed with experienced professionalscontinued to promote the continued growth and prudent management of loan assets. We have experienced consistent and significantemphasize growth in our commercial loan portfolio while continuing to provide our residential mortgage and consumer lending services. Asbalances;  as a result, we believe that we have developed a high quality, diversified loan portfolio with a favorable mix of loan types, maturities and yields.

Expanding our Banking Franchise. Management intends to continueThe Company augments organic growth with opportunistic acquisitions. Between fiscal 2002 and August 2012, the Company completed six acquisitions, including: National Bank of Florida in 2002; Ellenville National Bank in 2004; Warwick Community Bancorp in 2005; a branch office of HSBC Bank USA in 2005; Hudson Valley Investment Advisors in 2007; and Gotham Bank of New York in August 2012. On October 31, 2013, the Company completed the acquisition of Legacy Sterling. These acquisitions have supported the expansion of the banking franchiseCompany into attractive markets and diversified businesses. See additional disclosure of our acquisitions in Note 2. Acquisitions and Note 22. Subsequent Events to increase the numberconsolidated financial statements.

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Table of customers served and products used by businesses and consumers in our market area. Our strategy is to deliver exceptional customer service, which depends on up-to-date technology and multiple access channels, as well as courteous personal contact from a trained and motivated workforce. This approach has resulted in a relatively high level of core deposits, which drives our overall cost of funds. Management intends to maintain this strategy, which will require ongoing investment in banking locations and technology to support exceptional service levels for Provident Bank’ ;s customers.  Recent expansion efforts have been focused on Westchester County.Contents


Lending Activities

General.We originate Our commercial banking teams focus on the origination of commercial real estate loans and commercial business loans and acquisition, development and construction loans (collectively referred to as the “commercial loan portfolio”).& industrial loans. We also originate in our market area fixed-rate and adjustable-rate (“ARM”) residential mortgage loans collateralized by one- to four-family residential real estate, and consumer loans such as home equity lines of credit, homeowner loans and personal loans.loans in our market area. We retain mostsell many of the residential mortgage loans we originate althoughand we may sell longer-term one- to four-family residential loans andenter into loan participations in some commercial loans.loans for portfolio management purposes.

Commercial Real Estate Lending.We originate real estate loans secured predominantly by first liens on commercial real estate. The underlying collateral of our commercial real estate loans consists of multi-family properties, are predominantly non-residentialretail properties such asincluding shopping centers and strip centers, office buildings, shopping centers, retail strip centers,nursing homes, industrial and warehouse properties, hotels, motels, restaurants, and toschools. To a lesser extent more specialized properties such as churches, mobile home parks, restaurantswe originate commercial real estate loans for medical use, non-profits, gas stations and motel/hotels.other categories. We may, from time to time, purchase commercial real estate loan participations. We target commercial real estate loans with initial principal balances between $1.0 million and $15.0 million.  At September 30, 2010,2013, loans secured by commercial real estate totaled $582.0 mil lion,$1.3 billion, or 34.2%52.9% of our total loan portfolio and consisted of 1,041 loans outstanding, although there are a large number of loans with balances substantially greater than the average.portfolio. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

The majoritiesmajority of our commercial real estate loans have a term of ten years and are writtenstructured as five-year adjustable-ratefixed rate loans with a rate adjustment for the second five-year period or as ten-year fixed-rate mortgages and typically have balloon maturities up to ten years.loans. Amortization on these loans is typically based on 20-year payout schedules.  Margins20 to 25 year terms with balloon maturities generally in five or ten years. Interest rates on commercial real estate loans generally range from 200 basis points to 300 basis points above the applicable Federal Home Loan Bank advance rate.a reference index.

In the underwriting of commercial real estate loans, we generally lend up to 75% of the property’s appraised value. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we primarily emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally targeting a minimum ratio of 120%), computed after deductiondeductions for a vacancy factor and property expenses we deem appropriate. In addition, a personal guarantee of the loan or a portion thereof is generally required from the principal(s) of the borrower.borrower, except for loans secured by multi-family properties. We require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one-to four-family residential mortgage loans.  Commercial real estate loans entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve largesignificant loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. For commercial real estate loans in which the borrower is the primary occupant,a significant tenant, repayment experience also depends on the successful operation of the borr ower’sborrower’s underlying business.


Commercial Business Loans& Industrial Lending.We make various types of secured and unsecured commercial & industrial loans to customersbusinesses in our market area for the purpose of financing equipment acquisition, expansion, working capital, the acquisition of equipment, business expansion, and other general business purposes. The termterms of these loans generally range from less than one year to seven years. The loans are either negotiatedstructured on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index. At September 30, 2010,2013, we had 2,154 commercial business& industrial loans outstanding with an aggregate balance of $240.7$439.8 million, or 14.1% 0;18.2% of theour total loan portfolio.  As of September 30, 2010, the average commercial business loan balance was approximately $111,000 although there are a large number of loans with balances substantially greater than this average.

Commercial credit decisions areUnderwriting of a commercial & industrial loan is based upon a crediton an assessment of the loan applicant.  A determination is made as to the applicant’s willingness and ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. AnThis includes an evaluation is made of the applicant to determine character and capacity to manage. Personal guarantees of the principals are generally required, except in the case of not-for-profit corporations. In addition to an evaluation of the loan applicant’s financial statements, a determination is made ofwe analyze the probable adequacy of the primary and secondary sources of repayment to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthines s.creditworthiness. Checking with other banks and trade investigations may also be conducted. Collateral supporting a secured transaction also is analyzed to determine its marketability.  For small business loans and lines of credit, generally those not exceeding $100,000, we use a modified credit scoring system that enables us to process the loan requests more quickly and efficiently.  Commercial business loans generally bear higher interest rates than residential loans of like duration because they involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of collateral, if any.  In addition, credit scoring models are generally more predictive in rank-ordering risk default than determining the absolute likelihood of default.

One-To Four-Family Real EstateResidential Mortgage Lending.We offer conforming and non-conforming, fixed-rate and adjustable-rate ( “ARM”) residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally up to $1.1$4.0 million that are fully amortizing with monthly or bi-weekly loan payments. ThisOur residential mortgage loan portfolio totaled $411.2$400.0 million, or 24.2%16.6% of our total loan portfolio at September 30, 2010.2013.

One- to four-family residentialResidential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as “A” or “A-“.acceptable for purchase. Loans that conform to such guidelines are referred to as “conforming loans.” We generally originate fixed-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently $417,000 for single-family homes or higher$417 thousand in certainmany locations in the continental U.S. and are $625.5 thousand in high-cost areas such as determined byNew York City and surrounding counties in which we originate the Federal Housing Finance Agency.majority of our residential mortgage loans. Private mortgage insurance is generally required for loans

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with loan-to-value ratios in excess of 80%. In order to reducemanage our exposure to rising interest rates, we sold or securitized substantially allsell the majority of our conforming fixed rate 1-4 family residential mortgage loans originated in f iscal 2010,to government sponsored entities such as Fannie Mae and Freddie Mac. We realized proceeds from the sale of residential mortgage loans totaling $49.0$94.1 million in proceeds.and $79.1 million for the fiscal years ended September 30, 2013 and 2012, respectively.

We also originate loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to substantially the same credit standards as conforming loans. These loans which are generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans.  During the past two years, the market for jumbo loans has been erratic with many of the normal outlets unable to purchase this type of loan; consequently, no loans were sold during fiscal 2010.

We also originate loans other than jumbo loans that are not saleable to Fannie Mae or Freddie Mac, but which we deemintended to be acceptable risks. The amount of such loans originated for fiscal 2010 was $30.2 million, all of which were retainedheld in our residential mortgage loan portfolio.

We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and our capital and liquidity position, we may retain all of our newly originated longer term fixed-rate Our bi-weekly residential mortgage loans or from time to time we may decide to sell all or a portion of such loans in the secondary mortgage market to government sponsored entities such as Fannie Mae and Freddie Mac or other purchasers. Our bi-weekly one- to four-family residential mortgage loans that are retained in our portfolio result in shorter repayment schedules than conventional monthly mortgage loans, and are repaid through an automatic deduction from the borrower’s savings or checking account. As of September 30, 2010, bi-weekly loans totaled $117.9 million, or 28.7% of our residential loan portfolio. We retain the servicing rights on a large majority of loans sold to generate fee income and reinforce our commitment to customer service, although we may also sell non-conforming loans to mortgage banking companies, generally on a servicing-released basis.sold. As of September 30, 2010,2013, loans serviced for others, excluding loan participations, totaled $141.4$249.0 million.

Effective October 1, 2013, we transferred the servicing function for residential mortgage loans we own and service for others to a nationally recognized mortgage loan servicer. We anticipate the transfer will have a neutral to modestly positive impact on operating expenses and will better position the Company to grow its residential mortgage lending business.
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We currently offer several ARM loan products secured by residential properties with rates that are fixed for a period ranging from six months to ten years. After the initial term, if the loan is not already refinanced, the interest rate on these loans generally resetresets every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, , thereby increasing the potential for default. At September 30, 2010, our ARM portfolio included $1.3 million in loans that re-price every six months, $34.3 million in loans that re-price once a year, $5.8 million in loans that re-price periodically after an initial fixed-rate period of one year or more and $456,000 that re-price based upon other miscellaneous re-pricing terms.  Our adjustable rate loans do not have interest-only or negative amortization features.  We do not nor have we in the past originated “subprime” loans, loans to borrowers with subprime credit scores combined with either high loan-to-value or high debt-to-income ratios.

We require title insurance on all of our one- to four-familyresidential mortgage loans, and we also require that borrowers maintain fire and extended coverage or all risk casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements, but in any event in an amount calculated to avoid the effect of any coinsurance clause. Nearly all residential firstResidential mortgage loans generally are required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance.

Acquisition, Development and Construction Loans.Lending. We originate land acquisition, development and construction (“ADC”) loans to builders in our market area. TheseSince 2011, the Company has deemphasized this lending activity and we currently originate ADC loans on an exception basis. ADC loans totaled $229.5$102.5 million, or 13.5%4.2% of our total loan portfolio at September 30, 2010. Acquisition2013.

ADC loans help finance the purchase of land intended for further development, including single-family houses,homes, multi-family housing, and commercial income property.properties. In some cases, we may makehave made an acquisition loan before the borrower has received approval to develop the land as planned.planned; however, we did not originate any such loans in fiscal 2013. In general, the maximum loan- to-valueloan-to-value ratio for a land acquisition loan is 50% of the appraised value of the property, although higher loan-to-value ratios may be allowed for certain borrowers we deem to be our lowest risk, higher loan-to-value ratios may be allowed.lower risk. We also makefund development loans to builders in our market area to finance improvements to real estate, consisting mostlymainly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum loan amount loaned is generally limited to the cost of the improvements plus limited approval of soft costs.costs subject to an overall loan-to-value limitation. In general, we do not originate loans with interest reserves.  A portion of our ADC loans acquired through the purchase of participations do carry interest reserves. The total loans with interest reserves at September 30, 2010 were $39.5 million. Advances are made in accordance with a schedule reflecting the cost of the improvements.

We also make construction loans to area builders, often in conjunction with development loans. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers.purchasers except in cases of owner occupied construction loans. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We commit to provide the permanent mortgage financing on most of our construction loans on income-producing property. Collateral coverage and risk profile isare maintained by restricting the number of model or speculative units in each project.


Land acquisition, development and constructionADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. To mitigate this risk the Bank implemented an amortization program with repayment from outside sources over a five to seven year period.  As of September 30, 2010, approximately 50% of the outstanding balances are being amortized over a pe riod not to exceed five years and the balance will be converted as they mature.  Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.  In recent years as a result of the economic downturn, most projects have performed behind schedule, requiring the borrowers to carry these projects for a longer time frame than was originally contemplated when we approved the credit facilities.  As a result many of the borrowers have been utilizing other sources to maintain debt service or have been unable to maintain debt service requirements.  With current market conditions, the Bank is currently not considering unimproved land loans. New acquisition, development and construction loans are being underwritten based on current market conditions.

Consumer Loans. We originate a variety of consumer and other loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. As of September 30, 2010, consumer loans totaled $238.2 million, or 14% of the total loan portfolio.

At September 30, 2010, the largest group of consumer loans consisted of $225.1 million of loans secured by junior liens on residential properties. We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit. As of September 30, 2010, homeowner loans totaled $48.9 million or 2.9% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $176.1 million, or 10.3% of our total loan portfolio at September 30, 2010, with $147.3 million remaining undisbursed.

Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2010, these loans totaled $13.1 million, or 0.8% of our total loan portfolio. We originate consumer loans directly to our customers or on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee.  Personal loans also include secured and unsecured installment loans for other purposes. Unsecured installment loans, which include most personalADC loans generally have shorter terms than secured consumer loans, and generally have higher interest rates than rates charged on secured installment loans with comparable terms.  We also offer overdraft lines of credit on an unsecured basis, outstanding balances on these loans totaled $4.8 million with additional undrawn lines totaling $15.4 million.

Our procedures for underwriting consumer loans include an assessment of an applicant’s credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount.  We generally lend at an 80% loan-to-value ratio for home equity loans, but will go to 90% loan-to-value with a strong loan profile and higher pricing.

Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles. In addition, the repayment of consumer loans depends on the borrowers’ continued financial stability, as repayment historically has been more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy than a single family mortgage loan.


Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the dates indicated.

  September 30, 
  2010  2009  2008  2007  2006 
  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
  (Dollars in thousands) 
                               
                               
One- to four-family residential mortgage loans $411,239   24.2% $460,728   27.0% $513,381   29.6% $500,825   30.6% $462,996   31.4%
                                         
Commercial real estate loans  581,965   34.2   546,767   32.6   554,811   32.0   535,003   32.8   529,607   35.9 
Commercial business loans  240,650   14.1   242,629   14.2   243,642   14.1   207,156   12.6   160,823   10.9 
Acquisition, development, construction  229,463   13.5   201,611   11.4   170,979   9.9   153,074   9.3   96,656   6.6 
Total commercial loans  1,052,078   61.8   991,007   58.2   969,432   56.0   895,233   54.7   787,086   53.4 
                                         
Home equity lines of credit  176,134   10.3   180,205   10.6   166,491   9.6   162,669   9.9   149,862   10.2 
Homeowner loans  48,941   2.9   54,941   3.2   58,569   3.4   59,705   3.6   55,968   3.8 
Other consumer loans  13,149   0.8   16,376   1.0   23,680   1.4   19,626   1.2   17,646   1.2 
Total consumer loans  238,224   14.0   251,522   14.8   248,740   14.4   242,000   14.7   223,476   15.2 
                                         
Total loans  1,701,541   100.0%  1,703,257   100.0%  1,731,553   100.0%  1,638,058   100.0%  1,473,558   100.0%
                                         
Allowance for loan losses  (30,843)      (30,050)      (23,101)      (20,389)      (20,373)    
                                         
Total loans, net $1,670,698      $1,673,207      $1,708,452      $1,617,669      $1,453,185     


Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2010. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

  Residential Mortgage  Commercial Real Estate  Commercial Business  ADC  Consumer  Total 
  Amount  Weighted Average Rate  Amount  Weighted Average Rate  Amount  Weighted Average Rate  Amount  Weighted Average Rate  Amount  Weighted Average Rate  Amount  Weighted Average Rate 
  (Dollars in thousands) 
                                     
Due During the Years Ending September 30,
                                    
2011 $6,816   5.80% $32,158   5.11% $79,105   4.13% $149,094   4.38% $3,324   5.08% $270,497   4.44%
2012 to 2015  10,979   6.01   207,974   5.79   79,379   5.22   74,365   4.13   56,465   5.31   429,162   5.34 
2015 and beyond  393,444   5.70   341,833   6.32   82,166   4.72   6,004   3.64   178,435   4.91   1,001,882   5.68 
                                                 
Total $411,239   5.71% $581,965   6.05% $240,650   4.69% $229,463   4.28% $238,224   5.01% $1,701,541   5.39%


The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2010 that are contractually due after September 30, 2011.

  Fixed  Adjustable  Total 
  Dollars in thousands) 
          
Residential mortgage loans $365,234  $39,189  $404,423 
             
Commercial real estate loans  235,341   314,466   549,807 
Commercial business loans  50,414   111,131   161,545 
ADC  3,792   76,577   80,369 
Total commercial loan  289,547   502,174   791,721 
             
Consumer loans  65,038   169,862   234,900 
             
Total loans $719,819  $711,225  $1,431,044 


Loan Originations, Purchases, Sales and Servicing. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in our market area. These include competing banks, savings banks, credit unions, mortgage banking companies, life insurance companies and similar financial services firms. Loan originations are derived from a number of sources, including branch office personnel, existing customers, borrowers, builders, attorneys, real estate broker referrals and walk-in customers.

Our loan origination and sales activity may be adversely affected by a rising interest rate environment or period of falling house prices that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand, as well as being impacted by the level of unemployment and housing sale activity. Accordingly, the volume of loan origination, the mix of fixed and adjustable-rate loans, and the profitability of this activity can vary from period to period. One- to four-family residential mortgage loans are generally underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines, and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold, the sales are conducted generally using standard Fannie Mae/Freddie Mac purchase contracts and master commitments as applicable. One- to four-family mortgage loans may be sold to Fannie Mae or Freddie Mac on a non-recourse basis whereby foreclosure losses are generally the responsibility of the purchaser and not Provident Bank.  Consistent with its long-standing credit policies, Provident Bank does not originate or hold subprime mortgage loans.  We also hold no subprime loans through our investment portfolio.

During fiscal year 2010 $14.6 million in loans were sold as participation certificates whereby such loans were retained as mortgage backed securities guaranteed by Freddie Mac.  We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our policy generally has been to retain the servicing rights for all conforming loans sold. We therefore continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings, if necessary. We retain a portion of the interest paid by the borrower on the loans as consideration for our servicing activities.

Loan Approval/Authority and Underwriting. We have four levels of lending authority beginning with the Board of Directors. The Board grants lending authority to the Director Loan Committee, (the members of which are Directors), the Management Loan Committee, the President, and certain other designated officers to approve individual loan authorities. Our lending activities are subject to written policies established by the Board. These policies are reviewed periodically.

The Director Loan Committee may approve loans in accordance with applicable loan policies, up to the limits established in our policy governing loans to one borrower. This policy places limits on the aggregate dollar amount of credit that may be extended to any one borrower and related entities. Loans exceeding the maximum loan-to-one borrower limit described below require approval by the Board of Directors. The Management Loan Committee’s authority varies depending on the quality of the credit, and the aggregate relationship up to the policy limits set for one borrower and group of related borrowers. Two loan officers with sufficient loan authority acting together may approve loans up to $1 million. The maximum individual authority to approve an unsecured loan is $50,000; however, for credit-scored small business loans the maxim um individual authority is $100,000.

We have established a risk rating system for our commercial business loans, commercial and multi-family real estate loans, and acquisition, development and construction loans to builders. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are performed by commercial credit personnel who do not have responsibility for loan originations. We determine our maximum loan-to-one-borrower limits based upon the rating of the loan. The large majority of loans fall into three categories. The maximum for the best-rated borrowers is $20 million, $15 million for the next group of borrowers and $12 million for the third group. Sub-limits apply based on reliance on any single property, and for commercial business loans. On occasion, the Board of Directors may approve higher exposure limits for loans to one borrower in an amount not to exceed the legal lending limit of the Bank. The Board may also authorize the Director Loan Committee to approve loans for specific borrowers up to a designated Board approved limit in excess of the policy limit, for that borrower.

In connection with our residential and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas. Under certain conditions, appraisals may not be required for loans under $250,000 or in other limited circumstances. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in connection with certain residential mortgage refinances.


Loan Origination Fees and Costs. In addition to interest earned on loans, we also receive loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. We defer loan origination fees and costs, and amortize such amounts as an adjustment to yield over the term of the loan by use of the level yield method.  Deferred loan origination costs (net of deferred fees) were $720,000 at September 30, 2010.

To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale.  The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid.  Originated mortgage servicing rights with an amortized cost of $1.2 million are included in other assets at September 30, 2010.  See also Notes 2 and 5 of the “Notes to Consolidated Financial Statements”.

Loans to One Borrower. At September 30, 2010, our five largest aggregate amounts loaned to any one borrower and certain related interests (including any unused lines of credit) consisted of secured and unsecured financing of $30.1 million, $22.9 million, $19.4 million, $18.8 million and $18.0 million.  See “Regulation - Regulation of Provident Bank - Loans to One Borrower” for a discussion of applicable regulatory limitations.

Delinquent Loans, Troubled Debt Restructure, Other Real Estate Owned and Classified Assets

Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans.  A computer-generated late notice is sent by the 16th day after the payment due date on a loan requesting the payment due plus any late charge that was assessed. Accounts are distributed to a collector or account officer to contact borrowers, determine the reason for delinquency and seek payment, and accounts are monitored electronically for receipt of payments. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If payment is not received within 60 days of the due date, loans are generally accelerated and payment in full is demanded. Failure to pay within 90 d ays of the original due date generally results in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending upon individual circumstances.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due, unless well secured and in the process of collection. In addition, loans are placed on non-accrual status when, in the opinion of management, there is sufficient reason to question the borrower’s ability to continue to meet principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income related to current year income and charged to the allowance for loan losses with respect to income that was recorded in the prior fiscal year. Inter est payments received on non-accrual loans are not recognized as income unless warranted based on the borrower’s financial condition and payment record. At September 30, 2010, we had non-accrual loans of $21.4 million and $5.4 million of loans 90 days past due and still accruing interest, which were well secured and in the process of collection. At September 30, 2009 we had non-accrual loans of $21.9 million and $4.6 million of loans 90 days past due and still accruing interest.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned (“REO”) until such time as it is sold.

When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of book value or fair value less cost to sell. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2010 we had eight foreclosed properties with a recorded balance of $3.9 million.  In addition, $16.0 million in loan balances was considered troubled debt restructures which are still accruing interest income.


Troubled Debt Restructure.  The Company in an effort to assist our borrowers, has modified terms of certain loans secured by real estate.  These loans were $21.5 million at September 30, 2010, of which $5.5 million were classified as nonaccrual and $16.0 million were performing according to terms. The majority of performing TDR consisted of one relationship totaling $14.2 million. The Loan modifications included actions such as extension of maturity date, the lowering of interest rates and monthly payments.   The amount of commitments to lend debtors with loans that have been modified is $318,000 at September 30, 2010.  The commitments to lend on the restructured debt is contingent on clear title and a third party in spection to verify completion of work and is associated with loans that are considered to be performing.


Loan Portfolio Delinquencies. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

  Loans Delinquent For    
  30-89 Days  90 Days & over still accruing & non-accrual  Total 
  Number  Amount  Number  Amount  Number  Amount 
  (Dollars in thousands) 
At September 30, 2010                  
One- to four- family  1  $113   36  $8,033   37  $8,146 
Commercial real estate  4   1,469   26   9,857   30   11,326 
ADC  2   6,681   11   5,730   13   12,411 
Commercial business  2   3,403   6   1,376   8   4,779 
Consumer  27   681   22   1,844   49   2,525 
Total  36  $12,347   101  $26,840   137  $39,187 
At September 30, 2009                        
One- to four- family  2  $390   32  $7,357   34  $7,747 
Commercial real estate  2   398   24   6,803   26   7,201 
ADC  1   366   20   11,270   21   11,636 
Commercial business  18   999   8   457   26   1,456 
Consumer  22   494   13   582   35   1,076 
Total  45  $2,647   97  $26,469   142  $29,116 
At September 30, 2008                        
One- to four- family  19  $4,106   19  $4,218   38  $8,324 
Commercial real estate  8   1,666   12   3,832   20   5,498 
ADC  -   -   9   5,596   9   5,596 
Commercial business  29   1,318   35   2,811   64   4,129 
Consumer  43   435   41   421   84   856 
Total  99  $7,525   116  $16,878   215  $24,403 
At September 30, 2007                        
One- to four- family  28  $4,829   15  $1,899   43  $6,728 
Commercial real estate  31   3,387   8   2,586   39   5,973 
ADC  -   -   2   689   2   689 
Commercial business  9   357   19   1,683   28   2,040 
Consumer  49   835   30   401   79   1,236 
Total  117  $9,408   74  $7,258   191  $16,666 
At September 30, 2006                        
One- to four- family  43  $4,502   10  $1,102   53  $5,604 
Commercial real estate  15   1,098   6   2,980   21   4,078 
Commercial business  -   -   12   489   12   489 
Consumer  54   521   42   453   96   974 
Total  112  $6,121   70  $5,024   182  $11,145 


Risk elements. The table below sets forth the amounts and categories of our assets with various risk levels at the dates indicated.

  September 30, 
  2010  2009  2008  2007  2006 
                
  
Non- Accrual
  
Non- Accrual
  
Non- Accrual
  
Non- Accrual
  
Non- Accrual
 
Non-performing loans:               
One- to four- family $6,080  $4,425  $1,731  $-  $472 
Commercial real estate  6,886   5,826   3,100   1,099   2,367 
Commercial business loans  1,376   457   2,811   1,637   459 
Acquisition, land and development  5,730   10,830   5,596   644   - 
Consumer  1,341   371   351   129   144 
Accruing loans past due 90 days or more  5,427   4,560   3,289   3,749   1,582 
Total non-performing loans $26,840  $26,469  $16,878  $7,258  $5,024 
                     
Foreclosed properties  3,891   1,712   84   139   87 
Total non-performing assets $30,731  $28,181  $16,962  $7,397  $5,111 
                     
Troubled Debt Restructures still accruing and not included above $16,047  $674  $-  $-  $- 
                     
Ratios:                    
Non-performing loans to total loans  1.58%  1.55%  0.97%  0.44%  0.34%
Non-performing assets to total assets  1.02%  0.93%  0.57%  0.26%  0.18%

For the year ended September 30, 2010, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to $1.2 million. Interest income actually recognized on such loans totaled $383,000.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weakness es present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are either charged off or the subject of a specific reserve. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, designated as “special mention”.  As of September 30, 2010, we had $39.9 million of assets designated as “special mention”.

Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2010, classified assets consisted of substandard assets of $135.6 million and $300,000 were classified as doubtful.

Loans categorized as troubled debt restructures and still accruing are loans to which the lending relationship with a troubled borrower, who was still performing in accordance with the terms of their loan, was granted an extension of their credit facility in exchange for terms and conditions which were favorable to the Bank in improving the credit facility, but were not at market rates given the credit rating of the borrower at the time of the extension of the loan maturity.


Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management’s judgment, deserve current recognition in estimating probable incurred losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consists of amounts specifically allocated to non-perfor ming loans and other criticized or classified loans (if any), as well as allowances determined for each major loan category. After we establish a provision for loans that are known to be non-performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred losses inherent in that portion of the portfolio. When the loan portfolio increases, therefore, the percentage calculation results in a higher dollar amount of estimated probable incurred losses than would be the case without the increase, and when the loan portfolio decreases, the percentage calculation results in a lower dollar amount of estimated probable incurred losses than would be the case without the decrease. These percentages are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:

·levels of, and trends in, delinquencies and non-accruals;
·trends in volume and terms of loans;
·effects of any changes in lending policies and procedures;
·experience, ability, and depth of lending management and staff;
·national and local economic trends and conditions;
·concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
·for commercial loans, trends in risk ratings.

Of the major parts of our loan portfolio, we consider, land acquisition, development and construction loans, commercial real estate loans, and commercial business loans to be the higher risk categories.    We consider one-to-four family mortgage loans to be a lower risk category.  Although, we offer unsecured consumer loans and overdraft protection lines of credit, which are higher risk in nature, they constitute a modest percentage of our loan portfolio.

Land acquisition, development and construction lending is considered higher risk and exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the proper typroperty may not occur as anticipated.


4

Consumer Lending. We originate a variety of consumer loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. As of September 30, 2013, consumer loans totaled $193.6 million or 8.1% of the total loan portfolio.

We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit secured by junior liens on residential properties. As of September 30, 2013, homeowner loans totaled $29.1 million or 1.2% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $157.3 million, or 6.5% of our total loan portfolio at September 30, 2013, with $99.6 million remaining undisbursed.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the periods indicated.
 September 30,
 2013 2012 2011 2010 2009
 Amount % Amount % Amount % Amount % Amount %
 (Dollars in thousands)
Residential mortgage$400,009
 16.6% $350,022
 16.5% $389,765
 22.9% $434,900
 25.5% $460,728
 27.0%
Commercial real estate1,277,037
 52.9
 1,072,504
 50.6
 703,356
 41.4
 579,232
 34.0
 546,767
 32.1
Commercial & industrial439,787
 18.2
 343,307
 16.2
 209,923
 12.3
 217,927
 12.8
 242,629
 14.2
Acquisition, development & construction102,494
 4.2
 144,061
 6.8
 175,931
 10.3
 231,258
 13.6
 201,611
 11.9
Total commercial loans1,819,318
 75.3
 1,559,872
 73.6
 1,089,210
 64.0
 1,028,417
 60.4
 991,007
 58.2
Consumer193,571
 8.1
 209,578
 9.9
 224,824
 13.1
 238,224
 14.1
 251,522
 14.8
Total loans2,412,898
 100.0% 2,119,472
 100.0% 1,703,799
 100.0% 1,701,541
 100.0% 1,703,257
 100.0%
Allowance for loan losses(28,877)   (28,282)   (27,917)   (30,843)   (30,050)  
Total loans, net$2,384,021
   $2,091,190
   $1,675,882
   $1,670,698
   $1,673,207
  

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2013. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Weighted average rates are computed based on the rate of the loan at September 30, 2013.
 Residential mortgage Commercial  real estate Commercial & industrial Acquisition, development & construction Consumer Total
 Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
 (Dollars in thousands)
Maturing within:                 
  
< 1 year$5,923
 4.63% $69,858
 4.96% $147,755
 4.96% $40,336
 4.48% $4,105
 13.48% $267,977
 4.43%
2-5 years21,802
 4.53
 329,997
 4.66
 110,768
 4.66
 44,158
 4.52
 6,760
 6.96
 513,485
 4.52
> 5 years372,284
 4.57
 877,182
 4.48
 181,264
 4.48
 18,000
 3.09
 182,706
 4.29
 1,631,436
 4.42
Total loans$400,009
 4.57% $1,277,037
 4.55% $439,787
 4.55% $102,494
 4.25% $193,571
 4.58% $2,412,898
 4.44%


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The following table sets forth the composition of fixed-rate and adjustable-rate loans at September 30, 2013 that are contractually due after September 30, 2014:
 Fixed Adjustable Total
 (Dollars in thousands)
Residential mortgage$229,263
 $164,823
 $394,086
Commercial real estate615,491
 591,688
 1,207,179
Commercial & industrial140,129
 151,903
 292,032
Acquisition, development & construction8,644
 53,514
 62,158
Total commercial loans764,264
 797,105
 1,561,369
Consumer34,757
 154,709
 189,466
Total loans$1,028,284
 $1,116,637
 $2,144,921


Loan Approval/Authority and Underwriting. The Board of Directors has established the Credit Risk Committee (the “CRC”) to oversee the lending functions of the Bank. The CRC oversees the performance of the Bank’s loan portfolio and its various components, assists in the development of strategic initiatives to enhance portfolio performance, and considers matters for approval and recommendation to the Board of Directors.

The Management Credit Committee (the “MCC”) consists of the Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, and other senior lending personnel. The MCC is authorized to approve loans within the existing policy limits established by the Board of Directors. For loans that are not within policy guidelines but are nonetheless deemed desirable, the MCC may recommend approval to the CRC, which in turn may recommend approval to the Board.

The MCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. Other than overdrafts, the only single initial lending authorities are for credit secured small business loans up to $250,000 and up to $500,000 if secured by residential property. Two loan officers with sufficient authority acting together may approve loans up to $3 million.

We have established a risk rating system for our commercial & industrial loans, commercial real estate loans and ADC loans. The risk rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are assessed by commercial credit personnel who do not have responsibility for loan originations. We determine our maximum loan-to-one-borrower limits based on the rating of the loan. The majority of our loans fall into four categories. The maximum for the best-rated borrowers is $20 million, $15 million for the next group of borrowers, $12 million for the third group and $6 million for the last group. Sub-limits apply based on reliance on any single property, and for commercial business loans. On occasion, the Board of Directors may approve higher exposure limits for loans to one borrower in an amount not to exceed the legal lending limit of the Bank. The Board may also authorize the Chief Risk Officer, or Management Credit Committee to approve loans for specific borrowers up to a designated Board approved limit in excess of the policy limit, for that borrower.

In connection with our residential mortgage and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas. Under certain conditions, appraisals may not be required for loans under $250,000 or in other limited circumstances. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in connection with certain residential mortgage refinances.

Loan Origination Fees and Costs. In addition to interest earned on loans, we may collect loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the marketplace, which in turn respond to the demand and availability of funding. We defer loan origination fees and costs, and amortize such amounts as an adjustment to yield over the term of the loan using the level yield method. Deferred loan origination costs (net of deferred fees) were $1.2 million at September 30, 2013.

To the extent that originated residential mortgage loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale. The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid. Originated mortgage servicing rights with an amortized cost of $2.0 million are included in other assets at September 30, 2013.


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Loans to One Borrower. At September 30, 2013, our five largest aggregate amounts loaned to any one borrower and certain related interests (including any unused lines of credit) consisted of secured and unsecured financing of $24.8 million, $24.0 million, $22.6 million, $21.2 million and $18.0 million. In addition, we have 52 relationships with an amount loaned of $10 million or more, with an aggregate exposure of $706.5 million. See “Regulation — Loans to One Borrower” for a discussion of applicable regulatory limitations.

Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets
Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans. A late payment notice is generated after the 16th day of the loan payment due date requesting the payment due plus any late charge assessed. Legal action, notwithstanding ongoing collection efforts, is generally initiated after 90 days of the original due date for failure to make payment. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending on individual circumstances.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis and are placed on non-accrual status when full payment of principal or interest is in doubt, or when either principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed against interest income. Interest payments received on non-accrual loans are generally applied to the principal balance of the outstanding loan. However, based on an assessment of the borrower’s financial condition and payment history, an interest payment may be applied to interest income on a cash basis. Appraisals are performed at least annually on classifieds loans. At September 30, 2013, we had non-accrual loans of $22.8 million, and we had $4.1 million of loans 90 days past due and still accruing interest which were well secured and in the process of collection. At September 30, 2012, we had non-accrual loans of $35.4 million and $4.4 million of loans 90 days past due and still accruing interest.

Impaired Loans. A loan is impaired when it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are based on one of three measures — the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, the Company may write-down a portion of the loan against the allowance for loan losses or a portion of the allowance for loan losses may be allocated so that the loan is reported net of its specific allowance. Impaired loans generally include a portion of classified loans, non-performing loans and accruing and performing troubled debt restructured loans. At September 30, 2013, we had $36.8 million in impaired loans with $1.6 million in specific allowances.

Troubled Debt Restructuring. The Company has formally modified loans to certain borrowers who experienced financial difficulty. If the terms of the modification include a concession, as defined by accounting principles generally accepted in the U.S., the loan is considered a troubled debt restructuring (“TDR”), which are also considered impaired loans. Nearly all of these loans are secured by real estate. Total TDRs were $26.1 million at September 30, 2013, of which $2.2 million were non-accrual and $23.9 million were performing according to terms and still accruing interest income. TDRs still accruing interest income are loans modified for borrowers that are experiencing one or more financial difficulties and are still performing in accordance with the terms of their loan prior to the modification. Loan modifications include actions such as extension of maturity date or the lowering of interest rates and monthly payments. Commitments to lend additional funds to borrowers with loans that have been modified were $4.1 million at September 30, 2013.

Other Real Estate Owned. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of our investment in the loan or fair value less cost to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2013, we had 23 OREO properties with a recorded balance of $6.0 million. After transfer to OREO we regularly update the fair value of the property. Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of other real estate owned expense.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality such as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are charged-off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention”. As of September 30, 2013, we had $13.5 million of assets designated as “special mention”.

Our determination as to the classification of our assets and the amount of our loss allowance are subject to review by our regulators, which can order the establishment of an additional loan loss allowance. Management regularly reviews our asset portfolio to determine

7

whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2013, classified assets consisted of loans of $61.1 million, OREO of $6.0 million, and $3.6 million of private label mortgage-backed securities.

Loan Portfolio Delinquencies. The following table sets forth certain information on our loan portfolio delinquencies at the dates indicated.
 Loans delinquent for    
 30-89 Days 
90 days or more still
accruing & non-accrual
 Total
 Number Amount Number Amount Number Amount
 (Dollars in thousands)
At September 30, 2013:           
Residential mortgage6 $621
 52 $9,316
 58 $9,937
Commercial real estate8 4,335
 26 8,769
 34 13,104
Commercial & industrial5 180
 8 789
 13 969
Acquisition, development & construction2 768
 11 5,420
 13 6,188
Consumer14 566
 28 2,612
 42 3,178
Total35 $6,470
 125 $26,906
 160 $33,376
At September 30, 2012:           
Residential mortgage10 $1,352
 56 $11,314
 66 $12,666
Commercial real estate7 1,875
 30 10,453
 37 12,328
Commercial & industrial7 237
 2 344
 9 581
Acquisition, development & construction9 7,067
 29 15,404
 38 22,471
Consumer22 1,816
 21 2,299
 43 4,115
Total55 $12,347
 138 $39,814
 193 $52,161
At September 30, 2011:           
Residential mortgage8 $1,212
 40 $7,976
 48 $9,188
Commercial real estate4 1,105
 34 13,214
 38 14,319
Commercial & industrial2 490
 3 243
 5 733
Acquisition, development & construction4 4,265
 24 16,984
 28 21,249
Consumer20 794
 26 2,150
 46 2,944
Total38 $7,866
 127 $40,567
 165 $48,433
At September 30, 2010:           
Residential mortgage1 $113
 36 $8,033
 37 $8,146
Commercial real estate4 1,469
 26 9,857
 30 11,326
Commercial & industrial2 3,403
 6 1,376
 8 4,779
Acquisition, development & construction2 6,681
 11 5,730
 13 12,411
Consumer27 681
 22 1,844
 49 2,525
Total36 $12,347
 101 $26,840
 137 $39,187
At September 30, 2009:           
Residential mortgage2 $390
 32 $7,357
 34 $7,747
Commercial real estate2 398
 24 6,803
 26 7,201
Commercial & industrial18 999
 8 457
 26 1,456
Acquisition, development & construction1 366
 20 11,270
 21 11,636
Consumer22 494
 13 582
 35 1,076
Total45 $2,647
 97 $26,469
 142 $29,116


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Risk Elements. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
 September 30,
 2013 2012 2011 2010 2009
 (Dollars in thousands)
Non-performing loans:         
Residential mortgage$7,484
 $9,051
 $7,485
 $6,080
 $4,425
Commercial real estate7,195
 8,815
 11,225
 6,886
 5,826
Commercial & industrial500
 344
 243
 1,376
 457
Acquisition, development & construction5,420
 15,404
 16,538
 5,730
 10,830
Consumer2,208
 1,830
 986
 1,341
 371
Accruing loans past due 90 days or more4,099
 4,370
 4,090
 5,427
 4,560
Total non-performing loans26,906
 39,814
 40,567
 26,840
 26,469
OREO6,022
 6,403
 5,391
 3,891
 1,712
Total non-performing assets$32,928
 $46,217
 $45,958
 $30,731
 $28,181
TDRs accruing and not included above$23,895
 $14,077
 $8,470
 $16,047
 $674
Ratios:         
Non-performing loans to total loans1.12% 1.87% 2.38% 1.58% 1.55%
Non-performing assets to total assets0.81
 1.15
 1.46
 1.02
 0.93

For the year ended September 30, 2013, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to $635 thousand. Interest income actually recognized on such loans totaled $374 thousand.

Allowance for Loan Losses. We believe the allowance for loan losses is critical to the understanding of our financial condition and results of operations. Selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to occur, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable possibility. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

We maintain our allowance for loan losses at a level that the Company believes is adequate to absorb probable losses inherent in the existing loan portfolio based on an evaluation of the collectibility of loans, underlying collateral, geographic and other concentrations, and prior loss experience. We use a risk rating system to evaluate the adequacy of the allowance for loan losses. With this system, each loan, with the exception of those included in large groups of smaller-balance homogeneous loans, is risk rated between one and ten, by credit administration, loan review or loan committee, with one being the best case and ten being a loss or the worst case. Loans with risk ratings between six and nine are monitored more closely by the credit administration team and may result in specific valuation allowances. We calculate an average loss estimate by loan type that is a twelve quarter average for commercial loans and eight quarter average for consumer loans. To the loss estimate we apply individual qualitative loss factors that result in an overall loss factor at an appropriate level for the allowance for loan losses for a particular loan type. These qualitative loss factors are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:

levels of, and trends in, delinquencies and non-accruals;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
experience, ability, and depth of lending management and staff;
national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
for commercial loans, trends in risk ratings.

The allowance for loan losses also includes an element for estimated probable but undetected losses. All loan losses are charged to the related allowance and all recoveries are credited to it. The Company analyzes loans by two broad segments or classes: real estate secured loans and loans that are either unsecured or secured by other collateral. The segments or classes considered real estate secured are:

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residential mortgage loans; commercial real estate loans; ADC loans; homeowner loans, and home equity lines of credit. The segments or classes considered unsecured or secured by other than real estate collateral are: commercial & industrial loans, and consumer loans. Commercial loan segments and residential mortgage loans over $500,000 are reviewed for impairment once they are past due 90 days or more, or are classified substandard or doubtful. If a loan is deemed to be impaired in one of the real estate secured segments, it is generally considered collateral dependent. If the value of the collateral securing a collateral dependent impaired loan is less than the carrying value of the loan, a charge-off is recognized equal to the difference between the appraised value and the book value of the loan. In addition, impairment reserves are recognized for estimated costs to hold and to liquidate the collateral. The ranges for the costs to hold and liquidate are 12-22% for the following segments: commercial real estate, residential and ADC loans and 7-13% for homeowner loans and home equity lines of credit. Impaired loans in the real estate secured segments are re-appraised using a summary or drive-by appraisal report every six to nine months.

For loans in the consumer segmentwe charge-off the full amount of the loan when it becomes 90 to 120 days or more past due, or earlier in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For loans in the commercial & industrial loan segment, we conduct a cash flow projection, and charge-off the difference between the net present value of the cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize a 10% impairment reserve to account for the imprecision of our estimates. 

ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans depends on the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. ADC loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and pricing of the loan. We have deemphasized this type of loan.

Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or the borrower may use the cash flow for other purposes. In addition, the foreclosure process, if necessary, may be slow and properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.

Commercial business& industrial lending is also higherexposes us to risk because repayment depends on the successful operation of the business which is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before foreclosing which we cannot be assured of doing, and the value in a foreclosure sale or other means of liquidation is subject to downward pressure.may be uncertain.

When we evaluate residential mortgage loans and equity loans we weigh both the credit capacity of the borrower and the collateral value of the home.  As unemployment and underemployment increases, and liquidity reserves if any, diminish, the credit capacity of the borrower decreases, which increases our risk.  Also, after a period of years of stable or increasing home values in our market, home prices have declined from a high in 2005 and 2006.  We are exposed to risk in both our first mortgage and equity lending programs due to declines in values in recent years.  We are also exposed to risk because the time to foreclose is significant and has become longer under current conditions.

10
14

The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

Allowance for Loan Losses by Year.Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.
 September 30,
 2013 2012 2011 2010 2009
 (Dollars in thousands)
Balance at beginning of period$28,282
 $27,917
 $30,843
 $30,050
 $23,101
Charge-offs:         
Residential mortgage(2,547) (2,551) (2,140) (749) (461)
Commercial real estate(3,725) (2,707) (1,802) (987) (902)
Commercial & industrial(1,354) (1,526) (5,400) (6,578) (7,271)
Acquisition, development & construction(3,422) (4,124) (8,939) (848) (1,515)
Consumer(2,009) (1,901) (1,989) (1,168) (1,140)
Total charge-offs(13,057) (12,809) (20,270) (10,330) (11,289)
Recoveries:         
Residential mortgage101
 356
 15
 3
 2
Commercial real estate577
 528
 2
 23
 —
Commercial & industrial410
 1,116
 605
 670
 249
Acquisition, development & construction182
 299
 10
 261
 200
Consumer232
 263
 128
 166
 187
Total recoveries1,502
 2,562
 760
 1,123
 638
Net charge-offs(11,555) (10,247) (19,510) (9,207) (10,651)
Provision for loan losses12,150
 10,612
 16,584
 10,000
 17,600
Balance at end of period$28,877
 $28,282
 $27,917
 $30,843
 $30,050
Ratios:         
Net charge-offs to average loans outstanding0.52% 0.56% 1.17% 0.56% 0.62%
Allowance for loan losses to non-performing loans107
 71
 69
 115
 114
Allowance for loan losses to total loans1.20
 1.48
 1.64
 1.81
 1.76

  At or For Years Ended September 30, 
  2010  2009  2008  2007  2006 
  (Dollars in thousands) 
                
Balance at beginning of year $30,050  $23,101  $20,389  $20,373  $21,047 
                     
Transfer to reserve for contingent loan commitments                    
Charge-offs:                    
One- to four- family  (749)  (461)  (97)  -   - 
Commercial real estate  (987)  (902)  (627)  -   - 
ADC  (848)  (1,515)  -   -   - 
Commercial business  (6,578)  (7,271)  (3,596)  (2,164)  (1,509)
Consumer  (1,168)  (1,140)  (609)  (329)  (327)
Total charge-offs  (10,330)  (11,289)  (4,929)  (2,493)  (1,836)
                     
Recoveries:                    
One- to four- family  3   2   -   -   - 
Commercial real estate  23   -   -   -   - 
ADC  261   200   -   -   - 
Commercial business  670   249   291   581   236 
Consumer  166   187   150   128   121 
Total recoveries  1,123   638   441   709   357 
                     
Net charge-offs  (9,207)  (10,651)  (4,488)  (1,784)  (1,479)
Provision for loan losses  10,000   17,600   7,200   1,800   1,200 
                     
Balance at end of year $30,843  $30,050  $23,101  $20,389  $20,373 
                     
Ratios:                    
Net charge-offs to average loans outstanding  0.56%  0.62%  0.28%  0.12%  0.11%
Allowance for loan losses to non-performing loans  115%  114%  137%  281%  406%
Allowance for loan losses to total loans  1.81%  1.76%  1.33%  1.24%  1.38%

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category (excluding loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 September 30, 
 2010  2009  2008 
 Allowance for Loan Losses  Loan Balances by Category  Percent of Loans in Each Category to Total Loans  Allowance for Loan Losses  Loan Balances by Category  Percent of Loans in Each Category to Total Loans  Allowance for Loan Losses  Loan Balances by Category  Percent of Loans in Each Category to Total Loans September 30,
 (Dollars in thousands) 2013 2012 2011
                           
Allowance
for loan
losses
 
Loan
balance
 % of total loans 
Allowance
for loan
losses
 
Loan
balance
 % of total loans 
Allowance
for loan
losses
 
Loan
balance
 % of total loans
One- to four- family $2,641  $411,239   24.2% $3,106  $460,728   27.0% $1,494  $513,381   29.6%
(Dollars in thousands)
Residential mortgage$4,474
 $400,009
 16.6% $4,359
 $350,022
 16.5% $3,498
 $389,765
 22.9%
Commercial real estate  5,915   581,965   34.2   7,695   546,767   32.6   5,793   554,811   32.0 9,967
 1,277,037
 52.9
 7,230
 1,072,504
 50.6
 5,568
 703,356
 41.4
Commercial business  8,970   240,650   14.1   8,928   242,629   14.2   7,051   243,642   14.1 
ADC  9,752   229,463   13.5   7,680   201,611   11.4   6,841   170,979   9.9 
Commercial & industrial5,302
 439,787
 18.2
 4,603
 343,307
 16.2
 5,945
 209,923
 12.3
Acquisition, development & construction5,806
 102,494
 4.2
 8,526
 144,061
 6.8
 9,895
 175,931
 10.3
Consumer  3,565   238,224   14.0   2,641   251,522   14.8   1,922   248,740   14.4 3,328
 193,571
 8.1
 3,564
 209,578
 9.9
 3,011
 224,824
 13.1
                                    
Total $30,843  $1,701,541   100.0% $30,050  $1,703,257   100.0% $23,101  $1,731,553   100.0%$28,877
 $2,412,898
 100.0% $28,282
 $2,119,472
 100.0% $27,917
 $1,703,799
 100.0%

  September 30, 
  2007  2006 
  Allowance for Loan Losses  Loan Balances by Category  Percent of Loans in Each Category to Total Loans  Allowance for Loan Losses  Loan Balances by Category  Percent of Loans in Each Category to Total Loans 
  (Dollars in thousands) 
                   
One- to four- family $668  $500,825   30.6% $765  $462,996   31.4%
Commercial real estate  8,157   535,003   32.7   9,382   529,607   35.9 
Commercial business  5,223   207,156   12.6   5,461   160,823   10.9 
ADC  4,743   153,074   9.3   2,862   96,656   6.6 
Consumer  1,598   242,000   14.8   1,903   223,476   15.2 
                         
Total $20,389  $1,638,058   100.0% $20,373  $1,473,558   100.0%

11
16

Securities Investments
 September 30,
 2010 2009
 
Allowance
for loan
losses
 
Loan
balance
 % of total loans 
Allowance
for loan
losses
 
Loan
balance
 % of total loans
 (Dollars in thousands)
Residential mortgage$2,641
 $434,900
 25.6% $3,106
 $460,728
 27.1%
Commercial real estate5,915
 579,231
 34.0
 7,695
 546,767
 32.1
Commercial & industrial8,970
 217,928
 12.8
 8,928
 242,629
 14.2
Acquisition, development & construction9,752
 231,258
 13.6
 7,680
 201,611
 11.8
Consumer3,565
 238,224
 14.0
 2,641
 251,522
 14.8
Total$30,843
 $1,701,541
 100.0% $30,050
 $1,703,257
 100.0%

Investment Securities
Our investment securities investment policy is establishedreviewed and approved by our Board of Directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management strategy. The Board’s Asset/LiabilityEnterprise Risk Committee oversees our investment program and evaluates on an ongoing basis our investment policy and objectives. Our chief financial officer, or our chief financial officer acting with our chief executive officer, is responsible for making securities portfolio decisions in accordance with established policies. Our chief financial officer, chief executive officerChief Financial Officer, Chief Executive Officer, Treasurer and certain other executivesenior officers have the authority to purchase and sell securities within specific guidelines established byin the investment policy .policy. In addition, a summary of all transactions areis reviewed by the Board’s Asset/LiabilityEnterprise Risk Committee at least quarterly.

Our current investment policy generally permits securities investments in debt securities issued by the U.S. government and U.S. agencies, municipal bonds and notes, and corporate debt obligations, as well as investments in preferred and common stock of government agencies and government sponsored enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank of New York (federal agency securities) and, to a lesser extent, other equity securities. Securities in these categories are classified as “investment securities” for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations (“CMOs”) issued or backed by securities issued by these government agencies. Also permitted are investments in securities issued or backed by the Small Business Administration, privately issued mortgage-backed securities and CMOs, and asset-backed securities collateralized by auto loans, credit card receivables, and home equity and home improvement loans. Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approachOur objective is to increase the overall yield on investment securities yields while managing interest rate and credit risk.

FASB ASC Topic #320,320, Investments - Debt and Equity securitiesSecurities, requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our intent and ability to hold and our intent.the security. Securities designated available for sale are reported at fair value, while securities designated held to maturity are reported at amortized cost. We do not have a trading portfolio.  Excluding mortgage backed securities discussed elsewhere management sold $163.9 million in investment securities and realized net gains of $1.8 million as the market yields associated with the securities sold were below levels management believed justifying retaining such securities.

Government and Agency Securities.At September 30, 2010,2013, we held government and agency securities as available for sale with a fair value of $418.3$261.5 million, consisting primarily of agency obligations with maturities of more than one year through ten years. In addition, we held $77.3 million in government and agency securities as held to maturity at amortized cost. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes and as collateral for borrowings.borrowings and municipal deposits.

Corporate and Municipal Bonds and Notes.At September 30, 2010,2013, we held $30.5 million in corporate debt securities.securities as available for sale with a fair value of $118.6 million. Corporate bonds have a higher risk of default due to potential for adverse changes in the creditworthiness of the issuer. In recognition of this risk, our policy limits investments in corporate bonds to securities with maturities of ten years or less and rated “A” or better by at least one nationally recognized rating agency at time of purchase, and to a total investment size of no more than $2.0$10.0 million per issuer and aissuer. Our total corporate bond portfolio limit is the lesser of $40.0 million.5% of total assets or 75% of tangible capital.

State and Municipal Bonds. At September 30, 2013, we held $147.7 million at carrying value in bonds issued by states and political subdivisions, $19.0 million of which were classified as held to maturity at amortized cost and are mainly unrated and $128.7 million of which were classified as available for sale at fair value. The policy also limits investments in municipal bonds to securities with maturities of 20 years or less and rated as investme ntinvestment grade by at least one nationally recognized rating agency at the time of purchase, and favors issues that are insured, howeverinsured. However, we also purchase securities that are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy generally imposes an investment limitationsize limit of $5.0 million per municipal issuer and a total municipal bond portfolio limit of 10% of assets. At September 30, 2010, we held $219.5 million in bonds issued by states and political subdivisions, $27.8 million of which were classified as held to maturity at amortized cost and are mostly unrated and $191.7 million of which were classified as available for sale at fair value.  At September 30, 20102013, we did not hold any obligations that were rated less than “A”“A-” as available for sa le.sale.

12


Equity Securities.At September 30, 2010, our equity securities available for sale had a fair value of $889,000.  We also2013, we held $19.6$24.3 million (at cost) of Federal Home Loan Bank of New York (“FHLBNY”FHLB”) common stock, a portion of which must be held as a condition of membership in the Federal Home Loan Bank System, with the remainder held as a condition to our borrowing under the Federal Home Loan BankFHLB advance program. Dividends on FHLBNYFHLB stock recorded in the year ended September 30, 2010 amounted to $1.2 million.  We held no preferred shares of Freddie Mac or Fannie Mae for the year ended September 30, 2010.  We also held no “auction rate securities” or “pooled trust preferred securities” during the year ended September 30, 2010.2013 amounted to $864 thousand.


Mortgage-Backed Securities.We purchase mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower credit risk as a result of the guarantees provided by Freddie Mac and Fannie Mae; (iii) increase liquidity, and (iv) maintain our status as a thrift for charter and income tax purposes. We invest primarily in mortgage-backed securities issued or sponsored by Freddie Mac, Fannie Mae and Ginnie Mae or private issuers for CMOs. To a lesser extent, we also invest in securities backed by agencies of the U.S. Government, such as Ginnie Mae. At September 30, 2010, our mortgage-backed securities portfolio totaled $264.6 million, consisting of $ 259.6 million available for sale at fair value and $5.0 million held to maturity at amortized cost. The total mortgage-backed securities portfolio includes CMOs of $39.4 million, consisting of $38.7 million available for sale at fair value and $729,000 held to maturity at amortized cost.  Within this total, $6.3 million at amortized cost and $6.0 fair value were issued by private issuers, including $2.3 million at amortized cost below investment grade, which have experienced no losses to date. The remaining mortgage-backed securities of $225.2 million were pass-through securities, consisting of $221.0 million available for sale at fair value and $4.2 million held to maturity at amortized cost.

Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as us, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk in addition to the guarantee of repa ymentrepayment of principal outstanding that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We review prepayment estimates for our mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. As a result of our reviews, we anticipated an acceleration of prepayments.  Management sold $279.4 million in mortgage backed securities and realized $6.4 million in net gains on the sales.  Such proceeds were reinvested in securities with yields which were lower than the recorded yields of the securities sold and a more diversified risk profile.

A portion of our mortgage-backed securities portfolio is invested in CMOs, including Real Estate Mortgage Investment Conduits (“REMICs”), backed by Fannie Mae and Freddie Mac and certain private issuers. CMOs and REMICs are types of debt securities issued by a special-purpose entityentities that aggregatesaggregate pools of mortgages and mortgage-backed securities and createscreate different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime rate caps, prepayment risk, and interest rates.

18At September 30, 2013, our mortgage-backed securities portfolio totaled $605.3 million, consisting of $449.2 million in available for sale securities at fair value and $156.1 million in held to maturity securities at amortized cost.


Available for Sale Portfolio. The following table sets forth the composition of our available for sale portfolio at the dates indicated.

  September 30, 
  2010  2009  2008 
  
Amortized Cost
  Fair Value  
Amortized Cost
  Fair Value  
Amortized Cost
  Fair Value 
  (Dollars in thousands) 
                   
Investment Securities:                  
U.S. Government securities $71,071  $72,293  $20,893  $21,076  $-  $- 
Federal agency obligations  344,154   346,019   186,301   186,700   30,022   30,041 
Corporate Bonds  29,406   30,540   25,245   25,823   -   - 
State and municipal securities  180,879   191,657   158,007   167,584   159,334   149,601 
Equity securities  1,146   889   1,145   885   1,146   1,030 
                         
Total investment securities available for sale  626,656   641,398   391,591   402,068   190,502   180,672 
                         
Mortgage-Backed Securities:                        
Pass-through securities:                        
Fannie Mae  149,084   153,188   238,723   243,063   385,138   384,672 
Freddie Mac  56,632   58,452   92,885   94,506   189,113   189,989 
Ginnie Mae  9,047   9,315   26,586   26,929   2,300   2,300 
CMOs and REMICs  38,338   38,659   66,784   66,017   34,521   34,055 
                         
Total mortgage-backed securities available for sale  253,101   259,614   424,978   430,515   611,072   611,016 
                         
Total securities available for sale $879,757  $901,012  $816,569  $832,583  $801,574  $791,688 

At September 30, 2010, our available for sale federal agency securities portfolio, at fair value, totaled $418.3 million, or 13.8% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of one year or less, and $415.2 million had maturities of between one and ten years and a weighted average yield of 1.76%. The agency securities portfolio currently includes both callable debentures and non callable debentures.

At September 30, 2010, our available for sale state and municipal notes securities portfolio, at fair value totaled $191.7 million or 6.3% of total assets.  Of the state and municipal note securities portfolio, based on amortized cost, had $3.3 million in securities with a final maturity of one year or less and a weighted average yield of 1.96%; $11.9 million maturing in one to five years with a weighted average yield of 3.33%; $102.9 million maturing in five to ten years with a weighted average yield of 3.42% and $62.8 million maturing in greater than ten years with a weighted average yield of 4.12%. Equity securities available for sale at September 30, 2010 had a fair value of $889,000.

At September 30, 2010, $259.6 million of our available for sale mortgage-backed securities, at fair value, consisted of pass-through securities, which totaled 8.59% of total assets and $38.7 million of CMO securities, at fair value. The total amortized cost of these pass- through securities was $253.1 million and consisted of $149.1 million, $56.6 million and $9.0 million of Fannie Mae, Freddie Mac and Ginnie Mae MBS, respectively, with respective weighted averages yields of 3.43%, 3.85% and 3.52%.  At the same date, the fair value of our available for sale CMO portfolio totaled $38.7 million, or 1.28% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae, Freddie Mac and $6.0 million sold by private party issuers. The amortized costs of these CMOs result in a weighted average yield of 2.82%. We own both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our portfolio of CMOs available for sale at September 30, 2010 had contractual maturities of over five years. However, as with mortgage-backed pass-through securities, the actual maturity of a CMO may be less than its stated contractual maturity due to prepayments of the underlying mortgages and the terms of the CMO tranche owned.
 September 30,
 2013 2012 2011
 
Amortized
cost
 Fair value 
Amortized
cost
 Fair value 
Amortized
cost
 Fair value
 (Dollars in thousands)
Residential mortgage-backed securities:           
Fannie Mae$214,191
 $211,438
 $155,601
 $161,407
 $136,699
 $139,991
Freddie Mac67,272
 67,629
 81,509
 85,260
 98,511
 100,675
Ginnie Mae3,374
 3,462
 4,488
 4,778
 4,973
 5,180
CMO/other169,336
 166,654
 191,867
 193,064
 81,170
 82,412
Total residential mortgage-backed securities454,173
 449,183
 433,465
 444,509
 321,353
 328,258
Other securities:           
Federal agencies273,637
 261,547
 404,820
 408,823
 199,741
 204,648
Corporate bonds118,575
 114,933
 —
 —
 16,984
 17,062
State and municipal127,324
 128,730
 146,136
 156,481
 177,666
 188,684
Equities—
 —
 1,087
 1,059
 1,192
 1,192
Total other securities519,536
 505,210
 552,043
 566,363
 395,583
 411,586
Total available for sale securities$973,709
 $954,393
 $985,508
 $1,010,872
 $716,936
 $739,844

13
19



Held to Maturity Portfolio.The following table sets forth the composition of our held to maturity portfolio at the dates indicated.

  September 30, 
  2010  2009  2008 
  
Amortized Cost
  Fair Value  
Amortized Cost
  Fair Value  
Amortized Cost
  Fair Value 
  (Dollars in thousands) 
                   
Investment Securities:                  
State and municipal securities $27,879  $28,815  $37,162  $38,055  $32,604  $32,391 
Other  1,000   1,038   1,000   1,034   58   60 
Total investment securities held to maturity  28,879   29,853   38,162   39,089   32,662   32,451 
                         
Mortgage-Backed Securities:                        
Pass-through securities:                        
Fannie Mae  1,835   1,931   2,713   2,823   4,929   4,987 
Freddie Mac  2,389   2,513   2,834   2,916   4,297   4,335 
Ginnie Mae  16   17   45   45   87   89 
CMOs and REMICs  729   748   860   866   1,038   1,037 
                         
Total mortgage-backed securities held to maturity  4,969   5,209   6,452   6,650   10,351   10,448 
                         
Total securities held to maturity $33,848  $35,062  $44,614  $45,739  $43,013  $42,899 
 September 30,
 2013 2012 2011
 
Amortized
cost
 Fair value 
Amortized
cost
 Fair value 
Amortized
cost
 Fair value
 (Dollars in thousands)
Residential mortgage-backed securities:           
Fannie Mae$70,502
 $70,815
 $28,637
 $29,849
 $1,298
 $1,361
Freddie Mac59,869
 60,164
 42,706
 44,053
 32,858
 32,841
CMO/other25,776
 25,494
 27,921
 28,119
 25,828
 25,983
Total residential mortgage-backed securities156,147
 156,473
 99,264
 102,021
 59,984
 60,185
Other securities:           
Federal agencies77,341
 73,883
 22,236
 22,342
 29,973
 29,857
State and municipal19,011
 19,021
 19,376
 20,435
 18,583
 19,691
Other1,500
 1,519
 1,500
 1,526
 1,500
 1,539
Total other securities97,852
 94,423
 43,112
 44,303
 50,056
 51,087
Total held to maturity securities$253,999
 $250,896
 $142,376
 $146,324
 $110,040
 $111,272

At September 30, 2010, our held to maturity mortgage-backed securities portfolio totaled $5.0 million at amortized cost, consisting of: none with contractual maturities of one year or less, $839,000 with a weighted average yield of 5.03% and contractual maturities within five years, and $451,000 with a weighted average yield of 6.15% and contractual maturities of five to ten years and $3.7 million with a weighted average yield of 2.68% with contractual maturities of greater than ten years; CMOs of $729,000 are included in this portfolio. While the contractual maturity of the CMOs underlying collateral is greater than ten years, the actual period to maturity of the CMOs may be shorter due to prepayments on the underlying mortgages and the terms of the CMO tranche owned.

State and municipal securities totaled $27.9 million at amortized cost (primarily unrated obligations) and consisted of $12.6 million, with a final maturity of one year or less and a weighted average yield of 2.53%; $7.9 million, maturing in one to five years, with a weighted average yield of 3.63%; $2.1 million maturing in five to ten years, with a weighted average yield of 4.55% and $5.3 million, maturing in greater than ten years, with a weighted average yield of 4.35%.


Portfolio Maturities and Yields. The following table summarizes the composition, maturities and maturitiesweighted average yield of the investment debt securities portfolio and the mortgage backed securities portfolio at September 30, 2010.2013. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis.

  One Year or Less  More than One Year through Five Years  More than Five Years through Ten Years  More than Ten Years  Total Securities 
  Amortized Cost  Weighted Average Yield  Amortized Cost  Weighted Average Yield  Amortized Cost  Weighted Average Yield  Amortized Cost  Weighted Average Yield  Amortized Cost  Fair Value  Weighted Average Yield 
  (Dollars in thousands) 
Available for Sale:                                 
                                  
Mortgage-Backed Securities                                 
Fannie Mae $1   2.25% $3,376   3.93% $70,433   3.32% $75,274   3.51% $149,084  $153,188   3.43%
Freddie Mac  -   -   2,989   3.94   10,263   3.51   43,380   3.92   56,632   58,452   3.85 
Ginnie Mae  -   -   -   -   14   3.34   9,033   3.52   9,047   9,315   3.52 
CMOs and REMICs  -   -   -   -   663   4.38   37,675   2.79   38,338   38,659   2.82 
Total  1   2.25   6,365   3.93   81,373   3.35   165,362   3.46   253,101   259,614   3.43 
Investment Securities                                            
U.S. Government and agency securities  -   -   369,033   1.65   46,192   2.65   -   -   415,225   418,312   1.76 
Corporate  2,026   3.95   27,380   3.03   -   -   -   -   29,406   30,540   3.10 
State and municipal  3,327   1.96   11,905   3.33   102,883   3.42   62,764   4.12   180,879   191,657   3.63 
Total  5,353   2.72   408,318   1.79   149,075   3.18   62,764   4.12   625,510   640,509   2.36 
Total debt securities available for sale $5,354   2.72% $414,683   1.82% $230,448   3.24% $228,126   3.64% $878,611  $900,123   2.67%
                                             
Held to Maturity:                                            
                                             
Mortgage-Backed Securities                                            
Fannie Mae $-   -% $633   5.34% $-   -% $1,202   2.63% $1,835  $1,931   3.57%
Freddie Mac  -   -   190   3.77   451   6.15   1,748   3.23   2,389   2,513   3.82 
Ginnie Mae  -   -   16   7.70   -   -   -   -   16   17   7.70 
CMOs and REMICs  -   -   -   -   -   -   729   1.43   729   748   1.43 
Total  -   -   839   5.03   451   6.15   3,679   2.68   4,969   5,209   3.39 
                                             
Investment Securities                                            
State and municipal securities  12,592   2.53   7,927   3.63   2,086   4.55   5,274   4.35   27,879   28,815   3.34 
Other  -   -   1,000   2.87   -   -   -   -   1,000   1,038   2.87 
Total  12,592   2.53   8,927   3.55   2,086   4.55   5,274   4.35   28,879   29,853   3.32 
Total debt securities held to maturity $12,592   2.53% $9,766   3.68% $2,537   4.83% $8,953   3.66% $33,848  $35,062   3.33%%
 1 Year or Less 1-5 years 5-10 years 10 years or more Total
 
Amortized
cost
 Yield Amortized
cost		 Yield Amortized
cost		 Yield Amortized
cost		 Yield Amortized
cost		 
Fair
Value
 Yield
 (Dollars in thousands)
Available for sale:                     
Residential mortgage-backed securities$—
 —% $7,849
 1.69% $107,980
 2.19% $338,344
 2.17% $454,173
 $449,183
 2.16%
Federal agencies—
 —
 22,442
 1.10
 251,195
 1.64
 —
 —
 273,637
 261,547
 1.59
Corporate bonds—
 —
 28,043
 1.58
 90,532
 2.36
 —
 —
 118,575
 114,933
 2.17
State and municipal2,242
 2.21
 30,572
 3.20
 75,928
 3.15
 18,582
 2.98
 127,324
 128,730
 3.12
Total$2,242
 2.21% $88,906
 2.03% $525,635
 2.09% $356,926
 2.21% $973,709
 $954,393
 2.13%
                      
Held to maturity:                     
Residential mortgage-backed securities:$—
 —% $—
 —% $31,723
 2.29% $124,424
 2.49% $156,147
 $156,473
 2.45%
Federal agencies—
 —
 12,373
 1.10
 64,968
 1.70
 —
 —
 77,341
 73,883
 1.60
State and municipal2,800
 2.49
 2,133
 3.38
 7,934
 2.45
 6,144
 3.56
 19,011
 19,021
 2.88
Other1,000
 2.84
 250
 1.29
 250
 3.75
 —
 —
 1,500
 1,519
 2.73
Total$3,800
 2.58%3,800,000
$14,756
 1.39% $104,875
 1.92% $130,568
 2.54% $253,999
 $250,896
 2.22%


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21

Sources of Funds

General.Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are theour primary sources of our funds for use in lending, investing and for other general corporate purposes.

Deposits.We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, NOW accounts, checking accounts, money market accounts, club accounts, certificates of deposit and IRAs and other qualified plan accounts. We also provide a variety of commercial checking accounts and other products for businesses. In addition, we provide low-cost checking account services for low-income customers.

At September 30, 2010,2013, our deposits totaled $2.1 billion.$3.0 billion. Interest-bearing demand deposits totaled $1.6 billion,$434.4 million and non-interest-bearing demand deposits totaled $529.9 million.$943.9 million. NOW, savings and money market deposits totaled $1.2$1.8 billion at September 30, 2010. Also at that date, we. We also had a total of $377.6$268.1 million in certificates of deposit, of which $316.1$239.1 million had maturities of one year or less. Although we have a significant portion of

We focus on gathering low cost, core deposits through our deposits in shorter-term certificates of deposit, our management monitors activity on these accounts and, based on historical experiencecommercial relationship teams and our current pricing strategy, we believe we will retain a large portion of such accounts upon maturity, although we may have to match competitive rates to retain many of these accounts.financial centers. We also gather deposits from municipalities in our market area.

Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our favorable locations, customer service and competitive pricing to attract and retain these deposits. While we accept certificates of deposit in excess of $100,000 for which we may provide preferential rates, we do not actively solicit such deposits as they are more difficult to retain than core deposits. Our limited purpose commercial bank subsidiary, Provident Municipal Bank, accepts municipal deposits. Municipal time accounts (certificates of deposit) are generally obtained through a bidding process, and tend to carry higher average interest rates than retail certificates of deposit of similar term.  The Company had $18.6 million of certificates of deposit account registry service (CDAR’s), $7.9 million of whi ch were reciprocal CDs at September 30, 2010.  This compares to $20.6 million CDAR’s, $10.6 million of which were reciprocal as of September 30, 2009.

Distribution of Deposit Accounts by Type. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

  For the year ended September 30, 
  2010  2009  2008 
                   
                   
  Amount  Percent  Amount  Percent  Amount  Percent 
  (Dollars in thousands) 
                   
                   
Demand deposits:                  
Retail $174,731   8.2% $169,122   8.1% $162,161   8.1%
Commercial & municipal  355,126   16.6   323,112   15.5   325,729   16.4 
Total demand deposits  529,857   24.8   492,234   23.6   487,890   24.5 
Business & municipal NOW deposits  276,100   12.9   225,046   10.8   217,462   10.9 
Personal NOW deposits  139,517   6.5   127,595   6.1   115,442   5.8 
Savings deposits  392,321   18.3   357,814   17.2   335,986   16.9 
Money market deposits  427,334   19.9   384,632   18.5   306,504   15.4 
Subtotal  1,765,129   82.4   1,587,321   76.2   1,463,284   73.5 
                         
Certificates of deposit  377,573   17.6   494,961   23.8   525,913   26.5 
                         
Total deposits $2,142,702   100.0% $2,082,282   100.0% $1,989,197   100.0%
 September 30,
 2013 2012 2011
 Amount % Amount % Amount %
 (Dollars in thousands)
Non-interest bearing demand:           
Retail$163,986
 5.5% $167,050
 5.4% $194,299
 8.5%
Commercial457,147
 15.4
 412,630
 13.3
 296,505
 12.9
Municipal322,801
 10.9
 367,624
 11.8
 160,422
 7.0
Total non-interest bearing demand943,934
 31.9
 947,304
 30.4
 651,226
 28.4
Interest bearing demand:           
Retail237,854
 8.0
 213,755
 6.9
 164,637
 7.2
Commercial53,083
 1.8
 38,486
 1.2
 37,092
 1.6
Municipal143,461
 4.8
 195,882
 6.3
 200,773
 8.7
Total interest bearing demand434,398
 14.7
 448,123
 14.4
 402,502
 17.5
Savings580,125
 19.6
 506,538
 16.3
 429,825
 18.7
Money market735,709
 24.8
 821,704
 26.4
 509,483
 22.2
Subtotal2,694,166
 90.9
 2,723,669
 87.5
 1,993,036
 86.8
Certificates of deposit268,128
 9.1
 387,482
 12.5
 303,659
 13.2
Total deposits$2,962,294
 100.0% $3,111,151
 100.0% $2,296,695
 100.0%

15
22


As of September 30, 20102013 and September 30, 20092012 the Company had $513.8$757.1 million and $470.2$901.7 million, respectively, in municipal deposits. Of these amounts, $219.0approximately $374.3 million and $201.0$424.6 million were deposits related to school district tax deposits due on September 30, 20102013 and 2009,September 30, 2012, respectively, which we generally retain only for a short period.  period of time.

The following table sets forth the distribution of average deposit accounts by account category withand the average rates paid at the dates indicated.

  September 30, 
  2010  2009  2008 
  Average Balance  Interest  Average Rate Paid  Average Balance  Interest  Average Rate Paid  Average Balance  Interest  Average Rate Paid 
  (Dollars in thousands) 
Non interest bearing deposits $429,655  $-   -  $380,571  $-   -  $351,995  $-   - 
NOW deposits  280,304   579   0.21%  232,164   670   0.29%  189,524   1,015   0.54%
Savings deposits(1)  397,760   403   0.10%  366,355   758   0.21%  356,854   1,243   0.35%
Money market deposits  419,152   1,456   0.35%  374,507   2,707   0.72%  285,119   5,299   1.86%
Certificates  of deposit  451,509   6,079   1.35%  577,723   14,240   2.46%  556,973   20,787   3.73%
Total interest bearing deposits  1,548,725  $8,517   0.55%  1,550,749  $18,375   1.18%  1,388,470  $28,344   2.04%
Total deposits $1,978,380          $1,931,320          $1,740,465         
 September 30,
 2013 2012 2011
 
Average
balance
 Rate 
Average
balance
 Rate 
Average
balance
 Rate
 (Dollars in thousands)
Non-interest bearing demand$646,373
 —% $520,265
 —% $472,388
 —%
Interest bearing demand466,110
 0.08
 399,819
 0.12
 315,623
 0.19
Savings572,246
 0.17
 485,624
 0.08
 432,227
 0.10
Money market819,442
 0.30
 671,325
 0.33
 489,347
 0.33
Certificates of deposit352,469
 0.60
 289,230
 0.87
 373,142
 0.93
Total interest bearing deposits2,210,267
 0.27
 1,845,998
 0.30
 1,610,339
 0.38
Total deposits$2,856,640
 0.21
 $2,366,263
 0.24
 $2,082,727
 0.29

(1) Includes club accounts and mortgage escrow balances

Certificates of Deposit by Interest Rate Range. The following table sets forth information concerning certificates of deposit by interest rate rangesrange at the dates indicated.

 At September 30, 2010       
 Period to Maturity       
                   Total at September 30, As of September 30, 2013    
 
Less than One Year
  
One to Two Years
  
Two to Three Years
  
More than Three Years
  Total  
Percent of Total
  2009  2008 Period to maturity Total at September 30,
 (Dollars in thousands) 1 year or less 1-2 years 2-3 years 3 years or more Total % of
total		 2012 2011
Interest Rate Range:                        
                        (Dollars in thousands)
2.00% and below $303,066  $14,237  $3,927  $220  $321,450   84.7% $322,674  $5,869 
Interest rate range:               
1.00% and below$218,204
 $11,072
 $2,046
 $5,464
 $236,786
 88.3% $239,149
 $245,777
1.01% to 2.00%4,922
 225
 2,606
 1,127
 8,880
 3.3
 114,836
 15,024
2.01% to 3.00%  4,531   4,712   1,168   10,850   21,261   5.6%  72,483   422,672 3,773
 5,951
 533
 —
 10,257
 3.8
 11,569
 16,842
3.01% to 4.00%  5,854   4,208   2,554   6,476   19,092   5.0%  77,720   28,556 5,838
 —
 —
 —
 5,838
 2.3
 9,101
 10,526
4.01% to 5.00%  2,491   3,501   5,309   5,814   17,115   4.5%  21,439   66,726 6,367
 —
 —
 —
 6,367
 2.4
 12,524
 15,002
5.01% to 6.00%  154   186   315   -   655   0.2%  645   2,080 —
 —
 —
 —
 —
 —
 303
 488
6.01% and above  -   -   -   -   -   0.0%  -   10 
                                
Total $316,096  $26,844  $13,273  $23,360  $379,573   100% $494,961  $525,913 $239,104
 $17,248
 $5,185
 $6,591
 $268,128
 100.0% $387,482
 $303,659

Certificates of Deposit by Time to Maturity. The following table sets forth certificates of deposit by time remaining until maturity as of September 30, 2010.2013.

  Maturity 
  
3 months or Less
  
Over 3 to 6 Months
  
Over 6 to 12 Months
  
Over 12 Months
  Total 
  (Dollars in thousands) 
Certificates of deposit less than $100,000 $87,746  $72,245  $68,516  $43,349  $271,856 
Certificates of deposit of $100,000 or more (¹)
  35,168   28,756   23,665   18,128   105,717 
  $122,914  $101,001  $92,181  $61,477  $377,573 
________________
(¹)The weighted interest rates for these accounts, by maturity period, are 0.65% for 3 months or less; 0.79% for 3 to 6 months; 0.95% for 6 to 12 months; and 2.87% for over 12 months. The overall weighted average interest rate for accounts of $100,000 or more was 1.12%
 Period to maturity    
 
3 months or
less
 3-6 months 6-12 months 
Over 12
months
 Total Rate
 (Dollars in thousands)  
Certificates of deposit less than $100,000$69,973
 $34,083
 $39,179
 $20,668
 $163,903
 0.30%
Certificates of deposit $100,000 or more39,224
 24,993
 31,652
 8,356
 104,225
 0.50
��$109,197
 $59,076
 $70,831
 $29,024
 $268,128
 0.38%

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23


Brokered Deposits. We utilize brokered deposits on a limited basis and maintain limits for the use of wholesale deposits and other short-term funding in general to be less than 10% of total assets. Most of the brokered deposit funding maintained by the Bank has a maturity to coincide with the anticipated inflows of deposits through municipal tax collections.

Listed below are the Company’s brokered deposits:
 September 30,
 2013 2012
 (Dollars in thousands)
Savings$—
 $13,344
Money market34,571
 46,566
Reciprocal CDAR’s 1
1,343
 1,354
CDAR’s one way768
 764
Total brokered deposits$36,682
 $62,028
1
Certificate of deposit account registry service
Short-term Borrowings. Our short-term borrowings (less(which include borrowings with a maturity in less than one year) consistconsisted of advances and overnight borrowings.borrowings principally from the Federal Home Loan Bank. At September 30, 2010,2011, short-term borrowings also included $51.5 million of debt guaranteed by the FDIC which matured in February 2012. At September 30, 2013, we had access to additional Federal Home Loan Bank advances of up to an additional $200 million in overnight advances on a collateralized basis. $588 million.

The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates and for the years indicated.

 At or For the Years Ended September 30, 
 2010  2009  2008 At or for the year ended September 30,
 (Dollars in thousands) 2013 2012 2011
         (Dollars in thousands)
Balance at end of year $44,873  $62,677  $153,893 $158,897
 $10,136
 $61,500
Average balance during year  91,442   91,985   257,942 88,779
 27,286
 55,098
Maximum outstanding at any month end  184,040   293,608   372,021 
Maximum amount outstanding at any month end295,652
 103,500
 128,200
Weighted average interest rate at end of year  3.82%  4.09%  2.16%0.95% 1.88% 2.96%
Weighted average interest rate during year  2.33%  3.38%  3.50%0.57
 0.78
 1.67

Competition

We face significant competition in both originating loans and attracting deposits. The greater New York metropolitan region is a highly competitive market area haswith a high concentration of financial institutions, many of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. We have emphasized personalizedrelationship banking and the advantage of local decision-making in our banking business and this strategy appears to have been well received in our market area.business. We do not rely on any individual, group, or entity for a material portion of our deposits. Although we have not done so in the past, netNet interest income could be adversely affected should competitive pressures cause us to increase ourthe interest rates paid on deposits in order to maintain our market share.

Employees

As of September 30, 2010,2013, we had 497477 full-time employees and 10666 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.


Regulation

GeneralRegulation

AsGeneral. Prior to the Merger, the Company was a savings and loan holding company Provident Bancorp and itsthe Bank was a federal savings bank. In connection with the Merger, the Bank converted to a national bank subsidiary, Providentcharter and the Company became a bank holding company and a financial holding company under the Bank are supervised and regulated by the OfficeHolding Company Act of Thrift Supervision (“OTS”1956, as amended (the “BHC Act”). As a state-chartered, insured bank,Prior to the Merger, Provident Municipal Bank iswas a commercial bank regulated by the New York State Department of BankingFinancial Services and the FDIC. In connection with the Merger, Provident Municipal Bank merged into Sterling National Bank and ceased its separate existence.


17

Significant elements of the laws and regulations applicable to the Company and the Bank are described below. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Sterling and its subsidiaries could have a material effect on the business, financial condition and results of operations of the Company.   Sterling is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Sterling’s common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “STL,” and is subject to the rules of the NYSE for listed companies.

As a bank holding company, the Company is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”) as its primary federal regulator. As a national bank, the Bank is principally subject to the supervision, examination and reporting requirements of the Office of the Comptroller of the Currency (the “OCC”), as its primary federal regulator, as well as the Federal Deposit Insurance Corporation (“FDIC”(the “FDIC”). Because it is an FDIC-insured institution, ProvidentInsured banks, including the Bank, also isare subject to extensive regulation of many aspects of their business. These regulations relate to, among other things: (a) the nature and amount of loans that may be made by the FDIC.  Provident Bank’s relationshipBank and the rates of interest that may be charged; (b) types and amounts of other investments; (c) branching; (d) permissible activities; (e) reserve requirements; and (f) dealings with its depositorsofficers, directors and borrowersaffiliates. 
Bank Holding Company Activities. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as the Company, may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is governedeither (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury) or (ii) complementary to a great extentfinancial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by boththe Federal Reserve Board), without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section captioned “Prompt Corrective Action,” included elsewhere in this item. A depository institution subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed’ under applicable Federal Reserve Board regulations. If a financial holding company ceases to meet these capital and management requirements, the Federal Reserve Board’s regulations provide that the financial holding company must enter into an agreement with the Federal Reserve Board to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board. If the company does not return to compliance within 180 days, the Federal Reserve Board may require divestiture of the holding company’s depository institutions.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. See the section captioned “Community Reinvestment Act” included elsewhere in this item.
The Federal Reserve Board has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The BHC Act, the Bank Merger Act, and other federal and state laws, especiallystatutes regulate acquisitions of banks and banking companies. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition by the Company of more than 5.0% of the voting shares or substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior approval of the Federal Reserve Board or other appropriate bank regulatory authority is required for the Bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act (see the section captioned “Community Reinvestment Act” included elsewhere in matters concerning the ownership of deposit accountsthis item) and fair housing laws and the form and contenteffectiveness of Provident Bank’s loan documents.  As a regulated financial services firm, our relati onships and good standing with regulators are of fundamental importance to the continuation and growth of our businesses. The OTS, FDIC, SEC, and other regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations.subject organizations in combating money laundering activities.


Certain federal banking laws have been recently amended by the
18

The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). See “Regulation—Financial Reform Legislation” below.  Among, which was enacted in July 2010, significantly restructured the more significant changes made byfinancial regulatory environment in the United States. Although the Dodd-Frank Act changes, effective July 21, 2011 (with a possible delay of up to six months) (the so-called “Designated Transfer Date”),Act’s provisions that have received the OTS will cease to exist as a separate entity and will be merged and become a separate division of the Office of the Comptroller of the Currency (“OCC”).  The OCC will assume the OTS’ role as regulator and supervisor of Provident Bank.  The Federal Reserve will become the primary supervisor and regulator with respect to Provident Bancorp.  References in the fo llowing discussion to the OTS should be read to mean the Federal Reserve or OCC, as appropriate, once the Designated Transfer Date occurs.

Some of the numerous governmental regulations to which Provident Bancorp and its subsidiaries are subject are summarized below.  These summaries are not complete and you should refer to these laws and regulations for more information.  Failure to comply with applicable laws and regulations could result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal agreements and cease and desist orders.  Applicable laws and regulations may change in the future and any such change could have a material adverse impact on Provident Bancorp, Provident Bank or Provident Municipal Bank.

In addition, Provident Bancorp and its subsidiaries are subject to examination by regulators, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agenciesmost public attention generally have broad discretionbeen those applying to, impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, thator more likely to affect, larger institutions such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations.

Holding Company Regulation

Provident Bancorp is a unitary savings and loan holding company because it owns only one savings association.  The OTS has supervisory and enforcement authority over Provident Bancorp and its non-bank subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a risk to Provident Bank.

Provident Bancorp must generally limit its activities to those permissible for (i) financial holding companies under the Bank Holding Company Act, or (ii) multiple savings and loan holding companies under the Savings and Loan Holding Company Act.  Activities in which a financial holding company may engage are those considered financial in nature or those incidental or complementary to financial activities.  These activities include lending, trust and investment advisory activities, insurance agency activities, and securities and insurance underwriting activities.  Activities permitted to multiple savings and loan holding companies include certain real estate investment activities, and other activities permitted toas bank holding companies under the Bank Holding Company Act.


Federal law prohibits Provident Bancorp, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings association or a savings and loan holding company, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the voting shares of a savings association or savings and loan holding company that is not already a subsidiary, without prior written approval of the OTS. In evaluating applications for acquisition, the OTS must consider the financial and managerial resources and future prospects of the company and association involved, the effect of the acquisition on the association, the risk to the Deposit Insurance Fund, the convenience and needs of the communi ty to be served, and competitive factors.

As a public company with securities registered under the Securities Exchange Act of 1934, Provident Bancorp also is subject to that statute and to the Sarbanes-Oxley Act.

Dividends

Provident Bancorp is a legal entity separate and distinct from its savings association and other subsidiaries, and its principal sources of funds are cash dividends paid by these subsidiaries.  OTS regulations limit the amount of capital distributions, including cash dividends, stock repurchases, and other transactions charged to the institution’s capital account, that can be made by Provident Bank.  Furthermore, because Provident Bank is a subsidiary of a holding company, it must file a notice with the OTS at least 30 days before Provident Bank’s Board of Directors declares a dividend or approves a capital distribution.  This notice may be denied if the OTS finds that:

·the savings association would be undercapitalized or worse following the distribution;
·the proposed capital distribution raises safety and soundness concerns;
·or the capital distribution would violate a prohibition contained in any statute, regulation, agreement with the OTS, or OTS-imposed condition.

Provident Bank must file an application (rather than a notice) with the OTS if, among other things, the total amount of all capital distributions, including the proposed distribution, for the calendar year exceeds the institution’s net income for that year, plus retained net income for the preceding two years.

As of October 1, 2010, the maximum amount of dividends that could be declared by Provident Bank for fiscal 2011, without regulatory approval, is net income for calendar year 2011, plus $16.2 million.

Capital Requirements

As a savings and loan holding company, Provident Bancorp is not currently subject to any regulatory capital requirements.  However, as a federal savings association, Provident Bank is subject to OTS capital requirements.  The OTS regulations require savings associations to meet three minimum capital standards: at least an 8% risk-based capital ratio, a 4% leverage ratio (3% for institutions receiving the highest supervisory rating), and at least a 1.5% tangible capital ratio.

The OTS’ risk-based capital standards require a savings association to maintain at least a Tier 1 (core) capital ratio to risk-weighted assets of at least 4%, and a total (core plus supplementary) capital ratio to risk-weighted assets of at least 8%.  To determine these ratios, the regulations define core capital as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of fully consolidated subsidiaries, less intangible capital, other than certain mortgage servicing rights and credit card relationships. Supplementary capital is defined as including cumulative perpetual preferred stock, mandatory convertible securities, subordinated debt, intermediate preferred stock, allowance for loan and lease los ses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor ranging from 0% to 100%, assigned by the OTS capital regulation based on the risks inherent in the type of asset.


The OTS’ leverage ratio is defined as the ratio of core capital to adjusted total assets.  The tangible capital ratio is defined as the ratio of tangible capital (the components of which are very similar to those of core capital) to adjusted total assets.

As an FDIC-insured bank, Provident Municipal Bank is subject to the risk-based capital and leverage capital requirements of the FDIC.  These requirements are similar to the OTS risk-based capital and leverage capital requirements described above.

The Dodd-Frank Act contains a number of provisions that will affect the capital requirements applicable to Provident Bank and to Provident Bancorp, including the requirement that thrift holding companies be subject to consolidated capital requirements, effective on the Designated Transfer Date.  See “Regulation--Financial Reform Legislation,” below.  In addition, on September 12, 2010, the Basel Committee adopted the Basel III capital rules.  These rules, which will be phased in over a period of years, set new standards for common equity, Tier 1 and total capital, determined on a risk-weighted basis.  The impact on Provident Bank and Provident Bancorp of the Dodd-Frank requirements and the Basel III rules cannot be determined at this time.

The OTS, the FDIC and other federal banking agencies have broad powers under current federal law to take “prompt corrective action” in connection with depository institutions that do not meet minimum capital requirements.  For this purpose, the law establishes five capital categories for insured depository institution: “well-capitalized”, “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”  To be considered “well capitalized,” an institution must maintain a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage capital ratio of 5% or greater, and not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure.  An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8%, and a leverage capital ratio of at least 4%.

If an institution fails to meet these capital requirements, progressively more severe restrictions are placed on the institution’s operations, management and capital distributions, depending on the capital category in which an institution is placed.  Any institution that is “adequately capitalized” is, absent a waiver from the FDIC, prohibited from accepting or renewing brokered deposits.  Any institution that is determined to be “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to raise additional capital and may not accept or renew brokered deposits.  In addition, numerous mandatory supervisory actions become immediately applicable to the insured depository institution, including, but not limited to, re strictions on growth, investment activities, capital distributions, and affiliate transactions. The federal banking agencies also may take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the replacement of senior executive officers and directors.  The agencies also may appoint a receiver or conservator for a savings association that is “critically undercapitalized”.

At September 30, 2010, the capital of Provident Bank and Provident Municipal Bank exceeded all applicable capital requirements, and each met the requirements to be treated as a “well-capitalized” institution.

Deposit Insurance

The FDIC insures deposit accounts in Provident Bank and Provident Municipal Bank generally up to a maximum of $250,000 per separately-insured depositor.  As FDIC-insured depository institutions, Provident Bank and Provident Municipal Bank are required to pay deposit insurance premiums based on the risk each institution poses to the Deposit Insurance Fund.  Currently, the annual FDIC assessment rate ranges from $0.05 to $0.43 per $100 of insured deposits, based on the institution’s relative risk to the Deposit Insurance Fund, as measured by the institution’s regulatory capital position and other supervisory factors.  The FDIC also has the authority to raise or lower assessment rates on insured deposits, subject to limits, and to impose special additional assessments.

Under the FDIC’s Temporary Liquidity Guaranty Program (“TLGP”), non-interest bearing transaction deposit accounts, interest–bearing transaction accounts paying 25 basis points or less, and IOLTA accounts may be fully insured above and beyond the $250,000 limit through December 31, 2010. Provident Bank and Provident Municipal Bank each opted out of the TLGP for the period of July 1, 2010 through December 31, 2010.  The Dodd-Frank Act requires federal deposit insurance coverage for non-interest bearing transaction deposit accounts at an unlimited amount from December 31, 2010 through December 31, 2012.  However, interest-bearing transaction accounts paying 25 basis points or less, and IOLTA accounts will no longer be insured after December 31, 2010 beyond the $250,000 limit.


In February 2009, the FDIC substantially increased the quarterly initial base assessment rates as of the second quarter of 2009.  In May 2009, the FDIC imposed a 5 basis point special assessment on each institution’s assets (excluding Tier 1 capital) as reported on the institution’s report of condition as of June 30, 2009, up to a maximum special assessment amount of one tenth of one percent of the institution’s assessment base for the second quarter 2009 risk-based assessment.  As of December 31, 2009, insured depository institutions were required to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012, together with their quarterly risk-based assessment for the third quarter of 2009.

On October 19, 2010, the Board of Directors of the FDIC adopted a new Restoration Plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”).  Among other things, the Restoration Plan provides that the FDIC will forego the uniform three basis point increase in initial assessment rates that was previously scheduled to take effect on January 1, 2011 and will maintain the current assessment rate schedule for all insured depository institutions until the reserve ratio reaches 1.15%.  The FDIC intends to pursue further rulemaking in 2011 regarding the requirement under the Reform Act that the FDIC offset the effect on institutions with less than $10 billion in assets (such as the Bank) of the requirement that th e reserve ratio reach 1.35% by September 30, 2020, rather than 1.15% by the end of 2016 (as required under the prior restoration plan), so that more of the cost of raising the reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets.  Implementation of the Restoration Plan is not expected to have a material effect upon the Company's consolidated operating results.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments.  Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.  This could result in an increase in deposit insurance assessments to be paid by Provident Bank.  This change will be effective for the fiscal quarter beginning April 1, 2011.

In addition, the FDIC collects funds from insured institutions sufficient to pay interest on debt obligations of the Financing Corporation (FICO).  FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation.

For the quarter ended September 30, 2010, the annualized FICO assessment was equal to $0.0104 for each $100 of insured domestic deposits maintained at an institution.  We were allocated $5,000 in DIF assessment credits as of January 1, 2010.  There were no remaining DIF assessment credits at September 30, 2010.

Regulation of Provident Bank

Business Activities. As a federal savings association, Provident Bank derives its deposit, lending and investment powers from the Home Owners’ Loan Act (the “HOLA”) and the regulations of the OTS. Under these laws and regulations, Provident Bank may offer any type of deposit accounts, make or invest in mortgage loans secured by residential and commercial real estate, make and invest in commercial and consumer loans, certain types of debt securities and certain other loans and assets, subject in certain cases to certain limits. Provident Bank also may establish and operate subsidiaries that engage in activities permissible for Provident Bank, as well as service corporation subsidiaries th at engage in activities not permissible for Provident Bank to engage in directly (such as real estate investment, and securities and insurance brokerage).  Pursuant to this authority, Provident Bank operates certain subsidiaries, including Provest Services Corp., which holds an investment in a limited partnership that operates an assisted living facility; Provest Services Corp. II, through which Provident Bank offers annuities and insurance products to its customers.  Provident Bank also controls Provident REIT, Inc. and WSB Funding to hold residential and commercial real estate loans and the Bank maintains several corporations which hold foreclosed properties acquired by Provident Bank.  Certain of Provident Bank’s subsidiaries are subject to separate regulatory requirements, such as those applicable to insurance agencies and investment advisors.  Hardenburgh Abstract Company Inc., a title insurance agency; Provident Risk Management Inc., a captive insurance com pany insuring Provident affiliated risk; and Hudson Valley Investment Advisors, LLC, an investment advisory firm are subsidiaries of Provident New York Bancorp.


Qualified Thrift Lender Test. As a federal savings association, Provident Bank must meet the qualified thrift lender (“QTL”) test. Under the QTL test, Provident Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of certain specified liquid assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.  “Qualified thrift inve stments” are primarily mortgage loans and securities, and other investments related to housing, home equity loans, credit card loans, education loans and other consumer loans up to a certain percentage of assets.  Provident Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986.  If Provident Bank were to fail the QTL test, it would be required to either convert to a bank charter or operate under specified restrictions.

At September 30, 2010, Provident Bank maintained approximately 77.1% of its portfolio assets in qualified thrift investments, and satisfied the QTL test.

Loans to One Borrower. Provident Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2010, Provident Bank was in compliance with the loans-to-one-borrower limitations.

Transactions with Affiliates. Provident Bank currently is subject to restrictions on transactions with affiliates that are the same as those applicable to commercial banks under Sections 23A and 23B of the Federal Reserve Act, as well as certain additional restrictions imposed on federal savings associations by the Home Owners’ Loan Act.  The term “affiliate” under these laws means any company that controls or is under common control with a savings association and includes Provident Bancorp and its non-bank subsidiaries.  Transactions between Provident Bank and certain affiliates are restricted to an aggregate percentage of Provident Bank’s capital, and in gener al must be collateralized with certain specified assets.  The Home Owners’ Loan Act further prohibits a savings association from lending to any affiliate that is engaged in activities not permissible for a bank holding company and from purchasing or investing in securities issued by any affiliate other than with respect to shares of a subsidiary.  Permissible transactions with affiliates must be on terms that are as favorable to the savings association as comparable transactions with non-affiliates.

Provident Bank also is restricted in its ability to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, to the same extent as such restrictions apply to commercial banks.  Extensions of credit to insiders must (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons; (ii) not involve more than the normal risk of repayment or present other unfavorable features; and (iii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate. In addition, extensions of credit in excess of certain limits must be approved by Provident Bank’s Board of Directors.

The Dodd-Frank Act imposes further restrictions on transactions with affiliates and extensions of credit to executive officers, director and principal shareholders, by, among other things, expanding the types of transactions covered by the law to include securities lending, repurchase agreement and derivatives activities with affiliates.  These changes are effective one year after the Designated Transfer Date.   See “Regulation--Financial Reform Legislation”.

Safety and Soundness Regulations.  Federal law requires each federal banking agency to prescribe certain safety and soundness standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems, and audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; compensation; and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Establishing Standards for Safety and Soundness to implement the safety and soundness requirements of federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If a deficiency persists, the agency must issue an order that requires the institution to correct the deficiency, in addition to taking other statutorily-mandated or discretionary actions.


Enforcement. The OTS has primary enforcement responsibility over federal savings associations such as Provident Bank, and has the authority to bring enforcement action against all “institution-affiliated parties,” including controlling stockholders and attorneys, appraisers, and accountants who knowingly or recklessly participate in wrongful action likely to have a significant adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers or directors of the institution, receivership, conservatorship, or the termination of deposit insurance. Civil money penalties may be imposed for a wide range of violations and actions. The FDIC also has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings association.  If action is not taken by the OTS, the FDIC has authority to take action under specified circumstances.

Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OTS to help meet the credit needs of their communities, including low-and moderate-income neighborhoods, consistent with safe and sound operations. The OTS is required to assess the savings association’s record of compliance with the CRA, and to assign one of four possible ratings to an institution’s CRA performance, including “outstanding,” “satisfactory,” “needs to improve,” and “substantial noncompliance.”  The Equal Credit Opportunity Act and the Fair Housing Act also prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. Provident Bank received an “outstanding” Community Reinvestment Act rating in its most recent federal examination.

Federal Home Loan Bank System. Provident Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Provident Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of New York in an amount at least equal to 1 % of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of September 30, 2010, Provident Bank was in compliance with this requirement.

Other Regulations.  Provident Bank is subject to federal consumer protection statutes and regulations promulgated under these laws, including, but not limited to, the:

·Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; Home Mortgage Disclosure Act, requiring financial institutions to provide certain information about home mortgage and refinanced loans; Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
·Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information;
·Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
·Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Provident Bank also is subject to federal laws protecting the confidentiality of consumer financial records, and limiting the ability of the institution to share non-public personal information with third parties.


Finally, Provident Bank is subject to extensive anti-money laundering provisions and requirements, which require the institution to have in place a comprehensive customer identification program and an anti-money laundering program and procedures.  These laws and regulations also prohibit financial institutions from engaging in business with foreign shell banks; require financial institutions to have due diligence procedures and, in some cases, enhanced due diligence procedures for foreign correspondent and private banking accounts; and improve information sharing between financial institutions and the U.S. government.  Provident Bank has established policies and procedures intended to comply with these provisions.

Recent Regulatory Initiatives

Capital Purchase Program.  Under the Capital Purchase Program (“CPP”) announced by the U.S. Department of the Treasury on October 14, 2008, as part of the Troubled Asset Relief Program (“TARP”), Treasury committed to invest up to $250 billion in eligible institutions in the form of non-voting senior preferred stock.  Treasury approved the purchase up to $58.4 million of Provident Bancorp non-voting preferred stock, but the Company decided not to participate in the program.

TLGP.  Provident Bancorp and Provident Bank decided to opt-out of the TLGP effective July 1, 2010.  As a result, Provident Bank’s non-interest-bearing transaction deposits accounts (such as business checking accounts), and interest bearing transaction accounts, and IOLTA accounts will be fully insured up to $250,000 from July 1, 2010 through December 30, 2010.  From December 31, 2010 through December 31, 2012, only non-interest bearing transaction deposit accounts will be fully insured beyond the $250,000 limit under the Dodd-Frank Act.  Beginning January 1, 2013, deposit insurance coverage for non-interest bearing transaction deposit accounts will be limited to $250,000.

In addition the FDIC has guaranteed all newly issued senior unsecured debt (e.g., promissory notes, unsubordinated unsecured notes and commercial paper) up to prescribed limits issued by participating entities between October 14, 2008 and October 31, 2009. For eligible debt issued by that date, the FDIC will provide the guarantee coverage until the earlier of the maturity date of the debt or December 31, 2012.  Provident Bank issued $51.5 million senior unsecured debt in a pooled security in February 2009.  This debt matures in February 2012.  Provident prepaid $1.00 of insurance premiums for each $100 (on a per annum basis) of debt that was guaranteed. Additionally, the FDIC previously established an emergency debt guarantee facility through April 30, 2010, through which institutions that are unable to is sue non-guaranteed debt to replace maturing senior unsecured debt because of market disruptions or other circumstances beyond their control may apply on a case-by-case basis to issue FDIC-guaranteed senior unsecured debt. The FDIC guarantee of any debt issued under this emergency facility would expire the earlier of the maturity date or December 31, 2012, and the guarantee would be subject to an annualized assessment rate equal to a minimum of 300 basis points.

Financial Reform Legislation

On July 21, 2010, the President signed the Dodd-Frank Act into law.  This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including Provident Bancorp and Provident Bank.  It requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress.  The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Act may not be known for many months or years.

One change that is particularly significant to Provident Bancorp and Provident Bank is the abolition of the OTS, their historical federal financial institution regulator.  Currently, this is scheduled to occur on the Designated Transfer Date, which has been established as July 21, 2011 (with the possibility of a six-month extension).  After the agency is abolished, supervision and regulation of Provident Bancorp will move to the Federal Reserve and supervision and regulation of Provident Bank will move to the OCC.  Except as described below, however, the laws and regulations applicable to Provident Bancorp and Provident Bank will not generally change -- the HOLA and the regulations issued under the Act will generally still apply (although these laws and regulations will be interpreted by the Federal Reserv e and the OCC, respectively).


The Dodd-Frank Act contains a number of provisions intended to strengthen capital.  For example, the federal banking agencies are directed to establish minimum leverage and risk-based capital that are at least as stringent as those currently in effect. The regulations implementing these rules are to be finalized not later than January 22, 2012 (although they are not applicable to savings and loan holding companies, like the Provident Bancorp, until July 21, 2015).  In addition, Provident Bancorp for the first time will be subject to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank.

The Dodd-Frank Act also expands the affiliate transaction rules in Sections 23A and 23B of the Federal Reserve Act to broaden the definition of affiliate and to apply to securities lending, repurchase agreement and derivatives activities that Provident Bank may have with an affiliate, as well as to strengthen collateral requirements and limit Federal Reserve exemptive authority. Also, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders is being expanded to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction.  These expansions will be effective one year after the Designated Transfer Date At this time, we do not anticipate that being subject to a ny of these provisions will have a material effect on Provident Bancorp or Provident Bank.

The Dodd-Frank Act also contains provisions that expand the insurance assessment base and increase the scope of deposit insurance coverage.  See “Regulation--Deposit Insurance”.

The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates for election as directors using a company’s proxy materials.  The legislation also directs the federal financial institution regulatory agencies to promulgate rules prohibiting excessive compensation being paid to financial institution executives.

The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau that will take over responsibility as of the Designated Transfer Date of the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others.  Institutions that have assets of $10 billion or less, such asmore, it contains numerous other provisions that affect all bank holding companies and banks, including the Company and the Bank, will continue to be supervisedsome of which are described in this area by their primary federal regulators (in the case of Provident Bank, the OTS until it is abolished, and then the OCC).more detail below. The Act also gives the CFPB expanded data collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices.  The consumer compla int function also will be consolidated into the CFPB. The Dodd-Frank Act also narrows the scope of federal preemption of state laws related to federally chartered institutions, including federal savings banks.  As a result it is likely the Bank would be subject to a wider array of State laws going forward.  In addition, the Federal Reserve is required to adopt a rule addressing interchange fees applicable to debit card transactions that is expected to lower fee income generated from this source.

Many of the provisions of the Dodd-Frank Act will not become effective until the Designated Transfer Date or after and, if required, the adoption and effectiveness of implementing regulations.  In addition, the scope and impact of many of the Dodd-Frank Act’s provisions will be determined through the rulemaking process.over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Act on Provident Bancorpthe Company or ProvidentSterling Bank at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. Nor can we predict the impact or substance of other future legislation or regulation. However, it is expected that they at a minimum will increase our operating and compliance costs.

Dividends.The Company depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the Bank.
Various legal restrictions limit the extent to which the Bank can pay dividends or make other distributions to the Company. All national banks are limited in the payment of dividends without the approval of the OCC to an amount not to exceed the net profits (as defined by OCC regulations) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and while maintaining its “well capitalized” status, as of September 30, 2013, the Bank could pay dividends of approximately $35.8 million to the Company, without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future periods.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution, such as the Bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are strong.

Capital Requirements. As a bank holding company, the Company is subject to consolidated regulatory capital requirements administered by the Federal Reserve Board. The Bank is subject to similar capital requirements administered by the OCC. The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee. The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A banking organization’s capital, in turn, is classified in tiers, depending on type:

Core Capital (Tier 1). Currently, Tier 1 capital includes common equity, retained earnings, qualifying noncumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries, and, under existing standards, a limited amount of qualifying trust preferred securities, and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill, most intangible assets and certain other assets.
Supplementary Capital (Tier 2).Currently, Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.

Under the existing risk-based capital rules, the Company and the Bank are currently required to maintain Tier 1 capital and total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). For a depository institution to be considered “well capitalized,” its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. The elements currently comprising Tier 1 capital

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ITEM 1A.   Risk Factorsand Tier 2 capital and the minimum Tier 1 capital and total capital ratios may in the future be subject to change, as discussed in more detail below.
Financial reform legislation will,
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for financial holding companies and banking organizations that have the highest supervisory rating. All other banking organizations are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized,” its leverage ratio must be at least 5.0%. The bank regulatory agencies have encouraged banking organizations to operate with capital ratios substantially in excess of the stated ratios required to maintain “well capitalized” status. This has resulted from, among other things, eliminatecurrent economic conditions, the OTS, tightenglobal financial crisis and anticipated increases in formal capital requirements for banking organizations as further detailed below. In light of the foregoing, the Company and the Bank expect that they will maintain capital ratios in excess of well capitalized requirements.
Sterling Bancorp Regulatory Capital Ratios. At September 30, 2013 the Company as a savings and loan holding company was not subject to specific regulatory capital ratio requirements.  At September 30, 2013, the Bank was subject to a leverage ratio requirement calculated pursuant to rules for federal savings banks, which required the Bank to calculate its leverage ratio as the ratio of the Bank’s Tier 1 capital to its period end adjusted assets (as defined for regulatory purposes).

At September 30, 2013, the capital of Sterling National Bank and Provident Municipal Bank exceeded all applicable capital requirements, and each met the requirements to be treated as a “well-capitalized” institution.

Basel III Capital Rules. Effective July 2, 2013 the Company’s primary federal regulators, the Federal Reserve Board and the OCC, approved final rules known as the “Basel III Capital Rules” that substantially revise the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank. The Basel III Capital Rules address the components of capital and other issues affecting the numerator in banking institutions’ regulatory capital ratios. Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules will come into effect for the Company and the Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations. CET1 capital consists of common stock instruments that meet the eligibility criteria in the final rules, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interest.
When fully phased-in on January 1, 2019, Basel III Capital Rules require banking organizations to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased-in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased-in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets .
The Basel III Capital Rules also provides for a “countercyclical capital buffer” that is applicable to only certain covered institutions and is not expected to have any current applicability to the Company or the Bank.
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
The Basel III Capital Rules provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the Company and the

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Bank are given a one-time election (the “Opt-out Election”) to filter certain accumulated other comprehensive income (“AOCI”) components, comparable to the treatment under the current general risk-based capital rule.  The AOCI Opt-out Election must be made on the March 31, 2015 Call Report and FR Y-9C for the Bank and Sterling, respectively.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased-in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to the Bank, the Basel III Capital Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 risk-based capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio and still be well-capitalized.
In addition, the Basel III Capital Rules revise the rules for calculating risk-weighted assets to enhance their risk sensitivity, which includes (1) a new framework under which mortgage-backed securities and other securitization exposures will be subject to risk-weights ranging from 20% to 1,250% and (2) adjusted risk-weights for credit exposures, including multi-family and commercial real estate exposures that are 90 days or more past due or on non-accrual, which will be subject to a 150% risk-weight, except in situations where qualifying collateral and/or guarantees are in place. The existing treatment of residential mortgage exposures will remain subject to either a 50% risk-weight (for prudently underwritten owner-occupied first liens that are current or less than 90 days past due) or a 100% risk-weight (for all other residential mortgage exposures including 90 days or more past due exposures).
Management believes that, as of September 30, 2013, Sterling and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income.

Source of Strength Doctrine.Federal Reserve Board policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, Sterling is expected to commit resources to support the Bank, including at times when Sterling may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Deposit Insurance. Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and the Bank is subject to deposit insurance assessments to maintain the DIF.  Deposit insurance assessments are based on average consolidated total assets minus average tangible equity. Under the FDIC’s risk-based assessment system, insured institutions with less than $10 billion in assets, such as the Bank, are assigned to one of four risk categories based on supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain other factors.

The initial base assessment rate ranges from 5 to 35 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, an institution must pay an additional premium equal to 50 basis points on every dollar (above 3% of an institution’s Tier 1 capital) of long-term, unsecured debt held that was issued by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program). The FDIC has the authority to raise or lower assessment rates, subject to limits, and to impose special additional assessments.

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

The temporary unlimited deposit insurance coverage for non-interest-bearing transaction accounts that became effective on December 31, 2010 pursuant to rules adopted in accordance with the Dodd-Frank Act terminated on December 31, 2012. These accounts are now insured under the general deposit insurance coverage rules of the FDIC.

FDIC deposit insurance expense totaled $2.4 million, $2.5 million and $2.3 million in fiscal 2013, 2012 and 2011, respectively. FDIC deposit insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding

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bonds issued by FICO in the late 1980s to recapitalize the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessments will continue until the bonds mature in 2017 to 2019.

Under the Federal Deposit Insurance Act, as amended (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Liquidity Requirements.Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without minimum required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The Basel III liquidity framework contemplates that the LCR will be subject to an observation period continuing through mid-2013 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard on January 1, 2015, with a phase-in period ending January 1, 2019. Similarly, it contemplates that the NSFR will be subject to an observation period through mid-2016 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard by January 1, 2018. These new standards are subject to further rulemaking and their terms may well change before implementation. The federal banking agencies have not proposed rules implementing the Basel III liquidity framework and have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks.

Management believes that, as of September 30, 2013, the Bank would meet the LCR requirement under the Basel III on a fully phased-in basis if such requirements were currently effective. Management's evaluation of the impact of the NSFR requirement is ongoing as of September 30, 2013. Requirements to maintain higher levels of liquid assets could adversely impact the Company’s net income.
Prompt Corrective Action. The Basel III Capital Rules incorporates new requirements into the prompt correction action framework, which was described above in “Capital Requirements.” The following is a summary of the capital rules applicable to the Company and principally the Bank at September 30, 2013 and for the fiscal year ending September 30, 2014.  The FDIA requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.
A depository institution will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any regulatory order agreement or written directive to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of total assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or

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would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
Sterling believes that, as of September 30, 2013, its bank subsidiary, Sterling National Bank, was “well capitalized” based on the aforementioned ratios. For further information regarding the capital ratios and leverage ratio of the Company and the Bank see the discussion under the section captioned “Capital and Liquidity” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note14. Stockholder's Equity- Regulatory Matters in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, elsewhere in this report.

Safety and Soundness Regulations. In accordance with the FDIA, the federal banking agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking agencies authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Incentive Compensation.The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been finalized. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives.

In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, discussed above.

The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.

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Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Loans to One Borrower. The Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2013, the Bank was in compliance with the loans-to-one-borrower limitations.

Depositor Preference.The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Community Reinvestment Act.The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings that must be publicly disclosed. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of certain applications. The Bank received a rating of “satisfactory” in its most recent CRA exam.
Financial Privacy.The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Anti-Money Laundering and the USA Patriot Act.A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations of financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Office of Foreign Assets Control Regulation.The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Transactions with Affiliates.Transactions between the Bank and its affiliates are regulated by the Federal Reserve Board under sections 23A and 23B of the Federal Reserve Act and related FRB regulations. These regulations limit the types and amounts of covered transactions engaged in by the Bank and generally require those transactions to be on an arm’s-length basis. The term “affiliate” is defined to mean any company that controls or is under common control with the Bank and includes the Company and its non-bank subsidiaries. “Covered transactions” include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter

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of credit on behalf of an affiliate. In general, these regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.

Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York (“FHLBNY”), the Bank is required to acquire and hold shares of capital stock of the FHLBNY in an amount at least equal to the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. For the Bank, the membership stock purchase requirement is 0.2% of the Mortgage-Related Assets, as defined by the FHLBNY, which consists principally of residential mortgage loans and mortgage-backed securities, held by the Bank. The activity-based stock purchase requirement is equal to the sum of: (1) a specified percentage ranging from 4.0% to 5.0%, which for the Bank is 4.5%, of outstanding borrowings from the FHLBNY; (2) a specified percentage ranging from 4.0% to 5.0%, which for the Bank is inapplicable, of the outstanding principal balance of Acquired Member Assets, as defined by the FHLBNY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which for the Bank is inapplicable; and (4) a specified percentage ranging from 0% to 5%, which for the Bank is inapplicable, of the carrying value on the FHLBNY’s balance sheet of derivative contracts between the FHLBNY and the Bank. The FHLBNY can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLBNY capital plan. As of September 30, 2013, the Bank was in compliance with the minimum stock ownership requirement.

Federal Reserve System. FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $12.4 million and $79.5 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $79.5 million. The first $12.4 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements.

Other Regulations. The Bank is subject to federal consumer protection statutes and regulations promulgated under those laws, including, but not limited to, the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act, requiring financial institutions to provide certain information about home mortgage and refinanced loans;
Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”), which took over responsibility for enforcing the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others, on July 21, 2011. Institutions that have assets of $10 billion or less, such as the Bank, will continue to be supervised and examined in this area by their primary federal regulators (in the case of the Bank, the OCC). The Act also gives the CFPB expanded data collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. The Dodd-Frank Act also weakened the federal preemption of state laws that had applied to national banks. As a result it is likely the Bank will be subject to a wider array of State laws going forward.

In January 2013, the CFPB issued a series of final rules related to mortgage loan origination and mortgage loan servicing. In particular, on January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act

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and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule will become effective January 10, 2014.

We are still evaluating the rules recently issued by the CFPB to determine if they will have any long-term impact on our mortgage loan origination and servicing activities. Compliance with these rules will likely increase our overall regulatory compliance costs.
Legislative and Regulatory Initiatives.  From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Sterling or any of its subsidiaries could have a material effect on the Company’s business, financial condition and results of operations.

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ITEM 1A. Risk Factors
Combining Provident and Legacy Sterling may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the Merger may not be realized.
Provident New York Bancorp and Legacy Sterling operated independently until the completion of the Merger. The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on the Company’s ability to successfully combine and integrate the businesses of the predecessor companies in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in new lawsdecreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and regulationspolicies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Merger. The loss of key employees or delays or other problems in implementing planned system conversions could adversely affect the Company’s ability to successfully conduct its business, which could have an adverse effect on Sterling’s financial results and the value of its common stock. If the Company experiences difficulties with the integration process, the anticipated benefits of the Merger may increasenot be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause the Company to lose customers or cause customers to remove their accounts from the Bank and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on the Company during this transition period and for an undetermined period after completion of the Merger on the combined company. In addition, the actual cost savings of the Merger could be less than anticipated.
Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our costs of operations.

business.
The Dodd-Frank Act willis significantly changechanging the current bank regulatory structure and affectaffecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  It requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress.  The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

One change thatThe Company is particularly significant to us is the abolition of the OTS, our historical federal financial institution regulator, effective on the Designated Transfer Date.  After the agency is abolished, supervisionsupervised and regulation of Provident Bancorp will move to the Federal Reserve and supervision and regulation of Provident Bank will move to the OCC.  Except as described below, however, the laws and regulations applicable to us will not generally change -- the Home Owners Loan Act and the regulations issued under the Dodd-Frank Act will generally still apply (although these laws and regulations will be interpretedregulated by the Federal Reserve and the OCC, respectively).  However,Bank is supervised and regulated by the OCC. The application of the laws and regulations may vary as administered by the Federal Reserve and the OCC. It is pos sible that the OCC may rate the activities of Provident Bank in ways that are more restrictive than the OTS has.  This might cause us to incur increased costs or become more restrictive in certain activities than we have in the past.  We cannot now predict the effect, if any, of the change in regulators on Provident Bank.

In addition, Provident Bancorp for the first time will beCompany is subject to consolidated capital requirements and will be required tomust serve as a source of strength to Providentthe Bank. The specific requirements are not now known, although itIt is possible such requirements may limit our capacity to pay dividends or repurchase shares.  Provident Bank also will be subject to the same lending limits as national banks.  In addition, the affiliate transaction rules in Section 23A of the Federal Reserve Act will apply to securities lending, repurchase agreement and derivatives activities that Provident Bank may have with an affiliate.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based onThe FDIC insures deposits at FDIC-insured financial institutions, including the average consolidated total assets less tangible equity capitalBank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. The Bank’s FDIC insurance premiums increased substantially beginning in 2009, and we expect to pay high premiums in the future. Economic conditions during the great recession increased bank failures and decreased the DIF. In order to restore the DIF to its statutorily mandated minimum of 1.15% over a financial institution.  This could result in an increase inperiod of several years, the FDIC increased deposit insurance assessments to be paid by Provident Bank.premium rates.  The Dodd-Frank Act also permanently increasesincreased the maximum amountminimum target Deposit Insurance Fund ratio from 1.15% of deposit insuranceestimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The FDIC has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. There is no implementation deadline for banks, savings institutionsthe 2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the statutory target level. Any increase in our FDIC premiums could have an adverse effect on the Bank’s profits and credit unions to $250,000 per depositor, retroactive to January 1, 2008. Non-interest bearing transaction accounts will have unlimited deposit insurance beginning December 31, 2010 through December 31, 2012.financial condition.

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau to take overalso created the CFPB, which has assumed responsibility for the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Savings Act, among others. InstitutionsHowever, institutions such as Providentthe Bank, which have assets of $10 billion or less, will continue to be supervised in this area by their primary federal regulators (in the case of Providentthe Bank, the OTS until it is abolished, and then the OCC).  The Federal Reserve will also be adopting a rule addressing interchange fees for debit card transactions that is expected to lower fee income generated from this source.  Although technically this rule will only apply to institutions with assets in excess of $10 billion , it is expected that smaller institutions, such as Provident Bank, may also be impacted.

In addition, the Dodd-Frank Act significantly rolls back the federal preemption of state consumer protection laws that is currentlywas enjoyed by federal savings associations and national banks by (1) requiring that a state consumer financial law prevent or significantly interfere with the exercise of a federal savings association’s or national bank’s powers before it can be preempted, (2) mandating that any preemption decision be made on a case by case basis rather than a blanket rule, and (3) ending the applicability of preemption to subsidiaries and affiliates of national banks and federal savings associations.banks. As a result, we may now be subject to state consumer protection laws in each state where we do business, and those laws may be interpreted and enforced differently in differenteach states.

Many of the provisions of the Dodd-Frank Act will not become effective until a year or more after its enactment and, if required, the adoption and effectiveness of implementing regulations.  In addition, theThe scope and impact of many of the Dodd-Frank Act’sAct provisions will be determined through the rulemaking process.over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which

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it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. However, it is expected that at a minimum they will increase our operating and compliance costs.

We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive regulation and supervision. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the DIF and our depositors, as well as other consumers and not to benefit our shareholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place are flawless. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Our failure to comply with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions, and legal proceedings.

Failure to comply with applicable laws and regulations also could result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal agreements and cease and desist orders. In addition, the OCC and the FDIC have specific authority to take “prompt corrective action,” depending on our capital level. Currently, we are considered “well-capitalized” for prompt corrective action purposes. If we were designated by the OCC as “adequately capitalized,” our ability to take brokered deposits would become limited. If we were to be designated by the OCC in one of the lower capital levels - “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized” - we would be required to raise additional capital and also would be subject to progressively more severe restrictions on our operations, management and capital distributions; replacement of senior executive officers and directors; and, if we became “critically undercapitalized,” to the appointment of a conservator or receiver.

Changes in laws, government regulation and monetary policy may have a material effect on our results of operations. Financial institutions have been the subject of significant legislative and regulatory changes and may be the subject of further significant legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, the costs and burden of compliance have significantly increased and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for the Bank, as well as for our borrowers, particularly as implemented through the Federal Reserve System, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on the Bank or our borrowers, and therefore on our results of operations.
Difficult market conditions have adversely affected our industry.


We are operating in a challenging economic environment, including generally uncertain national and local conditions. FinancialAdditional concerns from some of the countries in the European Union and elsewhere have also strained the financial markets both abroad and domestically. Although there has been some improvement in the overall global macroeconomic conditions in 2013, financial institutions continue to be affected by declinesconditions in the real estate market and the constrained financial markets. DeclinesIn recent years, declines in the housing market, over the past two years, with falling home prices and increasing foreclosure,increases in unemployment and under-employment have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks.  These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to see k additional capital, to merge with larger and stronger institutions and, in some cases, to fail.institutions. Reflecting concern about the stability of the financial markets generally and the strength of counterparties,over economic conditions, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions.  This tighteningborrowers. Although we have observed some increases in lending activity over the past few months, a worsening of credit has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and reduction of business activity generally.  The resulting economic pressure on consumers and lack of confidence inconditions may impact the financial markets has adversely affected our business, financial condition andBank’s results of operations.  A worsening of these conditions would likely exacerbate the adverse effects of these market conditions on usoperations and others in the financial services industry.condition. In particular, we may face the following risks in connection with these events:

·Loan delinquencies could increase further;
·Problem assets and foreclosures could increase further;
·Demand for our products and services could decline;
·Collateral for loans made by us, especially real estate, could decline further in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans; and
·Investments in mortgage-backed securities could decline in value as a result of performance of the underlying loans or the diminution of the value of the underlying real estate collateral.
Investments in mortgage-backed securities could decline in value as a result of performance of the underlying loans or the diminution of the value of the underlying real estate collateral pressing the government sponsored agencies to honor its guarantees to principal and interest.


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An inadequate allowance for loan losses would negatively impact our results of operations.

We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectabilitycollectibility of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and borrower defaults result in losses exceeding our allowance for loan losses, our results of operations could be significantly and adversely affected. We cannot assure you that our allowance will be adequate to cover probable loan losses inherent in our portfolio.

The need to account for assets at market prices may adversely affect our results of operations.

We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the assetassets in question presentspresent minimal credit risk. We may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.

Acquisition, development,Changes in the value of goodwill and construction (ADC) loans, commercialintangible assets could reduce our earnings.
The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2013, the fair value of Sterling Bancorp shares exceed the recorded book value. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

Commercial real estate, commercial & industrial and commercial and industrialADC loans expose us to increased risk.

risk and earnings volatility.
We consider our commercial real estate loans, commercial and& industrial loans and ADC loans to be the higher risk categories in our loan portfolio. These loans are particularly sensitive to economic conditions. At September 30, 2010,2013, our portfolio of commercial real estate loans totaled $582.0 million,$1.3 billion, or 34.2%52.9% of total loans, our portfolio of commercial and& industrial business loan portfolioloans totaled $240.7$439.8 million, or 14.1%18.2% of total loans, and our portfolio of ADC loans totaled $229.5$102.5 million, or 13.5%4.2% of total loans. We plan to continue to emphasize the origination of these types of loans.  loans, other than ADC loans, which we now make only on an exception basis.

Commercial real estate loans generally involve a higher degree of credit risk than residential loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend on the successful operation and management of the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. In the case of commercial & industrial loans, although we strive to maintain high credit standards and limit exposure to any one borrower, the collateral for these loans often consists of accounts receivable, inventory and equipment. This type of collateral typically does not yield substantial recovery in the event we need to foreclose on it and may rapidly deteriorate, disappear, or be misdirected in advance of foreclosure. This adds to the potential that our charge-offs will be more volatile than we have experienced in the past, which could significantly negatively affect our earnings in any quarter.
In addition, many of our borrowers also have more than one commercial real estate, commercial business or ADC loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss. In particular, many of our ADC loans continue to pose higher risk levels than the levels expected at origination. Many projects are stalled or are selling at prices lower than expected. While we continue to seek paydownspay downs on loans with or without sales activity, this portfolio may cause us to incur additional bad debt expense even if losses are not realized. Additionally, the balance on over half of our ADC loans is maturing within one year, which may expose us to greater risk of loss.loss or to report increased levels of loans considered troubled debt restructures.

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Changes in the value of goodwill and intangible assets could reduce our earnings.

We are required by U.S. generally accepted accounting principles to test goodwill and other intangible assets for impairment at least annually. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used.  Using a discount rate of 12% and a terminal multiple of 14 times expected earnings, the net present value of Provident New York Bancorp shares exceed recorded book value by 17% as of September 30, 2010.  If there were further declines in the value of bank stocks and the fair value of banks in general, we could have to record an impairment of goodwill.

Our continuing concentration of loans in our primary market area may increase our risk.

Our success depends primarily on the general economic conditions in the counties in which we conduct business,most of our business. Most of our loans and deposits are generated from customers primarily in the New York City metropolitan area in general. Unlike large banks that are more geographically diversified, we provide bankingregion and financial services to customers primarily in Rockland and Orange Counties in New York. We also have a branch presence in Ulster, Sullivan, Westchester and Putnam Counties in New York and in Bergen County, New Jersey. The localOur expansion into New York City and continued growth in Westchester County and Bergen County has helped us diversify our geographic concentration with respect to our lending activities. A deterioration in economic conditions in our market area have a significant impact onwould adversely affect our loans, the abilityresults of the borrowers to repay these loansoperations and the value of the collateral securing these loans. A significant declinefinancial condition.

Changes in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would affect the local economic conditions andmarket interest rates could advers elyadversely affect our financial condition and results of operations.

Changes in Market Interest Rates Could Adversely Affect Our Financial Condition and Results of Operations.

Our financial condition and resultresults of operations are significantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. In recent years, the structure of theour balance sheet has become more asset sensitive in whichbecause our assets either mature or re-price at a faster pace than liabilities and in particular borrowings.our liabilities. If general levels of interest rates were to continue at existing levels or decline, further, net interest income would be adversely affected as asset yields would be expected to decline at faster rates than deposit or borrowing costs. A decline in net interest income may also occur, offsetting a portion or all gains in net interest income from assets re-pricing and increases in volume, if competitive market pressures limit our ability to maintain or lag deposit costs. Wholesale funding costs may also increase at a faster pace thenthan asset re-pricing and in this regardre-pricing. As of September 30, 2013, we have $265$220.0 million in structured/convertiblestructured advances with the FHLB at an average cost of 4.08%4.17%. If interest rates were to approach or exceed this level, it would be expected that the FHLB wouldmay call for conversion of those fundsborrowings and offer replacement borrowings at then current market rates which potentially would be higher.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans.

Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value of our securities fluctuates inversely with changes in interest rates. At September 30, 2010,2013, our investment and mortgage-backed securities available for sale securities portfolio totaled $901.0$954.4 million. Unrealized gainslosses on securities available for sale, net of tax, amounted to $12.6$22.2 million and are reported as part of other comprehensive income (loss), included as a separate component of stockholders’ equity. Further decreases in the fair value of securities available for sale therefore, could have an adverse effect on stockholders’ equity.

Our ability to pay dividends is subject to regulatory limitations and other limitations which may affect our ability to pay dividends to our stockholders or to repurchase our common stock.

ProvidentSterling Bancorp is a separate legal entity from its subsidiary, ProvidentSterling National Bank, and does not have significant operations of its own. The availability of dividends from Providentthe Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Providentthe Bank and other factors, that Providentthe Bank’s regulatorregulators could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, under the Dodd-Frank Act, ProvidentSterling Bancorp will beis subjected to consolidated capital requirements and will be required tomust serve as a source of strength to Providentthe Bank. If Providentthe Bank is unable to pay dividends to ProvidentSterling Bancorp or ProvidentSterling Bancorp is required to retain capital or contribute capital to Providentthe Bank, we may not be able to pay div idendsdividends on our common stock or to repurchase shares of common stock.


A breach of information security could negatively affect our earnings.

earnings.
Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. WeInternet. While to date we have not been subject to material cyber-attacks or other cyber incidents, we cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Disruptions to our vendors’ systems may arise from events that are wholly or partially beyond our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). If information security is breached, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

We are subject to extensive regulatory oversight.

We and In addition, our subsidiaries are subject to extensive regulation and supervision.  Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements.  There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control.  In order to comply with regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannotreputation could be certain that the policies, procedures and systems we have in place are flawless.  Therefore, there is no assurance that in every instance we are in full compliance with these requirements.  Our failure to comp ly with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions, and legal proceedings.

Failure to comply with applicable laws and regulations alsodamaged which could result in a rangeloss of sanctions and enforcement actions, includingcustomers, greater difficulty in attracting new customers, or an adverse effect on the impositionvalue of civil money penalties, formal agreements and cease and desist orders. In addition, the OTS and the FDIC have specific authority to take “prompt corrective action,” depending on our capital level. Currently, we are considered “well-capitalized” for prompt corrective action purposes. If we were to drop to the “adequately capitalized” level, the OTS could restrict our ability to take brokered deposits. If we were to fall to the lower capital levels – “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized” – we would be required to raise additional capital and also would be subje ct to progressively more severe restrictions on our operations, management and capital distributions; replacement of senior executive officers and directors; and, if we became “critically undercapitalized,” to the appointment of a conservator or receiver.common stock.


In addition, recently enacted, proposed and future legislation and regulations (including the Dodd-Frank Act, which is discussed above), have had, will continue to have or may have significant impact on the financial services industry.  Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, could cause us to change or limit some
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We are subject to competition from both banks and non-banking companies.

non-bank companies.
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks, other savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, real estate investment trusts (REITs), private issuers of debt obligations, venture capital firms, and suppliers of other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and have advantages over us in providing certain services. Many of our competitors are significantly larger than we are and have greater access to cap italcapital and other resources. Also, our ability to compete effectively is dependent on our ability to adapt successfully to technological changes within the banking and financial services industry.


Various factors may make takeover attempts more difficult to achieve.

achieve.
Our Board of Directors has no current intention to sell control of ProvidentSterling Bancorp. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of ProvidentSterling Bancorp without the consent of our Board of Directors. OneA shareholder may want a take overtakeover attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:

(a) Certificate of Incorporation and statutory provisions.
Provisions of the certificate of incorporation and bylaws of ProvidentSterling Bancorp and Delaware law may make it more difficult and expensive to pursue a takeover attempt that management opposes. These provisions also would make it more difficult to remove our current Board of Directors or management, or to elect new directors. These provisions also include limitations on voting rights of beneficial owners of more than 10% of our common stock, supermajoritysuper majority voting requirements for certain business combinations, the election of directors to staggered terms of three years and plurality voting. Our bylaws also contain provisions regarding the timing and conte ntcontent of stockholder proposals and nominations and qualification for service on the Board of Directors.

(b) Required change in control payments and issuance of stock options and Recognitionrecognition and Retention Plan shares.retention plan shares.
We have entered into employment agreements with executive officers, which require payments to be made to them in the event their employment is terminated following a change in control of ProvidentSterling Bancorp or ProvidentSterling National Bank. We have issued stock grants and stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan. In the event of a change in control, the vesting of stock and option grants accelerate. In 2006 we adopted the Provident Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of the Company. These payments

Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time to time that we expect may further our business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, diversion of management’s attention from other business activities, changes in relationships with customers, and the accelerationpotential loss of grants would increasekey employees. In addition, we may not be successful in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into operations. Ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the cost of acquiring Provident Bancorp, thereby discouraging future takeover attempts.future.

ITEM 1B.   Unresolved Staff CommentsOur results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.
Over the past few years, foreclosure time lines have increased due to, among other reasons, delays associated with the significant increase in the number of foreclosure cases as a result of the economic downturn, federal and state legal and regulatory actions, including additional consumer protection initiatives related to the foreclosure process and voluntary and, in some cases, mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure. Further increases in the foreclosure time-line may have an adverse effect on collateral values and our ability to minimize our losses.



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ITEM 1B.Unresolved Staff Comments
Not Applicable.

ITEM  2.   Properties

ITEM 2.Properties
We maintain our executive offices, commercial lending division and investment management and trust departmentback office operations departments at a leased facility located at 400 Rella Boulevard, Montebello, NY consisting of 48,17248,623 square feet. At September 30, 2010,2013, we conducted our business through 3534 full-service branches.financial centers which serve the New York Metro Market and the New York Suburban Market. Of our 35 branches 14these financial centers, 11 are located in Orange County, NY, 12New York and 11 in Rockland County, NY, 2New York. We operate 9 offices in Ulster, County, NY,Sullivan, Westchester and Putnam Counties in New York, 2 offices in Sullivan County, NY, 1 in Putnam County, NY, 3 in Westchester CountyNew York City, and 1 office in Bergen County, NJ.New Jersey. Additionally, 1817 of our branchesfinancial centers are owned and 17 are leased.leased.

In addition to our branch network and corporate headquarters we lease 2one and own 1two additional properties which are held for general corporate purposes and 8 foreclosed properties.  The total acreage of two foreclosed23 other real estate owned properties located in Sullivan and Ulster counties total 87.93 acres.   The total square footage of the remaining six foreclosed properties is 28,284 square feet and they are located inPutnam, Orange, Rockland, Sullivan and Ulster counties. This total acreage does not include the South Fallsburg land (a former branch location) totaling 1.9 acres.  See Note 7 of5. Premises and Equipment, net to the “Notes to Consolidated Financial Statements”Statements for further detail on our premises and equipment.
ITEM 3.Legal Proceedings

ITEM 3.  Legal Proceedings

Provident BancorpNote 16. Commitments and Contingencies - Litigation to the consolidated financial statements contained in Item 8 hereof is incorporated herein by reference. The Company does not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, inanticipate that the aggregate involve amounts that are believed by managementliability arising out of litigation pending against the Company and its subsidiaries will be material to be immaterial to Provident Bancorp’sits consolidated financial condition and results of operations.statements.
ITEM 4.Mine Safety Disclosures

ITEM 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of stockholders during the quarter ended September 30, 2010.Not Applicable.

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PART II

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

ITEM 5. Common Stock Market for Registrant’s Common Equity, Related Stockholder MattersPrices and Issuer Purchases of Equity SecuritiesDividends

(A)
The shares ofCompany’s common stock of Providentis traded on the New York Bancorp are quoted on the NASDAQ Global SelectStock Exchange (“NASDAQ”NYSE”) under the symbol “PBNY.” “STL”. The following table sets forth the high and low intra-day sales prices per share of Sterling Bancorp common stock and the cash dividends declared per share for the past two fiscal years.
Quarter endedHigh Low 
Cash dividends
declared
September 30, 2013$11.31
 $9.66
 $0.12
June 30, 20139.43
 8.71
 0.06
March 31, 20139.54
 8.70
 0.06
December 31, 20129.66
 8.67
 0.06
September 30, 20129.65
 7.44
 0.06
June 30, 20128.72
 7.24
 0.06
March 31, 20129.21
 6.70
 0.06
December 31, 20117.63
 5.51
 0.06

As of September 30, 2010, Provident New York Bancorp had 33 registered market makers, 5,589 stockholders2013, there were 44,351,046 shares of the Company’s common stock outstanding held by 5,061 holders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 38,262,288 shares outstanding.

Market Price and Dividends.. The following table sets forth marketclosing price and dividend information for theper share of common stock foron September 30, 2013, the past twolast trading day of the Company’s fiscal years.

Quarter Ended High  Low  Cash Dividends Declared 
          
September 30, 2010 $10.03  $7.92  $0.06 
June 30, 2010  10.40   8.42   0.06 
March 31, 2010  9.57   8.01   0.06 
December 31, 2009  9.41   8.00   0.06 
             
September 30, 2009 $10.44  $7.93  $0.06 
June 30, 2009  10.15   7.75   0.06 
March 31, 2009  11.91   7.31   0.06 
December 31, 2008  13.60   9.54   0.06 

Paymentyear, was $10.89. Giving effect to the Merger, there were 83,415,930 shares of dividends on Provident New York Bancorp’sthe Company’s common stock is subject to determination and declarationoutstanding held by 6,162 holders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms).
The Board of Directors and depends on a number of factors, includingSterling Bancorp is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent upon the Company’s future earnings, capital requirements regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerationscondition. See the section captioned “Regulation” included in Item 1. Business, the section captioned “Capital and general economic conditions. No assurance can be given that dividends will be declared or, if declared, whatLiquidity” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14. Stockholders’ Equity to the amountconsolidated financial statements all of dividends will be, or whether such dividends will continue.  Repurchaseswhich are included elsewhere in this report.

33

Performance Graph

Set forth below is a stock performance graph comparing the yearlycumulative total shareholder return on our shares ofSterling Bancorp common stock commencing with the closing price on September 30, 2005, with (a) the cumulative total return on stocks included in the NASDAQS&P 500 Composite Index and (b) the cumulative total return on stocks included in the SNL Mid-Atlantic Thrift Index.

There canBank Index, measured as of the last trading day of each year shown. The graph assumes an investment of $100 on September 30, 2008 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below.  We will not make or endorse any predictions asconsidered to be an indication of future stock performance.


PROVIDENT NEW YORK BANCORP


  At 
Index 09/30/05  09/30/06  09/30/07  09/30/08  09/30/09  09/30/10 
Provident New York Bancorp  100.00   119.17   115.85   119.00   88.16   79.52 
NASDAQ Composite  100.00   105.84   127.56   99.60   102.13   115.14 
SNL Mid-Atlantic Thrift Index  100.00   111.75   111.64   95.91   71.04   80.32 
source:  SNL Financial

 For the period ended
Index9/30/2008 9/30/2009 9/30/2010 9/30/2011 9/30/2012 9/30/2013
Sterling Bancorp100.00
 74.08
 66.82
 47.63
 79.39
 94.24
S&P 500100.00
 93.09
 102.55
 103.73
 135.05
 161.18
SNL Mid-Atlantic Bank Index100.00
 71.84
 64.63
 51.02
 67.92
 91.25
This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that Provident New YorkSterling Bancorp specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

(B)
Not Applicable


34
39

(C)
Issuer Purchases of Equity Securities

  
Total Number of Shares (or Units) Purchased (1)
  
Average Price Paid per share (or Unit)
  
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)
  
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased Under the Plans or Programs (2)
 
Period (2010)           1,598,167 
July 1 - July 31  10,000  $9.41   10,000   1,588,167 
August 1 - August 31  229,000   8.57   229,000   1,359,167 
September 1 - September 30  127,189   8.36   125,000   1,234,167 
                 
Total  366,189  $8.52   364,000     

Total Number
of shares
(or units)
purchased (1)
Average
price paid
per share
(or unit)
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs (2)
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under the
plans or programs (2)
Period (2013)
July 1 — July 31—
$—
—
776,713
August 1 — August 31—
—
—
776,713
September 1 — September 30—
—
—
776,713
Total—
$—
—
1
The total number of shares purchased during the periods includes shares deemed to have been received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes ($18,36651,907, or 2,189 shares)6,041shares), as is permitted under the Company’s stock benefit plans and shares repurchased as part of a previously authorized repurchase program..program.

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

35
40

ITEM 6. Selected Financial Data

ITEM 6.Selected Financial Data
The following financial conditionsummary data and operating data are derived fromis based in part on the audited consolidated financial statements of Provident New York Bancorp.and accompanying notes, and other schedules appearing elsewhere in this Form 10-K. Historical data is also based in part on, and should be read in conjunction with, prior filings with the SEC. Additional information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included as Item 7 and Item 8 of this report,Report, respectively.

 At September 30, 
 2010  2009  2008  2007  2006 
 (Dollars in thousands) At or for the year ended September 30,
Selected Financial Condition Data:               
               2013 2012 2011 2010 2009
(Dollars in thousands)
Selected financial condition data:         
Period end:         
Total assets $3,021,025  $3,021,893  $2,984,371  $2,802,099  $2,841,337 $4,049,172
 $4,022,982
 $3,137,402
 $3,021,025
 $3,021,893
Loans, net (1)  1,670,698   1,673,207   1,708,452   1,617,669   1,453,185 2,384,021
 2,091,190
 1,675,882
 1,670,698
 1,673,207
Securities available for sale  901,012   832,583   791,688   794,997   951,729 954,393
 1,010,872
 739,844
 901,012
 832,583
Securities held to maturity  33,848   44,614   43,013   37,446   60,987 253,999
 142,376
 110,040
 33,848
 44,614
Deposits  2,142,702   2,082,282   1,989,197   1,713,684   1,729,659 2,962,294
 3,111,151
 2,296,695
 2,142,702
 2,082,282
Borrowings  363,751   430,628   566,008   661,242   682,739 560,986
 345,176
 323,522
 363,751
 430,628
Equity  430,955   427,456   399,158   405,089   405,286 
Stockholders’ equity
482,866
 491,122
 431,134
 430,955
 427,456
         
Average:         
Total assets$3,815,609
 $3,195,299
 $2,949,251
 $2,913,560
 $2,895,504
Loans, net (1)
2,216,871
 1,806,136
 1,665,360
 1,656,016
 1,700,383
Securities available for sale950,628
 801,792
 880,624
 836,130
 739,021
Securities held to maturity172,642
 165,722
 28,787
 42,903
 47,079
Deposits2,856,640
 2,366,263
 2,082,727
 1,978,380
 1,931,320
Borrowings446,916
 356,296
 422,816
 488,330
 529,614
Stockholders’ equity489,412
 447,065
 427,290
 425,408
 415,887
         
Selected income statement data:         
Interest and dividend income$132,061
 $115,037
 $112,614
 $119,774
 $131,590
Interest expense19,894
 18,573
 21,324
 26,440
 37,720
Net interest income112,167
 96,464
 91,290
 93,334
 93,870
Provision for loan losses12,150
 10,612
 16,584
 10,000
 17,600
Net interest income after provision for loan losses100,017
 85,852
 74,706
 83,334
 76,270
Non-interest income27,692
 32,152
 29,951
 27,201
 39,953
Non-interest expense91,041
 91,957
 90,111
 83,170
 80,187
Income before income tax expense36,668
 26,047
 14,546
 27,365
 36,036
Income tax expense11,414
 6,159
 2,807
 6,873
 10,175
Net income$25,254
 $19,888
 $11,739
 $20,492
 $25,861
         
Per share data:

        
Basic earnings per share$0.58
 $0.52
 $0.31
 $0.54
 $0.67
Diluted earnings per share0.58
 0.52
 0.31
 0.54
 0.67
Dividends declared per share0.30
 0.24
 0.24
 0.24
 0.24
Dividend payout ratio51.7% 45.2% 77.4% 44.4% 35.8%
Book value per share$10.89
 $11.12
 $11.39
 $11.26
 $10.81
         
Commons shares outstanding:         
Period end:         
Weighted average shares basic43,734,425 38,227,653 37,452,596 37,161,180 38,537,881
Weighted average shares diluted43,783,053 38,248,046 37,453,542 38,185,122 38,705,837

_________________________

  Years Ended September 30, 
  2010  2009  2008  2007  2006 
  (Dollars in thousands) 
Selected Operating Data:               
                
Interest and dividend income $119,774  $131,590  $148,982  $151,626  $135,616 
Interest expense  26,440   37,720   53,642   66,888   50,859 
Net interest income  93,334   93,870   95,340   84,738   84,757 
Provision for loan losses  10,000   17,600   7,200   1,800   1,200 
Net interest income after provision for loan losses  83,334   76,270   88,140   82,938   83,557 
Non-interest income  27,201   39,953   21,042   19,845   17,152 
Non-interest expense  83,170   80,187   75,500   74,590   71,256 
Income before income tax expense  27,365   36,036   33,682   28,193   29,453 
Income tax expense  6,873   10,175   9,904   8,566   9,258 
Net income $20,492  $25,861  $23,778  $19,627  $20,195 
footnotesSee legend on the following pagepage.

36
41

 At or for the year ended September 30,
 2013 2012 2011 2010 2009
Performance ratios:         
Return on assets (ratio of net income to average total assets)0.63% 0.62% 0.40% 0.70% 0.89%
Return on equity (ratio of net income to average equity)5.2
 4.5
 2.8
 4.8
 6.2
Net interest margin (2)
3.37
 3.51
 3.65
 3.78
 3.81
Core efficiency ratio62.6
 68.3
 71.3
 69.0
 65.2
          
Capital ratios:         
Equity to total assets at end of period11.9% 12.2% 13.7% 14.3% 14.2%
Average equity to average assets12.8
 14.0
 14.5
 14.6
 14.4
Tier 1 leverage ratio (Bank only)9.3
 7.5
 8.1
 8.4
 8.6
Tier 1 capital ratio (Bank only)13.2
 12.1
 11.8
 12.1
 12.6
Total capital ratio (Bank only)14.2
 13.3
 13.0
 13.3
 13.8
          
Asset quality data and ratios:         
Allowance for loan loss$28,877
 $28,282
 $27,917
 $30,843
 $30,050
Non-performing assets32,928
 46,217
 45,958
 30,731
 28,181
Net charge-offs11,555
 10,247
 19,510
 9,207
 10,651
Non-performing assets to total assets (1)
0.81% 1.15% 1.46% 1.02% 0.93%
Non-performing loans to total loans (1)
1.12
 1.88
 2.38
 1.58
 1.55
Allowance for loan losses to non-performing loans107
 71
 69
 115
 114
Allowance for loan losses to total loans1.20
 1.47
 1.64
 1.81
 1.76
Net charge-offs to average loans0.52
 0.56
 1.17
 0.56
 0.62
          
_________________________
  At or For the Years Ended September 30, 
  2010  2009  2008  2007  2006 
Selected Financial Ratios and Other Data:               
Performance Ratios:               
Return on assets (ratio of net income to average total assets)  0.70%  0.89%  0.84%  0.70%  0.75%
Return on equity (ratio of net income to average equity)  4.82   6.22   5.88   4.82   5.15 
Average interest rate spread (2)  3.51   3.46   3.49   2.97   3.19 
Net interest margin (3)  3.78   3.81   3.96   3.57   3.68 
Efficiency ratio(4)  68.96   65.11   61.20   66.40   65.30 
Non-interest expense to average total assets  2.85   2.77   2.68   2.68   2.63 
Ratio of average interest-earning assets to average interest-bearing liabilities  126.66   123.54   122.26   122.34   122.48 
                     
Per Share Related Data:                    
                     
Basic earnings per share $0.54   0.67   0.61  $0.48  $0.49 
Diluted earnings per share  0.54   0.67   0.61   0.48   0.49 
Dividends per share  0.24   0.24   0.24   0.20   0.20 
Book value per share (6)  11.26   10.81   10.03   9.82   9.49 
Dividend payout ratio (5)  44.44%  35.82%  39.34%  41.67%  40.82%
                     
Asset Quality Ratios:                    
                     
Non-performing assets to total assets  1.02%  0.93%  0.57%  0.26%  0.18%
Non-performing loans to total loans  1.58   1.55   0.97   0.44   0.34 
Allowance for loan losses to non-performing loans  115   114   137   281   406 
Allowance for loan losses to total loans  1.81   1.76   1.33   1.24   1.38 
                     
Capital Ratios:                    
                     
Equity to total assets at end of year  14.27%  14.15%  13.37%  14.46%  14.26%
Average equity to average assets  14.60   14.36   14.34   14.61   14.49 
Tier 1 leverage ratio (bank only)  8.4   8.6   8.0   8.1   7.8 
                     
Other Data:                    
Number of full service offices  35   33   33   33   33 
(1)Excludes loans held for sale.
(2)The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(3)Theperiod.The net interest margin represents net interest income as a percent of average interest-earning assets for the period. Net interest income is commonly presented on a tax-equivalent basis. This is to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g. was received as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices.

(4)The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. As in the case of net interest income, generally, net interest income as utilized in calculating the efficiency ratio is typically expressed on a tax-equivalent basis.  Moreover, most financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under generally accepted accounting principles) certain component elements, such as non-recurring charges, other real estate expense and amortization of intangibles (deducted from noninterest expense) and securities transactions and other non-recurring items (excluded from noninterest income).   We follow these practices.

(5)The dividend payout ratio represents dividends per share divided by basic earnings per share.

(6)Book value per share is based on total stockholders’ equity and 38,262,288, 39,547,207, 39,815,213, 41,230,618 and 42,699,046 outstanding common shares at September 30, 2010, 2009, 2008, 2007 and 2006, respectively. For this purpose, common shares include unallocated employee stock ownership plan shares but exclude treasury shares.












37
42

ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company provides financial services to individuals and businesses in New York and New Jersey. The Company’s business is primarily accepting deposits from customers through its banking offices and investing those deposits, together with funds generated from operations and borrowings into commercial real estate loans, commercial business loans, ADC loans, residential mortgages, consumer loans, and investment securities. Additionally, the Company offers investment management services. The financial condition and results of operations of Provident New York Bancorp are discussed herein on a consolidated basis with the Bank. Reference to Provident New York Bancorp or the Company may signify the Bank, depending on the context.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities. The Federal Reserve Board, through a series of reductions to the federal funds target rate to an unprecedented 0-25 basis points has acted to increase liquidity in the credit markets.  These rate reductions significantly lowered yields on the short end of the tre asury yield curve more so than the long end of the curve, resulting in a steeper yield curve than existed at the prior fiscal year-end.

As described in greater detail below, the key factors that have affected our results over the last three years include:
·the effects of the economic downturn on our asset quality, which has led to higher levels of provisions for loan losses than historically had been the case;
·the current low interest rate environment, which has contributed to margin pressure on net interest income;
·management’s decision to take advantage of the interest rate environment and realize securities gains to reduce future interest rate exposure;
·limited opportunities to make loans that meet our credit standards and pricing criteria; and
·increased costs of FDIC insurance due to assessments utilized to restore the federal deposit insurance fund

The last recession and slow recovery over the past two years have resulted in borrowers experiencing higher levels of stress, which resulted in our increased levels of charge-offs and provisions for loan losses. In particular, small businesses and borrowers involved in Acquisition, Development and Construction projects have been affected. During the year our provisions were only modestly in excess of our net charge-offs. Management of our loan portfolio continues to be a top priority. We were able to grow commercial real estate loans, which was substantially offset by declines in one-to-four family residential mortgages as we sold a substantial portion of our new production.

In addition, we continue to experience pressure on net interest income. Low rates continue to have the effect of causing many assets to prepay or to be called. In anticipation of this, we have also been selling certain investment securities when market conditions imply it is in our best interest to do so. Reinvestment of cash is necessarily made at lower interest rates. Many of our liabilities are at rates that are either fixed or already very low, so maintaining net interest margin is a function of loan growth, growth in non-interest bearing deposits, and continuation of our deposit pricing discipline. Transaction accounts grew 11.9% during the year, non-time deposits grew as well, while CDs declined. This helped support our net interest margin which was 3.78% this year compared to 3.81% last year.

Operating expenses were stable, while fee income excluding securities gains, declined slightly. Deposit fees declined primarily due to changed customer behavior partially offset in other categories.

Net income for the year ended September 30, 2010, decreased 20.8% to $20.5 million, or $0.54 per diluted share from $25.9 million, or $0.67 per diluted share for the year ended September 30, 2009. Net interest income on a tax equivalent basis decreased $400,000 or 0.4% for the year ended September 30, 2010 as compared to the year ended 2009.   Net interest margin decreased 3 basis points to 3.78% at September 30, 2010 from 3.81% at September 30, 2009. Average loans decreased $44.3 million to $1.66 billion at September 30, 2009 from $1.70 billion at September 30, 2009.  The decrease in average loans is due to refinancing of residential loans as well as the sale of residential loans to the secondary market.  The provision for loan losses decreased $7.6 million from September 30, 2009 to $10.0 million for the year ended September 30, 2010.


Net income for the year ended September 30, 2009, increased 8.8% to $25.9 million, or $0.67 per diluted share from $23.8 million, or $0.61 per diluted share for the year ended September 30, 2008. Net interest income on a tax equivalent basis decreased $1.1 million or 1.1% for the year ended September 30, 2009 as compared to the year ended 2008.   Net interest margin decreased 15 basis points to 3.81% at September 30, 2009 from 3.96% at September 30, 2009. Average loans increased $56.0 million to $1.70 billion at September 30, 2009 from $1.64 billion at September 30, 2008.  The provision increased $10.4 million from September 30,2008 to $17.6 million at September 30, 2009 primarily due to an increase in charge-offs (concentrated in the community business loan portfolio) and due to the slow down in the economic activity as a result of the recession that started in December 2007.

Non-interest income decreased $12.8 million to $27.2 million for the year ended September 30, 2010 from $40.0 million for the year ended September 30, 2009, primarily resulting from a decrease of $9.9 million in net securities gains, $1.1 million increase in the fair value loss on interest rate caps, and a decrease of $1.1 million in deposit fees and service charges.   Non interest income increased $18.9 million to $40.0 million for the year ended September 30, 2009 from $21.0 million for the year ended September 30, 2008, primarily due to a increase of $17.1 million in net securities gains and an increase in bank owned life insurance due to a death payment.

Non-interest expense increased $3.0 million to $83.2 million for the year ended September 30,2010 from $80.2 million for the year ended September 30, 2009 primarily resulting from increased employee benefits and incentives, staffing for new offices, occupancy expense associated with the new offices and professional fees.  Non interest expense increased $4.7 million to $80.2 million at September 30, 2009 from $75.5 million at September 30, 2008 primarily due to increased FDIC assessments during 2009.

Total assets were essentially unchanged at $3.0 billion for the year ended September 30, 2010 and 2009.  Net loans remained flat decreasing by 0.1% as commercial lending increases in outstanding balances were offset by decreases in residential mortgage balances.  A significant portion of residential mortgage originations were sold in to the secondary market.  Deposits increased $60.4 million in 2010 primarily in business and retail transaction accounts, municipal NOW accounts, savings, and money market deposit accounts.

The following is an analysistable shows the reconciliation of the full year core operating efficiency ratio which is a non-GAAP financial measure:

 For the year ended September 30,
 2013 2012 2011 2010 2009
Net interest income$112,167
 $96,464
 $91,290
 $93,334
 $93,870
Non-interest income27,692
 32,152
 29,951
 27,201
 39,953
Total net revenues139,859
 128,616
 121,241
 120,535
 133,823
Tax equivalent adjustment on securities interest income3,060
 3,498
 4,007
 4,186
 4,049
Net gain on sales of securities(7,391) (10,452) (10,011) (8,157) (18,076)
Other than temporary loss on securities32
 47
 278
 —
 —
Other, (other gains and fair value loss on interest rate caps)77
 (12) 197
 1,160
 (517)
Core total revenues135,637
 121,697
 115,712
 117,724
 119,279
          
Non-interest expense91,041
 91,957
 90,111
 83,170
 80,187
Merger-related expenses(2,772) (5,925) —
 —
 —
Charge for asset write-downs(564) —
 (3,201) —
 —
Other real estate owned expense(1,562) (1,618) (1,171) (137) (207)
Amortization of intangible assets(1,296) (1,245) (1,426) (1,849) (2,185)
Defined benefit settlement charge / CEO change—
 —
 (1,772) —
 —
Core non-interest expense84,847
 83,169
 82,541
 81,184
 77,795
          
Core efficiency ratio62.6% 68.3% 71.3% 69.0% 65.2%

The core efficiency ratio reflects total revenues inclusive of the tax equivalent adjustment on municipal securities and excludes securities gains, other than temporary impairments and the other adjustments shown above. Core non-interest expense is adjusted to exclude the effect of merger-related expenses, non-recurring charges, other real estate expense and amortization of intangible assets. The Company believes this non-GAAP information provides useful information to users to assess the Company’s core operations.

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ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

General
The following MD&A provides information we believe necessary to understand our results of operations, our financial condition and results of the Company’s operations. This itemchanges therein and cash flows. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and related notes filed herewithother information contained in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of the Company’s business filed here within Part I, Item 1,“Business.”

this report.
44

Critical Accounting Policies

Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income.

Allowance for Loan Losses.The methodology for determining the allowance for loan losses is considered by managementthe Company to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, and review their risk components as a part of that evaluation. See Note 1, “Basis1. Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” inPolicies to our “Notesnotes to Consolidated Financial Statements”the consolidated financial statements for a discussion of the risk components. We consistently review the risk components to identify any changes in trends. At September 30, 2010 Provident2013 Sterling has recorded $30.8$28.9 million in its allowan ceallowance for loan losses.

AccountingGoodwill and Other Intangible Assets. The Company accounts for goodwill is considered toand other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be a critical policy because goodwill mustamortized, but rather that it be tested for impairment at least annually. The Company assesses qualitative factors to determine whether it is more likely than not (i.e. a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances (e.g. macroeconomic conditions, industry and market considerations, overall financial performance and other relevant Company-specific events). If after assessing the totality of events or circumstances such as those described above the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. Testing for impairment of goodwill and intangible assets is performed annually using a “two-step” approach thatand involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions utilized. The Company additionally utilized a discounted cash flow analysis to determine goodwill impairment as of September 30, 2010.  The analysis showed no impairment as the net present value under several discount rate and multiple assumptions was higher than stockholders equity.  If goodwill is determined to be impaired, it would be expensedused. Changes in the periodlocal and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in which it became impaired.  The Company has $160.9 million in recorded goodwillan impairment charge at September 30, 2010.a future date.

We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired. Other intangible assets have been recorded in connection with the acquisition of HVIA for non-competition and customer intangibles.  At September 30, 2010,2013 the CompanyBank had $3.6$1.9 million recorded in core depositnaming rights net of amortization included in other intangibles related to Provident Bank Ball Park and $2.0 million in mortgage servicing rights included in other intangibles.assets.

Income Taxes.We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
At September 30, 2010, Provident has2013, Sterling Bancorp had net deferred tax assets of $2.0$15.0 million.

Interest income.Interest income on loans, securities and other interest-earning assets is accrued monthly unless managementthe Company considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when management haswe have determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including

39

impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful. At September 30, 2010, Provident has $21.42013, Sterling had $22.8 million in loans in non-accrual status.

Summary
In fiscal 2013, the Company reported net income totaling $25.3 million, which was a 27.0% increase over net income of $19.9 million in fiscal 2012. Results for fiscal 2013 were positively impacted by an increase in loan and deposit balances acquired from Gotham Bank in August 2012.

The Company’s diluted earnings per share were $0.58 in fiscal 2013, which represented 11.5% growth over diluted earnings per share of $0.52 in fiscal 2012. In August 2012, the Company issued 6.3 million common shares in connection with the acquisition of Gotham Bank which increased weighted average diluted shares outstanding from 38.2 million in fiscal 2012 to 43.8 million in fiscal 2013.
 
A substantial amount of the Company’s growth in fiscal 2013 was generated through our commercial banking teams. Comparing fiscal 2013 results relative to 2012, commercial real estate and commercial & industrial loans grew by $301.0 million to $1.7 billion, which represented a growth rate of 21.3%. We also experienced growth in our deposit balances. During fiscal 2013, non-interest bearing and interest bearing demand deposits grew by $80.1 million to $912 million, which represented growth of 9.6%.
45
The emphasis on growing our commercial banking activities and consolidation of our financial centers has allowed us to increase the variable component of our operating expense base and significantly improve our core operating efficiency. In fiscal 2013, core total revenues (which includes net interest income and non-interest income) grew at 11.5% while total core operating expenses declined 2.0%. The Company will continue to focus on generating revenue growth that outpaces the growth in expenses.
On October 31, 2013 we completed our acquisition of Legacy Sterling. This acquisition is consistent with our strategy of expanding in the greater New York metropolitan region and focusing on commercial banking. We believe this merger will create a larger, more efficient organization by combining Sterling’s differentiated team-based distribution channels with Legacy Sterling’s diverse commercial and consumer lending product capabilities. We anticipate that the Merger will allow us to accelerate loan growth, increase our ability to gather low cost core deposits and generate substantial cost savings and revenue enhancement opportunities. On a pro forma combined basis, Sterling Bancorp had total assets of $6.8 billion and total deposits of $5.2 billion as of September 30, 2013.

We believe the Merger will significantly diversify our business. Legacy Sterling was predominately a commercial & industrial lender which will complement our loan portfolio which is substantially collateralized by real estate. Further, Legacy Sterling provides us with a greater non-interest income revenue stream. On a combined basis, we anticipate approximately 20-25% of our total revenues will consist of non-interest income.

Table of Contents

Comparison of Financial Condition at September 30, 20102013 and September 30, 20092012

Total assets as of September 30, 20102013 were $3.0$4.0 billion essentially unchanged from , an increase of $26.2 million compared to September 30, 2009.   Cash2012. The increase was a result of growth in net loans of $292.8 million and growth in investment securities of $55.1 million. These increases were substantially offset by a $324.9 million decline in the balance of cash and due from banks decreased $69.5 million to $90.9 million at September 30, 2010 due primarily to deposits received on September 30, 2009 and high levels of balances maintained at the Federal Reserve in 2009. Core deposit and other intangibles decreased by $1.8 million. Goodwill was unchanged. The Company had $5.9 million in loans held for sale as of September 30, 2010 and $1.2 million at September 30, 2009. Premises and equipment increased $2.9 million primarily related to new office locations in Nyack and Yonkers, New York and platform automated systems.banks.

Net loans as of September 30, 20102013 were $1.7$2.4 billion a decrease, an increase of $2.5$292.8 million, or 0.1%14.0%, over net loan balancesloans of $1.7$2.1 billion at September 30, 2009.  Commercial real estate loans increased $35.2 million, or 6.4%, and Acquisition, Development and Construction loans (ADC) increased $27.9 million or 13.8%2012. In fiscal 2013 we continued to $229.5 million compared to $201.6 million as of September, 2009. Consumer loans decreased by $13.3 million, or 5.3%, during the fiscal year ended September 30, 2010, residential loans decreased by $49.5 million, or 10.7%.  Total loan originations, excluding loans originated for sale were $472.1 million for the fiscal year ended September 30, 2010, while repayments were $464.6 million for the fiscal year ended September 30, 2010. There w ere increases in the reserves for ADC, commercial business loans and home equity lines of credit, with decreases infocus on growing our commercial real estate and residential mortgages.commercial & industrial loan portfolios. During the year, we increased commercial real estate loans $204.5 million, or 19.1%, and commercial & industrial loans $96.5 million, or 28.1%. The variances weregrowth in commercial loan balances was offset by a decline in ADC loans, which decreased $41.6 million or 28.9% to $102.5 million compared to $144.1 million as of September 30, 2012. We expect to continue to reduce the outstanding balance of ADC loans in fiscal 2014. Residential mortgage loans increased by $50.0 million, or 14.3% in fiscal 2013 driven by modificationsan increase in reserve factorsthe amount of adjustable rate mortgage loans retained in the Company’s held for investment portfolio. Management believes that the risk-adjusted return on these loans is more attractive than alternatives such as wellmortgage-backed securities and other investment securities. The allowance for loan losses increased from $28.3 million to $28.9 million as changes ina result of provisions for loan balances.losses of $12.2 million and net charge-offs of $11.6 million.

Total securities increased by $57.7$55.1 million, to $934.9 million$1.2 billion at September 30, 2010 from $877.2 million at September 30, 2009.   Security2013. Securities purchases were $853.6$659.5 million, sales of securities were $443.4$340.3 million, and maturities, calls, and repayments were $362.8 million.$224.6 million.

Goodwill and other intangibles totaled $169.0 million at September 30, 2013 a decrease of $1.4 million compared to September 30, 2012. The decrease was the result of amortization of core deposit intangibles.

Deposits as of September 30, 20102013 were $2.1$2.96 billion, an increasea decrease of $60.4$148.9 million, or 2.9%4.8%, from September 30, 2009.2012. Included in deposits for September 30, 20102013 were approximately $212.0$374.3 million in short-term seasonal municipal deposits compared to $201.0$424.6 million at September 30, 2012. The change in total deposits was driven by a decrease of $144.7 million in municipal deposits during the year. The balance of municipal

40

deposits typically reaches peak levels between the months of September and December. The Company continued to focus on decreasing the balance of higher cost certificates of deposit. In fiscal 2013, certificates of deposit decreased $119.4 million or 30.8% to $268.1 million. Excluding municipal deposits and certificates of deposits the total balance of deposits increased from $1.83 billion at September 30, 2009.  As of September 30, 2010 transaction accounts were 44.1% of deposits, or $945.5 million compared2012 to $844.9 million or 40.6%$1.95 billion at September 30, 2009. As2013, which represented growth of 6.6%.

Borrowings increased by $215.8 million, or 62.5%, from September 30, 2010 savings deposits2012, to $561.0 million. Included in borrowings at September 30, 2013 is $100 million of Senior Notes issued in connection with the Merger. The remaining increase in borrowings of $115.8 million was driven by incremental borrowings from the Federal Home Loan Bank of New York that were $392.3used mainly to fund loan growth.

Stockholders’ equity decreased $8.3 million from September 30, 2012 to $482.9 million at September 30, 2013. The decrease was primarily due to a $26.5 million decline, net of tax, in the fair value of available for sale securities. As interest rates increased during the year, the value of our available for sale securities declined. Offsetting this decline was an increase of $34.5$12.0 million or 9.6%.  Money market accounts increased $42.7 million or 11.1% to $427.3 million at September 30, 2010.  Offsetting the increases in savings and money market accounts was a decrease of $117.4 million, or 23.7% in certificates of deposits as the Company, while maintaining competitive rate structures, did not compete with the highest pricing in the market place.  The Company attributes the change in mix and net increases to customers unwilling to place significant amounts of deposits in term maturities in the current rate environment as well as the success of its marketing efforts.

Borrowings decreased by $66.9 million, or 13.9%, from September 2009, to $415.2 million. The decrease is related to the borrowings being paid down by maturing investment securities and deposits.

Stockholders’ equity increased $3.5 million from September 30, 2009 to $431.0 million at September 30, 2010. The increase was due to $9.2 million increase in the Company’s retained earnings, which consisted of net income of $25.3 million and a $2.6 million improvement in accumulated other comprehensive income, after realizing securities gains in the fiscal yeardividends declared of $8.2$13.3 million. During fiscal 2010,2013, the Company repurchased 1,515,823did not repurchase shares of its common stock at a cost of $12.9 million under the treasury repurchase program and issued a net 231,004 shares from its stock based compensation plans.program.

As of September 30, 20102013 the Company had authorization to purchase up to an additional 1,234,167776,713 shares of common stock. BankThe Bank’s Tier I capital to assets1 leverage ratio was 8.43% at September 30, 2010. Tangible capital9.33% and consolidated tangible equity as a percentage of tangible assets was 8.09%.
Credit Quality
Non-performing loans (“NPLs”) decreased $12.9 million, or 32.4%, to $26.9 millionat September 30, 2013 compared to $39.8 million at September 30, 2012. During the holding company levelfiscal year ended September 30, 2013, we continued to focus on the resolution of non-performing ADC loans. As a result of these efforts, we reduced non-performing ADC loans by $10.0 million and reduced our non-performing residential mortgage loans by $2.0 million, mainly by foreclosing on properties. We also reduced non-performing CRE loans by $1.7 million. There were small offsetting increases in NPLs of $310 thousand in HELOC loans, $2 thousand in consumer loans and $445 thousand in C&I loans.

The allowance for loan losses increased from $28.3 million to $28.9 million as the provisions exceeded net charge-offs by $595 thousand. The allowance for loan losses at September 30, 2013 was 9.33%$28.9 million, which represented 107.3% of non-performing loans and 1.20% of the total loan portfolio. Net charge-offs for the year ended September 30, 2013 were $11.6 million, or 0.52% of average loans, compared to net charge-offs of $10.2 million, or 0.56% of average loans for the prior year. The decrease in net charge-offs as a percentage of average loans was mostly due to improved performance in our commercial & industrial loans and ADC loans.
Our classified loans, those rated substandard or worse, declined from $88.7 million at September 30, 2012 to $61.1 million at September 30, 2013 primarily due to $40.6 million in loans that were upgraded in risk rating or the repayment of loans contained in this category. Also contributing to the decline were $9.6 million in net charge-offs and transfers to other real estate owned. Partially offsetting these declines were new loans risk rated substandard of $23.1 million. Special mention loans decreased from $42.4 million at September 30, 2012 to $13.5 million at September 30, 2013. This decline was primarily the result of $38.1 million in loans that were upgraded in risk rating or repayment of loans contained in this category. There were $300 thousand in net charge-offs from this category. Partially offsetting these declines was new loans risk rated special mention and loans that were upgraded from substandard of $9.5 million.


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46

Average Balances
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. Tax-exemptTax exempt securities are reported on a tax-equivalent basis, using a 35% federal tax rate. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 Years Ended September 30, 
 2010  2009  2008 
 
Average Outstanding Balance
  Interest  Yield/Rate  
Average Outstanding Balance
  Interest  Yield/Rate  
Average Outstanding Balance
  Interest  Yield/Rate For the year ended September 30,
 (Dollars in thousands) 2013 2012 2011
Interest Earning Assets:                           
Average
balance
 Interest Yield/Rate Average
balance		 Interest Yield/Rate Average
balance		 Interest Yield/Rate
(Dollars in thousands)
Interest earning assets:                 
Loans(1)
 $1,656,016  $92,542   5.59% $1,700,383  $97,149   5.71% $1,644,388  $107,633   6.55%$2,216,871
 $107,810
 4.86% $1,806,136
 $91,010
 5.04% $1,665,360
 $89,500
 5.37%
Securities taxable  662,914   18,208   2.75   592,071   25,552   4.32   647,167   31,947   4.94 948,884
 17,509
 1.85
 778,994
 16,537
 2.12
 695,961
 14,493
 2.08
Securities-tax exempt  216,119   11,959   5.53   194,028   11,569   5.96   173,541   10,511   6.06 174,386
 8,742
 5.01
 188,520
 9,996
 5.30
 213,450
 11,448
 5.36
Federal Reserve Bank  20,009   52   0.26   56,639   144   0.25   -   -   - 59,375
 193
 0.33
 51,351
 127
 0.25
 14,044
 32
 0.23
Other  25,007   1,198   4.79   27,061   1,225   4.53   35,103   2,570   7.32 23,905
 867
 3.63
 18,901
 865
 4.58
 20,933
 1,148
 5.48
Total Interest-earnings assets  2,580,065   123,959   4.80   2,570,182   135,639   5.28   2,500,199   152,661   6.11 
Total interest-earnings assets3,423,421
 135,121
 3.95
 2,843,902
 118,535
 4.17
 2,609,748
 116,621
 4.47
Non-interest earning assets  333,495           325,322           320,765         392,188
     351,397
     339,503
    
Total assets $2,913,560          $2,895,504          $2,820,964         $3,815,609
     $3,195,299
     $2,949,251
    
Interest Bearing Liabilities:                                    
Interest bearing liabilities:                 
NOW deposits $280,304   579   0.21  $232,164   670   0.29  $189,524   1,015   0.54 $466,110
 $391
 0.08% $399,819
 $483
 0.12% $315,623
 $595
 0.19%
Savings deposits(2)
  397,760   403   0.10   366,355   758   0.21   356,854   1,243   0.35 572,246
 973
 0.17
 485,624
 393
 0.08
 432,227
 444
 0.10
Money market deposits  419,152   1,456   0.35   374,507   2,707   0.72   285,119   5,299   1.86 819,442
 2,436
 0.30
 671,325
 2,194
 0.33
 489,347
 1,595
 0.33
Certificates of deposit  451,509   6,079   1.35   577,723   14,240   2.46   556,973   20,787   3.73 352,469
 2,123
 0.60
 289,230
 2,511
 0.87
 373,142
 3,470
 0.93
Senior Debt  51,495   2,029   3.94   32,730   1,269   3.88   -   -   - 
Senior notes24,478
 1,431
 5.85
 19,136
 753
 3.93
 51,498
 2,017
 3.92
Borrowings  436,835   15,894   3.64   496,884   18,076   3.64   656,538   25,298   3.85 422,438
 12,540
 2.97
 337,160
 12,239
 3.65
 371,318
 13,203
 3.56
Total interest-bearing liabilities  2,037,055   26,440   1.30   2,080,363   37,720   1.81   2,045,008   53,642   2.62 2,657,183
 19,894
 0.75
 2,202,294
 18,573
 0.84
 2,033,155
 21,324
 1.05
Non-interest bearing deposits  429,655           380,571           351,995         646,373
     520,265
     472,388
    
Other non-interest bearing liabilities  21,442           18,683           19,565         22,641
     25,675
     16,418
    
Total liabilities  2,488,152           2,479,617           2,416,568         3,326,197
     2,748,234
     2,521,961
    
Stockholders' equity  425,408           415,887           404,396         
Total liabilities and                                    
Stockholders' equity $2,913,560          $2,895,504          $2,820,964         
Stockholders’ equity489,412
     447,065
     427,290
    
Total liabilities and Stockholders’ equity$3,815,609
     $3,195,299
     $2,949,251
    
Net interest rate spread(3)
          3.51%          3.46%          3.49%    3.20%     3.33%     3.42%
Net Interest-earning assets(4)
 $543,010          $489,819          $455,191         
Net interest-earning assets (4)
$766,238
     $641,608
     $576,593
    
Net interest margin(5)
      97,519   3.78%      97,919   3.81%      99,019 �� 3.96%  115,227
 3.37%   99,962
 3.51%   95,297
 3.65%
Less tax equivalent adjustment      (4,185)          (4,049)          (3,679)      (3,060)     (3,498)     (4,007)  
Net Interest income     $93,334          $93,870          $95,340     
Net interest income  $112,167
     $96,464
     $91,290
  
Ratio of interest-earning assets to interest bearing liabilities      126.66%          123.54%          122.26%      128.8%     129.1% 
   128.4%  
 
(1)Balances includeIncludes the effect of net deferred loan origination fees and costs, and the allowance for the loan losses.losses, and non-accrual loans. Includes prepayment fees and late charges.
(2)Includes club accounts and interest-bearing mortgage escrow balances.
(3)Net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5)Net interest margin represents net interest income (tax equivalent) divided by average total interest-earning assets.


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47

Net interest income is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.

The following table presents the dollar amount of changes in interest income (on a fully tax-equivalent basis) and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e.(i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
 2013 vs. 2012 2012 vs. 2011
 
Increase (Decrease)
due to
 
Total
increase
 Increase (Decrease)
due to		 
Total
increase
 Volume Rate (decrease) Volume Rate (decrease)
 (Dollars in thousands)
Interest-earning assets:           
Loans$20,489
 $(3,689) $16,800
 $7,367
 $(5,857) $1,510
Securities taxable3,269
 (2,297) 972
 1,761
 283
 2,044
Securities tax exempt(725) (529) (1,254) (1,325) (127) (1,452)
Federal Reserve Bank22
 44
 66
 92
 3
 95
Other earning assets180
 (178) 2
 (90) (193) (283)
Total interest-earning assets23,235
 (6,649) 16,586
 7,805
 (5,891) 1,914
Interest-bearing liabilities:           
NOW deposits76
 (168) (92) 139
 (251) (112)
Savings deposits79
 501
 580
 46
 (97) (51)
Money market deposits456
 (214) 242
 599
 —
 599
Certificates of deposit485
 (873) (388) (745) (214) (959)
Senior notes247
 431
 678
 (1,269) 5
 (1,264)
Borrowings2,764
 (2,463) 301
 (1,223) 259
 (964)
Total interest-bearing liabilities4,107
 (2,786) 1,321
 (2,453) (298) (2,751)
Less tax equivalent adjustment(245) (193) (438) (466) (43) (509)
Change in net interest income$19,373
 $(3,670) $15,703
 $10,724
 $(5,550) $5,174

    
  2010 vs. 2009  2009 vs. 2008 
  Increase (Decrease) Due to  
Total Increase (Decrease)
  Increase (Decrease) Due to  
Total Increase (Decrease)
 
  Volume  Rate    Volume  Rate   
  (Dollars in thousands) 
                   
Interest-earning assets:                  
Loans $(2,546) $(2,061) $(4,607) $3,782  $(14,266) $(10,484)
Securities taxable  2,786   (10,130)  (7,344)  (2,585)  (3,810)  (6,395)
Securities tax exempt  1,260   (870)  390   1,233   (175)  1,058 
Federal Reserve Bank  (98)  6   (92)  -   144   144 
Other earning assets  (127)  100   (27)  (480)  (865)  (1,345)
                         
Total interest-earning assets  1,275   (12,955)  (11,680)  1,950   (18,972)  (17,022)
Interest-bearing liabilities:                        
NOW deposits  121   (212)  (91)  197   (542)  (345)
Savings deposits  63   (418)  (355)  32   (517)  (485)
Money market deposits  286   (1,537)  (1,251)  1,323   (3,915)  (2,592)
Certificates of deposit  (2,662)  (5,499)  (8,161)  750   (7,297)  (6,547)
Senior Debt  740   20   760   -   1,269   1,269 
Borrowings  (2,182)  -   (2,182)  (5,899)  (1,323)  (7,222)
                         
Total interest-bearing liabilities  (3,634)  (7,646)  (11,280)  (3,597)  (12,325)  (15,922)
Less tax equivalent adjustment  441   (305)  136   423   (53)  370 
Change in net interest income $4,468  $(5,004) $(536) $5,124  $(6,594) $(1,470)
Comparison of Operating Results for the Years Ended September 30, 2013 and September 30, 2012
Net income for the year ended September 30, 2013 was $25.3 million or $0.58 per diluted share. This compares to net income of $19.9 million, or $0.52 per diluted share for the year ended September 30, 2012.

AnalysisInterest Income. Tax equivalent interest income for the year ended September 30, 2013 increased to $135.1 million, an increase of Net Interest Income$16.6 million, or 14.0%, compared to the prior year. Average interest-earning assets for the year ended September 30, 2013 were $3.4 billion, an increase of $579.5 million, or 20.4%, over average interest-earning assets for the year ended September 30, 2012.

NetInterest income on loans increased $16.8 million in fiscal 2013 compared to the prior year. The increase was due to an increase in average loan balances of $410.7 million to $2.2 billion, which increased interest income isby $20.5 million. This was partially offset by an 18 basis points decline in the difference betweenyield on loans to 4.86% in fiscal 2013 as compared to 5.04% in fiscal 2012 which reduced interest income on loans by $3.7 million. The increase in loan volume was due to the success of our commercial banking teams and our successful retention of Gotham Bank interest-earning assets; the decline in loan yields reflects mainly the repayment of loans booked in prior periods that were replaced with loans at current market rates of interest.


43

Tax equivalent interest income on securities increased $971 thousand. A $155.6 million increase in the average balance of securities contributed $3.3 million of additional interest income. A decline in the yield on securities of 40 basis points to 2.34% reduced interest income from securities by $2.3 million.

Average other earning assets and balances at the Federal Reserve Bank increased $13.0 million, which contributed $202 thousand to interest income. This was substantially offset by lower rates earned on these average balances, which declined to 1.27% in fiscal 2013 from 1.41% in fiscal 2012.

Interest Expense for the year ended September 30, 2013 increased by $1.3 million to $19.9 million, an increase of 7.1% compared to interest expense of $18.6 million for the prior fiscal year. The increase in interest expense was due to the increase in the average balance of interest-bearing liabilities of $454.9 million, which was partially offset by a nine basis point reduction in the total cost of interest-bearing liabilities to 0.75% in fiscal 2013 from 0.84% in fiscal 2012. Interest expense on interest-bearing liabilities. Netdeposits increased $342 thousand. Average total interest-bearing deposits increased $364.3 million in fiscal 2013, which added $1.1 million to interest income dependsexpense for the fiscal year. However, the rate incurred on interest-bearing deposits declined to 27 basis points from 30 basis points, which reduced interest expense by $754 thousand. Interest expense incurred on the Senior Notes in fiscal 2013 was $1.4 million. Interest expense on other borrowings increased $301 thousand in fiscal 2013 mainly due to an increase of $85.3 million in the average daily balance of other borrowings which increased interest expense by $2.8 million. As a greater portion of the borrowings were short-term, including overnight borrowings, the rate on other borrowings declined to 2.97% in fiscal 2013 from 3.63% in fiscal 2012.

Net Interest Income for the fiscal year ended September 30, 2013 was $112.2 million, compared to $96.5 million for the year ended September 30, 2012. The tax equivalent net interest margin was 3.37%, which declined 14 basis points relative amountsto fiscal 2012. The main components of this decrease were the repayment of interest-earning assets and interest-bearing liabilitiesoriginated in prior periods that were replaced with assets at current market rates of interest.

Provision for Loan Losses. The provision for loan losses is determined by the Company as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level that is the Company’s best estimate of probable incurred credit losses inherent in the loan portfolio. We recorded $12.2 million in loan loss provisions in fiscal 2013 compared to $10.6 million in fiscal 2012, an increase of $1.5 million. Net charge-offs in the loan portfolio were $11.6 million in fiscal 2013, compared to $10.2 million in the previous year. The amount of provision for loan losses considered the improvement in the credit quality of our loan portfolio, net charge-offs and the growth in the loan portfolio.

Non-interest income was $27.7 million for fiscal 2013, compared to $32.2 million for fiscal 2012. Non-interest income is principally comprised of deposit fees and service charges, net gain on sale of securities, bank-owned life insurance (“BOLI”) contracts, net gains on the sale of loans and title insurance and investment management fees. During fiscal 2013, non-interest income declined $4.5 million, or 13.9%, due to a $3.1 million decline in net gain on sale of securities, and a $1.4 million decline in title insurance and investment management fees. In fiscal 2012, we sold the assets of our former subsidiaries that were active in the title insurance and investment management businesses. We commenced new initiatives for title insurance and wealth management during fiscal 2013. In fiscal 2013, fees from these new initiatives were $2.8 million as compared to $4.3 million fiscal 2012.

Deposit fees and service charges decreased by $413 thousand, or 3.6%, to $11.0 million as compared to $11.4 million in fiscal 2012. This decline was caused by a change in the composition of our deposits, as deposits gathered by our relationship teams are generally higher balance deposits but typically generate lower levels of fees and service charges than retail deposits. BOLI income and net gain on sale of loans were both relatively unchanged in fiscal 2013 compared to fiscal 2012. During fiscal 2013 the Company sold $94.1million in residential mortgage loans and recorded $2.0 million in gains compared to $79.1 million in loans sold with $1.9 million in gains at fiscal 2012. The majority of net gain on sale of loans was generated in the first half of fiscal 2013 before interest rates began to increase. Other non-interest income for fiscal 2013 was $2.6 million, a $410 thousand increase compared to fiscal 2012. Other non-interest income principally includes loan servicing revenues, miscellaneous loan fees earned, letter of credit fees, and safe deposit box rentals.

Non-interest expense for fiscal 2013 decreased by $916 thousand, or paid1.0% to $91.0 million, compared to $92.0 million for the same period in 2012. Non-interest expense is principally comprised of compensation and employee benefits, occupancy and office operations, merger-related expense, FDIC insurance and regulatory assessments, professional fees and other real estate owned expenses. The decline in non-interest expense between fiscal 2013 and fiscal 2012 is mainly due to lower merger-related expenses. Merger-related expenses in fiscal 2013 of $2.8 million included due diligence costs for the Merger, which closed October 31, 2013, but did not include restructuring costs or other charges. Merger-related expenses in fiscal 2012 of $5.9 million included both due diligence, restructuring costs and other charges in connection with the acquisition of Gotham Bank. The majority of the expense for the Merger with Legacy Sterling will be recognized subsequent to September 30, 2013.

44


In fiscal 2013 compensation and employee benefits increased $1.8 million, or 3.9%, to $47.8 million compared to $46.0 million in the prior year. At September 30, 2013 and 2012 we had 16 relationship teams; however, several of the teams were recruited over the course of 2012. Our full-time equivalent employees were 477 at September 30, 2013 compared to 493 at September 30, 2012. The decline in personnel, was the result of efficiencies generated by the acquisition of Gotham Bank and four branch consolidations in fiscal 2013.


Professional fees declined $854 thousand to $3.4 million compared to $4.2 million in fiscal 2012 due mainly to lower costs incurred in connection with loan workouts and collections given the improvement in our asset quality.

Income Tax expense was $11.4 million for fiscal 2013, compared to $6.2 million for fiscal 2012, representing an effective tax rate of 31.1% and 23.6%, respectively. The higher effective tax rate recognized in fiscal 2013 was mainly the result of merger-related expenses incurred during the year that were fully non-tax deductible. In addition, the tax rate in fiscal 2013 relative to fiscal 2012 was impacted by a change in the proportion of municipal securities tax-exempt income and BOLI income relative to total pre-tax income.

Comparison of Financial Condition at September 30, 2012 and September 30, 2011
Total assets as of September 30, 2012 were $4.0 billion, an increase of $885.6 million compared to September 30, 2011. Significant contributors to the increase were the acquisition of Gotham Bank, whose assets totaled $431.4 million on them, respectively.the acquisition date, and seasonal funds received from municipal tax collection activity.

Net loans as of September 30, 2012 were $2.1 billion, an increase of $415.3 million, or 24.8%, over net loan balances of $1.7 billion at September 30, 2011. Approximately half of this increase was due to the loans acquired from Gotham Bank. Commercial real estate loans increased $369.1 million, or 52.5%, commercial & industrial loans increased $133.4 million, or 63.5%, and ADC loans decreased $31.9 million or 18.1% to $144.1 million compared to $175.9 million as of September 30, 2011, reflecting our decision to decrease ADC lending. Total loan originations, excluding loans originated for sale, were $735.7 million for fiscal 2012, while repayments were $509.1 million. The allowance for loan losses increased from $27.9 million to $28.3 million as a result of provisions for loan losses of $10.6 million and net charge-offs of $10.2 million.

Total securities increased by $303.4 million, to $1.2 billion at September 30, 2012 from $849.9 million at September 30, 2011. Securities purchases were $774.7 million, sales of securities were $344.4 million, and maturities, calls, and repayments were $237.5 million.

Goodwill and other intangibles totaled $170.4 million at September 30, 2012 an increase of $4.9 million. The increase is mainly related to the August 2012 acquisition of Gotham Bank offset by decreases relating to the sale of assets of Hudson Valley Investment Advisors.

Depositsas of September 30, 2012 were $3.1 billion, an increase of $814.5 million, or 35.5%, from September 30, 2011. Included in deposits for September 30, 2012 were approximately $425.0 million in short-term seasonal municipal deposits compared to $284.0 million at September 30, 2011. As of September 30, 2012, transaction accounts were 44.9% of deposits, or $1.4 billion compared to $1.1 billion or 45.9% at September 30, 2011. As of September 30, 2012, savings deposits were $506.5 million, an increase of $76.7 million or 17.8%. Money market accounts increased $312.2 million or 61.3% to $821.7 million at September 30, 2012 and certificates of deposit increased $83.8 million or 27.6% to $387.5 million.

Borrowings decreased by $29.8 million, or 8.0%, from September 30, 2011, to $345.2 million primarily due to the maturity of the Company’s FDIC guaranteed borrowing. The Company restructured $5.0 million of FHLB advances during the first quarter of fiscal 2012 which had a weighted average rate of 4.04% and duration of 1.5 years, into new borrowings with a weighted average rate of 2.37%, and duration of 1.6 years. Prepayment penalties of $278 thousand associated with the modifications are being amortized into interest expense over the modification period on a level yield basis.

Stockholders’ equity increased $60.0 million from September 30, 2011 to $491.1 million at September 30, 2012. The increase was primarily due to an increase of $46.5 million in additional paid-in capital from the issuance of 6,258,504 shares of common stock at a price of $7.35 per share in connection with the acquisition of Gotham Bank. The Company received net proceeds of approximately $46.0 million. The Company’s retained earnings increased $10.8 million and accumulated other comprehensive income increased by $1.8 million. During fiscal 2012, the Company did not repurchase shares of common stock under the treasury repurchase program.

As of September 30, 2012, the Bank’s Tier 1 leverage ratio was 7.49% and consolidated tangible equity as a percentage of tangible assets was 8.30%.

45

Credit Quality
NPLs decreased to $39.8 million at September 30, 2012 compared to $40.6 million at September 30, 2011. However, non-performing loans peaked at $52.0 million at March 31, 2012. The increase during the first half of the year primarily resulted from deterioration in our ADC portfolio combined with an increase in non-performing commercial real estate loans.  Through a combination of loan restructurings, sales and partial charge-offs, we reduced the NPLs during the second half of fiscal 2012. 

The allowance for loan losses increased from $27.9 million to $28.3 million as the provisions exceeded net charge-offs by $365,000. The allowance for loan losses at September 30, 2012 was $28.3 million, which represented 71.0% of non-performing loans and 1.48% of our loan portfolio. Net charge-offs for the year ended September 30, 2012 were $10.2 million, or 0.56% of average loans, compared to net charge-offs of $19.5 million, or 1.17% of average loans for the prior year. The decrease in net charge-offs is mostly due to decreases in net charge-offs in commercial & industrial and ADC loans. Fiscal 2011included $8.9 million in net charge-offs in the ADC portfolio of which $7.5 million related to one borrower.
Our classified loans, those rated substandard or worse, declined from $94.0 million at September 30, 2011 to $88.7 million at September 30, 2012 primarily driven by a reduction in our ADC loans commensurate with the reduction in the non-performing loans from this segment. Special mention loans, however, increased from $23.0 million at September 30, 2011 to $42.4 million at September 30 2012, driven by increases in our commercial portfolios. Increases in commercial & industrial special mention loans were primarily caused by a downgrade of a loan to a substantial borrower that was used to partially finance a residential housing development that has been paying according to terms. The increase in commercial real estate portfolio special mention loans primarily resulted from upgrades from the substandard category.

Comparison of Operating Results for the Years Ended September 30, 20102012 and September 30, 2009

2011
Net income for the fiscal year ended September 30, 20102012 was $20.5$19.9 million or $0.54$0.52 per diluted share.  Excluding net securities gains and the fair value adjustment of interest caps adjusted net income was $16.3 million or $0.43 per diluted share for the year ended September 30, 2010. This compares to net income of $25.9$11.7 million, or $0.67$0.31 per diluted share for the fiscal year ended September 30, 2009.  Excluding net securities gains adjusted net income was $15.1 million or $0.39 earnings per diluted share for the year ended September 30, 2009.


Earnings excluding securities gains and the fair value adjustment of interest rate caps are presented below.  The Company presents earnings excluding these factors so that investors can better understand the results of the Company’s core banking operations and to better align with the views of the investment community.

(In thousands, except share data)      
  Twelve months ended 
  September 30, 
  2010  2009 
Net Income      
Net Income $20,492   25,861 
Securities gains1
  (4,844)  (10,735)
Fair value loss on interest rate caps1
  657   - 
Net adjusted income $16,305  $15,126 
         
Earnings per common share        
Diluted Earnings per common share $0.54  $0.67 
Securities gains1
  (0.13)  (0.28)
Fair value loss on interest rate caps1
  0.02   - 
Diluted adjusted earnings per common share $0.43  $0.39 
         
Non-interest income        
Total non-interest income $27,201  $39,953 
Securities gains  (8,157)  (18,076)
Fair value loss on interest rate caps  1,106   - 
Adjusted non interest-income $20,150  $21,877 
         
1After marginal tax effect 40.61%
        
2011.

Interest Income.Income   Interest income on a tax equivalent basis for the fiscal year ended September 30, 2010 decreased2012 increased to $124.0$100.0 million, a decreasean increase of $11.7$4.7 million, or 8.6%,4.9 %, compared to the prior year. The decrease was primarily due to declines in general market interest rates on variable rate loans, lower loan balances, sales of taxable securities in which gains of $8.2 million were realized and the proceeds reinvested at lower rates.  Average interest-earning assets for the year ended September 30, 2010 were $2.6$2.8 billion, an increase of $9.9$234.2 million, or 0.4%9.0%, over average interest-earning assets for the year ended September 30, 2009.prior year. Average loan balances decreasedincreased by $44.4$140.8 million, average balances at the Federal Reserve Bank decreased $36.6 mi llionincreased $37.3 million and average balances of other earning assets decreased by $2.1$2.0 million, primarily FHLB stock. On a tax-equivalent basis, average yields on interest earninginterest-earning assets decreased by 4830 basis points to 4.80%4.17%, from 4.47% for the year ended September 30, 2010, from 5.28%prior year. The primary reasons for the year ended September 30, 2009.  The re-pricing of floating rate assets,decrease in asset yields are declines in general market interest rates on new lending activity, and the sale of securities with subsequent reinvestment andat lower loan balances were the primary reasons for the decrease in asset yields.

Interest income on loans for the year ended September 30, 2010 decreased $4.62012 increased $1.5 million to $92.5$91.0 million from $97.1$89.5 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2010 decreasedincreased to $56.5$61.2 million, as compared to commercial loan interest income of $56.6$57.4 million for the prior fiscal year. Average balances of commercial loans grew $15.7$173.4 million to $976.9 million,$1.2 billion, with a 1047 basis pointpoints decrease in the average yield.  There was no change in the prime rate during fiscal year 2010.  Commercial loans adjustable with the prime rate totaled $363.9 million at September 30, 2010. Interest income on consumer loans decreased to $11.1$10.1 million, as compared to consumer loan interest income of $11.9$10.5 million for the prior fiscal year.  60;Average balances of consumer loans decreased $5.8$11.9 million to $246.6$221.4 million, with a 20an increase of 5 basis point decreasepoints in the average yield. Consumer loans adjustable with the prime rate totaled $171.1$162.2 million at September 30, 2010.2012. Income earned on residential mortgage loans was $24.9$19.7 million for the year ended September 30, 2010,2012, down $3.8$1.9 million from the prior year as a result of refinancing activity at lower rates and lower outstanding average balances.


Tax-equivalent interest income on securities, balances at the Federal Reserve Bank and other earning assets decreasedincreased to $31.4$27.5 million for the year ended September 30, 2010,2012, compared to $38.5$27.1 million for the prior year. This was due to higher balances of securities offset by a tax-equivalent decrease of 10322 basis points in yields. The Company sold $443.4$344.4 million in securities and recorded $8.2$10.5 million in net gains on the sales.sale. Further during fiscal 2010, $362.82012, proceeds totaling $237.5 million in securities maturedmaturities and the proceedsrepayments were reinvested at current market rates with a shorter duration.rates.

Interest Expense.Expense   Interest expense for the year ended September 30, 2010fiscal 2012 decreased by $11.3$2.8 million to $26.4$18.6 million, a decrease of 29.9%12.9% compared to interest expense of $37.7$21.3 million for the prior fiscal year. The decrease in interest expense was primarily due to the significanta decrease in thebalances on average borrowings and lower rates paid on interest-bearing deposits for the year ended September 30, 2010.interest bearing deposits. Rates paid on interest bearing liabilities decreased to 1.30%0.84% from 1.81%1.05% in fiscal 2009.2011. The average interest rate paid on certificates of deposit decreased by 111six basis points to 1.35%0.87% for the year ended September 30, 2010,2012, from 2.46%0.93% for the prior year.   The average interest rate paid on savings decreased to 0.1% or 11 basis points fo r the year ended September 30, 2010 from 0.21% paid during fiscal 2009. The average rate paid on money market rates also declined 37 basis points to 0.35% for the year ended September 30, 2010. The rates paid on NOW accounts decreased 8seven basis points for fiscal 20102012 as compared to fiscal 2009.2011. The average cost of borrowings remained flat at 3.64%increased to 3.63% at September 30, 20102012 from 3.56% in 2011; however, average borrowings balance decreased by $34.2 million. Further, during the year, the Bank restructured $5.0 million in FHLB advances and 2009, although average balances decreased $60.1 million.paid $278 thousand in prepayment fees as part of the modification.


46

Net Interest Income for the fiscal year ended September 30, 20102012 was $93.3$96.5 million, compared to $93.9$91.3 million for the year ended September 30, 2009.2011. The tax equivalent net interest margin decreased by 3 basis points to 3.78%, while the net interest spread increased by 514 basis points to 3.51%. The main component of this decrease relates to the fact that the Bank’s cash position throughout the year was higher than normal, and that cash was placed in lower yielding investments. Additionally, loans originated during the year were at lower yields than the historical weighted average cost of interest-bearing liabilities has decreased, although the average asset yields decreased faster due to lower volume of loans and the lower rates earned on variable rate loans and sales of securities during 2010. Further, the greater increase of interest earning assets compared to interest bearing liabilities partially offset the decline in net interest income.book yield.

Provision for Loan Losses.We recorded $10.0 million and $17.6$10.6 million in loan loss provisions for the yearsyear ended September 30, 2010 and September 30, 2009, respectively. Provision for loan losses decreased $7.6 million to $10.0 million as the allowance is now at target levels.  At September 30, 2010, the allowance for loan losses totaled $30.8 million, or 1.81% of the loan portfolio,2012 compared to $30.1$16.6 million or 1.76%in the prior year, a decrease of $6.0 million. We decreased the provision due to decreased net charge-offs, which were $10.2 million in fiscal 2012, compared to $19.5 million in the previous year. The ADC loan portfolio at September 30, 2009. Net charge-offs for the years ended September 30, 2010 and 2009 were $9.2 million and $10.7 million, respectively (an annual rate of 0.56% and 0.62%, respectively, of the average loan portfolio). Our credit-scored small business loan portfoliosegment continued to account forexperience higher levels of charge-offs in comparison to the single largest shareother segments as a result of ourreal estate market conditions. The remaining charge-offs were concentrated in write-downs of mortgage secured non-performing loans based on declining collateral values. Prior year net charge-offs. charge-offs were at an all-time high due to recording $8.9 million of charge-offs in the ADC portfolio, including $7.5 million in one relationship, as sale activity in residential housing subdivisions dropped sharply in the second half of fiscal year 2011.

During the year, we recorded net charge-offs of $4.5 million in this portfolio, on average outstanding balances of $97.1 million.

At September 30, 2010, substandardour special mention loans totaled $131.8 million, upincreased from $89.4$23.0 million at September 30, 2009.  Doubtful loans increased from $02011 to $300,000$42.4 million at September 30, 2010 compared2012, while our substandard and doubtful loans decreased from $94.0 million to September 30, 2009.  The bulk of the increase came from downgrades in the ADC portfolio, as home sales remain depressed and more borrowers are feeling stress in liquidity resources.  The substandard classification for many of these loans is due to delayed progress in the projects and stress on liquidity reserves or expected outside (non-project related) cash flows.  These loans, however, continue to pay interest on a current basis and do not otherwise warrant a non-accrual classification.$88.7 million. All significant loans classified substandard or special mention are reviewed for impairment, under applicable accounting an d regulatory standards.  Specific reserves for impairment were $2.3impairment. As a result of our review we established a specific reserve, which totaled $3.2 million at September 30, 2009 and $3.0 million September 30, 2010. Specific reserves are established when current information indicates that the carrying value of a loan is probably not recoverable, but there is sufficient uncertainty about the actual occurrence of a loss or the amount of any loss to be incurred. Our non-performing loans increased to $26.8 million at September 30, 2010 from $26.5 million at September 30, 2009, an increase of $300,000.  Loans transferred from the non-performing category into other real estate owned during fiscal 2010 totaled $3.6 million.2012.

Non-interest income consists primarily of income was $32.2 million for the fiscal year ended September 30, 2012 compared to $29.9 million for the fiscal year ended September 30, 2011. Income on securities sales, bankingdeposit fees and service charges, investment management fees, net increases in the cash surrender value of bank-owned life insurance (“BOLI”)BOLI contracts, title insurance fees and investment management fees. Non-interest income was $27.2 million fornet gains on the sale of loans made up the majority of non-interest income. During fiscal year ended September 30, 2010 compared to $40.0 million at September 30, 2009.   During the year ended September 30, 2010,2012, the Company recorded gains on sales of investment securities totaling $8.2$10.5 million compared to $18.1$10.0 million for the prior year. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjus tments.  As a result of our reviews, we anticipated an acceleration of prepayments, management sold $279.4 million in mortgage backed securities and realized $6.4 million in gains on the sales.  The proceeds were reinvested in securities with yields lower than the recorded yields of the securities sold.  This activity also provided greater diversification in the portfolio.  Deposit fees and service charges decreasedincreased by $1.2 million,$566,000, or 9.4%5.24%. Income derived from the Company’s BOLI investments decreased by $711,000, or 25.8%, due to $723 thousand in death benefit proceeds received in 2009. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $152,000 due to an increase in residential mortgage originations. Investment management fees increased $494,000 which is related to increased market values on assets under management. During fiscal 20102012 the Company originated and sold $52.8$80.6 million in residential mortgage loans and recorded $867,000$1.9 million in gains compared to $50.7$49.8 million in loans sold with $961,000$1.0 million in gains at September 30, 2009.the prior year.


Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization, data processing expenses and FDIC/other regulatory assessments. Non-interest expense for the fiscal year ended September 30, 20102012 increased by $3.0$1.8 million, or 3.7%2.0% to $83.2$92.0 million, compared to $80.2$90.1 million for the same period in 2009.2011. The largest components of non-interest expense consist of salaries and employee benefits, occupancy and office expenses, merger-related expense and professional fees. The increase was primarily attributable to merger expense of $5.9 million related to the acquisition of Gotham Bank and increased compensation and employee benefits of $4.1$2.4 million resulting from annual merit raisesto $46.0 million compared to $43.7 million in the prior year. These increases were off set by decreases of $1.5 million to advertising and increases in incentive compensation.  Further, the Company opened offices in Yonkerspromotion and Nyack during the fiscalprior year 2010, as well as, experiencing a full yearrestructuring charges of salary e xpense for the White Plains office.  Occupancy$3.2 million and office operations increased $632,000, or 4.9%, as the Company invested in new branch locations and automation in 2010. Professional fees increased $929,000 due to increased consulting fees as well as elevated external costsdeferred benefit settlement / CEO transition charges of collection for problem loans.  Stock-based compensation decreased by $1.4 million mostly due to the vesting of stock based compensation awards in addition to lower ESOP expense.   FDIC insurance decreased by $582,000 or 13.7% due to declines in FDIC assessments and ATM debit card expense decreased $514,000 or  3.2%.$1.8 million.

Income TaxesTax expense. Income tax expense was $6.9$6.2 million for the fiscal year ended September 30, 20102012 compared to $10.2$2.8 million for fiscal 2009,2011, representing effective tax rates of 25.1%23.7% and 28.2%19.3%, respectively. The lower tax rate in 20102011 was primarily due to the highhigher proportion of tax-free income BOLI and insuranceBOLI relative to the total levels of pre-tax income and the set up of a captive insurance company.


Comparison of Operating Results for the Years Ended September 30, 2009 and September 30, 2008

Net income for the year ended September 30, 2009 was $25.9 million or $0.67 per diluted share, excluding net securities gains adjusted net income was $15.1 million or $0.39 per diluted share.  This compares to net income of $23.8 million or $0.61 per diluted share for the year ended September 30, 2008.  Excluding net securities gains adjusted net income was $23.2 million or $0.59 earnings per diluted share for the year ended September 30, 2008.

Earnings excluding securities gains and the fair value adjustment of interest rate caps are presented below.  The Company presents earnings excluding these factors so that investors can better understand the results of the Company’s core banking operations and to better align with the views of the investment community.

(In thousands, except share data)      
  Twelve months ended 
  September 30, 
  2009  2008 
Net Income      
Net Income $25,861   23,778 
Securities gains1
  (10,735)  (584)
Net adjusted income $15,126  $23,194 
         
Earnings per common share        
Diluted Earnings per common share $0.67  $0.61 
Securities gains1
  (0.28)  (0.01)
Fair value loss on interest rate caps1
  -   - 
Diluted adjusted earnings per common share $0.39  $0.592
         
Non-interest income        
Total non-interest income $39,953  $21,042 
Securities gains  (18,076)  (983)
Fair value loss on interest rate caps  -   - 
Adjusted non interest-income $21,877  $20,059 
         
1After marginal tax effect 40.61%
        
2Rounding
        

Interest Income.  Interest income on a tax equivalent basis for the year ended September 30, 2009 decreased to $135.6 million, a decrease of $17.0 million, or 11.2%, compared to the prior year.  The decrease was primarily due to declines in general market interest rates on variable rate loans, sales of taxable securities in which gains of $18.1 million were realized and the proceeds reinvested at lower rates, as well as a decline in the average balances of taxable securities.  Average interest-earning assets for the year ended September 30, 2009 were $2.6 billion, an increase of $70.0 million, or 2.8%, over average interest-earning assets for the year ended September 30, 2008 of $2.5 billion.  Average loan balances grew b y $56.0 million, balances at the Federal Reserve Bank was $56.6 million and average balances of other earning assets decreased by $8.0 million, primarily FHLB stock.  On a tax-equivalent basis, average yields on interest earning assets decreased by 83 basis points to 5.28% for the year ended September 30, 2009, from 6.11% for the year ended September 30, 2008.  The re-pricing of floating rate assets, the sale of securities and a larger cash position were the primary reasons for the decrease in asset yields.

Interest income on loans for the year ended September 30, 2009, decreased 9.7% to $97.1 million from $107.6 million for the prior fiscal year.  Interest income on commercial loans for the year ended September 30, 2009 decreased to $56.6 million, as compared to commercial loan interest income of $63.5 million for the prior fiscal year.  Average balances of commercial loans grew $59.7 million to $961.2 million, with a 116 basis point decrease in the average yield.  The decrease in yield relates to the decline in the prime rate of 175 basis points during fiscal 2009.  Commercial loans adjustable with the prime rate totaled $367.0 million at September 30, 2009.  Interest income on consumer loans decreased by $2.4 million, or 16% and $174.1 million of consumer loans adjust with the prime rat e.  Income earned on residential mortgage loans was $28.7 million for the year ended September 30, 2009, down $1.2 million, from the prior year.


Tax-equivalent interest income on securities, balances at Federal Reserve Bank and other earning assets decreased to $38.5 million for the year ended September 30, 2009, compared to $45.0 million for the prior year. This was due to a tax-equivalent decrease of 83 basis points in yields along with a $34.6 million decline in the average balances of securities which was offset in part by a $56.6 million increase in balances at the Federal Reserve Bank. As noted above, the Company sold $539.3 million in securities and recorded $18.1 million in gains on the sales, further during fiscal 2009, $176.2 million in securities matured and the proceeds were reinvested at current market rates.

Interest Expense.  Interest expense for the year ended September 30, 2009 decreased by $15.9 million to $37.7 million, a decrease of 29.7% compared to interest expense of $53.6 million for the prior fiscal year. The decrease in interest expense was primarily due to the significant decrease in the average rates paid on interest-bearing deposits for the year ended September 30, 2009.  Rates paid on interest bearing liabilities decreased to 1.81% from 2.62% in fiscal 2008.  The average interest rate paid on certificates of deposit decreased by 127 basis points to 2.46% for the year ended September 30, 2009, from 3.73% for the prior year.   The average interest rate paid on savings decreased to 0.21% for the year ended S eptember 30, 2009 from 0.35% paid during fiscal 2008. The average rate paid on money market rates also declined, 114 basis points to 0.72% for the year ended September 30, 2009.  The rates paid on NOW accounts decreased 25 basis points for fiscal 2009 as compared to fiscal 2008.  By comparison, this average cost of borrowings decreased 21 basis points, which reflects a higher proportion of fixed rate borrowings outstanding in both years.

Net Interest Income for the fiscal year ended September 30, 2009 was $93.9 million, compared to $95.3 million for the year ended September 30, 2008. The net interest margin decreased by 15 basis points to 3.81%, while the net interest spread decreased by 3 basis points to 3.46%.    The Bank’s average cost of interest-bearing liabilities has decreased, although the average asset yields decreased faster due to the level of variable rate loans and sales of securities during 2009. Further, the greater increase of interest earning assets compared to interest bearing liabilities partially offset the decline in net interest income.

Provision for Loan Losses. We recorded $17.6 million and $7.2 million in loan loss provisions for the years ended September 30, 2009 and September 30, 2008, respectively. At September 30, 2009, the allowance for loan losses totaled $30.1 million, or 1.76% of the loan portfolio, compared to $23.1 million, or 1.33% of the loan portfolio at September 30, 2008. Net charge-offs for the years ended September 30, 2009 and 2008 were $10.7 million and $4.5 million, respectively (an annual rate of 0.62% and 0.28%, respectively, of the average loan portfolio). Our credit-scored small business loan portfolio continued to account for the majority of our charge-offs. During the year we recorded net charge-offs of $6.8 million in this portfolio, on average outstanding balances of $104 million.

At September 30, 2009, substandard loans totaled $89.4 million, up from $23.8 million at September 30, 2008.  The bulk of the increase came from downgrades in the ADC portfolio, as home sales remain depressed and more borrowers are feeling stress in liquidity resources.  Our non-performing loans increased to $26.5 million at September 30, 2009 from $16.9 million at September 30, 2008, an increase of $9.4 million.  The increase was driven by an increase in ADC loans of $5.7 million, $3.1 million in residential mortgage loans, and $1.8 million in commercial mortgage loans, with $1.6 million transferred from the non-performing category into other real estate owned during fiscal 2009.  The increase in substandard loans compared to nonperforming loans resulted from the underlying status of ADC loans.& #160; The substandard classification for many of these loans is due to delayed progress in the projects and stress on liquidity reserves or expected outside (non-project related) cash flows.  These loans, however, continue to pay interest on a current basis and do not otherwise warrant a non-accrual classification.  We increased provisions for loan losses to account for increased net charge-offs; growth in the criticized (special mention) and classified loans in the portfolio; and increased factors allocated to the non-criticized or classified ADC and residential mortgage portfolios.  All significant loans classified substandard or special mention are reviewed for impairment, under applicable accounting and regulatory standards.  Specific reserves for impairment were $1.3 million at September 30, 2008 and $2.3 million at September 30, 2009. Specific reserves are established when current information indicates that the entire book balance of a loan is probably not r ecoverable, but there is sufficient uncertainty about the actual occurrence of a loss or the amount of any loss to be incurred.


Non-interest income consists primarily of income on securities sales, banking fees and service charges, net increases in the cash surrender value of bank-owned life insurance (“BOLI”) contracts, title insurance fees and investment management fees. Non-interest income was $40.0 million for the fiscal year ended September 30, 2009 compared to $21.0 million at September 30, 2008.   During the year ended September 30, 2009, the Company recorded gains on sales of investment securities totaling $18.1 million compared to $983,000 for the prior year.  Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustmen ts.  As a result of our reviews, we anticipated an acceleration of prepayments.  Management sold $453.2 million in mortgage backed securities and realized $16.7 million in gains on the sales.  Such proceeds were reinvested in securities with yields which were lower than the recorded yields of the securities sold and a more diversified risk profile.  Deposit fees and service charges decreased by $36,000, or .29%. Income derived from the Company’s BOLI investments increased by $923,000, or 50.4%, due to $723 thousand in death benefit proceeds received in 2009. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $86 thousand due to the second quarter increase in residential mortgage originations. Investment management fees decreased $436 thousand which is related to decreased balances under management.  During fiscal 2009 the Company originated and sold $49.7 million in residential mortgage loans and recorded $1.0 milli on in gains.  No gains on loan sales were recorded in 2008.

Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization, data processing expenses and FDIC/other regulatory assessments. Non-interest expense for the fiscal year ended September 30, 2009 increased by $4.7 million, or 6.2% to $80.2 million, compared to $75.5 million for the same period in 2008. The increase was primarily attributable to FDIC assessments of $3.4 million, which included increased assessments and the special assessment imposed as of June 30, 2009, which were due to the losses experienced by the FDIC bank closures as a result of the recession.  Also contributing to the increase wer e employee benefits. Compensation and employee benefits increased by $2.5 million, or 6.7%, to $39.5 million for the year ended September 30, 2009.  The Company experienced increases in its health insurance programs and pension expense even though the pension plan is frozen.  Occupancy and office operations increased $368 thousand, or 3.0%, as the Company invested in branch relocations in 2008 and 2009. Stock-based compensation decreased by $.9 million due to lower acceleration of vesting of restricted stock awards and its first step ESOP loan maturing in December 2007, requiring less share allocations going forward. Marketing expenses decreased $245 thousand to $3.1 million at September 30, 2009 as compared to $3.3 million at September 30, 2008 due primarily to the 2008 production costs associated with our media campaigns.

Income Taxes. Income tax expense was $10.2 million for the fiscal year ended September 30, 2009 compared to $9.9 million for fiscal 2008, representing effective tax rates of 28.2% and 29.4%, respectively. The lower tax rate in 2009 was primarily due to the continued shift to tax-exempt securities, and the non-taxable BOLI payout partially offset by the maturity of the first-step ESOP loan which was primarily non-deductible expense.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

47

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The Company’s off-balance sheet arrangements, which principally include lending commitments, are described below. At September 30, 2010 and 2009, the Company had no interests in non-consolidated special purpose entities.

Lending Commitments.Lending commitments include loan commitments, unused credit lines, and letters of credit and unused credit lines.credit. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the normal course of business.

For our non-real estate commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements, or for development and construction in the case ofrequirements. At September 30, 2013 these commitments totaled $169.0 million. For our real estate businesses. For retail customers,businesses, loan commitments are generally for residential construction, multi-family and commercial construction projects, which totaled $71.0 million at September 30, 2013. Loan commitments for our retail customers are generally home equity lines of credit secured by residential property.  At September 30, 2010, commercialproperty and retailtotaled $100.0 million. In addition loan commitments totaled $114.8 million. Approved closed undrawn lines of credit totaled $119.7 million, $147.3 million and $15.4 million for commercial, retail accounts, and overdraft protection lines, respectively.  Letters of credit totaled $23.1overdrafts were $10.5 million. Letters of credit issued by the Company generally are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor’s completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Standby letters of credit are conditional commitments to support performance, typically of a contract or the financial integrity of a customer to a third party,third-party, and represent an independent undertaking by the Company to the third party.

third-party. Letters of credit as of September 30, 2013 totaled $35.1 million.
54

Provident Bank applies essentially the same credit policies and standards as it does in the lending process when making these commitments. See Note 1516. Commitments and Contingencies to “Consolidated Financial Statements” in Item 8 hereofthe consolidated financial statements for additional information regarding lending commitments.

Contractual Obligations.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.

Payments Due by Period. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2010.2013. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.recipient.

  Payments Due by Period 
Contractual Obligations 
Less than One Year
  
One to Three Years
  
Three to Five Years
  
More Than Five Years
  Total 
  (Dollars in thousands) 
                
FHLB and other borrowings $44,873  $101,704  $45,125  $223,545  $415,247 
Time deposits  316,096   38,117   23,360   -   377,573 
Letters of credits  7,586   4,443   1,734   9,341   23,104 
Undrawn lines of credit  282,428   -   -   -   282,428 
Operating leases  2,537   4,815   4,101   16,729   28,182 
Total $653,520  $149,079  $74,320  $249,615  $1,126,534 
Commitments to extend credit $80,935   30,640   490   2,757  $114,822 
 Payments due by period
  1 year or less 1-3 years 3-5 years 5 years or more Total
 (Dollars in thousands)
FHLB and other borrowings$158,897
 $78,908
 $320,447
 $2,734
 $560,986
Time deposits239,104
 22,433
 6,591
 —
 268,128
Letters of credits24,890
 1,561
 25
 8,576
 35,052
Undrawn lines of credit207,201
 —
 —
 —
 207,201
Operating leases3,458
 6,351
 6,270
 16,083
 32,162
Total$633,550
 $109,253
 $333,333
 $27,393
 $1,103,529
Commitments to extend credit$171,032
 —
 —
 —
 $171,032

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes of Provident New YorkSterling Bancorp have been prepared in accordance with U.S. GAAP. U.S. GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.


Liquidity and Capital Resources

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


48

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

Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial real estateloans and residential one- to four-familymortgage loans, and the purchase of investment securities and mortgage-backed securities. During the years ended September 30, 2010, 20092013, 2012 and 2008,2011, our loan originations totaled $472.1 million, $450.6$1.2 billion, $ 816.3 million and $596.6$628.4 million, respectively. Purchases of securities available for sale totaled $830.6$490.2 million, $708.7$679.6 million and $263.9$622.6 million for the years ended September 30, 2010, 20092013, 2012 and 2008,2011, respectively. Purchases of securities held to maturity totaled $23.0$169.3 million, $25 .1$95.2 million and $19.2$93.8 million for the years ended September 30, 2010, 20092013, 2012 and 2008,2011, respectively. These activities were funded primarily by borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $114.8$171.0 million at September 30, 2010, and consisted of $100.7 million at adjustable or variable rates and $14.1 million at fixed rates.2013. Unused lines of credit granted to customers were $282.4$207.2 million at September 30, 2010.2013. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit.

The Company’s investments in BOLI are considered illiquid and are therefore classified as other assets. Earnings from BOLI are derived from the net increase in cash surrender value of the BOLI contracts and the proceeds from the payment on the insurance policies, if any. The recorded value of BOLI contracts totaled $50.9$60.9 million and $49.6$59.0 million at September 30, 20102013 and September 30, 2009,2012, respectively.

Deposit flows are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, and other factors. The net increase/ (decrease) / increase in total deposits was $60.4($148.9 million $93.1), $814.5 million and $275.5$154.0 million for the years ended September 30, 2010, 20092013, 2012 and 2008,2011, respectively. Certificates of deposit that are scheduled to mature in one year or less from September 30, 20102013 totaled $316.1$239.1 million. Based upon prior experience and our current pricing strategy, management believeswe believe that a significant portion of such deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment.

Credit markets improved during fiscal 2010 from the extreme conditions that existed for fiscal 2009.  Credit spreads narrowed steadily during the past year and many are very near historicalhistorically low levels.  Notwithstanding these improvements loan demand remains muted causing liquidity to increase. Furthermore, the extremely low interest rate environment has enhancedcaused our deposit growthdeposits to remain at elevated levels which hashave also strengthened our liquidity position. Many banks are experiencing a situation similar to ours resulting in the industry liquidity to be at significantly elevated levels. However, much of this liquidity is held in the form of very short-term securities and non-maturity deposit accounts.  The preference of depositors to stay shortmaintain their funds in short-term deposit products could portendlead to potential liquidity reductions in the f uture and possibly put pressure on us to raisefuture if interest rates in the future to retain these funds.change.

We generally remain fully invested and utilizeaccess additional sources of funds through Federal Home Loan Bank of New York (“FHLB”) advances and other sources of which $415.2$561.0 million was outstanding at September 30, 2010. At 2013. Cash and short-term borrowing capacity at September 30, 2010, we had the ability to borrow an additional $188.9 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow up to an additional $178.3 million by pledging securities not required to be pledged for other purposes as of September 30, 2010.   Further, at September 30, 2010 we had only $18.6 million in Brokered Certificates of Deposit (including certificates of deposit accounts registry service (CDAR’s) reciprocal CD’s of $7.9 million) and have relationships with several brokers to utilize these sources of funding should conditions war rant further sources of funds.   Provident2013 is summarized below:
 (Dollars in thousands)
Cash and due from banks$113,090
Unpledged investment securities549,728
Unpledged mortgage collateral443,297
Total funding available$1,106,115

Sterling Bank is subject to regulatory capital requirements that are discussed in “Capital Requirements” under “Regulation”.


Cash and short-term borrowing capacity at September 30, 2010 is summarized below:

Cash and Due from Banks $90,872 
Unpledged investment Securities  188,904 
Unpledged mortgage collateral  178,311 
Total immediate funding $458,087 

The Company’s tangible capital toequity as a % of tangible assetassets - consolidated ratio is a strong 9.33%was 8.09% as of September 30, 2013.  Further, the Company has an active common stock repurchase program with 1.2 million shares remaining under its current board authorization. The Bank’s regulatory capital ratioratios as of September 30, 2013 were as follows:

Tier I1 leverage ratio8.409.33%
Tier I1 risk based capital ratio12.113.18%
Total risk based capital ratio13.314.24%

The levels are well above current regulatory capitalCompany has an effective shelf registration covering $14 million of debt and equity securities remaining available for use, subject to Board authorization and market conditions, to issue equity or debt securities at our discretion. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to be considered well capitalized.  Management is currently studying the impactsell securities on capital resulting from the Basel III accords.acceptable terms at any given time or at all.


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57

Item 7. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

·Legislative and regulatory changes such as the Dodd-Frank Act and its pending and future implementing regulations that adversely affect our business including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;
our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to integrate and fully realize costs savings and other benefits we estimated in connection with the Merger;

continued implementation of our team based business strategy, including customer acceptance of our products and services and the perceived overall value, pricing and quality of them, compared to our competitors;
·A deterioration in general economic conditions, either nationally or in our market areas, including extended declines in the real estate market and constrained financial markets;
business disruption following the Merger;

legislative and regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our business including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;
·Our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services industry in general and a failure to satisfy regulatory standards;

general economic conditions, either nationally, internationally, or in our market areas, including fluctuations in real estate values and constrained financial markets;
·Our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the U.S. Government;

our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
·Changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
·Computercomputer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs; and

changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees;
·Our business and operating results can be affected by widespread national disasters, terrorist activities or international hostilities, either as a result of the impact on the economy, and financial and capital markets generally, or on us, our customers, suppliers or counterparties.
our success at managing the risks involved in the foregoing and managing our business; and
the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control.

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

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58

ITEM 7A.  Quantitative and Qualitative Disclosures about Market Risk

ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk
Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. ProvidentSterling National Bank’s Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. A committee of the Board of Directors reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings.

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

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

Estimated Changes in NPVEVE and NII.The table below sets forth, as of September 30, 2010,2013, the estimated changes in our NPV(1) EVE that would result from the designated instantaneous changes in the forward rate curves, and our(2) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied uponon as indicative of actual results.

Change in Interest Rates (basis points)
  
Estimated NPV
  Estimated Increase (Decrease) in NPV  
Estimated NII
  Increase (Decrease) in Estimated NII 
    Amount  Percent    Amount  Percent 
(Dollars in thousands) 
 +300  $273,012  $(5,318)  -1.9% $92,916  $10,972   13.4%
 +200   289,886   11,556   4.2%  90,966   9,022   11.0%
 +100   298,894   20,564   7.4%  87,666   5,722   7.0%
 0   278,330   0   0.0%  81,944   0   0.0%
Interest rates Estimated Estimated change in EVE Estimated Estimated change in NII
(basis points) EVE Amount Percent NII Amount Percent
  (Dollars in thousands)
+300 $565,776
 $(48,679) (7.9)% $119,056
 $6,961
 6.2%
+200 587,069
 (26,386) (4.3) 117,349
 5,254
 4.7
+100 606,751
 (6,704) (1.1) 114,296
 2,201
 2.0
0 613,455
 —
 —
 112,095
 —
 —
-100 611,771
 1,684
 0.3
 104,600
 (7,495) (6.7)

The table set forth above indicates that at September 30, 2010,2013, in the event of an immediate 200 basis point increase in interest rates, we would be expectedexpect to experience a 4.2% increase4.3% decrease in NPVEVE and a 11.0%4.7% increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on NPVEVE and NII.NII beyond -100 basis points.

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

51

precise forecast of the effect of changes in market interest rates may have on our net interest income andincome. Actual results will differ from actual results.

likely differ.
59

During the past fiscal year 2013, the federal funds target rate remained in a range of 0.00 –- 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities decreased by 53increased 10 basis points from 0.95%0.23% to 0.42% during0.33% in fiscal year 20102013 while the yield on U.S. Treasury 10 year10-year notes decreased 78increased 99 basis points from 3.31%1.65% to 2.53%2.64% over the same timetwelve month period. The disproportional greater rate of decreaseincrease in rates on longer term maturities has resulted in thea steeper 2-10 year treasury yield curve being flatter at the end of fiscal 2013 relative to the pastbeginning of the fiscal year than it was whenyear. During the year began.  The overall lower yield curve caused a significant reduction in rates paid on deposits and short-term borrowings as well as rates charged on loans and other ass ets.  To fight the economic downturnfourth quarter, the FOMC declared areaffirmed its willingness to keepmaintain an accommodative stance on monetary policy stating that it intends to do so until the federal funds target low for an “extended period”.  Shouldunemployment rate and inflation expectations reach certain thresholds. However, should economic conditions improve, the FOMC could reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionably more thandisproportionately relative to the longer end, thereby resulting in a short-term margin compression.compression environment. We hold a notional amount of $50 million in notional principal of interest rate caps to help mitigate this risk.  Should rates not increase sufficiently to collect on such derivatives, the fair value of this derivative would decline and eventually mature.  The value at risk is $262,000.

ITEM 8.  Financial Statements and Supplementary Data

ITEM 8.Financial Statements and Supplementary Data
The following are included in this item:

(A)Report of Management on Internal Control Over Financial Reporting
(B)(A)Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
(C)Report of Independent Registered Public Accounting Firm on Financial Statements
(D)(B)
Consolidated Statements of Financial ConditionBalance Sheets as of September 30, 20102013 and 20092012
(E)
(C)
Consolidated Statements of Income for the years ended September 30, 2010, 20092013, 2012 and 20082011
(F)
(D)
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2010, 20092013, 2012 and 20082011
(G)
(E)Consolidated Statements of Cash Flows for the years ended September 30, 2010, 20092013, 2012 and 20082011
(H)
(F)Notes to Consolidated Financial Statements

The supplementary data required by this item (selected quarterly financial data) is provided in Note 2121. Quarterly Results of Operations (Unaudited) to the Notes to Consolidated Financial Statements.consolidated financial statements.

52
60

Report of Management on Internal Control Over Financial ReportingIndependent Registered Public Accounting Firm


Board of Directors and Stockholders
Provident New York Bancorp:

The management of Provident New YorkSterling Bancorp (“the Company”) is responsible for establishing and maintaining effective internal control over financial reporting.  The Company's system of internal controls is designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.

All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessedWe have audited the Company’saccompanying consolidated balance sheets of Sterling Bancorp as of September 30, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three year period ended September 30, 2013.  We also have audited Sterling Bancorp’s internal control over financial reporting as of September 30, 2010. This assessment was2013, based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September 30, 2010, the Company’s internal control over financial reporting is effective.

The Company's independent registered public accounting firm has issued an audit report on the effective operation of the Company's internal control over financial reporting as of September 30, 2010. This report appears on the following page.

By:/s/ George Strayton
George Strayton
President and Chief Executive Officer
(Principal Executive Officer
December 13, 2010


By:/s/ Paul Maisch
Paul Maisch
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 13, 2010


Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

Board of Directors and Stockholders
Provident New York Bancorp

We have audited Provident New York Bancorp’s (“the Company”) internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Provident New YorkSterling Bancorp’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting.   Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company'scompany's internal control over financial reporting based on our audit.audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Provident New York Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Provident New York Bancorp and subsidiaries as of September 30, 2010 and 2009 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years ended September 30, 2010 and our report dated December13, 2010 expressed an unqualified opinion on those consolidated financial statements.


/s/Crowe Horwath LLP

Livingston, New Jersey
December 13, 2010


Report of Independent Registered Public Accounting Firm on Financial Statements

Board of Directors and Stockholders
Provident New York Bancorp

We have audited the accompanying consolidated statements of financial condition of Provident New York Bancorp and subsidiaries (“the Company”) as of September 30, 2010 and 2009 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Provident New YorkSterling Bancorp and subsidiaries as of September 30, 20102013 and 20092012, and the results of its operations and its cash flows for each of the three years in the three-year period ended September 30, 20102013 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, Also in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Provident New York Bancorp’sour opinion, Sterling Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010,2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 13, 2010 expressed an unqualified opinion thereon.(COSO).

/s/
/s/ Crowe Horwath LLP

Livingston, New JerseyYork, New York
December 13, 20106, 2013


53
63

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)

  September 30, 
ASSETS 2010  2009 
Cash and due from banks $90,872  $160,408 
Securities (including $719,172 and $521,228 pledged as collateral for borrowings and deposits in 2010 and 2009, respectively):        
Available for sale, at fair value (note3)  901,012   832,583 
Held to maturity, at amortized cost (fair value of $35,062 and $45,739 in 2010 and 2009, respectively) (note 4)  33,848   44,614 
Total securities  934,860   877,197 
Loans held for sale  5,890   1,213 
Loans (note 5):        
One to four family residential mortgage loans  411,239   460,728 
Commercial real estate, commercial business and construction loans  1,052,078   991,007 
Consumer loans  238,224   251,522 
Gross loans  1,701,541   1,703,257 
Allowance for loan losses  (30,843)  (30,050)
Total loans, net  1,670,698   1,673,207 
Federal Home Loan Bank ("FHLB") stock, at cost  19,572   23,177 
Accrued interest receivable (note 6)  11,069   10,472 
Premises and equipment, net (note 7)  43,598   40,692 
Goodwill (note 2)  160,861   160,861 
Core deposit and other intangible assets (note 2)  3,640   5,489 
Bank owned life insurance  50,938   49,611 
Other assets (notes 5, 11 and 12)  29,027   19,566 
Total assets $3,021,025  $3,021,893 
LIABILITIES AND STOCKHOLDERS' EQUITY        
LIABILITIES        
Deposits (note 8) $2,142,702  $2,082,282 
FHLB and other borrowings (including repurchase agreements of $222,500 and $230,000 in 2010 and 2009, respectively) (note 9)  363,751   430,628 
Borrowing senior unsecured note (FDIC insured) (note 9)  51,496   51,494 
Mortgage escrow funds (note 5)  8,198   8,405 
Other (note 11)  23,923   21,628 
Total liabilities  2,590,070   2,594,437 
         
Commitments and Contingent liabilities (note 17)  -   - 
         
STOCKHOLDERS' EQUITY (note 15):        
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; 38,262,288 and 39,547,207 shares outstanding in 2010 and 2009 respectively)  459   459 
Additional paid-in capital  356,912   355,753 
Unallocated common stock held by employee stock ownership plan ("ESOP") (note 12)  (6,637)  (7,136)
Treasury stock, at cost (7,667,264 shares in 2010 and 6,382,345 shares in 2009)  (87,336)  (77,290)
Retained earnings  162,433   153,193 
Accumulated other comprehensive income, net of taxes of $3,577 in 2010 and $1,694 in 2009 (note 11 and 13)  5,124   2,477 
Total stockholders' equity  430,955   427,456 
Total liabilities and stockholders' equity $3,021,025  $3,021,893 

STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 September 30,
 2013 2012
ASSETS:   
Cash and due from banks$113,090
 $437,982
Securities:   
Available for sale, at fair value954,393
 1,010,872
Held to maturity, at amortized cost (fair value of $250,896 and $146,324 in 2013 and 2012, respectively)253,999
 142,376
Total securities1,208,392
 1,153,248
Assets held for sale—
 4,550
Loans held for sale1,011
 7,505
Gross loans2,412,898
 2,119,472
Allowance for loan losses(28,877) (28,282)
Total loans, net2,384,021
 2,091,190
Federal Home Loan Bank (“FHLB”) stock, at cost24,312
 19,249
Premises and equipment, net36,520
 38,483
Goodwill163,117
 163,247
Core deposit and other intangible assets5,891
 7,164
Bank owned life insurance60,914
 59,017
Other real estate owned6,022
 6,403
Other assets45,882
 34,944
Total assets$4,049,172
 $4,022,982
LIABILITIES AND STOCKHOLDERS’ EQUITY   
LIABILITIES:   
Deposits$2,962,294
 $3,111,151
FHLB and other borrowings462,953
 345,176
Senior notes98,033
 —
Mortgage escrow funds12,646
 11,919
Other liabilities30,380
 63,614
Total liabilities3,566,306
 3,531,860
Commitments and Contingent liabilities (See Note 16.)

 

STOCKHOLDERS’ EQUITY:   
Preferred stock, (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)—
 —
Common stock (par value $0.01 per share; 75,000,000 shares authorized; 52,188,056 and 45,929,552 issued for 2013 and 2012, respectively; 44,351,046 and 44,173,470 shares outstanding in 2013 and 2012 respectively)522
 522
Additional paid-in capital403,816
 403,541
Unallocated common stock held by employee stock ownership plan (“ESOP”); 549,262 and 599,194 unallocated shares outstanding in 2013 and 2012, respectively(5,493) (5,638)
Treasury stock, at cost (7,837,010 shares in 2013 and 8,014,586 shares in 2012)(88,538) (90,173)
Retained earnings187,889
 175,971
Accumulated other comprehensive (loss) income, net of tax (benefit) expense of ($10,482) in 2013 and $4,688 in 2012(15,330) 6,899
Total stockholders’ equity482,866
 491,122
Total liabilities and stockholders’ equity$4,049,172
 $4,022,982
See accompanying notes to consolidated financial statements.

54
64

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
For the yearsyear ended September 30,
(Dollars in thousands, except per share data)
201320122011
Interest and dividend income:
Loans, including fees$107,810
  2010  2009  2008 
Interest and dividend income:         
Loans, including fees $92,542  $97,149  $107,633 
Taxable securities  18,208   25,552   31,947 
Non-taxable securities  7,774   7,520   6,832 
Other earning assets  1,250   1,369   2,570 
Total interest and dividend income  119,774   131,590   148,982 
Interest expense:            
Deposits  8,517   18,375   28,344 
Borrowings  17,923   19,345   25,298 
Total interest expense  26,440   37,720   53,642 
Net interest income  93,334   93,870   95,340 
Provision for loan losses  10,000   17,600   7,200 
Net interest income after provision for loan losses  83,334   76,270   88,140 
Non-interest income:            
Deposit fees and service charges  11,228   12,393   12,429 
Net gain on sale of securities  8,157   18,076   983 
Title insurance fees  1,157   1,005   919 
Bank owned life insurance  2,044   2,755   1,832 
Gain (loss) on sale of premises and equipment  (54)  517   - 
Net gain on sales of loans  867   961   - 
Investment management fees  3,070   2,576   3,012 
Fair value loss on interest rate caps  (1,106)  -   - 
Other  1,838   1,670   1,867 
Total non-interest income  27,201   39,953   21,042 
Non-interest expense:            
Compensation and employee benefits  43,589   39,520   37,045 
Stock-based compensation plans  1,543   2,942   3,809 
Occupancy and office operations  13,434   12,802   12,434 
Advertising and promotion  3,252   3,093   3,338 
Professional fees  4,019   3,090   3,339 
Data and check processing  2,285   2,284   2,551 
Amortization of intangible assets  1,849   2,185   2,599 
ATM/debit card expense  1,601   2,115   1,936 
FDIC insurance and regulatory assessments  3,675   4,257   875 
Other  7,923   7,899   7,574 
Total non-interest expense  83,170   80,187   75,500 
Income before income tax expense  27,365   36,036   33,682 
Income tax expense  6,873   10,175   9,904 
Net income $20,492  $25,861  $23,778 
Weighted average common shares:            
Basic  38,161,180   38,537,881   38,907,372 
Diluted  38,185,122   38,705,837   39,226,641 
Earnings per common share (note 14)            
Basic $0.54  $0.67  $0.61 
Diluted $0.54  $0.67  $0.61 
$91,010
See accompanying notes to consolidated financial statements.
$89,500
Taxable securities17,509
16,538
14,493
Non-taxable securities5,682
6,497
7,441
Other earning assets1,060
992
1,180
Total interest and dividend income132,061
115,037
112,614
Interest expense:
Deposits5,923
5,581
6,104
Borrowings13,971
12,992
15,220
Total interest expense19,894
18,573
21,324
Net interest income112,167
96,464
91,290
Provision for loan losses12,150
10,612
16,584
Net interest income after provision for loan losses100,017
85,852
74,706
Non-interest income:
Deposit fees and service charges10,964
11,377
10,811
Net gain on sale of Contentssecurities7,391
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements
10,452
10,011
Other than temporary impairment on securities:
   Total impairment loss(73)(90)(787)
    Loss recognized in other comprehensive income41
43
509
           Net impairment loss recognized in earnings(32)(47)(278)
Title insurance fees395
1,106
1,224
Bank owned life insurance1,998
2,050
2,049
Net gain on sale of Changes in Stockholders’ Equity
Years Ended September 30, 2010, 2009loans
1,979
1,897
1,027
Investment management fees2,413
3,143
3,080
Other2,584
2,174
2,027
Total non-interest income27,692
32,152
29,951
Non-interest expense:
Compensation and 2008
(Dollars in thousands, exceptemployee benefits
47,833
46,038
43,662
Stock-based compensation plans2,239
1,187
1,162
Merger-related expense2,772
5,925
255
Occupancy and office operations14,953
14,457
14,508
Amortization of intangible assets1,296
1,245
1,426
Other real estate owned expense1,562
1,618
1,171
FDIC insurance and regulatory assessments3,010
3,096
2,910
Other17,376
18,391
25,017
Total non-interest expense91,041
91,957
90,111
Income before income tax expense36,668
26,047
14,546
Income tax expense11,414
6,159
2,807
Net income$25,254
$19,888
$11,739
Weighted average common shares:
Basic43,734,425
38,227,653
37,452,596
Diluted43,783,053
38,248,046
37,453,542
Earnings per common share data)
Basic$0.58
  
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 October 1, 2007  41,230,618  $459  $348,734  $(8,221) $(57,422) $125,743  $(4,204) $405,089 
Net income                      23,778       23,778 
Other comprehensive loss (note 13)                          (5,377)  (5,377)
Total comprehensive income                              18,401 
Deferred compensation transactions  —   —   40   —   —   —   —   40 
Stock option transactions, net  183,494   —   1,582   —   1,899   (1,291)  —   2,190 
ESOP shares allocated or committed to be released for allocation (187,827 shares)  —   —   492   586   —   —   —   1,078 
RRP awards  6,000   —   (81)  —   66   15   —   — 
Vesting of RRP shares  —   —   1,811   —   —   —   —   1,811 
Other RRP transactions  (34,142)  —   —   —   (451)  —   —   (451)
Purchase of treasury stock  (1,570,757)  —   —   —   (19,779)  —   —   (19,779)
Cash dividends paid ($0.20 per common share)  —   —   —   —   —   (9,525)  —   (9,525)
Other  —   —   304   —   —   —   —   304 
                                 
Balance at September 30, 2008  39,815,213   459   352,882   (7,635)  (75,687)  138,720   (9,581)  399,158 
Net income                      25,861       25,861 
Other comprehensive income (note 13)                          12,058   12,058 
Total comprehensive income                              37,919 
Deferred compensation transactions  —   —   128   —   —   —   —   128 
Stock option transactions, net  181,969   —   1,066   —   2,182   (2,009)  —   1,239 
ESOP shares allocated or committed to be released for allocation (49,932 shares)  —   —   (11)  499   —   —   —   488 
Vesting of RRP shares  —   —   1,688   —   —   —   —   1,688 
Other RRP transactions  (34,164)  —   —   —   (326)  —   —   (326)
Purchase of treasury stock  (415,811)  —   —   —   (3,459)  —   —   (3,459)
Cash dividends paid ($0.24 per common share)  —   —   —   —   —   (9,379)  —   (9,379)
                                 
Balance at September 30, 2009  39,547,207   459   355,753   (7,136)  (77,290)  153,193   2,477   427,456 
Net income                      20,492       20,492 
Other comprehensive income (note 13)                          2,647   2,647 
Total comprehensive income                              23,139 
Deferred compensation transactions  —   —   87   —   —   —   —   87 
Stock option transactions, net  249,953   —   247   —   3,016   (2,036)  —   1,227 
ESOP shares allocated or committed to be released for allocation (49,932 shares)  —   —   (58)  499   —   —   —   441 
Vesting of RRP shares  —   —   883   —   —   —   883     
Other RRP transactions  (18,949)  —   —   —   (177)  —   —   (177)
Purchase of treasury stock  (1,515,923)  —   —   —   (12,885)  —   —   (12,885)
Cash dividends paid ($0.24 per common share)  —   —   —   —   —   (9,216)  —   (9,216)
                                 
Balance at September 30, 2010  38,262,288  $459  $356,912  $(6,637) $(87,336) $162,433  $5,124  $430,955 
$0.52
See accompanying notes to consolidated financial statements.
$0.31
Diluted0.58
PROVIDENT NEW YORK
0.52
0.31
See accompanying notes to consolidated financial statements.

55

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the year ended September 30,
(Dollars in thousands, except share data)
 2013 2012 2011
Net income$25,254
 $19,888
 $11,739
Other comprehensive (loss) income:     
Securities available for sale:     
Net unrealized holding (losses) gains on securities available for sale net of related tax (benefit) expense of ($15,154), $5,220 and $4,624(22,167) 7,641
 6,762
    Less:     
Reclassification adjustment for net realized gains included in net income, net of related income tax expense of $3,001, $4,246 and $4,0654,390
 6,206
 5,946
Reclassification adjustment for other than temporary losses included in net income, net of related income tax benefit of ($13), ($19) and ($113)(19) (28) (165)
    Total securities available for sale(26,538) 1,463
 981
Change in funded status of defined benefit plans, net of related income tax expense (benefit) of $2,929, $205 and ($665)4,309
 300
 (969)
  Other comprehensive (loss) income(22,229) 1,763
 12
Total comprehensive income$3,025
 $21,651
 $11,751
See accompanying notes to consolidated financial statements.

56

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the year ended September 30,
(Dollars in thousands, except per share data)
 
Number of
shares
 
Common
stock
 
Additional
paid-in
capital
 
Unallocated
ESOP
shares
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balance at October 1, 201038,262,288
 $459
 $356,912
 $(6,637) $(87,336) $162,433
 $5,124
 $430,955
Net income          11,739
   11,739
Other comprehensive income            12
 12
Deferred compensation transactions—
 —
 45
 —
 —
 —
 —
 45
Stock option transactions, net—
 —
 558
 —
 

 —
 —
 558
ESOP shares allocated or committed to be released for allocation (49,932 shares)—
 —
 (59) 499
 —
 —
 —
 440
Restricted stock awards, net59,174
 —
 (393) —
 531
 —
 —
 138
Purchase of treasury stock(457,454) —
 —
 —
 (3,780) —
 —
 (3,780)
Cash dividends paid ($0.24 per common share)—
 —
 —
 —
 —
 (8,973) —
 (8,973)
Balance at September 30, 201137,864,008
 459
 357,063
 (6,138) (90,585) 165,199
 5,136
 431,134
Net income          19,888
   19,888
Other comprehensive income            1,763
 1,763
Deferred compensation transactions—
 —
 164
 —
 —
 —
 —
 164
Stock option transactions, net—
 —
 521
 —
 —
 —
 —
 521
ESOP shares allocated or committed to be released for allocation (49,932 shares)—
 —
 43
 500
 —
 —
 —
 543
Restricted stock awards, net50,958
 —
 (187) —
 412
 —
 —
 225
Capital raise6,258,504
 63
 45,937
 —
 —
 —
 —
 46,000
Cash dividends paid ($0.24 per common share)—
 —
 —
 —
 —
 (9,100) —
 (9,100)
Other—
 —
 —
 —
 —
 (16) —
 (16)
Balance at September 30, 201244,173,470
 522
 403,541
 (5,638) (90,173) 175,971
 6,899
 491,122
Net income—
 
 
 
 
 25,254
 —
 25,254
Other comprehensive income—
 
 
 
 
 
 (22,229) (22,229)
Deferred compensation transactions—
 —
 35
 —
 —
 —
 —
 35
Stock option transactions, net8,250
 —
 695
 —
 95
 (33) —
 757
ESOP shares allocated or committed to be released for allocation (49,932 shares)—
 —
 119
 145
 —
 —
 —
 264
Restricted stock awards, net169,326
 —
 (574) —
 1,540
 —
 —
 966
Cash dividends declared ($0.30 per common share)—
 —
 —
 —
 —
 (13,303) —
 (13,303)
Balance at September 30, 201344,351,046
 $522
 $403,816
 $(5,493) $(88,538) $187,889
 $(15,330) $482,866
See accompanying notes to consolidated financial statements.

57

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
YearsFor the Year Ended September 30, 2010, 2009 and 2008
(Dollars in thousands)

  2010  2009  2008 
Cash flows from operating activities:         
Net income $20,492  $25,861  $23,778 
Adjustments to reconcile net income to net cash provided by operating activities            
Provisions for loan losses  10,000   17,600   7,200 
(Gain) loss on other real estate owned  (18)  186   - 
Depreciation of premises and equipment  5,144   4,675   4,616 
Amortization of intangibles  1,849   2,185   2,599 
Net gain on sale of securities  (8,157)  (18,076)  (983)
Fair value loss on interest rate cap  1,106   -   - 
Gains on loans held for sale  (867)  (961)  - 
(Gain) loss on sale of premises and equipment  54   (517)  - 
Net amortization (accretion) of premium and discounts on securities  3,209   1,715   (47)
Accretion of premiums on borrowings (includes calls on borrowings)  (223)  (440)  (739)
ESOP and RRP expense  1,325   2,178   2,889 
ESOP forfeitures  (29)  (4)  (293)
Stock option compensation expense  247   768   1,196 
Originations of loans held for sale  (52,839)  (50,677)  (189)
Proceeds from sales of loans held for sale  49,029   49,653   - 
Increase in cash surrender value of bank owned life insurance  (1,327)  (1,961)  (1,832)
Deferred income tax (benefit) expense  26   (1,640)  (2,528)
Net changes in accrued interest receivable and payable  (1,536)  (585)  134 
Other adjustments (principally net changes in other assets and other liabilities)  (5,624)  (9,273)  4,504 
Net cash provided by operating activities  21,861   20,687   40,305 
Cash flows from investing activities:            
Purchases of securities:            
Available for sale  (830,613)  (708,727)  (263,857)
Held to maturity  (23,023)  (25,095)  (19,248)
Proceeds from maturities, calls and other principal payments on securities            
Available for sale  328,993   153,585   223,492 
Held to maturity  33,780   22,548   13,623 
Proceeds from sales of securities available for sale  443,389   556,796   40,438 
Proceeds from sales of securities held to maturity  -   625   - 
Loan originations  (472,066)  (450,551)  (596,593)
Loan principal payments  461,632   469,157   498,610 
Purchase of Interest rate cap derivatives  (1,368)  -   - 
Proceeds from sale of FHLB stock, net  3,605   5,498   4,126 
Purchases of premises and equipment  (8,152)  (8,852)  (11,253)
Proceeds from the sale of fixed assets  48   718   - 
Purchases of BOLI  -   -   (5,000)
Net cash (used in) provided by investing activities  (63,775)  15,702   (115,662)
201320122011
Cash flows from operating activities:
Net income$25,254
$19,888
$11,739
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for loan losses12,150
10,612
16,584
Loss and write downs on other real estate owned1,285
694
869
Depreciation of Contentspremises and equipment4,243
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Consolidated Statements
4,746
6,177
Amortization of intangibles1,296
1,245
1,426
Net gain on sale of securities(7,391)(10,452)(10,011)
Net gains on loans held for sale(1,979)(1,897)(1,027)
Loss (gain) on sale of premises and equipment75
(75)—
Net amortization of premium and discount on securities2,068
(1,006)3,181
Change in unamortized acquisition costs and premiums1,050
—
—
Accrued restructuring expense—
—
3,201
Accretion of premium on borrowings (includes calls on borrowings), net87
(67)(30)
Amortization of pre-payment fees on restructured borrowings1,466
1,459
1,033
ESOP and restricted stock expense1,544
667
607
Stock option compensation expense695
521
558
Originations of loans held for sale(85,657)(80,579)(49,807)
Proceeds from sales of loans held for sale94,130
79,147
52,548
Increase in cash surrender value of bank owned life insurance(1,998)(2,050)(2,049)
Deferred income tax expense (benefit)719
(64)118
Other adjustments (principally net changes in other assets and other liabilities)(26,413)2,237
(8,639)
Net cash provided by operating activities22,624
25,026
26,478
Cash Flows Continued
Years Ended September 30, 2010, 2009flows from investing activities:
Purchases of securities:
Available for sale(490,160)(679,553)(622,551)
Held to maturity(169,320)(95,157)(93,764)
Proceeds from maturities, calls and 2008
(Dollars in thousands)
other principal payments on securities:
Available for sale168,771
  2010  2009  2008 
Cash flows from financing activities         
Net increase in transaction, savings and money market deposits  177,808   124,037   312,793 
Net decrease in time deposits  (117,388)  (30,952)  (37,267)
Net decrease in short-term borrowings  (62,500)  (153,791)  (230,400)
Gross repayments of long-term borrowings  (4,152)  (3,995)  (14,161)
Gross proceeds from long-term borrowings  -   22,840   150,066 
Net increase in borrowings senior unsecured note  -   51,500   - 
Net (decrease) increase in mortgage escrow funds  (207)  1,133   1,290 
Treasury shares purchased  (13,062)  (3,785)  (20,230)
Stock option transactions  1,008   473   1,270 
Other stock-based compensation transactions  87   128   40 
Cash dividends paid  (9,216)  (9,379)  (9,525)
Net cash provided by (used in) financing activities  (27,622)  (1,791)  153,876 
Net increase (decrease) in cash and cash equivalents  (69,536)  34,598   78,519 
Cash and cash equivalents at beginning of year  160,408   125,810   47,291 
Cash and cash equivalents at end of year $90,872  $160,408  $125,810 
Supplemental cash flow information:            
Interest payments $27,379  $38,714  $55,268 
Income tax payments  7,993   11,739   13,227 
Loans transferred to real estate owned  2,943   1,815   - 
Net change in unrealized gains (losses) recorded on securities available for sale  5,241   25,900   (3,341)
Change in deferred taxes on unrealized (gains) losses on securities available for sale  (2,122)  (10,506)  1,370 
Issuance of RRP shares  -   -   81 
174,497
See accompanying notes
251,774
Held to consolidated financial statements.maturity55,866
63,037
17,220
Proceeds from sales of Contentssecurities available for sale339,123
PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes
344,431
540,145
Proceeds from sales of securities held to Consolidated Financial Statements
maturity
1,187
—
357
Loan originations(Dollars in thousands, except per share data)
1,124,310
)(735,676)(578,631)
Loan principal payments813,695
(1) Basis
509,060
553,235
(Purchases) proceeds from sale of Financial Statement Presentation and SummaryFHLB stock, net(5,063)(620)1,988
Proceeds from sales of Significant Accounting Policies

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident Bancorp” or “the Company”), Hardenburgh Abstract Title Company, which provides title searches and insurance for residential and commercialother real estate owned
4,730
3,468
301
Purchases of premises and equipment(2,355)(1,853)(3,465)
Proceeds from sale of 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 wholly4,738
—
—
Proceeds from sale of fixed assets—
75
—
Purchases of bank owned subsidiaries. These subsidiaries are (i) Provident Municipal Bank (“PMB”life insurance—
—
(3,980) 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, and (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) Limited Liability Companies, which hold foreclosed properties acquired by the bank.

58

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
For the year ended September 30,
(Dollars in thousands)
      
 2013 2012 2011
Cash received from Gotham acquisition—
 126,818
 —
Net cash (used in) provided by investing activities(403,098) (291,473) 62,629
Cash flows from financing activities:     
Net (decrease) increase in transaction, savings and money market deposits(29,503) 499,340
 227,907
Net (decrease) in time deposits(119,354) (53,786) (73,914)
Net increase (decrease) in short-term FHLB borrowings91,528
 (5,000) (34,840)
Increase in long-term FHLB borrowings25,000
 —
 —
Gross repayments of long-term FHLB borrowings(217) (5,244) (1,238)
Payments of pre-payment fees on FHLB borrowings—
 (278) (5,151)
Repayment of senior unsecured note—
 (51,499) —
Net proceeds from Senior Notes97,946
 —
 —
Net increase in mortgage escrow funds727
 2,218
 1,503
Treasury shares purchased—
 —
 (3,810)
Stock option transactions62
 102
 4
Other stock-based compensation transactions35
 164
 45
Equity capital raise—
 46,000
 —
Cash dividends paid(10,642) (9,100) (8,973)
Net cash provided by financing activities55,582
 422,917
 101,533
Net (decrease) increase in cash and cash equivalents(324,892) 156,470
 190,640
Cash and cash equivalents at beginning of year437,982
 281,512
 90,872
Cash and cash equivalents at end of year$113,090
 $437,982
 $281,512
Supplemental cash flow information:     
  Interest payments$18,831
 $18,447
 $21,815
  Income tax payments4,475
 1,873
 9,070
Real estate acquired in settlement of loans5,634
 6,148
 1,932
Unsettled securities transactions—
 41,758
 —
Dividends declared, not yet paid2,661
 —
 —
      
Acquisitions:     
Non-cash assets acquired:     
Securities available for sale—
 $54,994
 —
Total loans, net—
 205,453
 —
FHLB stock—
 1,045
 —
Accrued interest receivable—
 417
 —
Goodwill—
 5,665
 —
Core deposit intangibles—
 4,818
 —
Premises and equipment, net—
 490
 —
Other assets—
 1,663
 —
Total non-cash assets acquired—
 274,545
 —
      
      

59

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
For the year ended September 30,
(Dollars in thousands)
 2013 2012 2011
Liabilities assumed:     
Deposits—
 $368,902
 —
FHLB and other borrowings—
 30,784
 —
Other liabilities—
 1,677
 —
Total liabilities assumed—
 401,363
 —
      
Net non-cash (liabilities) acquired—
 $(126,818) —
Cash and cash equivalents acquired in acquisitions—
 126,818
 —
See accompanying notes to consolidated financial statements.


60

STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

Merger with Sterling Bancorp
On October 31, 2013, Provident New York Bancorp completed its acquisition of Sterling Bancorp (“Legacy Sterling”). In connection with the merger, Provident New York Bancorp completed the following corporate actions:

Legacy Sterling merged with and into Provident New York Bancorp. Provident New York Bancorp was the accounting acquirer and the surviving entity.
Provident New York Bancorp changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended.
Provident Bank converted to a national bank charter.
Sterling National Bank merged into Provident Bank.
Provident Bank changed its legal entity name to Sterling National Bank.
Provident Municipal Bank merged into Sterling National Bank.

We refer to the transactions detailed above collectively as the “Merger”.

The consolidated financial statements include the accounts of Sterling Bancorp (“Sterling” or the “Company”), PBNY Holdings, Inc. which has an investment in PB Madison Title Agency L.P., a company that provides title searches and title insurance for residential and commercial real estate, LandSave Development, LLC an inactive subsidiary, Provident Risk Management (a captive insurance company), Sterling National Bank (the “Bank”) and the Bank’s wholly owned subsidiaries. These subsidiaries included at September 30, 2013 (i) Provident Municipal Bank (“PMB”) which was a limited-purpose, New York State-chartered commercial bank formed to accept deposits from municipalities in the Company’s market area and was merged into the Bank at the time of the Merger, (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, and (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) Limited Liability Companies, which hold other real estate owned held by the Bank. Intercompany transactions and balances are eliminated in consolidation.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain amounts from prior years have been reclassified to conform to the current fiscal year presentation. Reclassifications had no affect on prior year net income or stockholders’ equity.

(a)Nature of Business
Since October 31, 2013, Sterling Bancorp (“Sterling” or the “Company”) is a bank holding company and financial holding company under the Bank Holding Company Act of 1956. Sterling is a Delaware corporation that owns all of the outstanding shares of Sterling National Bank (the “Bank”) and was formed in connection with the second step offering on January 14, 2004. Sterling is listed on the New York Stock Exchange (NYSE) under the symbol STL.

Sterling National Bank, an independent, full-service bank founded in 1888, is headquartered in Montebello, New York and is the principal bank subsidiary of Sterling. The Bank accounts for substantially all of Sterling’s consolidated assets and net income. We operate through commercial banking teams and financial centers which serve the greater New York metropolitan region. The Bank targets specific geographic markets - the New York Metro Market, which includes Manhattan and Long Island; and our New York Suburban Market, which consists of Rockland, Orange, Sullivan, Ulster, Putnam and Westchester counties in New York and Bergen County in New Jersey.

The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. In connection with the Merger, the Bank became a national bank and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). The Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board are the primary regulators for the Bank and the Company, respectively.

At September 30, 2012, the Company had $4.5 million of assets held for sale that represented the assets of Hudson Valley Investment Advisors (“HVIA”). The Company entered into an agreement to sell HVIA subsequent to September 30, 2012. The transaction settled on November 16, 2012.

61
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


(b)Use of estimates
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, the Company 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. An estimate that is particularly susceptible to significant near-term change is the allowance for loan losses, which is discussed below. Also subject to change are estimates involving goodwill impairment evaluations, mortgage servicing rights, benefit plans, deferred income taxes and fair values of financial instruments.
(c)Cash Flows
For purposes of reporting cash flows, cash equivalents include highly liquid, short-term investments such as overnight federal funds, as well as cash and deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with an original maturity of 90 days or less.

(d) Restrictions on Cash
A portion of the Company's cash on hand and on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

(e)Long Term Assets
Premises and equipment, core deposit and other intangible assets are reviewed annually for impairment or when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

(f)Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. (See Note 17.)

(g)Adoption of New Accounting Standards
Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220): Reporting Amounts Reclassified out of Accumulated Other Comprehensive Income. The amendments in this Update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments were effective for reporting periods beginning after December 15, 2012. See Note 19. Accumulated Other Comprehensive (Loss) Income for the impact of this standard.

(h)Securities
Securities include U.S. Treasury, U.S. Government Agency and Government Sponsored Agencies, municipal and corporate bonds, mortgage-backed securities, collateralized mortgage obligations and marketable equity securities.

The Company can classify its securities among three categories: held to maturity, trading, and available for sale. We determine the appropriate classification of the Company’s securities at the time of purchase.

Held to maturity securities are limited to debt securities for which we have the intent and the ability to hold to maturity. These securities are reported at amortized cost.

Trading securities are debt and equity securities held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in earnings. The Company does not engage in securities trading activities.

All other debt and marketable equity securities are classified as available for sale. These securities are reported at fair value, with unrealized gains and losses (net of the related deferred income tax effect) excluded from earnings and reported in a separate component of stockholders’ equity (accumulated other comprehensive income or loss). Available for sale securities include securities that we intend to hold for an indefinite period of time, such as securities to be used as part of the Company’s

62
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


asset/liability management strategy or securities that may be sold to fund loan growth, in response to changes in interest rates, changes in prepayment risks, the need to increase capital, or similar factors.

Premiums and discounts on debt securities are recognized in interest income on a level yield basis over the period to maturity. Amortization of premiums and accretion of discounts on mortgage-backed securities are based on the estimated cash flows of the mortgage-backed securities, periodically adjusted for changes in estimated lives, on a level yield basis. The cost of securities sold is determined using the specific identification method.

Securities are evaluated for impairment at least quarterly, and more frequently when economic and market conditions warrant such an evaluation. For securities in an unrealized loss position, we consider the extent and duration of the unrealized loss, and the financial condition of the issuer. The Company also assesses whether it intends to sell, or is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either criteria regarding intent to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. If the Company does not expect to recover the entire amortized cost basis of the security, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary impairment is separated into a) the amount representing the credit loss and b) the amount related to all other factors. The amount of other than temporary impairment related to credit loss is recognized in earnings while the amount related to other factors is recognized in other comprehensive income, net of applicable taxes. The cost basis of individual equity securities is written down to estimated fair value through a charge to earnings when declines in value below cost are considered to be other than temporary. As of September 30, 2013 the Company does not intend to sell nor is it more likely than not that it would be required to sell any of its debt securities with unrealized losses prior to recovery of its amortized cost basis less any current period credit loss.

(i)Loans Held For Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. In the absence of commitments from investors, fair value is based on current investor yield requirements. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

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

(j)Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Under the amortization measurement method, the Company subsequently measures servicing rights at fair value at each reporting date and records any impairment in value of servicing assets in earnings in the period in which the impairment occurs. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Servicing fees totaled $778, $695 and $623 for the years ended September 30, 2013, 2012 and 2011, respectively. Late fees and ancillary fees related to loan servicing are not material. Note effective October 1, 2013 the Bank transferred servicing of residential mortgage loans to a nationally recognized mortgage loan servicing company.

(k)Loans
Loans where we have the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Interest income on loans is accrued on the unpaid principal balance.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)



A loan is placed on non-accrual status when we have determined that the borrower may likely be unable to meet contractual principal or interest obligations, or when payments are 90 days or more past due, unless well secured and in the process of collection. Accrual of interest ceases and, in general, uncollected past due interest is reversed and charged against current interest income. Interest payments received on non-accrual loans, including impaired loans, are not recognized as income unless warranted based on the borrower’s financial condition and payment record. Furthermore, negative tax escrow will be included in the unpaid principal for loans individually evaluated for impairment, as this is part of the customer’s legal obligation to the Company.

The Company defers nonrefundable loan origination and commitment fees, and certain direct loan origination costs, and amortizes the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid or sold, the net deferred amount is recognized in the statement of income at that time. Interest and fees on loans include prepayment fees and late charges collected.
(l)Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable incurred credit losses inherent in the loan portfolio. The allowance for loan losses, is a critical accounting estimate and requires substantial judgment of management. The allowance for loan losses includes allowance allocations calculated in accordance with ASC Subtopic 450-20, “Loss Contingencies” and ASC Subtopic 310-35-2, “Loan Impairment.” The level of the allowance reflects management’s continuing evaluation of loan loss experience, specific credit risks, current loan portfolio quality, industry and loan type concentrations, economic and regulatory conditions and unidentified losses inherent in the loan portfolios, as well as trends in the foregoing. The Company analyzes loans by two broad segments or classes: real estate secured loans and loans that are either unsecured or secured by other collateral.

The segments or classes considered real estate secured are: residential mortgage loans; commercial real estate (“CRE”) loans; business banking CRE; acquisition, development and construction (“ADC”) loans; homeowner loans, and home equity lines of credit. The segments or classes considered unsecured or secured by other than real estate collateral are: commercial & industrial (“C&I”) loans, business banking C&I loans and consumer loans. In all segments or classes, significant loans are reviewed for impairment once they are past due 90 days or more, or are classified substandard or doubtful. Generally the Company considers a homogeneous residential mortgage or home equity line of credit to be significant if the Company’s investment in the loan is greater than $500. If a loan is deemed to be impaired in one of the real estate secured segments, it is generally considered collateral dependent. If the value of the collateral securing a collateral dependent impaired loan is less than the loan’s carrying value, a charge-off is recognized equal to the difference between the appraised value and the book value of the loan. Additionally impairment reserves are recognized for estimated costs to hold and to liquidate and a 10% discount of the appraisal value. The ranges for the costs to hold and liquidate are 12-22% for the following segments: CRE, business banking CRE and ADC loans and 7-13% for homeowner loans, home equity lines of credit, and residential mortgage loans. Impaired loans in the real estate secured segments are re-appraised using a summary or drive-by appraisal report every six to nine months.

For loans in the business banking C&I segmentwe charge off the full amount of the loan when it becomes 90 days or more past due, or earlier in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For loans in the C&I loan segment, we conduct a cash flow projection, and charge off the difference between the net present value of the cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize a 10% impairment reserve to account for the imprecision of our estimates. However, for most of these cases receipt of future cash flows is too unreliable to be considered probable, resulting in the charge off of the entire balance of the loan. For unsecured consumer loans, charge offs are recognized once the loan is 90 to 120 days or more past due or the borrower files for bankruptcy protection.

Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and other criticized or classified loans (if any), as well as allowances determined for the pass rated loans in each major loan category. After we establish an allowance for loan losses that are known to be non-performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred losses inherent in that portion of the portfolio. These percentages are determined by management, based on historical loss experience for the applicable loan category, and are adjusted to reflect our evaluation of:

•levels of, and trends in, delinquencies and non-accruals;

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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


•trends in volume and terms of loans;
•effects of any changes in lending policies and procedures;
•experience, ability, and depth of lending management and staff;
•national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and for commercial loans, trends in risk ratings.

Land acquisition, development and construction lending is considered higher risk and exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and pricing of the loan. We have deemphasized this type of loan.

Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service the debt or the borrower may use the cash flow for other purposes. In addition, the foreclosure process, if necessary may be slow and properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.

Commercial business lending is also higher risk because repayment depends on the successful operation of the business which is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of risks because we must gain control of assets used in the borrower’s business before foreclosing which we cannot be assured of doing, and the value in a foreclosure sale or other means of liquidation is subject to downward pressure.

When we evaluate residential mortgage loans and equity loans we weigh both the credit capacity of the borrower and the collateral value of the home. As unemployment and underemployment increases, and liquidity reserves if any, diminish, the credit capacity of the borrower decreases, which increases our risk. Also, after a period of years of stable or increasing home values in our market, home prices have declined from a high in 2005 and 2006. We are exposed to risk in both our first mortgage and equity lending programs due to declines in values in recent years. We are also exposed to risk because the time to foreclose is significant and has become longer under current conditions.

The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

(m) Troubled Debt Restructuring
Troubled debt restructuring (“TDR”) is a formally renegotiated loan in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not have been granted to the borrower otherwise. Not all loans that are restructured as a TDR are classified as non accrual before the restructuring occurs. Restructured loans can convert from non accrual to 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.

(n) Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) of New York, the Bank is required to hold a certain amount of FHLB common stock. This stock is a non-marketable equity security and, accordingly, is reported at cost.

(o) Premises and Equipment
Land is reported at cost, while premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three years for equipment and 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the

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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


terms of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized.

(p) Goodwill and Other Intangible Assets
Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level. The Company has the option to first perform a qualitative assessment to test goodwill for impairment on a reporting-unit-by-reporting-unit basis. If after performing the qualitative assessment, the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will perform the two-step process described below:

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
1.Identify potential impairments by comparing 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.  Certain amounts from prior years have been reclassified to conform to the current fiscal year presentation.

(a) Nature of Business

Provident New York Bancorp (“Provident Bancorp” or the “Company”), a unitary savings and loan holding company, is a Delaware corporation that owns all of the outstanding shares of Provident Bank (the “Bank”).  Provident Bancorp was formed in connection with the second step offering on January 14, 2004.

On June 29, 2005, Provident Bancorp, Inc. changed its name to Provident New York Bancorp in order to differentiate itself from the numerous bank holding companies with similar names. It began trading on the NASDAQ under the stock symbol “PBNY” on that date. Prior to that date, from January 7, 1999 its common stock traded under the stock symbol “PBCP.”

The Bank is a community bank offering financial services to individuals and businesses primarily in Rockland and Orange Counties, New York and the contiguous Sullivan, Ulster, Westchester and Putnam Counties, New York and Bergen County, New Jersey. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. The Bank is a federally-chartered savings association and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). The Office of Thrift Supervision (OTS) is the primary regulator for the Bank and for Provident New York Bancorp. Of the Bank’s loans 86% are collateralized or dependent on real estate.

(b) Use of estimates

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. An estimate that is particularly susceptible to significant near-term change is the allowance for loan losses, which is discussed below. Also subject to change are estimates involving goodwill impairment evaluations, mortgage servicing rights, benefit plans, deferred income taxes and fair values of financial instruments.

(c) Cash Flows

For purposes of reporting cash flows, cash equivalents include highly liquid, short-term investments such as overnight federal funds, as well as cash and deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with an original maturity of 90 days or less.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(d) Long Term Assets

Premises and equipment, core deposit and other intangible assets are reviewed annually for impairment or when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.

(e) Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.

(f) Adoption of New Accounting Standards

ASC Topic 715-20-65-2 Employers’ Disclosures about Postretirement Benefit Plan Assets requires the expansion of disclosure by requiring the following: 1) how investment allocation decisions are made by management; 2) major categories of plan assets; and 3) significant concentrations of risk.  Additionally, ASC 715-20-65-2 requires employers to disclose information about the valuation of plan assets similar to that required in ASC topic 820 Fair Value Measurements and Disclosures.  The effect of adopting this new guidance was immaterial.

ASC Topic 815-10-65-3 Derivatives and hedging expands the disclosure requirements for derivative instruments and hedging activities.  ASC 815-10-65-3 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. The effect of adopting this new guidance was immaterial.

ASC Topic 260-10-45-65-2 Earnings Per share addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per share (‘EPS”) under the two-class method.    ASC 260-10-45-65-2 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method.  The effect of adopting this new guidance was immaterial.

(g) Securities

Securities include U.S. Treasury, U.S. Government Agency and Government Sponsored Agencies, municipal and corporate bonds, mortgage backed securities, collateralized mortgage obligations and marketable equity securities.

The Company can classify its securities among three categories: held to maturity, trading, and available for sale. Management determines the appropriate classification of the Company’s securities at the time of purchase.

Held-to-maturity securities are limited to debt securities for which management has the intent and the Company has the ability to hold to maturity. These securities are reported at amortized cost.

Trading securities are debt and equity securities held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in earnings. The Company does not engage in securities trading activities.

All other debt and marketable equity securities are classified as available for sale. These securities are reported at fair value, with unrealized gains and losses (net of the related deferred income tax effect) excluded from earnings and reported in a separate component of stockholders’ equity (accumulated other comprehensive income or loss). Available-for-sale securities include securities that management intends to hold for an indefinite period of time, such as securities to be used as part of the Company’s asset/liability management strategy or securities that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase capital, or similar factors.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Premiums and discounts on debt securities are recognized in interest income on a level-yield basis over the period to maturity. Amortization of premiums and accretion of discounts on mortgage backed securities are based on the estimated cash flows of the mortgage backed securities, periodically adjusted for changes in estimated lives, on a level yield basis.  The cost of securities sold is determined using the specific identification method. Unrealized losses are charged to earnings when management determines that the decline in fair value of a security is other than temporary.

Securities are evaluated at least quarterly, and more frequently when economic and market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition of the issuer. Management also assesses whether it intendsreporting unit to sell, or is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either criteria regarding intent to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  If the Company does not expect to recover the entire amortized cost basis of the security, the Company does not intend to sell the security and itcarrying amount, including goodwill. Goodwill is not more likely than not th at the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary impairment is separated into a) the amount representing the credit loss and b) the amount related to all other factors.  The amount of other than temporary impairment related to credit loss is recognized in earnings while the amount related to other factors is recognized in other comprehensive income, net of applicable taxes.  The cost basis of individual equity securities is written down to estimated fair value through a charge to earnings when declines in value below cost are considered to be other than temporary. Based on a review of each of the securities in the investment portfolio in accordance with FASB ASC 320 at September 30, 2010, the Company concluded that it expects to recover the amortized cost basis of its investments and therefore there were no impairment charges.  As of September 30, 2010 the Company does not intend to sell nor is it more lik ely than not that it would be required to sell any of its securities with unrealized losses prior to recovery of its amortized cost basis less any current-period credit loss.

(h) Loans

Loans where management has the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Mortgage loans originated and held for sale in the secondary market (if any) are reported at the lower of aggregate cost or estimated fair value. Fair value is estimated based on outstanding investor commitments or, in the absence of such commitments, based on current investor yield requirements. Net unrealized losses are recognized in a valuation allowance by a charge to earnings. Interest income on loans is accrued on the level yield method.

A loan is placed on non-accrual status when management has determined that the borrower may likely be unable to meet contractual principal or interest obligations, or when payments are 90 days or more past due, unless well secured and in the process of collection. Accrual of interest ceases and, in general, uncollected past due interest is reversed and charged against current interest income, related to the current year and interest, recorded in the prior year, is charged to the allowance for loan losses. Interest payments received on non-accrual loans, including impaired loans, are not recognized as income unless warranted based on the borrower’s financial condition and payment record.

The Company defers nonrefundable loan origination and commitment fees, and certain direct loan origination costs, and amortizes the net amountlong as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid or sold, the net deferred amount is recognized in the statement of income at that time. Interest and fees on loans include prepayment fees and late charges collected.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(i) Allowance for Loan Losses

The allowance for loan losses is established through provisions for losses charged to earnings. Losses on loans (including impaired loans) are charged to the allowance for loan losses 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 an amount that management believes is necessary to absorb probable incurred losses on existing loans that may become uncollectible. Management’s evaluations, which are subject to periodic review by the OTS, take into consideration factors such 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 that may affect the borrowers’ ability to pay. Future adjustments to the allowance for loan losses may be necessary, based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other f actors.  The process of assessing the adequacy of the allowance for loan loss is subjective, particularly in times of economic downturns.  It is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates.  As such there can be no assurance that future charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.

The Company considers a loan to be impaired when, based on current information and events, it is probable that the borrower will be unable to comply with contractual principal and interest payments due. Certain loans are individually evaluated for collectability in accordance with the Company’s ongoing loan review procedures (principally commercial real estate, commercial business and construction loans). Smaller-balance homogeneous loans are collectively evaluated for impairment, such as residential mortgage loans and consumer loans. Impaired loans are based on one of three measures — the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loanreporting unit is collateral dependent. If the measure of an i mpaired loan is lessgreater than its recorded investment,carrying value. The second step is only required if a portion ofpotential impairment to goodwill is identified in step one.
2.Compare the allowance for loan losses is allocated so that the loan is reported, net, at its measured value.

(j) Troubled Debt Restructuring

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.. The Company has troubled debt restructurings of $21,504, $674, and $0 as of September 30, 2010, 2009 and 2008, respectively. As of September 30,2010, $5,457 of restructured loans were in nonaccrual and $16,047 were making payments in accordance with current terms.

(k) Mortgage Servicing Assets

Servicing assets represent theimplied fair value of retained servicing rightsgoodwill to its carrying amount, where the implied fair value of goodwill is computed on loans sold (as well asa residual basis, that is, by subtracting the costsum of purchased rights).  Servicing assets are expensed in proportion to,the fair values of the individual asset categories (tangible and overintangible) from the period of, estimated net servicing revenues.  Impairment is evaluated based on theindicated fair value of the assets, using groupings of the underlying loansreporting unit as to interest rates and then, secondarily, as to loan type and investor.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the capitalized amount for a grouping. Upon adoption of FASB ASC Topic # 860- Transfers and Servicing, the Company elected to continue to use the amortization method.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(l) Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank (FHLB) of New York, the Bank is required to hold a certain amount of FHLB stock. This stock is a non-marketable equity security and, accordingly, is reported at cost.

(m) Premises and Equipment

Land is reported at cost, while premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three years for equipment and 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized.

(n) Goodwill and Other Intangible Assets

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of business acquired.  Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized.   Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  Goodwill is the only intangible asset with an indefinite life on our balance sheet.

We asses the carrying value of our goodwill at least annually in order to determine if this intangible asset is impaired.  In reviewing the carrying value of our goodwill we asses the recoverability of such assets by evaluating the fair value of the related business unit.under step one. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized for the amount of the excess and the carrying value of goodwillrecognized. That loss is reduced accordingly.  An impairment would be requiredequal to be recorded during the period identified.

Testing for impairment of goodwill and intangible assets involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used.  Using a discount rate of 12% and a terminal multiple of 14 times expected earnings, the net present value of Provident New York Bancorp shares exceed recorded book value by 17% as of September 30, 2010.

The core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives of approximately eight years. Intangibles related to HVIA are amortized over 10 years on a straight-line basis.  Impairment losses on intangible assets are charged to expense, if and when they occur.

(n) Real Estate Owned

Real estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with any resulting write-down charged to the allowance for loan losses. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and other available information. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Gains and losses on sales of real estate owned are recognized upon disposition. Total foreclosed properties included in other assets are $3.9 million and $1.7 million at September 30, 20010 and 2009, respectively.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(o) Securities Repurchase Agreements

In securities repurchase agreements, the Company transfers securities to a counterparty under an agreement to repurchase the identical securities at a fixed price on a future date. These agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets other specified criteria. Accordingly, the transaction proceeds are recorded as borrowings and the underlying securities continue to be carried in the Company’s securities portfolio. Disclosure of the pledged securities is made in the consolidated statements of financial condition if the counterparty has the right by contract to sell or re-pledge such collateral.

(p) Income Taxes

Net deferred taxes are recognized for the estimated future tax effects attributable to “temporary differences” between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change.

A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion, or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

The Company evaluates uncertain tax positions in a two step process.  The first step is recognition, which requires a determination whether it is more likely than not that a tax position will be sustained upon examination.  The second step is measurement.  Under the measurement step, a tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefitgoodwill that is greater than fifty percent likely of being realized upon ultimate settlement.  Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.  Previously recognized tax position that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met.  The Company did not have any such position as of September 30, 2010.  See note 10 of the “Notes to Consolidated Financial Statements”.

(q) Bank Owned Life Insurance (BOLI)

The Company has purchased life insurance policies on certain key executives.  Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized).

(r) Stock-Based Compensation Plans

Compensation expense is recognized for the Employee stock ownership plan (“ESOP”) equal to the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value at that time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released for allocation is deducted from stockholders’ equity.

The Company applies FASB ASC Topic 718 “Compensation- Stock Based” in accounting for its stock option plan. During 2010, 2009 and 2008 the Company issued 321,976, 88,861 and 275,134 new stock-based option awards and recognized total non-cash stock-based compensation cost of $247, $768 and $1,196. As of September 30, 2010, the total remaining unrecognized compensation cost related to non-vested stock options was $998.   Options granted in 2010 have a two year vesting period.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

The Company’s stock-based compensation plans allow for accelerated vesting when employees retire under circumstances in accordance with the terms of the plans. Grants issued subsequent to adoption of FASB ASC Topic 718 (October 1, 2005), which are subject to such accelerated vesting, are expensed over the shorter of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be less than the vesting period expressed in the option agreement, depending upon the age of the grantee. As of September 30, 2010, 600 restricted shares and 36,000 stock options were potentially subject to accelerated vesting, and have been expensed. The Company recognized expense associated with the acceleration of 0 ,0, and 10,000 restricted shares in 2010, 2009 and 2008, respectively. The Company recognize d expense associated with the acceleration of 27,000, 0, and 3,100 stock option shares in 2010, 2009 and 2008, respectively.

(s) Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period.

Diluted EPS is computed in a similar manner, except that the weighted average number of common shares is increased to include incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options were exercised and unvested RRP shares became vested during the periods. For purposes of computing both basic and diluted EPS, outstanding shares exclude unallocated ESOP shares.

(t) Segment Information

Public companies are required to report certain financial information about significant revenue- producing segments of the business for which such information is available and utilized by the chief operating decision maker. As a community-oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of the community banking operation, which constitutes the Company’s only operating segment for financial reporting purposes.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(2) Acquisitions

Summary of Acquisition Transactions.  Below is the summary of the acquisition transactions for Warwick Community Bancorp (2005) “WSB”, Ellenville National Bank (2004) “ENB”, National Bank of Florida (2002) “NBF”, one purchase in 2005 of a branch office of HSBC Bank USA, National Association (“HSBC”) and Hudson Valley Investment Advisors (“HVIA”).

  HVIA  HSBC  WSB  ENB  NBF  Total 
At Acquisition Date                  
Number of shares issued  208,331   -   6,257,896   3,969,676   -   10,435,903 
Loans acquired $-  $2,045  $284,522  $213,730  $23,112  $523,409 
Deposits assumed  -   23,319   475,150   327,284   88,182   913,935 
Cash paid/(received)  2,500   (18,938)  72,601   36,773   28,100   121,036 
Goodwill  2,531   -   91,576   51,794   13,063   158,964 
Core deposit/other intangibles  2,830   1,690   10,395   6,624   1,787   23,326 
At September 30, 2010                        
Goodwill $3,279  $-  $92,145  $52,101  $13,336  $160,861 
Accumulated core deposit/other amortization  1,227   1,511   8,697   6,498   1,753   19,686 
Net core deposit/other intangible  1,603   179   1,698   126   34   3,640 

* In addition to the above, the Company also carries $1,172 in mortgage servicing rights included in other assets at September 30, 2010

The changes to goodwill, reflected above, are due to tax related items in connection with acquisitions and the $750 settlement of the earn out provision for HVIA in 2007.

Future Amortization of Core Deposit and Other Intangible Assets.  The following table sets forth the future amortization of core deposit and other intangible assets:

  September 30,  September 30, 
Amoritization Schedule 2010  2009 
Less than one year $1,364  $1,853 
One to two years  941   1,360 
Two to three years  580   941 
Three to four years  283   580 
Four to five years  283   283 
Beyond five years  189   472 
Total $3,640  $5,489 

Goodwill is not amortized to expense and is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit and other intangible assets are recognized apart from goodwill and they are amortized to expense over their estimated useful lives and evaluated at least annually for impairment.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(3)Securities Available for Sale

The following is a summary of securities available for sale:

  
Amortized Cost
  
Gross Unrealized Gains
  
Gross Unrealized Losses
  
Fair Value
 
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 
                 
September 30, 2009                
Mortgage-backed securities-residential                
Fannie Mae $238,723  $4,606  $(266) $243,063 
Freddie Mac  92,885   1,621   -   94,506 
Ginnie Mae  26,586   358   (15)  26,929 
CMO/Other MBS  66,784   174   (941)  66,017 
   424,978   6,759   (1,222)  430,515 
Investment securities                
U.S. Government securities  20,893   183   -   21,076 
Federal agencies  186,301   678   (279)  186,700 
Corporate bonds  25,245   579   (1)  25,823 
State and municipal securities  158,007   9,591   (14)  167,584 
Equities  1,145   -   (260)  885 
   391,591   11,031   (554)  402,068 
                 
Total available for sale $816,569  $17,790  $(1,776) $832,583 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per 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.

  September 30, 2010 
  
Amortized Cost
  
Fair Value
 
Remaining period to contractual maturity      
Less than one year $5,353  $5,424 
One to five years  408,318   412,796 
Five to ten years  149,075   156,636 
Greater than ten years  62,764   65,653 
Total $625,510  $640,509 

Proceeds from sales of securities available for sale during the years ended September 30, 2010, 2009 and 2008 totaled $443,389, $556,796 and $40,438, respectively. These sales resulted in gross realized gains of $8,518, $18,043 and $983 for the years ended September 30, 2010, 2009, and 2008 respectively, and gross realized losses of $361, $0, $0, in fiscal year 2010, 2009, and 2008 respectively.

Securities, including held to maturity securities, with carrying amounts of $228,442 and $231,190 were pledged as collateral for borrowings at September 30, 2010 and September 30, 2009, respectively. Securities with carrying amounts of $490,730 and $290,038 were pledged as collateral for municipal deposits and other purposes at September 30, 2010 and September 30, 2009, 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 September 30, 2010 
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
 
                   
Mortgage-backed securities-residential $610  $(8) $5,511  $(352) $6,121  $(360)
U.S. Government and agency securities  40,638   (54)  -   -   40,638   (54)
State and municipal securities  1,541   (20)  -   -   1,541   (20)
Equity securities  99   (6)  790   (251)  889   (257)
Total $42,888  $(88) $6,301  $(603) $49,189  $(691)


  Continuous Unrealized Loss Position       
  Less Than 12 Months  12 Months or Longer  Total 
As of September 30, 2009 
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
 
                   
Mortgage-backed securities-residential $63,965  $(494) $9,651  $(728) $73,616  $(1,222)
U.S. Government and agency securities  64,689   (278)  42   (1)  64,731   (279)
Corporate bonds  2,185   (1)  -   -   2,185   (1)
State and municipal securities  1,710   (14)  -   -   1,710   (14)
Equity securities  -   -   885   (260)  885   (260)
Total $132,549  $(787) $10,578  $(989) $143,127  $(1,776)


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

The Company, as of June 30, 2009 adopted the provisions under FASB ASC Topic 320 – Investments- Debt and Equity Securities which requires a forecast of recovery of cost basis through cash flow collection on all debt securities with a fair value less than its amortized cost less any current period credit loss with an assertion on the lack of intent to sell (or requirement to sell prior to recovery of cost basis).  Based on a review of each of the securities in the investment portfolio in accordance with FASB ASC 320 at September 30, 2010, the Company concluded that it expects to recover the amortized cost basis of its investments and therefore there were no impairment charges.  As of September 30, 2 010 the Company does not intend to sell nor is it more than likely than not that it would be required to sell any of its securities with unrealized losses prior to recovery of its amortized cost basis less any current-period credit loss.

Substantially all of the unrealized losses at September 30, 2010 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase.  There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2010. A total of 16 available for sale securities were in a continuous unrealized loss position for less than 12 months and 11 securities for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.

Within the collateralized mortgage-backed securities (CMO’s) category of the available for sale portfolio there are four individual private label CMO’s that have an amortized cost of $6,355 and a fair value (carrying value) of $5,996  as of September 30, 2010.  One of the four securities is below investment grade and has an amortized cost of $2,308 and a fair value of $2,044 at September 30, 2010.  The remaining three securities are rated at or above Aa3.

These securities were all performing as of September 30, 2010 and are expected to perform based on current information.  In determining whether there existed other than temporary impairment on these securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit risk and liquidity risk, and determined that no losses are expected.  The Company will continue to evaluate its portfolio in this manner on a quarterly basis.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(4) Securities Held to Maturity

The following is a summary of securities held to maturity:

  
Amortized Cost
  
Gross Unrealized Gains
  
Gross Unrealized Losses
  
Fair Value
 
September 30, 2010            
Mortgage-backed securities-residential            
Fannie Mae $1,835  $96  $-  $1,931 
Freddie Mac  2,389   124   -   2,513 
Ginnie Mae  16   1   -   17 
CMO/Other MBS  729   19   -   748 
   4,969   240   -   5,209 
Investment securities                
State and municipal securities  27,879   980   (44)  28,815 
Other  1,000   38   -   1,038 
   28,879   1,018   (44)  29,853 
                 
Total held to maturity $33,848  $1,258  $(44) $35,062 
                 
September 30, 2009                
Mortgage-backed securities-residential                
Fannie Mae $2,713  $110  $-  $2,823 
Freddie Mac  2,834   82   -   2,916 
Ginnie Mae  45   -   -   45 
CMO/Other MBS  860   6   -   866 
   6,452   198   -   6,650 
Investment securities                
State and municipal securities  37,162   940   (47)  38,055 
Equities  1,000   34   -   1,034 
   38,162   974   (47)  39,089 
                 
Total held to maturity $44,614  $1,172  $(47) $45,739 

The following is a summary of the amortized cost and fair value of investment securities held to maturity, by remaining period to contractual maturity. Actual maturities may differ because certain issuers have the right to call or repay their obligations.

  September 30, 2010 
  
Amortized Cost
  
Fair Value
 
Remaining period to contractual maturity      
Less than one year $12,592  $12,665 
One to five years  8,927   9,324 
Five to ten years  2,086   2,304 
Greater than ten years  5,274   5,560 
Total $28,879  $29,853 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Proceeds from sales of securities held to maturity during the years ended September 30, 2010, 2009 and 2008 totaled $0 , $625, and $0  respectively. These sales resulted in gross realized gains of $0, $33, and $0 for the years ended September 30, 2010, 2009, and 2008 respectively, and gross realized losses of $0 in fiscal year 2010, 2009, and 2008 respectively.   These securities can be considered maturities per FASB ASC Topic #320, Investments – Debt & Equity securities, as the sale of the securities occurred after at least 85 percent of the principal outstanding had been collected since acquisition.

The following table summarizes those securities held to maturity with unrealized losses, segregated by the length of time in a continuous unrealized loss position:

  Continuous Unrealized Loss Position       
  Less Than 12 Months  12 Months or Longer  Total 
As of September 30, 2010 
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
 
                   
State and municipal securities $-  $-  $676  $(44) $676  $(44)
Total $-  $-  $676  $(44) $676  $(44)


  Continuous Unrealized Loss Position       
  Less Than 12 Months  12 Months or Longer  Total 
As of September 30, 2009 
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
 
                   
State and municipal securities  1,019   (47)  -   -   1,019   (47)
Total $1,019  $(47) $-  $-  $1,019  $(47)

All of the unrealized losses on held to maturity securities at September 30, 2010 relate to local municipal general obligation bonds and are attributable to changes in market interest rates and credit risk spreads subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2010. There were no held-to-maturity securities in a continuous unrealized loss position for less than 12 months, and one security for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold securities with unrealized losses until maturit y, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2010.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(5) Loans

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

  September 30, 
  2010  2009 
       
One- to four-family residential mortgage loans:      
Fixed rate $369,417  $419,863 
Adjustable rate  41,822   40,865 
   411,239   460,728 
Commercial real estate loans  581,965   546,767 
Commercial business loans  240,650   242,629 
Acquisition, development & construction loans  229,463   201,611 
   1,052,078   991,007 
Consumer loans:        
Home equity lines of credit  176,134   180,205 
Homeowner loans  48,941   54,941 
Other consumer loans, including overdrafts  13,149   16,376 
   238,224   251,522 
Total loans  1,701,541   1,703,257 
Allowance for loan losses  (30,843)  (30,050)
Total loans, net $1,670,698  $1,673,207 

Total loans include net deferred loan origination costs of $720 and $1,651 at September 30, 2010 and September 30, 2009, respectively.

A substantial portion of the Company’s loan portfolio is secured by residential and commercial real estate located in Rockland and Orange Counties of New York and contiguous areas such as Ulster, Sullivan, Putnam and Westchester Counties of New York and Bergen County, New Jersey. The ability of the Company’s borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company’s concentrated lending area. Commercial real estate and acquisition, development and construction loans are considered by management to be of somewhat greater credit risk than loans to fund the purchase of a primary residence due to the generally larger loan amounts and dependency on income production or sale of the real estate. Substantially all of these loans are collateralized by real estate located in the Company’s primary market area.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

The principal balances of non-performing loans were as follows:

  2010  2009 
  
90 days past due and still accruing
  Non-Accrual  
90 days past due and still accruing
  Non-Accrual 
             
             
One- to four-family residential mortgage loans $1,953  $6,080  $2,932  $4,425 
Commercial real estate loans  2,971   6,886   977   5,826 
Commercial business loans  -   1,376   -   457 
Acquisition, development & construction loans  -   5,730   440   10,830 
Consumer loans  503   1,341   211   371 
Total non-performing loans $5,427  $21,413  $4,560  $21,909 
                 
Troubled debt restructured still accruing $16,047      $674     

Gross interest income that would have been recorded if the foregoing non-accrual loans had remained current in accordance with their contractual terms totaled $1,201, $1,429 and $1,129  for the years ended September 30, 2010, 2009 and 2008, respectively, compared to interest income actually recognized (including income recognized on a cash basis) of  $383,  $724 and $724, respectively.

Substantially all impaired loans are collateral-dependent loans measured based on the fair value of the collateral. The Company determines the need for a specific allocation of the allowance for loan losses on a loan-by-loan basis for impaired loans.  Impaired loans were as follows:

  2010  2009 
       
Year end loans with no allocated allowance for loan losses $10,319  $7,895 
Year end loans with allocated allowance for loan loses  31,763   14,206 
Total impaired loans $42,082  $22,101 
         
Amount of the allowance for loan losses allocated $3,046   2,349 
Average of individually impaired loans during year  27,032   19,310 
Interest income recognized during impairment  1,975   1,429 
Cash-basis interest income recognized  1,157   723 

Activity in the allowance for loan losses is summarized as follows:

  Year ended September 30, 
  2010  2009  2008 
Balance at beginning of year $30,050  $23,101  $20,389 
Provision for loan losses  10,000   17,600   7,200 
             
Charge-offs  (10,330)  (11,289)  (4,929)
Recoveries  1,123   638   441 
Net Charge offs  (9,207)  (10,651)  (4,488)
Balance at end of year $30,843  $30,050  $23,101 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Certain residential mortgages originated by the Company are sold in the secondary market. Non-interest income includes net gains on such sales of $867 in fiscal 2010, $961 in fiscal 2009, and $0 in fiscal 2008. At September 30, 2010 and 2009 there were $5,890 and $1,213 residential mortgage loans held for sale, respectively.

Other assets at September 30, 2010 and 2009 include capitalized mortgage servicing rights with a carrying amount of $1,172 and $840, respectively, which are recorded at the lower of amortized cost or fair market value, net of a valuation allowance of $54 at September 30, 2010 and $115 at September 30, 2009. No valuation allowance was required at September 30, 2008.  The Company generally retains the servicing rights on mortgage loans sold. Servicing loans for others involves collecting payments, maintaining escrow accounts, making remittances to investors and, if necessary, processing foreclosures. Mortgage loans serviced for others, including loan participations, totaled approximately $186,562, $163,621 and $129,331 at September 30, 2010, 2009 and 2008, respectively. Mortgage escrow funds include balances of $1,390 and $1,01 8 at September 30, 2010 and 2009, respectively, related to loans serviced for others. Mortgage servicing income recorded in other income was $630, $141, and $240 in 2010, 2009 and 2008 respectively.

(6) Accrued Interest Receivable

The components of accrued interest receivable were as follows:

  September 30, 
  2010  2009 
Loans $5,728  $5,417 
Securities  5,341   5,055 
Total accrued interest receivable $11,069  $10,472 

(7) Premises and Equipment, Net

Premises and equipment are summarized as follows:

  September 30, 
  2010  2009 
Land and land improvements $7,505  $4,320 
Buildings  31,480   31,332 
Leasehold improvements  8,965   8,553 
Furniture, fixtures and equipment  34,857   30,963 
   82,807   75,168 
Accumulated depreciation and amortization  (39,209)  (34,476)
Total premises and equipment, net $43,598  $40,692 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(8) Deposits

Deposit balances and weighted average interest rates at September 30, 2010 and 2009 are summarized as follows:

  September 30, 
  2010  2009 
  Amount  Rate  Amount  Rate 
Demand Deposits            
Retail $174,731   —% $169,122   —%
Commercial  277,217   —   236,516   — 
Municipal  77,909   —   86,596   — 
Total Non-interest bearing deposits  529,857   492,234         
NOW Deposits                
Retail  139,517   0.05   127,595   0.11 
Commercial  34,105   0.31   36,972   0.22 
Municipal  241,995   0.23   188,074   0.28 
Total Transaction deposits  945,474   844,875         
Savings deposits  392,321   0.11   357,814   0.11 
Money market deposits  427,334   0.29   384,632   0.43 
Certificates of deposit  377,573   1.12   494,961   1.83 
Total deposits $2,142,702   0.31% $2,082,282   0.57%

Municipal deposits held by PMB totaled $513,760 and $470,170 at September 30, 2010 and September 30, 2009, respectively. See Note 3, “Securities Available for Sale,” for the amount of securities that are pledged as collateral for municipal deposits and other purposes. Deposits received for tax receipts were $219,000 and $201,000 at September 30, 2010 and September 30, 2009, respectively.

Certificates of deposit had remaining periods to contractual maturity as follows:

  September 30, 
  2010  2009 
Remaining period to contractual maturity:      
Less than one year $316,096  $439,642 
One to two years  24,844   19,081 
Two to three years  13,273   10,952 
Three to four years  16,623   8,741 
Four to five years  6,737   16,545 
Total certificates of deposit $377,573  $494,961 

Certificate of deposit accounts with a denomination of $100 or more totaled $105,717 and $160,660 at September 30, 2010 and 2009, respectively. The Company had $18,554 (including certificates of deposit account registry service (CDAR’s) reciprocal CDs of $7,889) and $20,578 ($10,558 of which were reciprocal CDAR’s) of brokered deposits as of September 30, 2010 and 2009, respectively.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Interest expense on deposits is summarized as follows:

  Years ended September 30, 
  2010  2009  2008 
Savings deposits $403  $758  $1,244 
Money market and NOW deposits  2,035   3,377   6,313 
Certificates of deposit  6,079   14,240   20,787 
Total interest expense $8,517  $18,375  $28,344 

(9) FHLB and Other Borrowings

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

  September 30, 
  2010  2009 
  Amount  Rate  Amount  Rate 
By type of borrowing:            
Advances $141,251   4.16% $200,628   4.16%
Repurchase agreements  222,500   3.98%  230,000   3.95%
Senior unsecured debt (FDIC insured)  51,496   2.75%  51,494   2.74%
Total borrowings $415,247   3.88% $482,122   3.91%
By remaining period to maturity:                
Less than one year $44,873   3.82% $62,677   4.09%
One to two years  73,996   3.14%  44,921   3.79%
Two to three years  27,708   4.00%  73,994   3.14%
Three to four years  25,125   4.14%  31,639   3.98%
Four to five years  20,000   2.96%  25,159   4.14%
Greater than five years  223,545   4.19%  243,732   4.09%
Total borrowings $415,247   3.88% $482,122   3.91%

As a member of the FHLB, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible residential mortgage loans and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 2010 and 2009, the Bank had pledged residential mortgage loans totaling $313,587 and $350,538, respectively. The Bank had also pledged securities with carrying amounts of $228,442 and $231,190 as of September 30, 2010 and September 30, 2009, respectively, to secure repurchase agreements.  As of September 30, 2010, the Bank may increase its borrowing capacity by pledging securities and mortgages not required to be pledged for other purposes with a market value of $367,215. FHLB advances are subject to prepayment penalties if repaid prior to maturity.

Securities repurchase agreements had weighted average remaining terms to maturity of approximately 5.38 years and 6.2 years at September 30, 2010 and 2009, respectively. Average borrowings under securities repurchase agreements were $224,375 and $238,750 during the years ended September 30, 2010 and 2009, respectively, and the maximum outstanding month-end balance was $230,000 and $250,000, respectively.

FHLB borrowings (includes advance and repurchase agreements) of $227,500 and $227,500 at September 30, 2010 and 2009 respectively are putable quarterly, at the discretion of the FHLB. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 6.16 year and 6.75 years and weighted average interest rates of 4.24% and 4.63% at September 30, 2010 and 2009, respectively.  An additional $40 million are putable on a one time basis after initial lockout periods beginning in February 2011 with an weighted average interest rate of 3.27%.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(10) Derivatives

The Company purchased two interest rate caps in the first quarter of fiscal 2010 to assist in offsetting a portion of interest rate exposure should short term rate increases lead to rapid increases in general levels of market interest rates on deposits.   These caps are linked to LIBOR and have strike prices of 3.50% and 4.0%. These caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings, the amount for fiscal year 2010 was a loss of $1.1 million.  The fair value of the interest rate caps at September 30, 2010, is reflected in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.

The Company acts as an interest rate swap counterparty with certain commercial customers and manage this risk by entering into corresponding and offsetting interest rate risk agreements with third parties.   The swaps are considered a derivative instrument and must be carried at fair value. As the swaps are not a designated qualifying hedge, the change in fair value is recognized in current earnings, with no offset from any other instrument.  There was no net gain or loss recorded in earnings during fiscal year 2010.  Interest rate swaps are recorded on our consolidated statements of financial condition as a other asset or other liability at estimated fair value.

At September 30, 2010, summary information regarding these derivatives is presented below:

  September 30, 2010 
  
Notional Amount
  
Average Maturity
  
Weighted Average Rate
  
Weighted Average Variable Rate
  Fair Value 
                
Interest Rate Caps $50,000   4.18   3.75  NA% $262 
3rd party interest rate swap  1,182   9.37   6.25   1 m Libor + 2.5%  173 
Customer interest rate swap  (1,182)  9.37   6.25   1 m Libor + 2.5%  (173)

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

(11) Income Taxes

Income tax expense consists of the following:

  Years ended September 30, 
  2010  2009  2008 
Current tax expense:         
Federal $5,410  $10,369  $10,774 
State  1,437   1,446   1,658 
   6,847   11,815   12,432 
Deferred tax expense (benefit):            
Federal  375   (1,567)  (2,056)
State  (349)  (73)  (472)
   26   (1,640)  (2,528)
Total income tax expense $6,873  $10,175  $9,904 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate, for the following reasons:

  Years ended September 30, 
  2010  2009  2008 
Tax at Federal statutory rate of 35% $9,578  $12,612  $11,789 
             
State income taxes, net of Federal tax benefit  652   892   771 
Tax-exempt interest  (2,645)  (2,536)  (2,241)
BOLI income  (715)  (964)  (641)
Other, net  3   171   226 
Actual income tax expense $6,873  $10,175  $9,904 
Effective income tax rate  25.1%  28.2%  29.4%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized below. The net amount is reported in other assets or other liabilities in the consolidated statements of financial condition.

  September 30, 
  2010  2009 
Deferred tax assets:      
Allowance for loan losses $12,525  $12,203 
Deferred compensation  3,370   3,715 
Purchase accounting adjustments  13   105 
Accrued post retirement expense  1,121   1,111 
Other  190   1,014 
Total deferred tax assets  17,219   18,148 
Deferred tax liabilities:        
Undistributed earnings of subsidiary not consolidated for tax return purposes (REIT Income)  6,138   6,518 
Prepaid pension costs  3,592   3,866 
Core deposit intangibles  32   367 
Purchase accounting fair value adjustments  165   249 
Depreciation of premises and equipment  743   705 
Other comprehensive income  3,577   1,694 
Goodwill  53   (184)
Other  876   980 
Total deferred tax liabilities  15,176   14,195 
Net deferred tax asset $2,043  $3,953 

Based on management’s consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at September 30, 2010 and 2009.

The Bank is subject to special provisions in the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. Tax bad debt reserves consist of a defined “base-year” amount, plus additional amounts accumulated after the base year. Deferred tax liabilities are recognized with respect to reserves accumulated after the base year, as well as any portion of the base-year amount that is expected to become taxable (or recaptured) in the foreseeable future. The Bank’s base-year tax bad debt reserves for Federal tax purposes were $9,313 at both September 30, 2010 and 2009. The Bank’s tax bad debt reserves for NY State purposes were $44,340 and $46,555 at September 30, 2010 and 2009, respectively. Associated deferred tax liabilities of $5,755 and $5,872 have not bee n recognized at those dates since the Company does not expect that the Federal base-year reserves ($3,260) and New York State bad debt reserves $(3,839) and ($2,612) net of federal benefit  at September 30, 2010 and 2009, respectively will become taxable in the foreseeable future. Under the tax laws, events that would result in taxation of certain of these reserves include redemptions of the Bank’s stock or certain excess distributions by the Bank to Provident New York Bancorp.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

In 2010 the New York State law was modified to conform to the Federal treatment of the tax bad debt deduction.  These changes in the law are effective for taxable years beginning on or after January 1, 2010.  Therefore, going forward, there will no longer be a separate New York State deduction for bad debts, and the establishment and maintenance of a New York reserve is no longer necessary for thrift institutions.  Taxpayers that cease to be a thrift institution will not be required to recapture any amounts of the New York reserve for losses.

Unrecognized Tax Benefits

The Company does not have unrecognized tax benefits as of September 2010 or September 2009.

The total amount of interest and penalties recorded in the consolidated statement of income in income tax expense (benefit) for the years ended September 30, 2010, September 30, 2009, and September 30, 2008 were $0, ($89), and $58, respectively.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of New York and various other state income taxes.  The tax years that are currently open for audit are 2006 and later for both federal and for New York State income tax.

(12) Employee Benefit Plans and Stock-Based Compensation Plans

(a) Pension Plans

The Company has a noncontributory defined benefit pension plan covering employees that were eligible as of September 30, 2006. In July, 2006 the Board of Directors of the Company approved a curtailment to the Provident Bank Defined Benefit Pension Plan (“the Plan”) as of September 30, 2006. At that time, all benefit accruals for future service ceased and no new participants may enter the plan. The purpose of the Plan curtailment was to afford flexibility in the retirement benefits the Company provides, while preserving all retirement plan participants’ earned and vested benefits, and to manage the increasing costs associated with the defined benefit pension plan. The Company’s funding policy is to contribute annually an amount sufficient to meet statutory minimum funding requirements, but not in excess of the m aximum amount deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

The following is a summary of changes in the projected benefit obligation andits implied fair value, of plan assets.  The Company uses a September 30th measurement date for its pension plans.

  September 30, 
  2010  2009 
Changes in projected benefit obligation:      
Beginning of year $27,963  $23,100 
Service cost  -   - 
Interest cost  1,555   1,593 
Actuarial loss  3,296   4,130 
Contract conversion  -   - 
Benefits paid  (1,705)  (860)
End of year  31,109   27,963 
Changes in fair value of plan assets:        
Beginning of year  25,503   20,926 
Actual gain on plan assets  2,498   287 
Employer contributions  500   5,150 
Benefits and distributions paid  (1,705)  (860)
End of year  26,796   25,503 
Funded status at end of year $(4,313) $(2,460)

Amounts recognized in accumulated other comprehensive income (loss) at September 30, 2010 and 2009 consisted of:

  2010  2009 
Unrecognized actuarial loss $(13,159) $(11,980)
Deferred tax asset  5,344   4,865 
Net amount recognized in accumulated other comprehensive income (loss) $(7,815) $(7,115)

Discount rates of 5.00%, 5.75% and 7.0% were used in determining the actuarial present value of the projected benefit obligation at September 30, 2010, 2009 and 2008, respectively.  No compensation increases were used as the plan is frozen.  The weighted average long-term rate of return on plan assets was 7.75% for fiscal years ended 2010, 2009 and 2008. The accumulated benefit obligation was $31,109 and $27,963 at year end September 30, 2010 and 2009 respectively. The discount rate used in the determination of net periodic pension expense were 5.75%, 7.0% and 6.25%, for the years ending September 30, 2010, 2009 and 2008, respectively.

The following benefit payments, which reflect expected future service, as appropriate, are expected toit must be paid:

2011 $1,406 
2012  1,375 
2013  1,462 
2014  1,509 
2015  1,965 
2016 - 2019  9,054 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

The components of the net periodic pension expense (benefit) were as follows:

  Years ended September 30, 
  2010  2009  2008 
Service cost $-  $-  $- 
Interest cost  1,555   1,593   1,558 
Expected return on plan assets  (1,890)  (1,778)  (2,110)
Amortization of unrecognized loss  1,509   826   - 
Recognized net actuarial loss  -   -   - 
Net periodic pension expense (benefit) $1,174  $641  $(552)

Unrecognized actuarial loss and prior service cost totaling $2.0 million  is expected to be amortized to pension expense during the next fiscal year ending September 30, 2011.

Equity, Debt, Invest Funds and Other Securities:  The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not readily available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

The fair value of the plan assets at September 30, 2010, by asset category, is as follows:

  
Fair Value Measurements at September 30, 2010
  Level 1  Level 2  Level 3 
Asset Category            
Large U.S. equity $14,355  $-  $14,355  $- 
Small Mid U.S. equity  2,848   -   2,848   - 
International Equity  2,792   -   2,792   - 
Total Equity  19,995   -   19,995   - 
                 
High yield bond  1,043   -   1,043   - 
Intermediate term bond  4,727   -   4,727   - 
Inflation protected bond  1,031   -   1,031     
Total Fixed Income  6,801   -   6,801   - 
                 
Cash  -   -   -   - 
                 
Total Assets $26,796  $-  $26,796  $- 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


Weighted-average pension plan asset allocations based on the fair value of such assets at September 30, 2010, and September 30, 2009 and target allocations for 2011, by asset category, are as follows:

  
September 30, 2009
  
September 30, 2010
  
Target Allocation Range 2011
  
Weighted Average Expected Rate of Return
 
             
Large U.S. equity securities  50%  54%  40% - 85%  7.00%
Small mid U.S. equity securities  10%  11%  40% - 85%  15.00%
International equity securities  10%  10%  40% - 85%  12.00%
Total equity securities  70%  75%  40% - 85%  8.84%
                 
High yield bond  3%  4%  20% - 40%  8.00%
Intermediate term bond  23%  17%  20% - 40%  6.00%
Inflation protected bond  4%  4%  20% - 40%  3.00%
Total fixed income  30%  25%  20% - 40%  5.85%
                 
Cash  0%  0%  0% - 20%  0%

The expected long-term rate of return assumption as of each measurement date was determined by taking into consideration asset allocations as of each such date, historical returns on the types of assets held, and current economic factors. Under this method, historical investment returns for each major asset category are applied to the expected future investment allocation in that categorypresented as a percentage of total plan assets, and a weighted average is determined.  The Company’s investment policy for determining the asset allocation targets was developed basedseparate line item on the desire to optimize total return while placing a strong emphasis on preservation of capital. In general, it is hoped that, in the aggregate, changes in the fair value of plan assets will be less volatile than similar changes in appropriate market indices. Re turns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns.financial statements.

At September 30, 2013 the Company assessed goodwill for impairment using qualitative factors and concluded the two-step process was unnecessary. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

Core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives of approximately eight years. Intangibles related to the naming rights on Provident Bank Ball Park are amortized over 10 years on a straight-line basis. Impairment losses on intangible assets are charged to expense, if and when they occur.

(q) Other Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with any resulting write-down charged to the allowance for loan losses. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and other available information. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Gains and losses on sales of real estate owned properties are recognized upon disposition. Other real estate owned totaled $6.0 million and $6.4 million at September 30, 2013 and 2012, respectively.

(r) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to counterparty under an agreement to repurchase the identical securities at a fixed price on a future date. These agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets other specified criteria. Accordingly, the transaction proceeds are recorded as borrowings and the underlying securities continue to be carried in the Company’s investment securities portfolio. Disclosure of the pledged securities is made in the consolidated balance sheets if the counterparty has the right by contract to sell or re-pledge such collateral.


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


(s)Income Taxes
Net deferred taxes are recognized for the estimated future tax effects attributable to “temporary differences” between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change.

A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, we determine that it is more likely than not that some portion, or all of the deferred tax asset will not be realized.

The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

The Company evaluates uncertain tax positions in a two step process. The first step is recognition, which requires a determination of whether it is more likely than not that a tax position will be sustained upon examination. The second step is measurement. Under the measurement step, a tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax position that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company did not have any such position as of September 30, 2013. See Note 10 “Income Taxes”.

(t) Bank Owned Life Insurance (BOLI)
The Company has purchased life insurance policies on certain officers and key executives. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized).

(u) Stock-Based Compensation Plans
Compensation expense is recognized for the Employee stock ownership plan (“ESOP”) equal to the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value at that time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released for allocation is deducted from stockholders’ equity.

Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.

During the fiscal years ended September 30, 2013, 2012 and 2011 the Company issued 360,500, 515,000 and 119,526 new stock option awards and recognized total non-cash stock-based compensation cost of $634, $521 and $558, respectively. As of September 30, 2013, the total remaining unrecognized compensation cost related to non-vested stock options was $1,360. Options granted in 2013 have 3 year vesting periods.

The Company also has a restricted stock plan in which shares awarded are transferred from treasury stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The expense is amortized over the vesting period of the awards. The Company issued 186,900 shares during 2013 and 58,000 during 2012 and 63,870 shares were issued in 2011. The total restricted stock compensation cost recognized during 2013, 2012 and 2011 was $1,108, $276, and $168, respectively. As of September 30, 2013, the total remaining unrecognized compensation cost related to restricted stock was $1,239.

The Company’s stock-based compensation plans allow for accelerated vesting when employees retire under circumstances in accordance with the terms of the plans. Grants which are subject to such accelerated vesting, are expensed over the shorter

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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be less than the vesting period expressed in the stock based compensation agreement, depending upon the age of the grantee. As of September 30, 2013, 11,533 restricted shares and 48,121 stock options were potentially subject to accelerated vesting, and have been fully expensed. The Company recognized expense associated with the acceleration of restricted shares of $5 for fiscal 2013,and no expense in fiscal 2012 and 2011. The Company recognized expense associated with the acceleration of 2,000 shares in 2013, and no stock option shares in 2012 and 2011, respectively.

(v) Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period.
Diluted EPS is computed in a similar manner, except that the weighted average number of common shares is increased to include incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options were exercised and unvested restricted stock shares became vested during the periods. For purposes of computing both basic and diluted EPS, outstanding shares include earned ESOP shares.

(w) Segment Information
Public companies are required to report certain financial information about significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker. Substantially all of the Company’s operations occur through the Bank and involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of its banking operation, which constitutes the Company’s only operating segment for financial reporting purposes.

(x) Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Company does not believe there are such matters that will have a material effect on the financial statements.

(y) Derivatives
At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the

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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

(z) Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. 

There were no pension plan assets consisting of Provident New York Bancorp equity securities (common stock) at September 30, 2010 or at September 30, 2009.

The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. At this time, the Company has not determined whether contributions in 2011 will be made.

The Company has also established a non-qualified Supplemental Executive Retirement Plan to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $87, $94 and $82 for the years ended September 30, 2010, 2009 and 2008, respectively. The actuarial present value of the projected benefit obligation was $1,763 and $1,587 at September 30, 2010 and 2009, respectively, and the vested benefit obligation was $1,763 and $1,587 for the same periods, respectively, all of which is unfunded.

(b) Other Postretirement Benefit Plans

The Company’s postretirement plans, which are unfunded, provide optional medical, dental and life insurance benefits to retirees or death benefit payments to beneficiaries of employees covered by the Company and Bank Owned Life Insurance policies. The Company has elected to amortize the transition obligation for accumulated benefits to retirees as an expense over a 20-year period.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Data relating to the postretirement benefit plan follows:


  September 30, 
  2010  2009 
Change in accumulated postretirement benefit obligation:      
Beginning of year $2,041  $1,720 
Service cost  28   22 
Interest cost  107   118 
Actuarial loss  183   272 
Plan participants' contributions  -   - 
Amendments  -   - 
Benefits paid  (98)  (91)
End of year $2,261  $2,041 
         
Changes in fair value of plan assets:        
Beginning of year $-  $- 
Employer contributions  98   91 
Plan participants' contributions  -   - 
Benefits paid  (98)  (91)
End of year $-  $- 
         
Funded status $(2,261) $(2,041)

Components of net periodic benefit expense (benefit):

  For years ended September 30, 
  2010  2009  2008 
Service Cost $28  $22  $17 
Interest Cost  107   118   94 
Amortization of transition obligation  24   24   10 
Amortization of prior service cost  49   49   20 
Amortization of net actuarial gain  (95)  (119)  (115)
Total $113  $94  $26 

There is $13 unrecognized actuarial gain and prior service cost expected to be amortized out of accumulated other comprehensive income in 2011.

Estimated Future Benefit Payments
The following benefit payments are expected to be paid in future years:

2011  130 
2012  132 
2013  137 
2014  140 
2015  143 
2015-2019  751 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Assumptions used for plan 2010  2009 
       
Medical trend rate next year  4.50%  4.50%
Ultimate trend rate  4.50%  4.50%
Discount rate  4.50%  5.50%
Discount rate used to value periodic cost  5.50%  7.25%

There is no impact of a 1% increase or decrease in health care trend rate due to the Company's cap on cost.

Amounts recognized in accumulated other comprehensive income (loss) at September 30, 2010 and 2009 consisted of:

  2010  2009 
Post retirement plan unrecognized gain $1,047  $1,235 
Post retirement plan unrecognized service cost  (412)  (461)
Post retirement unrecognized transition obligation  (51)  (61)
Post retirement SERP  (306)  (182)
Post employment BOLI  (152)  (61)
Transition obligation  -   (621)
Subtotal  126   (151)
Deferred tax liability  (51)  61 
Net amount recognized in accumulated other comprehensive income (loss) $75  $(90)

(c) Employee Savings Plan

The Company also sponsors a defined contribution plan established under Section 401(k) of the IRS Code. Eligible employees may elect to contribute up to 50% of their compensation to the plan. The Company currently makes matching contributions equal to 50% of a participant’s contributions up to a maximum matching contribution of 3% of eligible compensation. Effective after September 30, 2006, the Bank amended the plan to include a profit sharing component which was 3% of eligible compensation, in addition to the matching contributions for 2010. Voluntary matching and profit sharing contributions are invested, in accordance with the participant’s direction, in one or a number of investment options. Savings plan expense was $1,751, $1,594 and $1,626 for the years ended September 30, 2010, 2009 and 2008, respectively.

(d) Employee Stock Ownership Plan

In connection with the reorganization and initial common stock offering in 1999, the Company established an ESOP for eligible employees who meet certain age and service requirements. The ESOP borrowed $3,760 from the Bank and used the funds to purchase 1,370,112 shares of common stock in the open market subsequent to the Offering. The Bank made periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan which matured December 31, 2007. The ESOP used these contributions, any dividends received by the ESOP on unallocated shares and forfeitures beginning in 2007, to make principal and interest payments on the loan.

In connection with the Second-Step Stock Conversion and Offering in January 2004, the Company established an ESOP loan for eligible employees. The ESOP borrowed $9,987 from Provident New York Bancorp and used the funds to purchase 998,650 shares of common stock in the offering. The term of the second ESOP loan is twenty years.

ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years. Any forfeited shares were allocated to other participants in the same proportion as contributions through 2006 and beginning in 2007 are used by the plan to reduce debt service.  A total of $29, $4 and $293 related to plan forfeitures were reversed against expense for the years ended September 30, 2010, 2009, and 2008 respectively.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

ESOP expense was $413 (net of forfeitures), $484 (net of forfeitures), and $802 (net of forfeitures) for the years ended September 30, 2010, 2009 and 2008, respectively. Through September 30, 2010 and 2009, a cumulative total of 1,705,078 shares and 1,655,146 shares, respectively, have been allocated to participants or committed to be released for allocation, respectively. The cost of ESOP shares that have not yet been allocated to participants or committed to be released for allocation is deducted from stockholders’ equity; 663,690 shares with a cost of $6,637 and a fair value of approximately $5,568 at September 30, 2010 and 713,622 shares with a cost of $7,136 and a fair value of approximately $6,815 at September 30, 2009, respectively.

A supplemental savings plan has also been established for certain senior officers to compensate executives for benefits provided under the Bank’s tax qualified plans (employee’s savings plan and ESOP) that are limited by the IRS Code. Expense recognized for this plan including the defined benefit component was $146, $212, and $234, for the years ended September 30, 2010, 2009 and 2008, respectively. Amounts accrued and recorded in other liabilities at September 30, 2010 and 2009, including the defined benefit component were $3.1 million and $2.8 million respectively.

(e) Recognition and Retention Plan

In February 2000, the Company’s stockholders approved the Provident Bank 2000 Recognition and Retention Plan (the RRP). The principal purpose of the RRP is to provide executive officers and directors a proprietary interest in the Company in a manner designed to encourage their continued performance and service. A total of 856,320 shares were awarded under the RRP in February 2000, and the grant-date fair value of these shares of $2,995 was charged to stockholders’ equity. The awards vested at a rate of 20% on each of five annual vesting dates, the first of which was September 30, 2000. As of February 2010, 27,413 shares remaining from this plan were no longer eligible to be granted. In January 2005, the Company’s stockholders approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the terms of which the Company is authorized to issue up to 798,920 shares of common stock as restricted stock awards. On March 10, 2005 a total of 762,400 shares were awarded under the RRP, and the grant-date fair value of $12.84 per share $(9,789), was charged to stockholders’ equity. The awards vested 10% on September 30, 2005. The remainder will vest 20% on each of four annual vesting dates beginning on September 30, 2006 and 10% on March 10, 2010. Employees who retire under circumstances in accordance with the terms of the Plan may be entitled to accelerate the vesting of individual awards. Such acceleration would require a charge to earnings for the award shares that would then vest. As of September 30, 2010, 600 shares were potentially subject to accelerated vesting.

Under the 2004 restricted stock plan, 49,620 shares of authorized but un-issued shares remain available for future grant at September 30, 2010. Forfeited shares are available for re-issuance.  The Company also can fund the restricted stock plan with treasury stock. The fair market value of the shares awarded under the restricted stock plan is being amortized to expense on a straight-line basis over the five year vesting period of the underlying shares. Compensation expense related to the restricted stock plan was $883, $1.7 million, and $1.8 million for the years ended September 30, 2010, 2009 and 2008, respectively. The remaining unearned compensation cost is $84 as of September 30, 2010 and is recorded as a reduction of additional paid in capital. On grant date, shares awarded under the restricted stock plan were transferr ed from treasury stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The fair value of the shares awarded, measured as of the grant date continues to be recognized and amortized on a straight-line basis to compensation expense over the vesting period of the awards.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

A summary of restricted stock award activity under the plan for the year ended September 30, 2010, is presented below:

  
Number of Shares
  
Weighted Average Grant-Date Fair Value
 
Nonvested shares at September 30, 2009  74,750  $12.93 
Granted  -   - 
Vested  68,500   12.88 
Forfeited  -   - 
Nonvested shares at September 30, 2010  6,250  $13.51 

The total fair value of restricted stock vested for fiscal year ended September 30, 2010, 2009 and 2008 was $575, $1.3 million, and $1.9 million, respectively.

(f) Stock Option Plan

The Company’s stockholders approved the Provident Bank 2000 Stock Option Plan (the Stock Option Plan) in February 2000. A total of 1,712,640 shares of authorized but unissued common stock was reserved for issuance under the Stock Option Plan, although the Company may also fund option exercises using treasury shares. The Company’s stockholders also approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, in February 2005. Under terms of the plan, a total of 1,997,300 shares of authorized but un-issued common stock were reserved for issuance under the Stock Option Plan. Under both plans, options have a ten-year term and may be either non-qualified stock options or incentive stock options. Reload options may be granted under the terms of the 2000 Stock Option Plan and provide for the automatic grant of a new option at the then-current market price in exchange for each previously owned share tendered by an employee in a stock-for-stock exercise. In February 2010, the 2000 Stock Option Plan expired with 338,594 options ungranted and were no longer eligible for grant.  The 2004 Plan options do not contain reload options. However, the 2004 plan allows for the grant of stock appreciation rights.  Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date. Employees who retire under circumstances, in accordance with the terms of the Plan, may be entitled to accelerate the vesting of individual awards. As of September 30, 2010, 36,000 shares were potentially subject to accelerated vesting.   Substantially, all stock options outstanding are expected to vest.  Compensation expense related to stock option plans was $247, $768 and $1.2 million for the years ended September 30, 2010, 2009 and 2008 , respectively.

The following is a summary of activity in the Stock Option Plan:

  
Shares subject to option
  
Weighted Average exercise price
 
Outstanding at September 30, 2009  2,241,494  $11.66 
Granted  321,976   9.66 
Exercised  (324,929)  4.97 
Forfeited  (315,697)  11.62 
Outstanding shares at September 30, 2010  1,922,844  $12.47 

The total intrinsic value of stock options vested (exercisable) for fiscal years ended September 30, 2010, 2009 and 2008 was $0, $4.1 million and $5.6 million,  respectively.  The unrecognized compensation cost associated with stock options was $998 as of September 30, 2010.  The intrinsic value of stock options exercised during 2010 was $1.1 million.

At September 30, 2010 and 2009, respectively, there were 93,257 shares and 363,154 shares available for future grant. The aggregate intrinsic value of options outstanding as of September 30, 2010 was $0. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading date of the year ended September 30, 2010 and the exercise price, multiplied by the number of in the money options).   The cash received from option exercises was $984 and $354 for fiscal 2010 and 2009 respectively.  There was no tax benefit recorded in the results of operations to the Company from the exercise of options for either fiscal 2010 or fiscal 2009.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

A summary of stock options at September 30, 2010 follows:

   Outstanding  Exercisable 
                    
      Weighted-Average     Weighted-Average 
   
Number of Stock Options
  
Exercise Price
  
Life (in Years)
  
Number of Stock Options
  
Exercise Price
  
Life (in Years)
 
                    
Range of Exercise Price                   
$10.03 to $11.85   370,314  $10.61   7.8   120,314  $11.78   7.8 
$11.85 to $12.84   1,321,700   12.84   4.3   1,314,700   12.84   4.3 
$12.84 to $15.66   230,830   13.34   6.7   125,530   13.40   6.7 
     1,922,844  $12.47   5.3   1,560,544  $12.80   4.8 

The aggregate intrinsic value of options currently exercisable as of September 30, 2010 was $0.   All non vested shares are expected to vest.

The Company used an option pricing model to estimate the grant date fair value of stock options granted. The weighted-average estimated value per option granted was $2.69 in 2010, $1.97 in 2009 and $2.99 in 2008. The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:

  2010  2009  2008 
Risk-free interest rate (1)  2.2%  1.9%  3.4%
Expected stock price volatility  33.2%  61.5%  28.0%
Dividend yield (2)  1.9%  3.3%  1.9%
Expected term in years  7.7   .91   5.5 

(1) represents the yield on a  risk free rate of return (either the US Treasury curve or the SWAP curve, in periods with high volatility in US Treasury securities) with a remaining term equal to the expected option term
(2)  represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(13) Comprehensive Income (Loss)

Comprehensive income (loss) represents the sum of net income and items of other comprehensive income or loss that are reported directly in stockholders’ equity, such as the change during the period in the after-tax net unrealized gain or loss on securities available for sale and change in the funded status of defined benefit plans. The Company has reported its comprehensive income in the consolidated statements of changes in stockholders’ equity.

The components of other comprehensive income (loss) are summarized as follows:

  Year ended September, 30, 
  2010  2009  2008 
Net unrealized holding gain (loss) arising during the year on securities available for sale, net of related income tax expense (benefit) of  $5,435 $17,834 and $(1,769), respectively $7,963  $26,142  $(1,391)
Reclassification adjustment for net realized (gains) included in net income, net of related income tax expense of $3,313, $7,328 and $399, respectively  (4,844)  (10,748)  (584)
   3,119   15,394   (1,975)
Change in funded status of defined benefit plans, net of related income tax benefit of $327, $2,280 and $2,326  (472)  (3,336)  (3,402)
  $2,647  $12,058  $(5,377)

The Company’s accumulated other comprehensive income (loss) included in stockholders’ equity at September 30, 2010 and 2009 consists of the after-tax net unrealized gain / (loss) on available for sale securities of $12,621 and $9,502 respectively, and the recognition of the funded status of defined benefit plans of $(7,497) and $(7,025), after tax, at September 30, 2010 and 2009, respectively.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(14) Earnings Per Common Share

The following is a summary of the calculation of earnings per share (EPS):

  Years ended September 30, 
  2010  2009  2008 
          
Net income $20,492  $25,861  $23,778 
  (in thousands) (in thousands) 
Weighted average common shares outstanding for computation of basic EPS(1)  38,161   38,538   38,907 
Common-equivalent shares due to the dilutive effect of stock options and RRP awards(2)  24   168   320 
Weighted average common shares for computation of diluted EPS  38,185   38,706   39,227 
Earnings per common share:            
Basic $0.54  $0.67  $0.61 
Diluted $0.54  $0.67  $0.61 

(1) Excludes unallocated ESOP shares and non vested RRP shares.
(2) Acquisitions

On August 10, 2012, the Company acquired 100% of the outstanding shares of Gotham Bank of New York (“Gotham”) in exchange for $40,510 in cash. Under the terms of the acquisition, common shareholders received cash equal to 125% of adjusted tangible net worth. The acquisition of Gotham allowed the Company to expand in the New York City market. Gotham delivered a long-term client base with core loan and deposit relationships, an attractive location in midtown Manhattan and our initial commercial banking team in New York City. Gotham’s results of operations were included in the Company’s results beginning on August 10, 2012. Acquisition-related costs of $5,925 are included in non-interest expense in the Company’s income statement for the year ended September 30, 2012.

The following table summarizes the consideration paid for Gotham and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:
 August 10,
 2012
ASSETS: 
Cash and due from banks$167,328
Securities, available for sale54,994
Total loans, net205,453
Federal Home Loan Bank (“FHLB”) stock
1,045
Accrued interest receivable417
Premises and equipment, net490
Other assets1,793
Total assets acquired$431,520
  
LIABILITIES: 
Deposits$368,902
FHLB and other borrowings30,784
Other liabilities1,677
Total liabilities assumed$401,363
  
Total identifiable net assets$30,157
Core deposit intangible4,818
Goodwill5,535
Cash paid$40,510


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The following table presents pro forma information as if the acquisition had occurred at October 1, 2010. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits acquired and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

 September 30,
 2012 2011
Net interest income$103,999
 $102,447
Net income22,914
 16,068
Basic earnings per share0.60
 0.37
Diluted earnings per share0.60
 0.37
Future Amortization of Core Deposit and Other Intangible Assets. The following table sets forth the future amortization of core deposit and other intangible assets, including naming rights of $1,870 at September 30, 2013:
 September 30,
 2013 2012
Less than one year$925
 $853
One to two years771
 960
Two to three years726
 814
Three to four years695
 751
Four to five years669
 714
Beyond five years2,105
 3,072
Total$5,891
 $7,164





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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


(3) Securities

A summary of amortized cost and estimated fair value of our securities is presented below:    
 September 30, 2013 September 30, 2012
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Available for sale               
Residential mortgage-backed securities:               
Fannie Mae$214,191
 $1,168
 $(3,921) $211,438
 $155,601
 $5,806
 $—
 $161,407
Freddie Mac67,272
 593
 (236) 67,629
 81,509
 3,751
 —
 85,260
Ginnie Mae3,374
 88
 —
 3,462
 4,488
 290
 —
 4,778
CMO/Other MBS169,336
 356
 (3,038) 166,654
 191,867
 1,787
 (590) 193,064
Total residential mortgage-backed securities:454,173
 2,205
 (7,195) 449,183
 433,465
 11,634
 (590) 444,509
Other securities:               
Federal agencies273,637
 —
 (12,090) 261,547
 404,820
 4,013
 (10) 408,823
Corporate bonds118,575
 153
 (3,795) 114,933
 —
 —
 —
 —
State and municipal127,324
 3,447
 (2,041) 128,730
 146,136
 10,349
 (4) 156,481
Equities—
 —
 —
 —
 1,087
 —
 (28) 1,059
Total other securities519,536
 3,600
 (17,926) 505,210
 552,043
 14,362
 (42) 566,363
Total available for sale$973,709
 $5,805
 $(25,121) $954,393
 $985,508
 $25,996
 $(632) $1,010,872

 September 30, 2013 September 30, 2012
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair
value
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair
value
Held to maturity               
Residential mortgage-backed securities:               
Fannie Mae$70,502
 $399
 $(86) $70,815
 $28,637
 $1,212
 $—
 $29,849
Freddie Mac59,869
 317
 (22) 60,164
 42,706
 1,347
 —
 44,053
CMO/Other MBS25,776
 33
 (315) 25,494
 27,921
 226
 (28) 28,119
Total residential mortgage-backed securities156,147
 749
 (423) 156,473
 99,264
 2,785
 (28) 102,021
Other securities:               
Federal agencies77,341
 —
 (3,458) 73,883
 22,236
 106
 —
 22,342
State and municipal19,011
 556
 (546) 19,021
 19,376
 1,059
 —
 20,435
Other1,500
 19
 —
 1,519
 1,500
 26
 —
 1,526
Total other securities97,852
 575
 (4,004) 94,423
 43,112
 1,191
 —
 44,303
Total held to maturity$253,999
 $1,324
 $(4,427) $250,896
 $142,376
 $3,976
 $(28) $146,324


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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The amortized cost and estimated fair value of securities at September 30, 2013 are presented below by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities are shown separately since they are not due at a single maturity date.

 September 30, 2013
 Available for sale Held to maturity
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Other securities remaining period to contractual maturity:       
One year or less$2,242
 $2,259
 $3,800
 $3,841
One to five years81,057
 81,596
 14,756
 14,578
Five to ten years417,655
 403,270
 73,152
 69,970
Greater than ten years18,582
 18,085
 6,144
 6,034
Total other securities519,536
 505,210
 97,852
 94,423
Residential mortgage-backed securities454,173
 449,183
 156,147
 156,473
Total securities$973,709
 $954,393
 $253,999
 $250,896

Sales of securities were as follows:
 September 30,
 2013 2012 2011
Available for sale:     
Proceeds from sales$339,123
 $344,431
 $540,145
Gross realized gains7,709
 10,468
 10,000
Gross realized losses(377) —
 —
Income tax expense on realized net gains2,282
 2,475
 1,930
Held to maturity: (1)
     
Proceeds from sales$1,187
 —
 $357
Gross realized gains59
 —
 18
Income tax expense on realized gains18
 —
 3
(1) During the fiscal year ended September 30, 2013 and 2011 the Company sold held to maturity securities after the Company had already collected at least 85% of the principal balance outstanding at acquisition.


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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The following table summarizes those securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position:
 Continuous unrealized loss position    
 Less than 12 months 12 months or longer Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Available for sale           
As of September 30, 2013           
Residential mortgage-backed securities:           
Agency-backed$137,265
 $(4,157) $—
 $—
 $137,265
 $(4,157)
CMO/other MBS122,324
 (2,742) 7,820
 (296) 130,144
 (3,038)
Total residential mortgage-backed securities259,589
 (6,899) 7,820
 (296) 267,409
 (7,195)
Federal agencies261,547
 (12,090) —
 —
 261,547
 (12,090)
Corporate95,013
 (3,795) —
 —
 95,013
 (3,795)
State and municipal43,585
 (2,033) 112
 (8) 43,697
 (2,041)
Total$659,734
 $(24,817) $7,932
 $(304) $667,666
 $(25,121)
As of September 30, 2012           
CMO/other MBS$64,065
 $(590) $—
 $—
 $64,065
 $(590)
Federal agencies4,993
 (10) —
 —
 4,993
 (10)
State and municipal716
 (4) —
 —
 716
 (4)
Equities—
 —
 809
 (28) 809
 (28)
Total$69,774
 $(604) $809
 $(28) $70,583
 $(632)

 Continuous unrealized loss position    
 Less than 12 months 12 months or longer Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Held to maturity           
As of September 30, 2013           
Fannie Mae$10,963
 $(86) $—
 $—
 $10,963
 $(86)
CMO other MBS31,412
 (337) —
 —
 31,412
 (337)
Federal agencies73,883
 (3,458) —
 —
 73,883
 (3,458)
Municipal bonds9,530
 (546) —
 —
 9,530
 (546)
Total$125,788
 $(4,427) $—
 $—
 $125,788
 $(4,427)
September 30, 2012           
Total$13,189
 $(28) $—
 $—
 $13,189
 $(28)


Substantially all of the unrealized losses at September 30, 2013 relate to investment grade debt securities and are attributable to changes in market interest rates subsequent to purchase. At September 30, 2013, a total of 323 available for sale securities were in a continuous unrealized loss position for less than 12 months and two securities were in an unrealized loss position for 12 months or longer. For securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


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

Within the CMO category of the available for sale portfolio there are four private label CMOs that had an amortized cost of $3,636 and a fair value (carrying value) of $3,613 as of September 30, 2013. Two of the four securities are considered to be OTTI and are below investment grade. The impaired private label CMOs had an amortized cost of $3,288 and a fair value of $3,263 at September 30, 2013. Impairment charges on these securities were $14 and $47 for the fiscal years ended September 30, 2013 and September 30, 2012, respectively. At September 30, 2013 total cumulative impairment charges on these two private label CMOs were $61. The remaining two securities are rated investment grade and were performing as of September 30, 2013 and are expected to continue to perform based on current information. In determining whether OTTI existed on these debt securities the Company evaluated the present value of cash flows expected to be collected based on collateral specific assumptions, including credit risk and liquidity risk, and determined that no additional credit losses were expected. The Company will continue to evaluate its investment securities portfolio for OTTI on at least a quarterly basis.

Excluding FHLB and New York Business Development Corporation stock, the Company owned one equity security with a balance of $809 at September 30, 2012, which was sold during the fiscal year ended September 30, 2013. For the twelve months ended September 30, 2013 and 2012, the Company incurred OTTI on this security of $18 and $0, respectively.

Securities pledged for borrowings at FHLB and other institutions, and securities pledged for municipal deposits and other purposes were as follows:
 September 30,
 2013 2012
Available for sale securities pledged for borrowings, at fair value$199,642
 $192,482
Available for sale securities pledged for municipal deposits, at fair value580,756
 703,261
Available for sale securities pledged for customer back-to-back swaps, at fair value4,645
 4,174
Held to maturity securities pledged for borrowings, at amortized cost55,497
 53,507
Held to maturity securities pledged for municipal deposits, at amortized cost167,926
 138,855
Total securities pledged$1,008,466
 $1,092,279


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)



(4) Loans

The components of the loan portfolio, excluding loans held for sale, were as follows:
 September 30,
 2013 2012
Residential mortgage$400,009
 $350,022
Commercial:   
Commercial real estate1,277,037
 1,072,504
Commercial & industrial439,787
 343,307
Acquisition, development & construction102,494
 144,061
Total commercial1,819,318
 1,559,872
Consumer:   
Home equity lines of credit156,995
 165,200
Other consumer loans36,576
 44,378
Total consumer193,571
 209,578
Total loans2,412,898
 2,119,472
Allowance for loan losses(28,877) (28,282)
Total loans, net$2,384,021
 $2,091,190
Total loans include net deferred loan origination costs (fees) of $1,201 and $(310) at September 30, 2013 and 2012, respectively.

Included in the Company’s loan portfolio are loans acquired from Gotham Bank. These loans were recorded at fair value at acquisition and carried a balance of $133,493 and $205,764 at September 30, 2013 and September 30, 2012, respectively. The discount associated with these loans which includes adjustments associated with market interest rates and expected credit losses, was $1,879 and $3,924 at September 30, 2013 and September 30, 2012, respectively. We evaluate these loans for impairment collectively. None of the Gotham Bank acquired loans were identified as purchase credit impaired at acquisition.

At September 30, 2013, the Company has pledged loans totaling $784.4 million to the FHLB as collateral for certain borrowing arrangements. See Note 8. Borrowings.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The following tables set forth the amounts and status of the Company’s loans and troubled debt restructurings (“TDRs”) at September 30, 2013 and September 30, 2012:
 September 30, 2013
 
Current
loans
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 Total
Residential mortgage$390,072
 $354
 $267
 $1,832
 $7,484
 $400,009
Commercial real estate1,263,933
 1,978
 2,357
 1,574
 7,195
 1,277,037
Commercial & industrial438,818
 178
 2
 289
 500
 439,787
Acquisition, development & construction96,306
 768
 —
 —
 5,420
 102,494
Consumer190,393
 566
 —
 404
 2,208
 193,571
Total loans$2,379,522
 $3,844
 $2,626
 $4,099
 $22,807
 $2,412,898
Total TDRs included above$23,754
 $—
 $—
 $141
 $2,199
 $26,094
Non-performing loans:           
Loans 90+ days past due and still accruing        $4,099
  
Non-accrual loans        22,807
  
Total non-performing loans        $26,906
  

 September 30, 2012
 
Current
loans
 
30-59
Days
past due
 
60-89
Days
past due
 
90+
Days
past due
 
Non-
accrual
 Total
Residential mortgage$337,356
 $855
 $497
 $2,263
 $9,051
 $350,022
Commercial real estate1,060,176
 902
 973
 1,638
 8,815
 1,072,504
Commercial & industrial342,726
 96
 141
 —
 344
 343,307
Acquisition, development & construction121,590
 7,067
 —
 —
 15,404
 144,061
Consumer205,463
 1,551
 265
 469
 1,830
 209,578
Total loans$2,067,311
 $10,471
 $1,876
 $4,370
 $35,444
 $2,119,472
Total TDRs included above$13,543
 $270
 $264
 $—
 $10,870
 $24,947
Non-performing loans:           
Loans 90+ days past due and accruing        $4,370
  
Non-accrual loans        35,444
  
Total non-performing loans        $39,814
  

Activity in the allowance for loan losses for the year ended September 30, 2013, 2012 and 2011 is summarized below:
 For the year ended September 30, 2013
 
Beginning
balance
 Charge-offs Recoveries 
Net
charge-offs
 Provision Ending balance
Residential mortgage$4,359
 $(2,547) $101
 $(2,446) $2,561
 $4,474
Commercial real estate7,230
 (3,725) 577
 (3,148) 5,885
 9,967
Commercial & industrial4,603
 (1,354) 410
 (944) 1,643
 5,302
Acquisition, development & construction8,526
 (3,422) 182
 (3,240) 520
 5,806
Consumer3,564
 (2,009) 232
 (1,777) 1,541
 3,328
Total loans$28,282
 $(13,057) $1,502
 $(11,555) $12,150
 $28,877
Net charge-offs to average loans outstanding          0.52%

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


 For the year ended September 30, 2012
 
Beginning
balance
 Charge-offs Recoveries 
Net
charge-offs
 Provision 
Ending
balance
Residential mortgage$3,498
 $(2,551) $356
 $(2,195) $3,056
 $4,359
Commercial real estate5,568
 (2,707) 528
 (2,179) 3,841
 7,230
Commercial & industrial5,945
 (1,526) 1,116
 (410) (932) 4,603
Acquisition, development & construction9,895
 (4,124) 299
 (3,825) 2,456
 8,526
Consumer3,011
 (1,901) 263
 (1,638) 2,191
 3,564
Total loans$27,917
 $(12,809) $2,562
 $(10,247) $10,612
 $28,282
Net charge-offs to average loans outstanding          0.56%
 For the year ended September 30, 2011
 Beginning balance Charge-offs Recoveries 
Net
charge-offs
 Provision 
Ending
balance
Residential mortgage$2,641
 $(2,140) $15
 $(2,125) $2,982
 $3,498
Commercial real estate5,915
 (1,802) 2
 (1,800) 1,453
 5,568
Commercial & industrial8,970
 (5,400) 605
 (4,795) 1,770
 5,945
Acquisition, development & construction9,752
 (8,939) 10
 (8,929) 9,072
 9,895
Consumer3,565
 (1,989) 128
 (1,861) 1,307
 3,011
Total loans$30,843
 $(20,270) $760
 $(19,510) $16,584
 $27,917
Net charge-offs to average loans outstanding      

   1.17%

Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans on a loan-by-loan basis. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance for loan losses. 

When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on non-accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectibility of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. 
During the third quarter of fiscal 2013, we modified the methodology we use to determine the allowance for loan losses required for residential mortgage loans and home equity lines of credit. In prior periods, we evaluated these loans for impairment on an individual basis. Effective the third quarter of fiscal 2013, we evaluate residential mortgage loans and home equity lines of credit with an outstanding balance of $500 or less on a homogeneous pool basis. This modified approach to our methodology did not have a material impact on the allowance for loan losses.

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(Dollars in thousands, except per share data)



The following table sets forth the loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2013:

 Loans evaluated by segment Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 Total loans 
Individually
evaluated for
impairment
 
Collectively evaluated for
impairment
 
Total
allowance
for loan losses
Residential mortgage$515
 $399,494
 $400,009
 $—
 $4,474
 $4,474
Commercial real estate14,091
 1,262,946
 1,277,037
 803
 9,164
 9,967
Commercial & industrial2,631
 437,156
 439,787
 249
 5,053
 5,302
Acquisition, development & construction19,582
 82,912
 102,494
 540
 5,266
 5,806
Consumer2
 193,569
 193,571
 1
 3,327
 3,328
Total loans$36,821
 $2,376,077
 $2,412,898
 $1,593
 $27,284
 $28,877

The following table sets forth the loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2012:
 Loans evaluated by segment Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 Total loans 
Individually
evaluated for
impairment
 
Collectively evaluated for
impairment
 
Total
allowance
for loan losses
Residential mortgage$12,739
 $337,283
 $350,022
 $871
 $3,488
 $4,359
Commercial real estate13,017
 1,059,487
 1,072,504
 1,036
 6,194
 7,230
Commercial & industrial357
 342,950
 343,307
 48
 4,555
 4,603
Acquisition, development & construction24,880
 119,181
 144,061
 996
 7,530
 8,526
Consumer2,299
 207,279
 209,578
 263
 3,301
 3,564
Total loans$53,292
 $2,066,180
 $2,119,472
 $3,214
 $25,068
 $28,282



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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The following table presents loans individually evaluated for impairment by segment at September 30, 2013 and 2012:
 September 30, 2013 September 30, 2012
 
Unpaid
principal
balance
 
Recorded
investment
 Related allowance 
Unpaid
principal
balance
 
Recorded
investment
 Related allowance
With no related allowance recorded:           
Residential mortgage$515
 $515
 $—
 $6,193
 $5,413
 $—
Commercial real estate12,451
 11,820
 —
 9,296
 7,837
 —
Commercial & industrial2,175
 2,131
 —
 262
 262
 —
Acquisition, development and construction17,971
 17,945
 —
 24,144
 20,597
 —
Consumer—
 —
 —
 1,146
 1,122
 —
Subtotal33,112
 32,411
 —
 41,041
 35,231
 —
With an allowance recorded:           
Residential mortgage—
 —
 —
 8,485
 7,326
 871
Commercial real estate3,150
 2,271
 803
 5,942
 5,180
 1,036
Commercial & industrial500
 500
 249
 95
 95
 48
Acquisition, development & construction2,753
 1,637
 540
 7,159
 4,283
 996
Consumer2
 2
 1
 1,400
 1,177
 263
Subtotal6,405
 4,410
 1,593
 23,081
 18,061
 3,214
Total$39,517
 $36,821
 $1,593
 $64,122
 $53,292
 $3,214



























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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the year ended September 30, 2013, 2012 and 2011:
 2013 2012
 
YTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
 
YTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
With no related allowance recorded:           
Residential mortgage$309
 $—
 $—
 $5,493
 $310
 $137
Commercial real estate17,325
 286
 275
 7,869
 520
 291
Commercial & industrial1,821
 91
 86
 467
 26
 26
Acquisition, development and construction12,827
 631
 587
 22,043
 636
 367
Consumer61
 —
 —
 1,113
 28
 8
Subtotal32,343
 1,008
 948
 36,985
 1,520
 829
With an allowance recorded:           
Residential mortgage1,602
 14
 10
 7,770
 180
 141
Commercial real estate6,646
 7
 7
 5,970
 84
 84
Commercial & industrial705
 —
 —
 99
 76
 76
Acquisition, development & construction1,104
 —
 —
 5,868
 18
 6
Consumer228
 —
 —
 1,503
 —
 —
Subtotal10,285
 21
 17
 21,210
 358
 307
Total$42,628
 $1,029
 $965
 $58,195
 $1,878
 $1,136
 2011
 
YTD
average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
With no related allowance recorded:     
Residential mortgage$2,702
 $92
 $51
Commercial real estate8,917
 497
 248
Commercial & industrial862
 42
 42
Acquisition, development and construction26,111
 1,892
 1,454
Consumer1,860
 61
 13
Subtotal40,452
 2,584
 1,808
With an allowance recorded:     
Residential mortgage6,319
 159
 159
Commercial real estate6,505
 199
 144
Acquisition, development & construction6,963
 114
 96
Consumer642
 33
 22
Subtotal20,429
 505
 421
Total$60,881
 $3,089
 $2,229








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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


Troubled Debt Restructurings
A TDR is a formally renegotiated loan in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not have been granted to the borrower otherwise. The restructuring of a loan may include, but is not limited to: (1) the transfer from the borrower to the Bank of real estate, receivables from third parties, other assets, or an equity interest in the borrower to the Bank in full or partial satisfaction of the loan, (2) a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (3) a combination of the above.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Bank’s internal underwriting policy. Modifications have involved a reduction of the stated interest rate of the loan for period ranging from three months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from three months to 30 years. Restructured loans are recorded in accrual status when the loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant characteristics.

All loans whose terms have been modified in a TDR, including both commercial and consumer loans, must be evaluated for impairment. Not all loans that are restructured as a TDR are classified as non-accrual before the restructuring occurs. If the subsequent TDR designation of these accruing loans has been assigned because of a below market interest rate or an extension of time, the new restructured loan may remain on accrual when management determines it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs that were on non-accrual before or while the loan was designated a TDR require a minimum of six months of performance in accordance with regulatory guidelines to return the loan to accrual status.

TDRs at September 30, 2013 and 2012 were as follows:
 September 30, 2013
 
Current
loans
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 Total
Residential mortgage$2,416
 $—
 $—
 $—
 $1,792
 $4,208
Commercial real estate5,305
 —
 —
 —
 —
 5,305
Commercial & industrial1,843
 —
 —
 141
 —
 1,984
Acquisition, development & construction14,190
 —
 —
 —
 151
 14,341
Consumer—
 —
 —
 —
 256
 256
Total$23,754
 $—
 $—
 $141
 $2,199
 $26,094
Allowance for loan losses$438
 $—
 $—
 $—
 $439
 $877

 September 30, 2012
 
Current
loans
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 Total
Residential mortgage$1,226
 $—
 $264
 $—
 $2,178
 $3,668
Commercial real estate2,640
 270
 —
 —
 —
 2,910
Acquisition, development & construction9,677
 —
 —
 —
 8,692
 18,369
Total$13,543
 $270
 $264
 $—
 $10,870
 $24,947
Allowance for loan losses$—
 $—
 $41
 $—
 $955
 $996

The Company has outstanding commitments to lend additional amounts of $4,101 and $4,225 to customers with loans that are classified as TDRs as of September 30, 2013 and September 30, 2012, respectively.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The following table presents loans by segment modified as TDRs in the fiscal year ended September 30, 2013 and 2012:
 September 30, 2013 September 30, 2012
   Recorded investment   Recorded investment
 Number
Pre-
modification
 
Post-
modification
 Number
Pre-
modification
 
Post-
modification
Residential mortgage6 $1,436
 $1,372
 5 $1,525
 $1,295
Commercial real estate2 2,682
 2,682
 3 2,336
 2,351
Commercial & industrial5 2,001
 2,001
 — —
 —
Acquisition, development & construction7 5,772
 5,772
 4 5,299
 5,299
Consumer1 302
 302
 — —
 —
Total restructured loans21 $12,193
 $12,129
 12 $9,160
 $8,945

The TDRs described above increased the allowance for loan losses by $300 and $134 and resulted in charge-offs of $110 and $0 for the years ended September 30, 2013 and 2012, respectively.

There was one consumer loan totaling $256 that was modified as TDRs during the last twelve months that had subsequently defaulted during the twelve months ended September 30, 2013.
Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (residential mortgage and HELOC) (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the greater New York metropolitan region. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on at least a quarterly basis on all criticized/classified loans. The Bank uses the following definitions of risk ratings:

1 and 2 - These grades include loans that are secured by cash, marketable securities or cash surrender value of life insurance policies.

3 - This grade includes loans to borrowers with strong earnings and cash flow and that have the ability to service debt. The borrower’s assets and liabilities are generally well matched and are above average quality. The borrower has ready access to multiple sources of funding including alternatives such as term loans, private equity placements or trade credit.

4 - This grade includes loans to borrowers with above average cash flow, adequate earnings and debt service coverage ratios. The borrower generates discretionary cash flow, assets and liabilities are reasonably matched, and the borrower has access to other sources of debt funding or additional trade credit at market rates.

5 - This grade includes loans to borrowers with adequate earnings and cash flow and reasonable debt coverage ratios. Overall leverage is acceptable and there is average reliance upon trade debt. Management has a reasonable amount of experience and modest debt owners are willing to invest available, outside capital as necessary.

6 - This grade includes loans to borrowers where there is evidence of some strain, earnings are inconsistent and volatile, and the borrowers’ outlook is uncertain. Generally such borrowers have higher leverage than those with a better risk rating. These borrowers typically have limited access to alternative sources of bank debt and may be dependent upon funding for working capital support.

7 - Special Mention (OCC definition) - Other Assets Especially Mentioned (OAEM) are loans that are currently protected but are potentially weak. Loans with special mention ratings have potential weaknesses which may, if not reviewed or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date. Such assets constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset.

8 - Substandard (OCC definition) - These loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. They are

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

9 - Doubtful (OCC definition)- These loans have all the weakness inherent in one classified as substandard with the added characteristics that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidating procedures, capital injection, perfecting liens or additional collateral and refinancing plans.

10 - Loss (OCC definition) - These loans are charged-off because they are determined to be uncollectible and unbankable assets. This classification does not reflect that the asset has no absolute recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future. Losses should be taken in the period in which they are determined to be uncollectible.

Loans risk-rated 1 through 6 as defined above are considered to be pass-rated loans. As of September 30, 2013 and September 30, 2012, the risk category of gross loans by segment was as follows:
 September 30, 2013 September 30, 2012
 
Special
Mention
 Substandard Doubtful 
Special
Mention
 Substandard Doubtful
Residential mortgage$824
 $9,786
 $—
 $830
 $11,314
 $—
Commercial real estate7,279
 24,561
 227
 20,729
 27,674
 —
Commercial & industrial3,545
 3,855
 365
 14,920
 3,995
 338
Acquisition, development & construction1,867
 19,410
 —
 5,669
 42,871
 —
Consumer15
 2,891
 —
 274
 2,482
 —
Total$13,530
 $60,503
 $592
 $42,422
 $88,336
 $338


(5) Premises and Equipment, Net

Premises and equipment are summarized as follows:
 September 30,
 2013 2012
Land and land improvements$7,282
 $7,331
Buildings30,558
 31,903
Leasehold improvements8,136
 7,931
Furniture, fixtures and equipment40,164
 38,292
  Total premises and equipment, gross86,140
 85,457
Accumulated depreciation and amortization(49,620) (46,974)
Total premises and equipment, net$36,520
 $38,483
(6) Goodwill

The change in goodwill during the year is as follows:
 September 30,
 2013 2012 2011
Beginning of year balance$163,247
 $160,861
 $160,861
Acquisitions(130) 5,665
 —
Disposals—
 (3,279) —
End of year balance$163,117
 $163,247
 $160,861

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During the fiscal year ended September 30, 2013, the Company decreased the identifiable assets acquired in connection with the Gotham Bank acquisition by $130 based on the completion of the analysis of fair value of the net assets acquired.

Included in core deposit and other intangible assets is an intangible asset associated with the naming rights to Provident bank ball park stadium which is located in Rockland County, New York. The Company has determined that in connection with the Merger it will write-off the intangible asset and incur an impairment charge of approximately $965 in the first fiscal quarter of 2014.

(7) Deposits

Deposit balances at September 30, 2013 and 2012 are summarized as follows:
 September 30,
 20132012
Non-interest bearing$943,934
 $947,304
Interest bearing434,398
 448,123
Savings580,125
 506,538
Money market735,709
 821,704
Certificates of deposit268,128
 387,482
Total deposits$2,962,294
 $3,111,151
Municipal deposits totaled $757,066 and $901,739 at September 30, 2013 and September 30, 2012, respectively. See Note 3. Securities for the amount of securities that were pledged as collateral for municipal deposits and other purposes. Municipal deposits received for tax receipts were approximately $374,348 and $424,610 at September 30, 2013 and 2012, respectively.
Certificates of deposit had remaining periods to contractual maturity as follows:
 September 30,
 2013 2012
Remaining period to contractual maturity:   
Less than one year$239,104
 $344,033
One to two years17,248
 26,407
Two to three years5,185
 10,601
Three to four years3,062
 3,261
Four to five years3,529
 3,180
Total certificates of deposit$268,128
 $387,482

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Certificates of deposit accounts with a denomination of $100 or more totaled $104,225 and $203,516 at September 30, 2013 and 2012, respectively. Listed below are the Company’s brokered deposits:
 September 30,
 2013 2012
Savings$—
 $13,344
Money market34,571
 46,566
Reciprocal CDAR’s 1
1,343
 1,354
CDAR’s one way768
 764
Total brokered deposits$36,682
 $62,028
1 Certificate of deposit account registry service



(8) Borrowings

The Company’s borrowings and weighted average interest rates are summarized as follows:
 September 30,
 2013 2012
 Amount Rate Amount Rate
By type of borrowing:       
FHLB advances and overnight$442,602
 2.77% $324,529
 3.71%
Repurchase agreements20,351
 0.88
 20,647
 0.88
Senior notes98,033
 5.98
 —
 —
Total borrowings$560,986
 3.26% $345,176
 3.54%
By remaining period to maturity:       
Less than one year$158,897
 0.95% $10,136
 1.88%
One to two years78,717
 1.97
 56,819
 2.00
Two to three years191
 5.32
 52,693
 2.89
Three to four years202,414
 4.21
 201
 5.32
Four to five years118,033
 5.57
 202,386
 4.21
Greater than five years2,734
 4.92
 22,941
 3.74
Total borrowings$560,986
 3.26% $345,176
 3.54%

As a member of the FHLB, the Bank may borrow up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 2013 and 2012, the Bank had pledged residential mortgage and commercial real estate loans totaling $784,422 and $613,554, respectively. The Bank had also pledged securities to secure borrowings, which are disclosed in Note 3. Securities. As of September 30, 2013, the Bank may increase its borrowing capacity by pledging securities and mortgage loans not required to be pledged for other purposes with a collateral value of $531,209.

FHLB borrowings which are putable quarterly at the discretion of the FHLB were $200,000 at September 30, 2013 and 2012. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 3.56 years and 4.56 years and weighted average interest rates of 4.23% at September 30, 2013 and 2012, respectively.

The Bank had two $10,000 repurchase agreements with a financial institution. The Bank has pledged a portion of the securities disclosed in Note 3. Securities as collateral for these borrowings.

On July 2, 2013 the Company issued $100,000 principal amount of 5.50% fixed rate Senior Notes through a private placement at a discount of 1.75%. The cost of issuance was $303, and at September 30, 2013 the unamortized discount was $1,967, which will be accreted to interest expense over the life of the Senior Notes, resulting in an all-in cost of 5.98%. Interest is due semi-annually

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in arrears on January 2 and July 2 of each year beginning January 2, 2014 until maturity on July 2, 2018. The Senior Notes were issued under an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee.

The senior notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries.

The indenture includes provisions that, among other things, restrict the Company’s ability to dispose of or issue shares of voting stock of a principal subsidiary bank (as defined in the Indenture) or transfer the entirety of or a substantial amount of the Company’s assets or merge or consolidate with or into other entities, without satisfying certain conditions.

The Senior Notes will not be registered under the Securities Act and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements.

(9) Derivatives

The Company purchased two interest rate caps in the first quarter of fiscal 2010 to offset a portion of interest rate exposure should short-term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.5% and 4.0%. These caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings. Losses recognized in earnings were $2 and $63 in fiscal 2013 and 2012, respectively. The fair value of the interest rate caps at September 30, 2013, is reflected in other assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.

The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

The Company pledged collateral to another financial institution in the form of investment securities with an amortized cost of $5,040 and a fair value of $4,645 as of September 30, 2013. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is written into the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Company is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.


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Summary information regarding these derivatives is presented below:
 
Notional
amount
 
Average
maturity (in years)
 
Weighted
average
fixed rate 
 
Weighted
average
variable rate
 Fair value
September 30, 2013         
Interest rate caps$50,000
 1.18 3.75% NA $—
3rd party interest rate swap54,180
 5.76 4.22
 1 m Libor + 2.45 997
Customer interest rate swap(54,180) 5.76 4.22
 1 m Libor + 2.45 (997)
September 30, 2012         
Interest rate caps$50,000
 2.18 3.75% NA $2
3rd party interest rate swap42,332
 7.30 4.29
 1 m Libor + 2.28 2,485
Customer interest rate swap(42,332) 7.30 4.29
 1 m Libor + 2.28 (2,485)

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments; however, the fair value of these commitments is not material.

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(10) Income Taxes

Income tax expense consists of the following:
 For the year ended September 30,
 2013 2012 2011
Current tax expense:     
Federal$9,146
 $5,538
 $1,912
State1,549
 685
 777
Total current tax expense10,695
 6,223
 2,689
Deferred tax expense (benefit):     
Federal522
 (261) 282
State197
 197
 (164)
Total deferred tax expense (benefit)719
 (64) 118
Total income tax expense$11,414
 $6,159
 $2,807


Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate for the following reasons:
 For the year ended September 30,
 2013 2012 2011
Tax at Federal statutory rate of 35%$12,833
 $9,116
 $5,090
State and local income taxes, net of Federal tax benefit1,135
 573
 430
Tax-exempt interest, net of disallowed interest(2,192) (2,448) (2,551)
BOLI income(699) (718) (714)
Non-deductible compensation expense—
 —
 594
Non-deductible acquisition related costs416
 418
 —
Other, net(79) (782) (42)
Actual income tax expense$11,414
 $6,159
 $2,807
Effective income tax rate31.1% 23.6% 19.3%





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The following table presents the Company’s deferred tax position at September 30, 2013 and 2012:
 September 30,
 2013 2012
Deferred tax assets:   
Allowance for loan losses$11,809
 $11,566
Deferred compensation798
 1,429
Other accrued compensation and benefits1,497
 1,722
Accrued post retirement expense1,441
 1,512
Deferred rent1,059
 873
Intangibles amortization—
 109
Other comprehensive loss (securities)7,844
 —
Other comprehensive loss (defined benefit plans)2,638
 5,612
Other2,172
 2,971
Total deferred tax assets29,258
 25,794
Deferred tax liabilities:   
Undistributed earnings of subsidiary not consolidated for tax return purposes (income from REITs)4,483
 5,195
Prepaid pension costs3,758
 4,189
Purchase accounting adjustments1,057
 597
Depreciation of premises and equipment2,686
 2,822
Other comprehensive income (securities)—
 10,300
Intangibles amortization112
 —
Other2,207
 2,187
Total deferred tax liabilities14,303
 25,290
Net deferred tax asset$14,955
 $504

Based on the Company’s consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at September 30, 2013 and 2012.

Retained earnings at September 30, 2013 and 2012 include approximately $9,313 for which no provision for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Bank’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purposes other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at September 30, 2013 and 2012 was approximately $3,260.

As of September 30, 2013 and 2012, the Company had no unrecognized tax benefits or accrued interest and penalties recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company records interest and penalties as a component of income tax expense.

Sterling Bancorp and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of New York and various other states. The Company is no longer subject to examination by Federal and New York taxing authorities for tax years prior to 2010.
(11) Employee Benefit Plans and Stock-Based Compensation Plans

(a)Pension Plans
The Company has a noncontributory defined benefit pension plan covering employees that were eligible as of September 30, 2006. In July, 2006, the Board of Directors approved a curtailment to the Provident Bank Defined Benefit Pension Plan (the “Plan”) effective September 30, 2006. At that time, all benefit accruals for future service ceased and no new participants were allowed to enter the plan. The purpose of the Plan curtailment was to afford flexibility in the retirement benefits the Company provides, while preserving all retirement plan participants’ earned and vested benefits, and to manage the increasing costs associated with the

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defined benefit pension plan. The Company’s funding policy is to contribute annually an amount sufficient to meet statutory minimum funding requirements, but not in excess of the maximum amount deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future.

The following is a summary of changes in the projected benefit obligation and fair value of plan assets. The Company uses a September 30 measurement date for its pension plans.
 September 30,
 2013 2012
Changes in projected benefit obligation:   
Beginning of year balance$35,471
 $30,612
Service cost—
 —
Interest cost1,452
 1,501
Actuarial (gain) loss(3,672) 4,961
Benefits and distributions paid(1,546) (1,603)
End of year balance31,705
 35,471
Changes in fair value of plan assets:   
Beginning of year balance32,657
 28,312
Actual gain on plan assets4,306
 5,948
Employer contributions—
 —
Benefits and distributions paid(1,546) (1,603)
End of year balance35,417
 32,657
Funded status at end of year$3,712
 $(2,814)

Amounts recognized in accumulated other comprehensive (loss) at September 30, 2013 and 2012 consisted of:
 September 30,
 2013 2012
Unrecognized actuarial loss$(5,479) $(13,056)
Deferred tax asset2,225
 5,612
Net amount recognized in accumulated other comprehensive (loss)$(3,254) $(7,444)

The discount rates used to determine the actuarial present value of the projected benefit obligation and the net periodic pension expense were 5.2%, 4.1% and 5.0% at September 30, 2013, 2012 and 2011, respectively. No compensation increases were used as the Plan is frozen. The expected weighted average long-term rate of return on plan assets was 7.8% for the fiscal years ended 2013 and 2012.
Estimated future benefit payments are the following for the years ending September 30:
2014$1,570
20151,670
20161,790
20171,716
20181,937
2019 - 202310,326

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The components of the net periodic pension expense were as follows:
 For the year ended September 30,
 2013 2012 2011
Service cost$—
 $—
 $—
Interest cost1,452
 1,501
 1,498
Expected return on plan assets(2,462) (2,125) (2,343)
Amortization of unrecognized actuarial loss2,062
 2,316
 1,667
Settlement charge—
 —
 490
Net periodic pension expense$1,052
 $1,692
 $1,312

The amount of unrecognized actuarial loss and prior service cost that is expected to be amortized to pension expense during the fiscal year ending September 30, 2014 is $400.
The following is a description of the valuation methodologies used for assets measured at fair value. There were no changes in the methodologies used at September 30, 2013 and 2012. See Note 17. Fair Value Measurements for a detailed discussion of the three levels of inputs that may be used to measure fair values.

The fair value of the Plan assets is based on the lowest level of any input that is significant to the fair value measurement within the fair value hierarchy. Plan assets consisted of pooled separate accounts at September 30, 2013. The fair value of shares of units of participation in pooled separate accounts are based on the net asset values of the funds reported by the fund managers as of September 30, 2013 and recent transaction prices (Level 2 inputs). Assets allocated to these pooled separate accounts can include, but are not limited to stocks (both domestic and foreign), bonds and mutual funds. While some pooled separate accounts may have publicly quoted prices (Level 1 inputs), the units of separate accounts are not publicly quoted and are therefore classified as Level 2. The fair value of Plan assets by asset category as of September 30, 2013 and 2012, was the following:
 September 30, 2013
 Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Asset category:       
Large cap U.S. equity$16,378
 $—
 $16,378
 $—
Small and mid cap U.S. equity4,443
 —
 4,443
 —
International equity3,654
 —
 3,654
 —
Total equity24,475
 —
 24,475
 —
Total balanced asset allocation1,691
 —
 1,691
 —
High yield bond1,018
 —
 1,018
 —
Intermediate term bond8,233
 —
 8,233
 —
Total fixed income9,251
 —
 9,251
 —
Total assets$35,417
 $—
 $35,417
 $—

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 September 30, 2012
 Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Asset category:       
Large cap U.S. equity$14,358
 $—
 $14,358
 $—
Small and mid cap U.S. equity3,672
 —
 3,672
 —
International equity3,284
 —
 3,284
 —
Total equity21,314
 —
 21,314
 —
Total balanced asset allocation1,646
 —
 1,646
 —
High yield bond981
 —
 981
 —
Intermediate term bond8,716
 —
 8,716
 —
Total fixed income9,697
 —
 9,697
 —
Total assets$32,657
 $—
 $32,657
 $—

The Company’s policy is to invest the Plan assets in a prudent manner for the purpose of providing benefit payments to participants and offseting reasonable expenses of administration. The Company’s investment strategy is designed to provide a total return that, over the long-term, places a strong emphasis on the preservation of capital. The strategy attempts to maximize investment returns on assets at a level of risk deemed appropriate by the Company while complying with applicable regulations and laws.

The Plan’s investment policy prohibits the direct investment in real estate but allows the Plan’s mutual funds to include a small percentage of real estate related investments. The investment strategy utilizes asset allocation as a principal determinant for establishing an appropriate risk profile. Weighted-average pension plan asset allocations based on the fair value of such assets at September 30, 2013, and September 30, 2012 and target allocations for 2013, by asset category, are as follows:
 2013 2012 
Target allocation
range 2013
 
Weighted
average expected
rate of return
Large cap U.S. equity44% 46% 
 10.0%
Small and mid cap U.S. equity11
 13
 
 15.5
International equity10
 10
 
 12.0
Total equity65
 69
 45% - 70% 11.3
Total balanced asset allocation5
 5
 
 6.0
High yield bond3
 3
 
 8.0
Intermediate term bond27
 23
 
 6.0
Total fixed income30
 26
 20% - 40% 6.2
Total assets100% 100%   9.7
Cash—
 —
 0% - 20% —

The expected long-term rate of return assumption as of each measurement date was determined by taking into consideration asset allocations as of each such date, historical returns on the types of assets held, and current economic factors. Under this method, historical investment returns for each major asset category are applied to the expected future investment allocation in that category as a percentage of total plan assets, and a weighted average is determined. The Company’s investment policy for determining the asset allocation targets was developed based on the desire to optimize total return while placing a strong emphasis on preservation of capital. In general, it is hoped that, in the aggregate, changes in the fair value of plan assets will be less volatile than similar changes in appropriate market indices. Returns on invested assets are periodically compared with target market indices for each asset type to aid us in evaluating such returns.

There were no pension plan assets consisting of Sterling Bancorp equity securities (common stock) at September 30, 2013 or at September 30, 2012.

The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. At this time, the Company has not determined whether contributions in fiscal 2014 will be made.

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The Company has also established a non-qualified Supplemental Executive Retirement Plan (“SERP”) to provide certain executives with supplemental retirement benefits in addition to the benefits provided by the pension plan due to amounts limited by the Internal Revenue Code of 1986, as amended (“IRS Code”). The periodic pension expense for the supplemental plan amounted to $49, $41 and $44 for the years ended September 30, 2013, 2012 and 2011, respectively. Additionally, a settlement charge of $278 in 2011 was recorded reflecting the partial settlement of the defined benefit portion of the SERP relating to the benefit obligation of a former employee. The actuarial present value of the projected benefit obligation and the vested benefit obligation was $1,194 and $1,016 at September 30, 2013 and 2012, respectively, and the vested benefit obligation was $1,180 and $1,016 for the same periods, respectively, all of which is unfunded. Discount rates of 3.0% and 3.8% were used in determining the actuarial projected benefit at September 30, 2013 and 2.5% and 3.25% for September 30, 2012.
(b) Other Post retirement Benefit Plans
The Company’s other post retirement benefit plans, which are unfunded, provide optional medical, dental and life insurance benefits to retirees or death benefit payments to beneficiaries of employees covered by the Company and Bank Owned Life Insurance policies. The Company elected to amortize the transition obligation for accumulated benefits to retirees as an expense over a 20 year period.
Data relating to the post retirement benefit plan is the following:
 September 30,
 2013 2012
Changes in accumulated post retirement benefit obligation:   
Beginning of year$3,103
 $2,509
Service cost48
 46
Interest cost134
 125
Actuarial loss177
 548
Plan participants’ contributions—
 —
Amendments—
 —
Benefits paid(160) (125)
End of year3,302
 3,103
Changes in fair value of plan assets:   
Beginning of year$—
 $—
Employer contributions160
 125
Plan participants’ contributions—
 —
Benefits paid(160) (125)
End of year—
 —
Funded status$(3,302) $(3,103)
Components of net periodic benefit expense:
 For the year ended September 30,
 2013 2012 2011
Service cost$48
 $46
 $38
Interest cost134
 125
 107
Amortization of transition obligation24
 24
 24
Amortization of prior service cost47
 47
 48
Amortization of net actuarial loss (gain)2
 (25) (60)
Total$255
 $217
 $157

Total unrecognized actuarial gain and prior service cost expected to be amortized from accumulated other comprehensive income in fiscal year 2014 is $20.

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Estimated future benefit payments are the following for the years ending September 30:
2014$208
2015209
2016211
2017212
2018215
2019 - 20231,107
Plan assumptions include the following:
 For the year ended September 30,
 2013 2012
Medical trend rate next year4.5% 4.5%
Ultimate trend rate4.5
 4.5
Discount rate4.2
 4.1
Discount rate used to value periodic cost4.1
 4.3
There is no impact of a 1% increase or decrease in health care trend rate due to the Company’s cap on cost.
Amounts recognized in accumulated other comprehensive (loss) at September 30, 2013 and 2012 consisted of the following:
 For the year ended September 30,
 2013 2012
Post retirement plan unrecognized actuarial (gain) loss$(20) $175
Post retirement plan unrecognized service cost(270) (317)
Post retirement unrecognized transition obligation(20) (30)
Post retirement SERP(307) (400)
Post employment BOLI(399) (122)
Subtotal(1,016) (694)
Deferred tax asset413
 282
Net amount recognized in accumulated other comprehensive (loss)$(603) $(412)
(c) Employee Savings Plan
The Company also sponsors a defined contribution plan established under Section 401(k) of the IRS Code. Eligible employees may elect to contribute up to 50.0% of their compensation to the plan. The Company currently makes matching contributions equal to 50.0% of a participant’s contributions up to a maximum matching contribution of 3.0% of eligible compensation. The plan also provides for a discretionary profit sharing component, in addition to the matching contributions. Fiscal year 2013 did not include a profit sharing component. Voluntary matching and profit sharing contributions are invested in accordance with the participant’s direction in one or a number of investment options. Savings plan expense was $935, $1,029 and $1,875 for the years ended September 30, 2013, 2012 and 2011, respectively.

(d) Employee Stock Ownership Plan (“ESOP”)
In connection with the Second-Step Stock Conversion and Offering in January 2004, the Company established an ESOP for substantially all eligible employees who meet certain age and service requirements. The ESOP borrowed $9,987 from Sterling Bancorp and used the funds to purchase 998,650 shares of common stock in the offering. The term of this ESOP loan is twenty years.

ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years.


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


ESOP expense was $497, $390, and $436 for the years ended September 30, 2013, 2012 and 2011, respectively. Of the 998,650 shares of common stock acquired by the ESOP through September 30, 2013 and 2012, a total of 439,388 and 389,456 common shares, respectively, have been allocated to participants or committed to be released for allocation. The cost of ESOP shares that have not yet been allocated to participants or committed to be released for allocation is deducted from stockholders’ equity; this was 549,262 shares with a cost of $5,493 and a fair value of approximately $5,981 at September 30, 2013 and 599,194 shares with a cost of $5,992 and a fair value of approximately $5,638 at September 30, 2012.

Effective October 30, 2013, the Company terminated the ESOP plan. In accordance with the provisions of the plan, all participants will receive contributions the calendar year 2013 and will become 100% vested in their accounts. Unallocated shares will be liquidated and used to retire the outstanding loan obligation. The Company estimates plan termination costs of approximately $150 which will be incurred in fiscal 2014.

The Company established a supplemental savings plan for certain senior officers to compensate executives for benefits provided under the Bank’s tax qualified plans (employee’s savings plan and ESOP) that are limited by the IRS Code. Expense recognized for this plan including the defined benefit component was $79, $0, and $340, for the years ended September 30, 2013, 2012 and 2011, respectively. Amounts accrued and recorded in other liabilities at September 30, 2013 and 2012, including the defined benefit component were $1.2 million.

(e) Stock Compensation Plans
The Company has two active stock compensation plans, the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2012 Stock Incentive Plan (the “2012 Plan”). Both the 2004 Plan and the 2012 Plan were established to help the Company promote growth and profitability by providing certain directors, key officers and employees with an incentive to achieve corporate objectives through a participation interest in the performance of the common stock of the Company.

Under the 2004 Plan, the Company may grant among other things, nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights, or any combination thereof to certain employees and directors. The Company’s stockholders authorized the issuance of up to 798,920 shares of common stock as restricted stock awards, and 1,997,300 shares available for stock options and stock appreciation rights. The awards are subject to accelerated vesting for death, retirement and change in control. As of September 30, 2013, 11,533 restricted shares were potentially subject to accelerated vesting as the employees were eligible for retirement. A total of 191,724 options and 7,120 restricted stock awards remain available for future grant at September 30, 2013.

Under the 2012 Plan the Company may grant, in addition to the types of grants available under the 2004 Plan, performance based awards, restricted stock unit awards, other stock-based awards, or any combination thereof to certain employees and directors.
The Company’s stockholders authorized the issuance of up to 2,900,000 shares of common stock. Stock options or stock appreciation rights awards are accounted as one share for every share granted. Other awards permitted under the 2012 Plan are accounted as 3.6 shares for every share granted. As of September 30, 2013, 48,121 restricted shares were potentially subject to accelerated vesting as the employees were eligible for retirement. A total of 1,867,340 shares of common stock remain available for future grant as of September 30, 2013.

In addition to the above plans, the Company provided awards under its 2011 Employment Inducement Stock Program which included options to purchase 107,256 shares of common stock and restricted stock awards covering 29,550 shares of common stock, both of which vest in four equal installments through July 2015, and performance-based restricted stock awards covering 11,820 shares which vest upon attainment of designated performance conditions in combination with continued service through December 31, 2014. These awards are governed by the terms of an award notice and the terms of the 2004 Plan.

Under the Company’s stock based compensation plans, forfeited shares are available for re-issuance. The Company generally funds restricted stock awards with treasury stock. On grant date, restricted shares awarded under the 2004 Plan and the 2012 Plan were transferred from treasury stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable.

The fair market value of the restricted shares awarded under the plans is being amortized to expense on a straight-line basis over the vesting period of the underlying shares. Compensation expense related to restricted stock awards was $1,108, $276, and $168 for the years ended September 30, 2013, 2012 and 2011, respectively. The remaining unearned compensation cost of $1,239 as of September 30, 2013 is recorded as a reduction of additional paid-in capital and will be expensed over three years. The total fair value of restricted stock vested for the fiscal years ended September 30, 2013, 2012 and 2011 was $716, $157, and $73, respectively.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)



Under both plans, options vest over periods ranging from two to five years and have a ten-year contractual term and may be either non-qualified stock options or incentive stock options. The Company uses shares held as treasury stock to satisfy share option exercises. Currently, the Company has a sufficient number of treasury shares to satisfy expected share option exercises. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date. Employees who retire under circumstances in accordance with the terms of the Plan, may be entitled to accelerated vesting of individual awards.

As of September 30, 2013, 48,121 shares were potentially subject to accelerated vesting. Substantially all stock options outstanding are expected to vest. Compensation expense related to stock option awards was $634, $521 and $558 for the years ended September 30, 2013, 2012 and 2011, respectively.

The following table summarizes the activity in the Company’s active stock-based compensation plans for
September 30, 2013:
   Non-vested stock awards/stock units outstanding Stock options outstanding
 Shares available for grant Number of shares Weighted average grant date fair value Number of shares Weighted average exercise price
Balance at October 1, 20122,875,877
 97,817
 $8.31
 1,972,480
 $11.04
Granted (1)
(1,028,140) 186,900
 9.04
 360,500
 9.04
Stock awards vested—
 (65,720) 8.94
 —
 —
Exercised—
 —
 —
 (8,250) 7.51
Forfeited225,501
 (9,300) 7.28
 (203,167) 11.06
Canceled/expired(7,054) —
 —
 (7,054) 13.97
Balance at September 30, 20132,066,184
 209,697
 $8.73
 2,114,509
 $10.71
Exercisable at September 30, 2013      1,386,619
 $11.90
(1) Reflects certain non-vested stock awards that count as 3.6 shares for each share granted.

The total intrinsic value of stock options vested (exercisable) for the fiscal years ended September 30, 2013, 2012 and 2011 was $651, $33 and $0 respectively. The unrecognized compensation expense associated with stock options was $1,360 as of September 30, 2013 and is expected to be recognized over a period of 3 years.

The aggregate intrinsic value of options outstanding as of September 30, 2013 was $2,428. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended September 30, 2013 and the exercise price, multiplied by the number of in-the-money options). The cash received from option exercises was $62 and $0 for fiscal 2013 and 2012, respectively. There was no tax benefit recorded from the exercise of options for fiscal 2013 or fiscal 2012.

A summary of stock options at September 30, 2013 follows:
 Outstanding Exercisable
   Weighted-average   Weighted-average
 
Number of
stock options
 
Exercise
price
 
Life
(in years)
 
Number of
stock options
 
Exercise
price
 
Life
(in years)
Range of exercise price:           
   $6.71 to $9.00875,309
 $8.34
 8.55 187,419
 $8.12
 8.55
   $9.28 to $12.64263,000
 10.41
 5.64 223,000
 10.60
 5.64
   $12.84 to $13.92976,200
 12.92
 1.79 976,200
 12.92
 1.79
 2,114,509
 $10.71
 5.06 1,386,619
 $11.90
 5.06


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)



The Company uses an option pricing model to estimate the grant date fair value of stock options granted. The weighted-average estimated value per option granted was $2.74 in 2013, $2.31 in 2012, and $2.27 in 2011.

The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:
 For the year ended September 30,
 2013 2012 2011
Risk-free interest rate1.0% 1.4% 2.2%
Expected stock price volatility40.8
 40.0
 34.5
Dividend yield (1)
2.6
 3.0
 2.8
Expected term in years5.75
 5.82
 5.90
(1) Represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date.

(12) Other Non-interest Expense

Other non-interest expense items are presented in the following table. Components exceeding 1% of the aggregate of total net interest income and total non-interest income are presented separately.

  For the year ended September 30,
  2013 2012 2011
Other non-interest expense:      
   Defined benefit settlement charge / CEO transition $—
 $—
 $1,772
   Restructuring charge (severance / branch consolidation) —
 —
 3,201
   Advertising and promotion 1,502
 1,849
 3,328
   Professional fees 3,393
 4,247
 4,389
   Data and check processing 2,520
 2,802
 2,763
   ATM/debt card expense 1,722
 1,711
 1,584
   Other 8,239
 7,782
 7,980
Total other non-interest expense $17,376
 $18,391
 $25,017
       


(13) Earnings Per Common Share

The following is a summary of the calculation of earnings per share (“EPS”):
 For the year ended September 30,
 2013 2012 2011
Net income$25,254
 $19,888
 $11,739
Weighted-average common shares outstanding for computation of basic EPS (1)
43,734,425
 38,227,653
 37,452,596
Common-equivalent shares due to the dilutive effect of stock options (2)
48,628
 20,393
 946
Weighted average common shares for computation of diluted EPS43,783,053
 38,248,046
 37,453,542
Earnings per common share:     
Basic$0.58
 $0.52
 $0.31
Diluted$0.58
 $0.52
 $0.31
(1)Includes earned ESOP shares.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


(2)Represents incremental shares computed using the treasury stock method.

As of September 30, 2010, 2009 and 2008 there were 1,826,519,  1,934,637 and 1,155,653 stock options, respectively, that were considered anti-dilutive for these periods and were not included in common-equivalent shares.

(15)

As of September 30, 2013, 2012 and 2011 there were 1,786,608, 1,771,132 and 1,871,299 stock options, respectively, that were considered anti-dilutive and were not included in common-equivalent shares.
(14) Stockholders’ Equity

(a) Regulatory Capital Requirements

OTS regulations require banks to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%.

Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements.

The regulations establish a framework for the classification of banks into five categories: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 (core) capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%.

The foregoing capital ratios are based, in part, on specific quantitative measures of assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. These capital requirements apply only to the Bank, and do not consider additional capital retained by Provident New York Bancorp.

Management believes that, as of September 30, 2010 and 2009 the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

The following is a summary of the Bank’s actual regulatory capital amounts and ratios at September 30, 2010 and 2009, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution. PMB is also subject to certain regulatory capital requirements, which it satisfied as of September 30, 2010 and 2009.

        OTS requirements 
        Minimum capital  Classification as well 
  Bank actual  adequacy  capitalized 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
September 30, 2010:                  
     Tangible Capital $240,230   8.4% $42,734   1.5% $-   - 
     Tier 1 (core) capital  240,230   8.4   113,958   4.0   142,447   5.0%
     Risk-based capital:                        
            Tier 1  240,230   12.1   -   -   119,251   6.0 
            Total  265,148   13.3   159,002   8.0   198,752   10.0 
                         
September 30, 2009:                        
     Tangible Capital $246,339   8.6% $42,784   1.5% $-   - 
     Tier 1 (core) capital  246,339   8.6   114,090   4.0   142,613   5.0%
     Risk-based capital:                        
            Tier 1  246,339   12.6   -   -   117,447   6.0 
            Total  270,807   13.8   156,596   8.0   195,746   10.0 

Tangible and Tier 1 capital amounts represent the stockholder’s equity of the Bank, less intangible assets and after-tax net unrealized gains (losses) on securities available for sale and any other disallowed assets, such as deferred income taxes.  Total capital represents Tier 1 capital plus the allowance for loan losses up to a maximum amount equal to 1.25% of risk-weighted assets.

The following is a reconciliation of the Bank’s total stockholder’s equity under accounting principles generally accepted in the United States of America (“GAAP”) and its regulatory capital:

  September 30, 
  2010  2009 
Total GAAP stockholder's equity  (Provident Bank) $403,630  $408,555 
Goodwill and certain intangible assets  (158,127)  (159,600)
Unrealized (gains) losses on securities available for sale included in other accumulated comprehensive income
  (12,770)  (9,641)
Other Comprehensive loss (income)  7,497   7,025 
Tangible, tier 1 core and Tier 1 risk-based capital  240,230   246,339 
Allowance for loan losses  24,918   24,468 
Total risk-based capital $265,148  $270,807 

(b) Dividend Payments

Under OTS regulations, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to the sum of net income for the current calendar year and net income retained for the two preceding calendar years. Dividend payments in excess of this amount require OTS approval. After September 30, 2010 the amount that can be paid to Provident New York Bancorp by Provident Bank is $16.2 million plus earnings for the remainder of calendar year 2010.  The Bank paid $29.4 million in dividends to Provident New York Bancorp during the fiscal year ended September 30, 2010 ($10.5 million during the year ended 2009 and $19 million during the year ended September 30, 2008).


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

Unlike the Bank, Provident New York Bancorp is not subject to OTS regulatory limitations on the payment of dividends to its stockholders.

(c) Stock Repurchase Programs

The Company announced its fifth stock repurchase program on December 17, 2009, authorizing the repurchase of 2,000,000 shares, of which 1,234,167 remain to be purchased at September 30, 2010.

The total number of shares repurchased under repurchase programs during the fiscal year ended September 30, 2010, 2009, and 2008, was 1,515,923,  415,811, and 1,570,757, respectively at a total cost of $12.9 million, $3.5 million, and $19.8 million, respectively.

(d) Liquidation Rights

Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with OTS regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s ownership interest in the retained earnings of Provident Federal as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation o f the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The liquidation account is reduced annually on December 31 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount of the liquidation account.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(16) Off-Balance-Sheet Financial Instruments

In the normal course of business, the Company is a party to off-balance-sheet financial instruments that involve, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated financial statements. The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance-sheet financial instruments, are summarized as follows:

  September 30, 
  2010  2009 
Lending-related instruments:      
Loan origination commitments $114,822  $133,547 
Unused lines of credit  282,428   302,455 
Letters of credit  23,104   24,569 

As of September 30, 2010 and September 30, 2009, 86%, and 94% respectively of lending related off balance sheet instruments were at variable rates.

The contractual amounts of loan origination commitments, unused lines of credit and letters of credit represent the Company’s maximum potential exposure to credit loss, assuming (i) the instruments are fully funded at a later date, (ii) the borrowers do not meet the contractual payment obligations, and (iii) any collateral or other security proves to be worthless. The contractual amounts of these instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. Substantially all of these lending-related instruments have been entered into with customers located in the Company’s primary market area described in Note 5 (“Loans”).

Loan origination commitments are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments have fixed expiration dates (generally ranging up to 60 days) or other termination clauses, and may require payment of a fee by the customer. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if any, obtained by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include mortgages on residential and commercial real estate, deposit accounts with the Company, and other property. The Company’s loan origination commitments at September 30, 2010 provide for interest rates ranging principally from 2.19% to 7.75%.

Unused lines of credit are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the borrower.

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

As of September 30, 2010, the Company had $23,104 in outstanding letters of credit, of which $10,276 were secured by collateral.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(17) Commitments and Contingencies

Certain premises and equipment are leased under operating leases with terms expiring through 2033. The Company has the option to renew certain of these leases for additional terms.  Future minimum rental payments due under non-cancelable operating leases with initial or remaining terms of more than one year at September 30, 2010 were as follows (for fiscal years ending September 30th):

2011 $2,537 
2012  2,483 
2013  2,332 
2014  2,118 
2015  1,983 
2016 and thereafter  16,729 
  $28,182 

Occupancy and office operations expense include net rent expense of $2,802, $2,726, and $2,398, for the years ended September 30, 2010, 2009 and 2008, respectively.

The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management, after consultation with legal counsel, does not anticipate losses on any of these claims or actions that would have a material adverse effect on the consolidated financial statements.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(18) 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 Se ptember 30, 2010, these securities have an amortized cost of $6,355 and a fair value of $5,996.  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 September 30, 2010. These securities have a weighted average coupon rate of 3.22%, a weighted average life of 4.18 years, a weighted average 1 month prepayment history of 8.17 years and a weighted average twelve month default rate of 2.91 CDR.  One of the four securities is below investment grade and has an amortized cost of $2,308 and a fair value of $2,044 at September 30, 2010.  The remaining three securities are rated at or above Aa3.


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per 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 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  $- 

1Interest rate caps and swaps
(a) Regulatory Capital
2Swaps
OCC regulations require banks to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%. The Bank met these capital requirements as of September 30, 2013.

In connection with the Merger, the Company became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended. Effective the quarter ending December 31, 2013, Sterling Bancorp is subject to capital ratio requirements including: Tier 1 leverage capital to average assets, tier 1 leverage capital to risk-weighted assets, and total capital to risk-weighted assets.

Under its prompt corrective action regulations, the OCC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements.

The regulations establish a framework for the classification of banks into five categories: well-capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 (core) capital to total adjusted assets ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%.

The foregoing capital ratios are based, in part, on specific quantitative measures of assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OCC about capital components, risk weightings and other factors. These capital requirements apply only to the Bank, and do not consider additional capital retained by Sterling Bancorp.
We believe that, as of September 30, 2013 and 2012 the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OCC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that we believe have changed the Bank’s capital classification.

The following is a summary of the Bank’s actual regulatory capital amounts and ratios at September 30, 2013 and 2012, compared to the OCC requirements for minimum capital adequacy and for classification as a well-capitalized institution.

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      OCC requirements
  Bank actual 
Minimum capital
adequacy
 
Classification as well-
capitalized
 
  Amount Ratio Amount Ratio Amount Ratio
 September 30, 2013:           
 Tier 1 leverage$363,274
 9.3% $155,670
 4.0% $194,587
 5.0%
 Risk-based capital:           
 Tier 1363,274
 13.2
 —
 —
 165,352
 6.0
 Total392,376
 14.2
 220,469
 8.0
 275,587
 10.0
 September 30, 2012:           
 Tier 1 leverage$289,441
 7.5% $153,469
 4.0% $191,836
 5.0%
 Risk-based capital:           
 Tier 1289,441
 12.1
 —
 —
 143,085
 6.0
 Total317,929
 13.3
 190,780
 8.0
 238,475
 10.0
Tangible and Tier 1 capital amounts represent the stockholder’s equity of the Bank, less intangible assets and after-tax net unrealized gains (losses) on securities available for sale and any other disallowed assets, such as deferred income taxes. Total capital represents Tier 1 capital plus the allowance for loan losses up to a maximum amount equal to 1.3% of risk-weighted assets.

The following is a reconciliation of the Bank’s total stockholder’s equity under accounting principles generally accepted in the United States of America (“GAAP”) and its regulatory capital:
 September 30,
 2013 2012
Total GAAP stockholder’s equity (Sterling National Bank)$516,281
 $466,037
Goodwill and certain intangible assets(168,122) (169,525)
Unrealized losses (gains) on securities available for sale included in other accumulated comprehensive income (loss)11,455
 (15,077)
Disallowed servicing asset(198) (162)
Other comprehensive loss3,858
 8,168
Tier 1 risk-based capital363,274
 289,441
Allowance for loan losses and off-balance sheet commitments29,102
 28,488
Total risk-based capital$392,376
 $317,929
(b) Dividend Payments
OCC regulations limit the amount of cash dividends that can be made by the Bank to the Company. Furthermore, because the Bank is a subsidiary of a holding company, it must file a notice with the Federal Reserve at least 30 days before the Bank’s Board of Directors declares a dividend. This notice may be disapproved if the Federal Reserve finds that:

the Bank would be undercapitalized or worse following the dividend;
the proposed dividend raises safety and soundness concerns; or
the dividend would violate a prohibition contained in any statute, regulation, enforcement action, or agreement with or condition imposed by an appropriate federal banking agency.

Under OCC regulations, the Bank generally may declare annual cash dividends up to an amount equal to the sum of net income for the current calendar year and net income retained for the two preceding calendar years. Dividend payments in excess of this amount require OCC approval. After September 30, 2013 the amount that can be paid to Sterling Bancorp by Sterling National Bank is $35.8 million plus earnings for the remainder of calendar year 2013. The Bank did not pay dividends to Sterling Bancorp during the fiscal year ended September 30, 2013. The Bank paid dividends to Sterling Bancorp of $6.0 million during the fiscal year ended 2012 and $10.0 million during the fiscal year ended September 30, 2011.


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The Company has 776,713 shares that are available to be purchased under an announced stock repurchase program. There were no shares repurchased under the repurchase programs during the fiscal year ended September 30, 2013 and 2012 . The total number of shares repurchased under repurchase programs during fiscal2011 was 457,454 at a total cost of $3.8 million.

(c) Liquidation Rights
Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with OCC regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s ownership interest in the retained earnings of the Bank as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The liquidation account is reduced annually on September 30 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. At September 30, 2013 the liquidation account had a balance of $13.3 million. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount of the liquidation account.

(15) Off-Balance-Sheet Financial Instruments

In the normal course of business, the Company enters into various transactions, which in accordance with generally accepted accounting principles are not included in its consolidated balance sheet. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.  Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. Based on the Company’s credit-risk exposure assessment of standby letter of credit arrangements, the arrangements contain security and debt covenants similar to those contained in loan agreements. As of September 30, 2013, the Company had $35,052 in outstanding letters of credit, of which $17,159 were secured by collateral.

The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance sheet financial instruments, are summarized as follows:
 September 30,
 2013 2012
Loan origination commitments$171,032
 $125,729
Unused lines of credit207,201
 265,940
Letters of credit35,052
 26,441



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(16) Commitments and Contingencies

Certain premises and equipment are leased under operating leases with terms expiring through 2033. The Company has the option to renew certain of these leases for additional terms. Future minimum rental payments due under non-cancelable operating leases with initial or remaining terms of more than one year at September 30, 2013 were as follows:
2014$3,458
20153,220
20163,131
20173,152
20183,118
2019 and thereafter16,083
 $32,162

Occupancy and office operations expense includes net rent expense of $3,340, $2,952 and $2,845 for the years ended September 30, 2013, 2012 and 2011, respectively.

Litigation

The Company and the Bank are involved in a number of judicial proceedings concerning matters arising from conducting their business activities. These include routine legal proceedings arising in the ordinary course of business. These proceedings also include actions brought against the Company and the Bank with respect to corporate matters and transactions in which the Company and the Bank were involved. In addition, the Company and the Bank may be requested to provide information or otherwise cooperate with government authorities in the conduct of investigations of other persons or industry groups.

There can be no assurance as to the ultimate outcome of a legal proceeding; however, the Company and the Bank have generally denied, or believe they have meritorious defenses and will deny, liability in all significant litigation pending against us, including the matters described below, and we intend to defend vigorously each case, other than matters we describe as having settled. We accrue a liability for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.

Between April 9, 2013 and June 5, 2013, eight actions were filed on behalf of a putative class of Legacy Sterling shareholders against Legacy Sterling, its current directors, and Provident New York Bancorp in connection with the Merger described in Note 22. Subsequent Events.  The first seven of the actions were filed in the Supreme Court of the State of New York, New York County; the eighth action was filed in the United States District Court for the Southern District of New York.  On May 17, 2013, the seven state court actions were consolidated under the caption In re Sterling Shareholders Litigation, Index No. 651263/2013 (Sup. Ct., N.Y. Cnty.). On June 21, 2013, the lead plaintiffs in the consolidated state court action filed an amended class action complaint alleging that Legacy Sterling’s board of directors breached its fiduciary duties by agreeing to the proposed merger transaction and by failing to disclose all material information to shareholders. The consolidated and amended complaint also alleges that Provident New York Bancorp has aided and abetted those alleged fiduciary breaches.  The consolidated state court action seeks, among other things, an order enjoining the defendants from proceeding with or consummating the merger, as well as other equitable relief and/or money damages in the event that the transaction is consummated.  The federal action, captioned Miller v. Sterling Bancorp, et al., No. 13 CV 3845 (S.D.N.Y.), alleges the same breach of fiduciary duty and aiding and abetting claims against defendants, and also alleges defendants’ preliminary proxy statement was inaccurate or incomplete in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.  The plaintiff in the federal action agreed to coordinate his case with the earlier-filed consolidated state court action.
On September 12, 2013, following certain coordinated discovery and negotiations among counsel, the parties to these actions entered into a memorandum of understanding regarding a settlement in principle of this litigation. Although Legacy Sterling and Provident New York Bancorp believed that the disclosures concerning the proposed merger were accurate and complete in all material respects, to avoid the risk that the lawsuits could delay or otherwise adversely affect the consummation of the proposed merger and to minimize the expense and burden of defending such actions, the defendants agreed to make certain supplemental disclosures, which were set forth in a Form 8-K Current Report filed by Legacy Sterling with the U.S. Securities and Exchange Commission on September 12, 2013.  The proposed settlement is subject to, among other things, certain confirmatory discovery

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and approval of the New York State Supreme Court.  Under the terms of the proposed settlement, following final approval by the court, each of the state and federal actions will be dismissed with prejudice.

(17) Fair value measurements

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

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risk etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

In general, fair value is based on quoted market prices, when available. If quoted market prices in active markets are not available, fair value is based on internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

Investment Securities Available for Sale

The majority of the Company’s available for sale investment securities  are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment securities that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are mortgage pass-through securities, state and municipal general obligation or revenue bonds, U.S. agency bullet and callable securities and corporate bonds. Pricing for such instruments is fairly generic and is easily obtained. From time to time, the Company validates, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

The Company reports the fair value of private label collateralized mortgage obligations or “CMOs” with a rating from a national recognized bond rating agency of below investment grade using Level 3 inputs. As of September 30, 2013, these securities have an amortized cost of $3,636 and a fair value of $3,613. In determining the fair value of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that management believes market participants would use in pricing these securities in an orderly market. Significant increases (decreases) in any of the unobservable inputs would result in a

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significantly lower (higher) fair value measurement of the securities. Present value estimated cash flow models were used to discount expected cash flows at the interest rate reflective of similarly structured securities in an orderly market. These securities have a weighted average coupon rate of 3.12%, a weighted average life of 3.49 years, and a weighted average twelve month constant prepayment rate history of 20.39 years.The two private label CMOs with sub-investment grade ratings have a weighted average twelve month constant default rate of 4.30%. There was $14 of OTTI recognized on these securities during the year ended September 30, 2013.

The credit ratings of these securities were as follows at September 30, 2013:
 
Amortized
cost
 
Fair
value
Baa1$246
 $248
Ba1102
 101
B11,931
 1,919
B31,357
 1,345
Total private label CMOs$3,636
 $3,613
Derivatives

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

Commitments to Sell Real Estate Loans

The Company enters into various commitments to sell real estate loans in the secondary market. Such commitments are considered to be derivative financial instruments and therefore are carried at estimated fair value on the consolidated 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 value of these commitments is not material.
A summary of assets and liabilities at September 30, 2013 measured at estimated fair value on a recurring basis is as follows:
 September 30, 2013
 Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Available for sale securities:       
Residential mortgage-backed securities:       
Fannie Mae$211,438
 $—
 $211,438
 $—
Freddie Mac67,629
 —
 67,629
 —
Ginnie Mae3,462
 —
 3,462
 —
CMO/Other MBS163,041
 —
 163,041
 —
Privately issued CMOs3,613
 —
 —
 3,613
Total residential mortgage-backed securities449,183
 —
 445,570
 3,613
Federal agencies261,547
 —
 261,547
 —
Corporate bonds114,933
 —
 114,933
 —
State and municipal128,730
 —
 128,730
 —
Total available for sale securities954,393
 —
 950,780
 3,613
Interest rate caps and swaps997
 —
 997
 —
Total assets$955,390
 $—
 $951,777
 $3,613
Swaps$997
 $—
 $997
 $—
Total liabilities$997
 $—
 $997
 $—

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A summary of assets and liabilities at September 30, 2012 measured at estimated fair value on a recurring basis is the follows:
 September 30, 2012
 Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Available for sale securities:       
Residential mortgage-backed securities:       
Fannie Mae$161,407
 $—
 $161,407
 $—
Freddie Mac85,260
 —
 85,260
 —
Ginnie Mae4,778
 —
 4,778
 —
CMO/Other MBS188,434
 —
 188,434
 —
Privately issued CMOs4,630
 —
 —
 4,630
Total residential mortgage-backed securities444,509
 —
 439,879
 4,630
Federal agencies408,823
 —
 408,823
 —
State and municipal156,481
 —
 156,481
 —
Equities1,059
 —
 1,059
 —
Total available for sale securities1,010,872
 —
 1,006,242
 4,630
Interest rate caps and swaps2,487
 —
 2,487
 —
Total assets$1,013,359
 $—
 $1,008,729
 $4,630
Swaps$2,485
 $—
 $2,485
 $—
Total liabilities$2,485
 $—
 $2,485
 $—

The changes in Level 3 assets measured at fair value on a recurring basis are summarized below:
 Change in Level 3 assets
Balance at September 30, 2010$5,996
Paydowns(908)
Accretion, net1
OTTI(75)
Change in fair value(163)
Balance at September 30, 20114,851
Paydowns(675)
Accretion, net15
OTTI(47)
Change in fair value486
Balance at September 30, 20124,630
Paydowns(1,018)
Accretion, net3
OTTI(14)
Change in fair value12
Balance at September 30, 2013$3,613

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

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

Loans Held for Sale and Impaired Loans

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

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

The Company may record adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for loan losses. Impairment 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 impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place and are also based on Level 3 inputs. Impaired loans are evaluated on at least a quarterly basis for additional impairment and their carrying values are adjusted as needed. Loans subject to non-recurring fair value measurements were $35,230 and $50,078 which equals the carrying value less the allowance for loan losses allocated to these loans at September 30, 2013 and 2012, respectively. Changes in fair value recognized in provisions on loans held by the Company were $2,726 and $5,088 for the twelve months ended September 30, 2013 and 2012, respectively.

When valuing impaired loans that are collateral dependent, the Company charges-off the difference between the recorded investment in the loan and the appraised value, which is generally less than 12 months old. A discount for estimated costs to dispose of the asset is used when evaluating the impaired loans. Nearly all of our impaired loans are considered collateral dependent.

A summary of impaired loans at September 30, 2013 measured at estimated fair value on a non-recurring basis is the following:
 September 30, 2013
 Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Commercial real estate$3,672
 $—
 $—
 $3,672
Commercial & industrial500
 —
 —
 500
Acquisition, development and construction1,839
 —
 —
 1,839
Consumer2
 —
 —
 2
Total impaired loans measured at fair value$6,013
 $—
 $—
 $6,013

A summary of impaired loans at September 30, 2012 measured at estimated fair value on a non-recurring basis is the following:
 September 30, 2012
 Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Residential mortgage$8,628
 $—
 $—
 $8,628
Commercial real estate6,537
 —
 —
 6,537
Commercial & industrial95
 —
 —
 95
Acquisition, development and construction8,232
 —
 —
 8,232
Consumer1,215
 —
 —
 1,215
Total impaired loans measured at fair value$24,707
 $—
 $—
 $24,707

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Mortgage Servicing Rights

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

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with FASB ASC Topic 860 - Transfers and Servicing, the Company must record impairment charges on a non-recurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights the Company utilizes a third-party, which on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights relies upon Level 3 inputs. The fair value of mortgage servicing rights at September 30, 2013 and 2012 were $1,978 and $1,624, respectively.

Assets Taken in Foreclosure of Defaulted Loans

Assets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less costs to sell and are primarily comprised of commercial and residential real estate property and upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. The fair value is derived using Level 3 inputs. Appraisals are reviewed by our credit department, our external loan review consultant and verified by officers in our credit administration area. Assets taken in foreclosure of defaulted loans subject to non-recurring fair value measurement were $6,022 and $6,403 at September 30, 2013 and 2012. There were write-downs of $1,083 and $1,098 related to changes in fair value recognized through income for those foreclosed assets held by the Company during the twelve months ending September 30, 2013 and 2012, respectively.


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Significant Unobservable Inputs to Level 3 Measurements

The following table presents quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets at September 30, 2013:
Non-recurring fair value measurements Fair value Valuation technique Unobservable input / assumptions 
Range (1) (weighted average)
Impaired loans:        
Commercial real estate $3,672
 Appraisal Adjustments for comparable properties 15.0% - 36.0% (22.0%)
Commercial & industrial 500
 Appraisal Adjustments for comparable properties 10.0% -19.0% (14.4%)
Acquisition, development & construction 1,839
 Appraisal Adjustments for comparable properties 10.0% - 30.0% (13.5%)
Consumer 2
 Appraisal Adjustments for comparable properties 0
Assets taken in foreclosure:        
Residential mortgage 998
 Appraisal Adjustments by management to reflect current conditions/selling costs 16.0% - 59.0% (21.6%)
Commercial real estate 3,320
 Appraisal Adjustments by management to reflect current conditions/selling costs 20.0% - 37.0% (24.8%)
Acquisition, development & construction 1,704
 Appraisal Adjustments by management to reflect current conditions/selling costs 25.0% - 70.0% (30.2%)
Mortgage servicing rights 1,978
 Third-party Discount rates 9.3% - 12.8%
    Third-party Prepayment speeds 100 - 968 (224)

FASB Codification Topic 825: Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest receivable.

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

Loans
The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

FHLB of New York Stock
The redeemable carrying amount of these securities with limited marketability approximates their fair value.

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) are assigned fair values equal to the carrying amounts payable on demand. Certificates of deposit and mortgage escrow funds are segregated by account type and original term, and fair values are estimated by discounting the contractual cash flows. The discount rate for each account grouping is 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 deposits. We believe 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.


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


Borrowings and Senior notes
The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments.

Other Financial Instruments
Other financial assets and liabilities listed in the table below 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 described in Note 15. 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 September 30, 2013 and September 30, 2012, the estimated fair value of these instruments approximated the related carrying amounts, which were not material.

The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2013:
 September 30, 2013
 
Carrying
amount
 

Level 1 inputs
 

Level 2 inputs
 

Level 3 inputs
Financial assets:       
Cash and due from banks$113,090
 $113,090
 $—
 $—
Securities available for sale954,393
 —
 950,780
 3,613
Securities held to maturity253,999
 —
 250,896
 —
Loans, net2,384,021
 —
 —
 2,422,824
Loans held for sale1,011
 —
 1,011
 

Accrued interest receivable on securities4,892
 —
 4,892
 —
Accrued interest receivable on loans6,805
 —
 —
 6,805
FHLB stock24,312
 —
 —
 —
Interest rate caps and swaps997
 —
 997
 —
Financial liabilities:       
Non-maturity deposits(2,694,166) (2,694,166) —
 —
Certificates of deposit(268,128) —
 (268,088) —
FHLB and other borrowings(462,953) —
 (488,369) —
Senior notes(98,033) —
 (98,142) —
Mortgage escrow funds(12,646) —
 (12,644) —
Accrued interest payable on deposits(1,480) —
 (1,480) —
Accrued interest payable on borrowings(1,525) 

 (1,525) 

Interest rate caps and swaps(997) —
 (997) —

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)



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

Level 1 inputs
 

Level 2 inputs
 

Level 3 inputs
Financial assets:       
Cash and due from banks$437,982
 $437,982
 $—
 $—
Securities available for sale1,010,872
 —
 1,006,242
 4,630
Securities held to maturity142,376
 —
 146,324
 —
Loans, net2,091,190
 —
 —
 2,157,133
Loans held for sale7,505
 —
 7,505
 —
Accrued interest receivable on securities4,011
 —
 4,011
 —
Accrued interest receivable on loans6,502
 —
 —
 6,502
FHLB stock19,249
 —
 —
 —
Interest rate caps and swaps2,487
 —
 2,487
 —
Financial liabilities:       
Non-maturity deposits(2,723,669) (2,723,669) —
 —
Certificates of deposit(387,482) —
 (389,031) —
FHLB and other borrowings(345,176) —
 (377,906) —
Mortgage escrow funds(11,919) —
 (11,917) —
Accrued interest payable on deposits(500) —
 (500) —
Accrued interest payable on borrowings(1,442) 

 (1,442) 

Interest rate caps and swaps(2,485) —
 (2,485) —

(18) Recently Issued Accounting Standards Not Yet Adopted

Accounting Standards Update (“ASU”) 2013-11 - Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued. This standard provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, as similar tax loss, or a tax credit carryforward, except to the extent that a net operation loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. This standard is effective for the Company October 1, 2014 and is not expected to have a material effect on the Company’s consolidated financial statements.

ASU 2013-10 - Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes was issued. This standard permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury and LIBOR. The standard also removes the restriction on using different benchmark rates for similar hedges. This standard was effective for the Company July 17, 2013 and did not have a material effect on the Company’s consolidated financial statements.

ASU 2013-03 - Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date was issued. This standard provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance (e.g. debt arrangements, other contractual obligations and settled litigation and judicial rulings) is fixed at the reporting date. This standard is effective for the Company October 1, 2014 and is not expected to have a material effect on the Company’s consolidated financial statements.

See Note 1. Basis of Financial Statement Presentation and Summary of Significant Accounting Policy for a discussion of the adoption of new accounting standards.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


(19) Accumulated Other Comprehensive (Loss) Income

Activity in accumulated other comprehensive (loss) income (“AOCI”), net of tax, for the periods ended September 30, 2013, 2012 and 2011, was as follows:
 Unrealized gains(losses) on securities Unrealized gains (losses) for pension and other post-retirement obligations Total
Balance at September 30, 2010$12,622
 $(7,498) $5,124
Period change981
 (969) 12
Balance at September 30, 2011$13,603
 $(8,467) $5,136
      
Balance at September 30, 2011$13,603
 $(8,467) $5,136
Period change1,463
 300
 1,763
Balance at September 30, 2012$15,066
 $(8,167) $6,899
      
Balance at September 30, 2012$15,066
 $(8,167) $6,899
Other comprehensive loss before reclassifications(22,167) 3,041
 (19,126)
Amounts reclassified from AOCI(4,371) 1,268
 (3,103)
Period change(26,538) 4,309
 (22,229)
Balance at September 30, 2013$(11,472) $(3,858) $(15,330)

The following table presents the reclassification adjustments from AOCI included in net income and the impacted line items on the income statement for the period ended September 30, 2013:
Components of AOCI 
Amount reclassified from AOCI and impact on net income  (1)
 Affected income statement line item
     
Unrealized gains (losses) on available for sale securities    
  $7,391
 Non-interest income - net gain on sale of securities
  (32) Non-interest income - net impairment loss in earnings
  7,359
 Net change before tax
  (2,988) Tax expense
  $4,371
 Net change after tax
     
Amortization of defined benefit pension items    
Actuarial loss $(2,135) 
Non-interest expense - compensation and employee benefits (2)
  867
 Tax benefit
  $(1,268) Net change after tax
     
(1) Amounts in parentheses indicate a reduction from income.
(2)These accumulated other comprehensive (loss) income components are included in the computation of net periodic pension expense see Note 11. Pensions and Other Post Retirement Employee Benefit Plans and Stock-based Compensation Plans.


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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)



(20) Condensed Parent Company Financial Statements
Set forth below are the condensed balance sheets of Sterling Bancorp and the related condensed statements of income and cash flows:
 September 30,
 2013 2012
Assets:   
Cash$56,230
 $6,716
Loan receivable from ESOP6,437
 6,896
Securities available for sale at fair value—
 809
Investment in Sterling National Bank517,907
 467,295
Investment in non-bank subsidiaries3,271
 5,482
Other assets1,184
 5,371
Total assets$585,029
 $492,569
    
Liabilities:   
Senior notes$98,033
 $—
Other liabilities4,130
 1,447
Total liabilities102,163
 1,447
Stockholders’ equity482,866
 491,122
Total liabilities & stockholders’ equity$585,029
 $492,569
    

The table  below presents the condensed statement of income:
 Year ended September 30,
 2013 2012 2011
Interest income$262
 $282
 $304
Dividend income on equity securities22
 30
 31
Dividends from Sterling National Bank—
 6,000
 10,000
Dividends from non-bank subsidiaries1,600
 500
 500
Bank owned life insurance income—
 10
 91
Interest expense(1,431) —
 —
Non-interest expense(2,700) (1,838) (1,819)
Income tax benefit898
 87
 157
(Loss) income before equity in undistributed earnings of subsidiaries(1,349) 5,071
 9,264
Equity in undistributed (excess distributed) earnings of:     
Sterling National Bank27,174
 13,739
 1,498
Non-bank subsidiaries(571) 1,078
 977
Net income$25,254
 $19,888
 $11,739

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


The table below presents the condensed statement of cash flows:
 Year ended September 30,
 2013 2012 2011
Cash flows from operating activities:     
Net income$25,254
 $19,888
 $11,739
Adjustments to reconcile net income to net cash provided by operating activities:     
Equity in (undistributed) excess distributed earnings of:     
Sterling National Bank(27,174) (13,739) (1,498)
Non-bank subsidiaries571
 (1,078) (977)
Other adjustments, net5,259
 380
 (1,444)
Net cash provided by operating activities3,910
 5,451
 7,820
Cash flows from investing activities:     
Purchase of equity securities, available for sale—
 (105) —
Sales of securities818
 103
 —
Investment in subsidiaries(45,000) (44,203) —
ESOP loan principal repayments459
 441
 424
Net cash (used for) provided by investing activities(43,723) (43,764) 424
Cash flows from financing activities:     
Treasury shares purchased—
 —
 (3,810)
Senior notes offering97,946
 —
 —
Equity capital raise—
 46,000
 —
Cash dividends paid(10,642) (9,100) (8,973)
Stock option transactions including RRP1,758
 910
 770
Other equity transactions265
 527
 441
Net cash provided by (used for) financing activities89,327
 38,337
 (11,572)
Net increase (decrease) in cash49,514
 24
 (3,328)
Cash at beginning of year6,716
 6,692
 10,020
Cash at end of year$56,230
 $6,716
 $6,692

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


(21) Quarterly Results of Operations (Unaudited)

The following is a condensed summary of quarterly results of operations for the fiscal years ended September 30, 2013 and 2012:
 
First
quarter
 
Second
quarter
 
Third
quarter
 
Fourth
quarter
Year Ended September 30, 2013:       
Interest and dividend income$33,145
 $32,420
 $32,593
 $33,903
Interest expense5,222
 4,601
 4,276
 5,795
Net interest income27,923
 27,819
 28,317
 28,108
Provision for loan losses2,950
 2,600
 3,900
 2,700
Non-interest income7,659
 6,852
 6,581
 6,600
Non-interest expense22,546
 23,339
 21,789
 23,367
Income before income tax10,086
 8,732
 9,209
 8,641
Income tax expense3,066
 2,203
 2,833
 3,312
Net income$7,020
 $6,529
 $6,376
 $5,329
Earnings per common share:       
Basic$0.16
 $0.15
 $0.15
 $0.12
Diluted0.16
 0.15
 0.15
 0.12
Year Ended September 30, 2012:       
Interest and dividend income$28,168
 $28,411
 $28,345
 $30,113
Interest expense4,930
 4,506
 4,263
 4,874
Net interest income23,238
 23,905
 24,082
 25,239
Provision for loan losses1,950
 2,850
 2,312
 3,500
Non-interest income7,176
 7,971
 7,979
 9,026
Non-interest expense20,721
 21,290
 21,162
 28,784
Income before income tax7,743
 7,736
 8,587
 1,981
Income tax expense (benefit)2,026
 2,035
 2,378
 (280)
Net income$5,717
 $5,701
 $6,209
 $2,261
Earnings per common share:       
Basic$0.15
 $0.15
 $0.17
 $0.06
Diluted0.15
 0.15
 0.17
 0.06

(22) Subsequent Events (Unaudited)

On October 31, 2013, Provident New York Bancorp completed its acquisition of Sterling Bancorp (“Legacy Sterling”) through the merger of Legacy Sterling into Provident New York Bancorp. Provident New York Bancorp was the accounting acquirer and the surviving entity. Provident New York Bancorp changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended. Sterling National Bank merged into Provident Bank and Provident Bank changed its legal entity name to Sterling National Bank and converted to a national bank charter. Consistent with our strategy of expanding in the greater New York metropolitan region, we believe the Merger creates a larger, more diversified company that will accelerate the build-out of our differentiated strategy targeting small-to-middle market commercial and consumer clients.

The Merger was a stock-for-stock transaction valued at $457.8 million based on the closing price of Provident New York Bancorp common stock on October 31, 2013. Legacy Sterling shareholders received a fixed ratio of 1.2625 shares of Provident New York Bancorp stock for each of the 30,937,004 shares of Legacy Sterling common stock that were outstanding. The Company’s stockholders authorized an increase in the number of common shares from 75 million to 200 million. The Company issued 39,057,968 shares of common stock in the Merger; post-Merger, total shares outstanding were 83,868,972. Legacy Provident

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)


shareholders own approximately 53% of stock in the combined company and Legacy Sterling shareholders own approximately 47%.

On a pro forma combined basis, for the twelve months ended September 30, 2012, the companies had revenue of $253 million and $33 million in net income. The combined company is expected to have approximately $6.7 billion in total assets.

The Company has engaged an independent third-party to assist management in estimating the fair value of the majority of the assets acquired and liabilities assumed. The Company will file a Current Report on Form 8-K (or an amendment to a prior report) no later than January 15, 2014 that will include historical and pro forma information regarding Legacy Sterling and Sterling required in connection with the Merger.


114

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

A summary of assets and liabilities at September 30, 2009 measured at estimated fair value on a recurring basis were as follows:

  
Fair Value Measurements at September 30, 2009
  Level 1  Level 2  Level 3 
Investment securities available for sale:            
U.S. Treasury and federal agencies $207,776  $207,776  $-  $- 
Obligations of states and political subdivisions  167,584   -   167,584   - 
Government issued or guaranteed mortgage-backed securities  420,104   -   420,104   - 
Privately issued collateralized mortgage obligation  10,411   -   -   10,411 
Corporate debt securities  25,823   -   25,823   - 
Equities  885   -   885   - 
Total investment securities available for sale  832,583   207,776   614,396   10,411 

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending September 30, 2010:

  
Privately issued CMOS
 
Balance at September 30, 2009 $10,411 
Pay downs  (1,946)
(Amortization) and accretion  49 
Change in fair value  380 
Loss recognized on Sale  (186)
Sale  (2,712)
Balance at September 30, 2010 $5,996 

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 not generally recorded at fair value on a recurring basis.

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 com parable 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 $28,717 and $11,857 which equals the carrying value less the allowance for loan losses allocated to these loans at September 30, 2010 and September 30, 2009, respectively.  Loans subject to nonrecurring fair value measurements have been transferred from Level 2 to Level 3 as of September 30, 2010.
ITEM 9.Changes in fair value recognized on provisions on loans held by the Company were $467 and $2,913 for the twelve months ended September 30, 2010 and 2009, respectively.

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per 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 twelve months ended in the fiscal year ended September 30, 2010 was an increase of $332.  A valuation allowance of $54 and $115 was recorded at September 30, 2010 and 2009, 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 $3,891 and $1,712 at September 30, 2010 and 2009, respectively.  Changes in fair value recognized for those foreclos ed assets held by the Company totaled $44 and $186 at September 30, 2010 and 2009, respectively.

A summary of assets and liabilities at September 30, 2010 measured at estimated fair value on a non -recurring 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 

A summary of assets and liabilities at September 30, 2009 measured at estimated fair value on a non -recurring basis were as follows:

  
Fair Value Measurements at September 30, 2009
  Level 1  Level 2  Level 3 
             
Impaired loans with specific allowance allocations $11,857  $-  $11,857  $- 
Mortgage servicing rights  840   -   -   840 
                 
Total $840  $-  $-  $840 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(19) 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 discou nt 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):

             
  September 30,  September 30, 
  2010  2009 
  
Carrying amount
  
Estimated fair value
  
Carrying amount
  
Estimated fair value
 
Financial assets:            
Cash and due from banks $90,872  $90,872  $160,408  $160,408 
Securities available for sale  901,012   901,012   832,583   832,583 
Securities held to maturity  33,848   35,062   44,614   45,739 
Loans  1,670,698   1,680,939   1,673,207   1,674,490 
Loans held for sale  5,890   5,934   1,213   1,242 
Accrued interest receivable  11,069   11,069   10,472   10,472 
FHLB of New York stock  19,572   19,572   23,177   23,177 
Financial liabilities:                
Non-maturity deposits  (1,765,129)  (1,765,129)  (1,587,321)  (1,587,321)
Certificates of Deposit  (377,573)  (380,744)  (494,961)  (498,105)
FHLB and other borrowings  (415,247)  (473,785)  (482,122)  (524,187)
Mortgage escrow funds  (8,198)  (8,198)  (8,405)  (8,405)
Accrued interest payable  (2,307)  (2,307)  (3,246)  (3,246)

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
(Dollars in thousands, except per 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 experienc e 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 described in Note 15 (“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 September 30, 2010 and September 30, 2009, 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
(Dollars in thousands, except per share data)

(20) Recently Issued Accounting Standards Not Yet Adopted

Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)-Accounting for Transfers of Financial Assets has been issued.  ASU 2009-16 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets.  This standard is effective for the Company October 1, 2010 and is not expected to have a material effect on the Company’s consolidated financial statements.

ASC 2009-17, Consolidations (Topic 810)-Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities has been issued. ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This standard is effective for the Company October 1, 2010 and is not expected to have a material effect on the Company’s consolidated financial statements.

ASC 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements has been issued.  ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. This standard is generally effective for the Company October 1, 2010 and is not expected to have a material effect on the Company’s consolidated financial statements.

ASU 2010-20, Receivables (Topic 310)-Disclosures abut the Credit Quality of Financing Receivables and the Allowance for Credit Losses will require significantly more information about credit quality in a financial institution’s portfolio.  This statement addresses only disclosures and does not seek to change recognition or measurement.  This standard is effective for the Company October 1, 2010 and is not expected to have a material effect on the Company’s consolidated financial statements.
See Note 1 for a discussion of adoption of new accounting standards.

(21) Condensed Parent Company Financial Statements

Set forth below are the condensed statements of financial condition of Provident New York Bancorp and the related condensed statements of income and cash flows:

Condensed Statements of Financial Condition September 30, 
  2010  2009 
Assets:      
Cash $10,020  $2,466 
Loan receivable from ESOP  7,762   8,170 
Securities available for sale at fair value  790   790 
Investment in Provident Bank  404,755   409,588 
Non-bank subsidiaries  8,702   7,218 
Other assets  365   690 
Total assets $432,394  $428,922 
         
Liabilities $1,439  $1,466 
Stockholders’ equity  430,955   427,456 
         
Total liabilities & stockholders' equity $432,394  $428,922 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

  Year ended September 30, 
  2010  2009  2008 
Condensed Statements of Income         
Interest income $326  $358  $473 
Dividend income on equity securities  28   28   27 
Dividends from Provident Bank  29,400   10,500   19,000 
Dividends from non-bank subsidiaries  400   607   650 
Non-interest expense  (2,262)  (3,372)  (3,807)
Income tax benefit  321   797   962 
Income before equity in undistributed earnings of subsidiaries  28,213   8,918   17,305 
Equity in undistributed (excess distributed) earnings of:            
Provident Bank  (8,257)  17,076   6,644 
Non-bank subsidiaries  536   (133)  (171)
Net income $20,492  $25,861  $23,778 


  Year ended September 30, 
  2010  2009  2008 
Condensed Statements of Cash Flows         
Cash flows from operating activities:         
Net income $20,492  $25,861  $23,778 
Adjustments to reconcile net income to net cash provided by operating activities:            
Equity in (undistributed) excess distributed earnings of Provident Bank  8,257   (17,076)  (6,644)
Non-bank subsidiaries  (536)  133   171 
Other adjustments, net  (1,077)  (475)  760 
Net cash provided by operating activites  27,136   8,443   18,065 
Cash flows from investing activities:            
Purchase of equity securities, available for sale  —   —   (1,041)
ESOP loan principal repayments  408   392   754 
Net cash provided by (used in) investing activities  408   392   (287)
Cash flows from financing activities:            
Capital contribution to subsidiaries  (350)  —   — 
Treasury shares purchased  (13,062)  (3,785)  (20,230)
Cash dividends paid  (9,216)  (9,379)  (9,525)
Stock option transactions including RRP  2,196   3,055   4,001 
Other equity transactions  442   488   1,382 
Net cash used in financing activities  (19,990)  (9,621)  (24,372)
Net increase (decrease)  in cash  7,554   (786)  (6,594)
Cash at beginning of year  2,466   3,252   9,846 
Cash at end of year $10,020  $2,466  $3,252 


PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

(22) Quarterly Results of Operations (Unaudited)

The following is a condensed summary of quarterly results of operations for the years ended September 30, 2010 and 2009:

  
First quarter
  
Second quarter
  
Third quarter
  
Fourth quarter
 
Year ended September 30, 2010            
Interest and dividend income $30,418  $29,627  $30,408  $29,321 
Interest expense  7,532   6,693   6,210   6,005 
Net interest income  22,886   22,934   24,198   23,316 
Provision for loan losses  2,500   2,500   2,750   2,250 
Non-interest income  8,093   6,113   5,281   7,714 
Non-interest expense  19,894   21,173   20,741   21,362 
Income before income tax expense  8,585   5,374   5,988   7,418 
Income tax expense  2,419   1,207   1,232   2,015 
Net income $6,166  $4,167  $4,756  $5,403 
Earnings per common share:                
Basic $0.16  $0.11  $0.12  $0.14 
Diluted $0.16  $0.11  $0.12  $0.14 
Year ended September 30, 2009                
Interest and dividend income $35,871  $33,586  $31,651  $30,482 
Interest expense  10,825   9,951   8,925   8,019 
Net interest income  25,046   23,635   22,726   22,463 
Provision for loan losses  2,500   7,100   3,500   4,500 
Non-interest income  5,771   11,123   15,255   7,804 
Non-interest expense  19,235   20,076   21,517   19,359 
Income before income tax expense  9,082   7,582   12,964   6,408 
Income tax expense  2,791   2,038   4,014   1,332 
Net income $6,291  $5,544  $8,950  $5,076 
Earnings per common share:                
Basic $0.16  $0.14  $0.23  $0.13 
Diluted $0.16  $0.14  $0.23  $0.13 


ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

Not Applicable.
ITEM 9A.Controls and Procedures.

Evaluation of Disclosure
Controls and Procedures

As of September 30, 2010, under the supervision and with the participation of Provident New York Bancorp’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on the evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in Provident New York
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2013, under the supervision and with the participation of Sterling Bancorp’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be recorded, processed, summarized and reported in Sterling Bancorp’s periodic SEC reports.  There were no changes in the Company’s internal controls over financial reporting during the fourth fiscal quarter of 2010 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting (see “Report of Management on Internal Control Over Financial Reporting”)

Provident New York Bancorp’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of the management of Provident New York Bancorp’s, including Provident New York Bancorp’s CEO and CFO, Provident New York Bancorp conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2010 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which is also referred to as COSO.  Based on that evaluation, management of Provident New York Bancorp concluded that the Company&# 8217;s internal control over financial reporting was effective as of September 30, 2010.  Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

The effectiveness of the Company’s internal control over financial reporting as of September 30, 2010 has been audited by Crowe Horwath LLP, as stated in their report which is included elsewhere herein.

ITEM 9B.Other Information

Not applicable.

Changes in Internal Control Over Financial Reporting
As of September 30, 2012, management’s assessment of the Company’s internal control over financial reporting identified two material weaknesses in internal control over financial reporting related to the provision for income taxes and to ensuring pension accounting matters were properly recorded and presented in the Consolidated Financial Statements. To remediate these weaknesses, during fiscal year 2013, made changes to senior accounting personnel, implemented systematic process and procedures to enable the Company to maintain effective internal controls over the provision for income taxes and deferred taxes and enhanced its internal controls over financial reporting related to pension accounting.

Except as disclosed herein, there were no changes in the Company’s internal control over financial reporting during the year ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(b) Management's Annual Report on Internal Control Over Financial Reporting
The management of Sterling Bancorp (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s system of internal controls is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.
All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the Company’s internal control over financial reporting as of September 30, 2013. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September 30, 2013, the Company’s internal control over financial reporting is effective.

The effectiveness of the Company’s internal control over financial reporting as of September 30, 2013 has been audited by Crowe Horwath LLP, as stated in their report which is included elsewhere herein.

ITEM 9B.Other Information
Not applicable.

115

PART III

ITEM 10.Directors, Executive Officers, and Corporate Governance
ITEM 10.  Directors, Executive Officers, and Corporate Governance

The “Proposal“Proposal I — Election of Directors” sectionand “Section 16(a) Beneficial Ownership Reporting Compliance” sections of Provident New YorkSterling Bancorp’s Proxy Statement for the Annual Meeting of Stockholders to be held in February 20112014 (the “Proxy Statement”) is incorporated herein by reference.

ITEM 11.Executive Compensation
ITEM 11.Executive Compensation

The “Proposal“Proposal I — Election of Directors” section of the Proxy Statement is incorporated herein by reference.

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
113

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Provident New YorkSterling Bancorp does not have any equity compensation programs that were not approved by stockholders, other than its employee stock ownership plan.

Set forth below is certain information as of September 30, 2010,2013, regarding equity compensation that has been approved by stockholders.
Equity compensation plans
approved by stockholders
Number of securities
to be issued upon
exercise of outstanding
options and rights
 
Weighted average
Exercise  price (1)
 
Number of securities
remaining available
for issuance under plan
Stock Option Plans2,114,509
 $10.71
 2,066,184

Equity compensation plans approved by stockholders Number of securities to be issued upon exercise of outstanding options and rights  Weighted average Exercise price  Number of securities remaining available for issuance under plan 
Stock Option Plans  1,922,844  $12.47   93,257 
Recognition and Retention Plan (1)  6,250   N/A   49,620 
Total  (2)  1,929,094  $12.47   142,877 
(1)
Represents shares that have been granted but have not yet vested.
(2)(1)Weighted average exercise price represents Stock Option PlanPlans only, since RRPrestricted shares have no exercise price.

The “Proposal I — Election of Directors” section of the Proxy Statement is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions and Director Independence

ITEM 13.Certain Relationships and Related Transactions and Director Independence
The “Transactions with Certain Related Persons” section of the Proxy Statement is incorporated herein by reference.
ITEM 14.Principal Accountant Fees and Services

ITEM 14. Principal Accountant Fees and Services

TheProposal III - Ratification of appointment of “Independent Registered Public Accounting Firm” section of the proxy statement is incorporated herein by reference.

116

PART IV

ITEM 15.Exhibits and Financial Statement Schedules

(1) Financial Statements

ITEM 15.Exhibits and Financial Statement Schedules
(1)Financial Statements
The financial statements filed in Item 8 of this Form 10-K are as follows:

(A)Report of Independent Registered Public Accounting Firm on Financial Statements
(B)Consolidated Statements of Financial ConditionBalance Sheets as of September 30, 20102013 and 20092012
(C)Consolidated Statements of Income for the years ended September 30, 2010, 20092013, 2012 and 20082011
(D)Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2010, 20092013, 2012 and 20082011
(E)Consolidated Statements of Cash Flows for the years ended September 30, 2010, 20092013, 2012 and 20082011
(F)Notes to Consolidated Financial Statements

(G)Financial Statement Schedules
114

(2)    Financial Statement Schedules

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(3)Exhibits

(3) Exhibits

3.1
Certificate of Incorporation of Provident New York Bancorpthe Company, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 1,
2013).
3.2
Bylaws of Provident New York Bancorp,the Company, as amended2
(incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on November 1, 2013).
4.1Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on November 1, 2013).
4.2Form of Corporate Governance Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on August 7, 2012).
4.3Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, no instrument which defines the holders of long-term debt of the Company or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the Company hereby agrees to furnish a copy of any such instrument to the Commission upon request.
10.1Employment Agreement, dated as of June 20, 2011, with Jack L. Kopnisky (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 21, 2011).*
10.2
Form of Amendment to Employment Agreement, dated as of November 26, 2012, with George Strayton3*
Jack L. Kopnisky (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on November 26, 2012).*
10.3
Amendment No. 2 to Employment Agreement, dated as of April 3, 2013, with Daniel Rothstein4*
Jack L. Kopnisky (incorporated by reference to Exhibit 10.1 of the Company’s Amendment No. 1 to Current Report on Form 8-K filed on April 9, 2013).*
10.4
Deferred CompensationEmployment Agreement, dated as amended and restated5*
of November 1, 2013, with Luis Massiani (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 4, 2013).*
10.5Form of Employment Agreement, dated as of November 22, 2011, with Rodney Whitwell (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K filed on December 14, 2012).*
10.6Form of Reinstated Employment Agreement, dated as of November 26, 2012, with Rodney Whitwell (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on November 27, 2012).*
10.7Employment Agreement, dated as of November 1, 2013, with David S. Bagatelle (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 4, 2013).*
10.8Employment Agreement, dated as of November 1, 2013, with James R. Peoples (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on November 4, 2013).*
10.9Services and Covenant Agreement, dated as of April 3, 2013, by and between the Company and Louis J. Cappelli (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2013).*
10.10Services and Covenant Agreement, dated as of April 3, 2013, by and between the Company and John C. Millman (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 1, 2013).*
10.11[Form[s] of Employment Agreement between Legacy Sterling and former Legacy Sterling executives who are now executives of the Company]

117

10.12Employment Agreement, dated as of July 1, 2012, with Daniel Rothstein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 2, 2012).
10.13Retention Award Letter, dated as of May 13, 2013, with Daniel G. Rothstein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 14, 2013).*
10.14Employment Agreement, dated as of January 9, 2012, with Stephen V. Masterson (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 10, 2012).*
10.15Form of Separation Agreement, dated as of November 21, 2012, with Stephen V. Masterson (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 27, 2012).*
10.16Provident Bank Amended and Restated 1995 Supplemental Executive Retirement Plan6* (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 0-25233)).*
10.5.110.17
Provident Bank 2005 Supplemental Executive Retirement Plan7*
(incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 0-25233)).*
10.610.18
Executive Officer Incentive Program8*
10.7
1996 Long-Term Incentive Plan for Officers and Directors, as amended9*
10.8
Provident Bank 2000 Stock Option Plan10*
(incorporated by reference to Appendix A to the Company’s Proxy Statement filed on January 18, 2000 (File No. 0-25233)).*
10.910.19
Provident Bank 2000 Recognition and Retention Plan11*
10.10
Employment Agreement with Paul A. Maisch12*
10.11
Provident Bancorp, Inc. 2004 Stock Incentive Plan13*(incorporated by reference to Appendix A to the Company’s Proxy Statement filed on January 19, 2005 (File No. 0-25233)).*
10.1210.20Form of Stock Option Agreement, dated as of July 6, 2011, between the Company and Jack L. Kopnisky (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2011).*
10.21Form of Restricted Stock Award Notice, dated as of July 6, 2011, between the Company and Jack L. Kopnisky (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2011)).*
10.22Form of Performance-Based Restricted Stock Award Notice, dated as of July 6, 2011, between the Company and Jack L. Kopnisky (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2011).*
10.23Provident Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 1, 2011).*
10.24
Provident Bank Executive OfficerNew York Bancorp 2012 Stock Incentive Plan14*(incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders, filed on January 6, 2012).*
10.1310.25
Employment Agreement with Stephen DormerAmendment to the Provident New York Bancorp 2012 Stock Incentive Plan 15*(incorporated by reference to Annex H to the Company’s Joint Proxy Statement / Prospectus filed on August 14, 2013).*
10.1410.26
Employment Agreement with Richard Jones16*
Sterling Bancorp Stock Incentive Plan (incorporated by reference to Exhibit 10 to Legacy Sterling’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-05273)).*
21
10.27
Form of Sterling Bancorp 2013 Employment Inducement Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Post Effective Amendment on Form S-8 to Form S-4 filed on November 1, 2013.*
10.28Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 1, 2013).*
21Subsidiaries of Registrant (filed(filed herewith)
23
Consent of Crowe Horwath LLP (filed(filed herewith)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed(filed herewith)
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed(filed herewith)
32
Certification Pursuant to 18 U.S.C. Section 1350, as amended by Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
101.INSXBRL Instance Document (filed herewith)
101.SCHXBRL Taxonomy Extension Schema Document (filed herewith)
101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith)

118

101.PREXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
101.DEFXBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
*Indicates management contract or compensatory plan or arrangement.

1
Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (File No. 333-108795), originally filed with the Commission on September 15, 2003.

2Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K  (File No. 0-25233), filed with the Commission on November 3, 2010.

3Incorporated by reference to Exhibit 10.2 of the 2008 10-K (File No, 0-25233), files with the Commission on December 15, 2008.
4Incorporated by reference to Exhibit 10.3 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.
5Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No 333-63593) filed with the Commission on September 17, 1998.
6Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008
7Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008
8Incorporated by reference to Exhibit 10.6 of the 2007 10-K (File No. 0-25233), filed with the Commission on December 13, 2007.
9Incorporated by reference to Exhibit 10.7 of Amendment No. 1 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No. 333-63593), filed with the Commission on September 17, 1998.
10Incorporated by reference to Appendix A of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.
11Incorporated by reference to Appendix B of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.


119
115

12Incorporated by reference to Exhibit 10.10 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.
13Incorporated by reference to Appendix A to the Proxy Statement for the 2005 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 19, 2005.
14Incorporated by reference to Exhibit 10 to the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on December 5, 2005.
15Incorporated by reference to Exhibit 10.13 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.
16Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on February 6, 2009.

* Indicates management contract or compensatory plan or arrangement.


SIGNATURES

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

Provident New YorkSterling Bancorp

Date:December13, 2010December 9, 2013By:/s/ George StraytonJack L. Kopnisky
   George StraytonJack L. Kopnisky
   President, Chief Executive Officer and Director
(Principal (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:/s/ George StraytonJack L. Kopnisky By:/s/ Paul A. MaischLuis Massiani
 George StraytonJack L. Kopnisky  Paul A. MaischLuis Massiani
 President, Chief Executive Officer and  Executive Vice President
 Director  Chief Financial Officer
 Principal Executive Officer  Principal AccountingFinancial Officer
Date:December 13, 20109, 2013  Principal FinancialAccounting Officer
   Date:December 13, 20109, 2013

By:/s/ William F. HelmerBy:/s/ Dennis L. Coyle
William F. HelmerLouis J. Cappelli  Dennis L. Coyle
Louis J. Cappelli
 Chairman of the Board of Directors  Vice Chairman
Date:December 13, 2010Date:December 13, 2010

By:/s/ Navy DjonovicBy:/s/ Judith HershaftBy:
/s/ Thomas F. Jauntig, Jr.
Navy Djonovic9, 2013  Judith Hershaft
Thomas F. Jauntig, Jr.
 DirectorDirectorDirector
Date:December 13, 2010Date:December 13, 2010Date:December 13, 2010
        
By:/s/ Thomas G. KahnRobert Abrams By:/s/ R. Michael KennedyJames F. Deutsch By:/s/ Victoria KossoverNavy E. Djonovic
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Date:December 13, 20109, 2013 Date:December 13, 20109, 2013 Date:December 13, 20109, 2013
        
By:/s/ Burt SteinbergJames B. KleinBy:/s/ Robert W. LazarBy:/s/ John C. Millman
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