Sterling Bancorp (STL) 10-Q 2011 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

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

 SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to __________

Commission File Number: 0-25233

PROVIDENT NEW YORK BANCORP

(Exact Name of Registrant as Specified in its Charter)

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

400 Rella Boulevard, Montebello, New York	10901
(Address of Principal Executive Office)	(Zip Code)

(845) 369-8040

(Registrant’s Telephone Number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

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

Yes o  No o

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

Large Accelerated Filer o Accelerated Filer 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 o  No x

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

Classes of Common Stock	Shares Outstanding as of May 2, 2011
$0.01 per share	38,035,034

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
QUARTERLY PERIOD ENDED MARCH 31, 2011
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition (unaudited) at March 31, 2011 and September 30, 2010	3
	Consolidated Statements of Income (unaudited) for the Three Months and Six Months Ended March 31, 2011 and March 31, 2010	4
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Six Months Ended March 31, 2011	5
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended March 31, 2011 and 2010	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months and Six Months Ended March 31, 2011 and 2010	8
	Notes to Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	42
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1.A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	(Removed and reserved).	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

(In thousands, except share data)

	March 31,			September 30,
	2011			2010
ASSETS
Cash and due from banks	$	72,670		$	90,872
Securities (note 6) (including $608,279 and $719,172 pledged as collateral for borrowings and deposits at March 31, 2011 and September 30, 2010 respectively)
Available for Sale		833,179			901,012
Held to maturity, at amortized cost (fair value of $29,203 and $35,062 at March 31, 2011 and September 30, 2010, respectively)		28,054			33,848
Total securities		861,233			934,860
Loans held for sale		—			5,890
Loans (notes 3 and 4):
Gross loans		1,684,827			1,701,541
Allowance for loan losses		(30,130	)		(30,843	)
Total loans, net		1,654,697			1,670,698
Federal Home Loan Bank (“FHLB”) stock, at cost		18,179			19,572
Accrued interest receivable		11,345			11,069
Premises and equipment, net		42,830			43,598
Goodwill		160,861			160,861
Core deposit and other intangible assets		2,857			3,640
Bank owned life insurance		51,985			50,938
Other assets		42,634			29,027
Total assets	$	2,919,291		$	3,021,025
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits (note 7)	$	2,089,904		$	2,142,702
FHLB borrowings (including repurchase agreements of $211,159 and $222,500 at March 31, 2011 and September 30, 2010, respectively) (note 8)		327,943			363,751
Borrowings senior unsecured note (FDIC insured) (note 8)		51,498			51,496
Mortgage escrow funds		14,286			8,198
Other liabilities		15,391			23,923
Total liabilities		2,499,022			2,590,070
Commitments and contingent liabilities (note 13)		—			—
STOCKHOLDERS’ EQUITY:
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)					—
Common stock (par value $0.01 per share; 75,000,000 shares authorized; 45,929,552 issued; 38,072,942 and 38,262,288 shares outstanding at March 31, 2011 and September 30, 2010, respectively)		459			459
Additional paid-in capital		357,075			356,912
Unallocated common stock held by employee stock ownership plan (“ESOP”)		(6,387	)		(6,637	)
Treasury stock, at cost (7,856,610 and 7,667,264 shares at March 31, 2011 and September 30, 2010, respectively)		(89,090	)		(87,336	)
Retained earnings		168,300			162,433
Accumulated other comprehensive income (loss), net of taxes		(10,088	)		5,124
Total stockholders’ equity		420,269			430,955
Total liabilities and stockholders’ equity	$	2,919,291		$	3,021,025

See accompanying notes to unaudited consolidated financial statements

3

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollars in thousands, except share data)

	For the Three Months						For the Six Months
	Ended March 31,						Ended March 31,
	2011			2010			2011		2010
Interest and dividend income:
Loans	$	22,039		$	22,655		$	45,244	$	46,055
Taxable securities		3,531			4,724			7,061		9,476
Non-taxable securities		1,901			1,901			3,826		3,796
Other earning assets		332			347			732		718
Total interest and dividend income		27,803			29,627			56,863		60,045
Interest expense:
Deposits		1,585			2,201			3,227		4,991
Borrowings		3,707			4,492			7,941		9,234
Total interest expense		5,292			6,693			11,168		14,225
Net interest income		22,511			22,934			45,695		45,820
Provision for loan losses (note 4)		2,100			2,500			4,200		5,000
Net interest income after provision for loan losses		20,411			20,434			41,495		40,820
Non-interest income:
Deposit fees and service charges		2,643			2,744			5,410		5,737
Net gain on sale of securities		748			1,884			4,950		4,272
Title insurance fees		274			237			637		548
Bank owned life insurance		553			496			1,047		1,050
Net gain on sale of loans		310			117			852		400
Investment management fees		789			776			1,532		1,555
Fair value (loss) gain on interest rate cap		(2	)		(616	)		232		(236	)
Other		480			475			1,018		880
Total non-interest income		5,795			6,113			15,678		14,206
Non-interest expense:
Compensation and employee benefits (note 12)		11,183			10,824			22,411		21,088
Retirement benefit settlement charge		278			—			278		—
Stock-based compensation plans		296			581			575		1,033
Occupancy and office operations		3,757			3,537			7,392		6,863
Advertising and promotion		843			794			1,796		1,536
Professional fees		1,043			914			2,105		1,748
Data and check processing		691			577			1,333		1,127
Amortization of intangible assets		371			472			783		965
FDIC insurance and regulatory assessments		919			931			1,687		1,715
ATM/debit card expense		366			536			759		1,090
Other		2,044			2,007			3,941		3,902
Total non-interest expense		21,791			21,173			43,060		41,067
Income before income tax expense		4,415			5,374			14,113		13,959
Income tax expense		842			1,207			3,820		3,626
Net Income	$	3,573		$	4,167		$	10,293	$	10,333
Weighted average common shares:
Basic		37,496,395			38,188,191			37,524,627		38,384,180
Diluted		37,497,467			38,209,766			37,524,950		38,430,506
Earnings per common share (note 10)
Basic	$	0.10		$	0.11		$	0.27	$	0.27
Diluted	$	0.10		$	0.11		$	0.27	$	0.27

See accompanying notes to unaudited consolidated financial statements

4

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(In thousands, except share data)

																		Accumulated
	Number					Additional			Unallocated									Other			Total
	of			Common		Paid-In			ESOP			Treasury			Retained			Comprehensive			Stockholders’
	Shares			Stock		Capital			Shares			Stock			Earnings			Income (loss)			Equity
Balance at September 30, 2010		38,262,288		$	459	$	356,912		$	(6,637	)	$	(87,336	)	$	162,433		$	5,124		$	430,955
Net income		—			—		—			—			—			10,293			—			10,293
Other comprehensive loss		—			—		—			—			—			—			(15,212	)		(15,212	)
Total comprehensive loss																						(4,919	)
Deferred compensation transactions		—			—		19			—			—			—			—			19
Stock option transactions, net		—			—		278			—			—			—			—			278
ESOP shares allocated or committed to be released for allocation (24,966 shares)		—			—		(10	)		250			—			—			—			240
RRP Awards		19,000			—		(187	)		—			187			—			—			—
Vesting of RRP Awards		—			—		63			—			—			—			—			63
Purchase of treasury shares		(208,346	)		—		—			—			(1,941	)		—			—			(1,941	)
Cash dividends paid ($0.12 per common share)		—			—		—			—			—			(4,426	)		—			(4,426	)
Balance at March 31, 2011		38,072,942		$	459	$	357,075		$	(6,387	)	$	(89,090	)	$	168,300		$	(10,088	)	$	420,269

See accompanying notes to unaudited consolidated financial statements

5

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)

	For the Six Months
	Ended March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	10,293		$	10,333
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		4,200			5,000
Write down of other real estate owned		100			7
Depreciation and amortization of premises and equipment		2,860			2,532
Amortization of intangibles		783			965
Net gain on sales of loans held for sale		(852	)		(400	)
Net realized gain on sale of securities available for sale		(4,950	)		(4,272	)
Fair value (income) loss on interest rate cap		(232	)		236
Loss on sales of fixed assets		—			54
Net amortization of premium on securities		4,714			2,108
Amortization of premiums on borrowings		(32	)		(165	)
Amortization of prepaid penalties on borrowings		338			—
ESOP and RRP expense		302			1,032
ESOP forfeitures		(3	)		(2	)
Retirement benefit settlement expense		278			—
Stock option compensation expense		278			4
Originations of loans held for sale		(37,819	)		(23,934	)
Proceeds from sales of loans held for sale		44,561			22,581
Increase in cash surrender value of bank owned life insurance		(1,047	)		(334	)
Deferred income tax expense		(1,225	)		(7,261	)
Net changes in accrued interest receivable and payable		(726	)		(1,241	)
Other adjustments (principally net changes in other assets and other liabilities)		(8,692	)		(2,666	)
Net cash provided by operating activities		13,129			4,577
Cash flows from investing activities
Purchases of available for sale securities		(357,238	)		(425,529	)
Purchases of held to maturity securities		(8,005	)		(15,619	)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale		131,361			130,954
Held to maturity		10,844			16,547
Proceeds from sales of securities available for sale and held to maturity		270,351			231,019
Loan originations		(261,632	)		(197,708	)
Loan principal payments		272,853			229,331
Purchase of interest rate derivative		—			(1,368	)
Purchase of FHLB stock		(23,239	)		(17,281	)
Redemption of FHLB stock		24,632			17,693
Purchases of premises and equipment		(2,092	)		(4,388	)
Proceeds from the sale of premises		—			48
Net cash (used) / provided by investing activities		57,835			(36,301	)

(Continued)

6

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share data)

	For the Six Months
	Ended March 31,
	2011			2010
Cash flows from financing activities:
Net decrease in transaction, savings and money market deposits	$	(23,967	)	$	(62,116	)
Net decrease in time deposits		(28,831	)		(13,213	)
Net decrease in short-term borrowings		(62,340	)		(7,100	)
Gross repayments of long-term borrowings		(57,756	)		(2,056	)
Restructured debt		89,135			—
Payment of penalties on restructured borrowings		(5,151	)		—
Net increase in mortgage escrow funds		6,088			5,000
Treasury shares purchased		(1,941	)		(7,694	)
Stock option transactions		4			850
Other stock-based compensation transactions		19			42
Cash dividends paid		(4,426	)		(4,566	)
Net cash used in financing activities		(89,166	)		(90,853	)
Net decrease in cash and cash equivalents		(18,202	)		(122,577	)
Cash and cash equivalents at beginning of period		90,872			160,408
Cash and cash equivalents at end of period	$	72,670		$	37,831
Supplemental information:
Interest payments	$	11,618		$	15,899
Income tax payments		6,850			4,810
Net change in net unrealized losses recorded on securities available for sale		(26,550	)		(9,320	)
Change in deferred taxes on net unrealized losses on securities available for sale		10,782			3,783
Real estate acquired in settlement of loans		580			143

See accompanying notes to unaudited consolidated financial statements

7

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(In thousands, except share data)

	For the Three Months					For the Six Months
	Ended March 31,					Ended March 31,
	2011			2010		2011			2010
Net Income:	$	3,573		$	4,167	$	10,293		$	10,333
Other Comprehensive income (loss):
Net unrealized holding gains (losses) on securities available for sale net of related tax expense (benefit) of $158, $1,878, $(8,772) and $(2,050)		229			2,744		(12,828	)		(2,998	)
Less:
Reclassification adjustment for net unrealized gains included in net income, net of related income tax expense of $304, $763, $2,010 and $1,733		444			1,121		2,940			2,539
		(215	)		1,623		(15,768	)		(5,537	)
Change in funded status of defined benefit plans, net of related income tax expense of $306, $147, $380 and $301		449			230		556			454
		234			1,853		(15,212	)		(5,083	)
Total Comprehensive income (loss)	$	3,807		$	6,020	$	(4,919	)	$	5,250

See accompanying notes to unaudited consolidated financial statements.

8

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

1. Basis of Presentation

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

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

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

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

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

2. Recent  Accounting Standards, Not Yet Adopted

Accounting Standards Update (ASU)2011-02, Receivables (Topic 310)-A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring has been issued.  The ASU clarifies which loan modifications constitute troubled debt restructurings and assists creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.  This standard is effective for the Company July 1, 2011 and is not expected to have a material effect on the Company’s consolidated financial statements.

3. Loans

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

	March 31, 2011		September 30, 2010
Real estate - residential mortgage	$	411,014	$	434,900
Real estate - commercial mortgage		635,639		579,232
Acquisition, development & construction loans		205,293		231,258
Commercial business loans		205,490		217,927
Consumer loans, including home equity loans		227,391		238,224
Total	$	1,684,827	$	1,701,541

9

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

4. Allowance for Loan Losses and Non-Performing Assets

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

	Three Months Ended March 31, 2011
	1- 4 Family Residential			Commercial Real Estate			Commercial Business			Acquisition Development & Construction			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	2,814		$	6,284		$	9,216		$	8,981		$	3,741		$	31,036
Charge-offs		(287	)		(659	)		(1,921	)		(125	)		(159	)		(3,151	)
Recoveries		1			—			98			—			46			145
Net Charge-offs		(286	)		(659	)		(1,823	)		(125	)		(113	)		(3,006	)
Provision for loan losses		1,011			651			745			(128	)		(179	)		2,100
Ending Balance	$	3,539		$	6,276		$	8,138		$	8,728		$	3,449		$	30,130
Net charge-offs to average loans outstanding (annualized)																	0.71	%

	Six Months Ended March 31, 2011
	1- 4 Family Residential			Commercial Real Estate			Commercial Business			Acquisition Development & Construction			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	2,587		$	5,913		$	8,677		$	10,231		$	3,435		$	30,843
Charge-offs		(440	)		(876	)		(3,280	)		(125	)		(665	)		(5,386	)
Recoveries		1			—			389			7			76			473
Net Charge-offs		(439	)		(876	)		(2,891	)		(118	)		(589	)		(4,913	)
Provision for loan losses		1,391			1,239			2,352			(1,385	)		603			4,200
Ending Balance		3,539			6,276			8,138			8,728			3,449			30,130
Net charge-offs to average loans outstanding (annualized)																	0.58	%
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,552		$	407		$	461		$	723		$	553		$	3,696
Collectively evaluated for impairment		1,987			5,869			7,677			8,005			2,896			26,434
Total ending allowance	$	3,539		$	6,276		$	8,138		$	8,728		$	3,449		$	30,130
Loans:
Loans as of March 31, 2011:
Individually evaluated for impairment	$	10,062		$	11,328		$	1,167		$	31,100		$	1,876		$	55,533
Collectively evaluated for impairment		400,952			624,311			204,323			174,193			225,515			1,629,294
Total ending loans balance	$	411,014		$	635,639		$	205,490		$	205,293		$	227,391		$	1,684,827

10

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

	Three Months Ended March 31, 2010
										Acquisition
	1- 4 Family			Commercial			Commercial			Development
	Residential			Real Estate			Business			& Construction			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	3,016		$	5,999		$	8,083		$	10,276		$	2,593		$	29,967
Charge-offs		(198	)		(30	)		(1,375	)		(250	)		(594	)		(2,447	)
Recoveries		—			1			144			251			28			424
Net Charge-offs		(198	)		(29	)		(1,231	)		1			(566	)		(2,023	)
Provision for loan losses		144			1,067			993			(270	)		566			2,500
Ending Balance	$	2,962		$	7,037		$	7,845		$	10,007		$	2,593		$	30,444
Net charge-offs to average loans outstanding (annualized)																	0.48	%

	Six Months Ended March 31, 2010
										Acquisition
	1- 4 Family			Commercial			Commercial			Development
	Residential			Real Estate			Business			& Construction			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	3,131		$	7,757		$	8,758		$	7,742		$	2,662		$	30,050
Charge-offs		(506	)		(227	)		(3,240	)		(455	)		(796	)		(5,224	)
Recoveries		—			15			287			261			55			618
Net Charge-offs		(506	)		(212	)		(2,953	)		(194	)		(741	)		(4,606	)
Provision for loan losses		337			(508	)		2,040			2,459			672			5,000
Ending Balance		2,962			7,037			7,845			10,007			2,593			30,444
Net charge-offs to average loans outstanding (annualized)																	0.55	%
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	536		$	986		$	356		$	979		$	219		$	3,076
Collectively evaluated for impairment		2,426			6,051			7,489			9,028			2,374			27,368
Total ending allowance	$	2,962		$	7,037		$	7,845		$	10,007		$	2,593		$	30,444

11

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans substantially consist of nonperforming loans and accruing and performing troubled debt restructured loans.  The recorded investment of an impaired loan includes the unpaid principal balance, negative escrow and any tax in arrears.

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011:

					Allowance		YTD				Cash-basis
	Unpaid				for Loan		Average		Interest		Interest
	Principal		Recorded		Losses		Impaired		Income		Income
	Balance		Investment		Allocated		Loans		Recognized		Recognized
With no related allowance recorded:
Real estate - residential mortgage	$	2,790	$	2,984	$	—	$	2,978	$	53	$	4
Real estate - commercial mortgage		6,192		6,429		—		6,347		102		16
Acquisition, development and construction		27,839		28,239		—		35,107		403		501
Commercial business loans		434		434		—		578		1		1
Consumer loans		802		808		—		798		17		—
Subtotal		38,057		38,894		—		45,808		576		522
With an allowance recorded:
Real estate - residential mortgage		6,963		7,078		1,552		7,229		27		17
Real estate - commercial mortgage		4,770		4,899		407		5,005		27		2
Acquisition, development and construction		2,822		2,861		723		2,988		—		—
Commercial business loans		733		733		461		720		—		—
Consumer loans		1,068		1,068		553		1,144		—		—
Subtotal		16,356		16,639		3,696		17,086		54		19
Total	$	54,413	$	55,533	$	3,696	$	62,894	$	630	$	541

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2010:

					Allowance
	Unpaid				for Loan
	Principal		Recorded		Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Real estate - residential mortgage	$	2,896	$	2,930	$	—
Real estate - commercial mortgage		1,658		1,793		—
Acquisition, development and construction		4,732		4,760		—
Commercial business loans		458		458		—
Consumer loans		378		378		—
Subtotal		10,122		10,319		—
With an allowance recorded:
Real estate - residential mortgage		5,682		5,879		800
Real estate - commercial mortgage		6,974		7,203		399
Acquisition, development and construction		15,613		15,652		766
Commercial business loans		1,365		1,365		511
Consumer loans		1,663		1,664		570
Subtotal		31,297		31,763		3,046
Total	$	41,419	$	42,082	$	3,046

12

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Average impaired loans for the six months ended September 30, 2010 were $27,032.  Listed below are the interest income recognized during impairment and cash received for interest during impairment for the six months ending March 31, 2011 and March 31, 2010, respectively.

	March 31,		March 31,
	2011		2010
Interest income recognized during impairment	$	630	$	988
Cash-basis interest income recognized		541		579

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

	March 31, 2011					September 30, 2010
	90 days past due Still accruing		Non- Accrual			90 days past due Still accruing		Non- Accrual
Non-performing loans:
One- to four- family	$	2,536	$	7,106		$	1,953	$	6,080
Commercial real estate		3,984		7,906			2,971		6,886
Commercial business		180		655			—		1,376
Acquisition, development and construction loans		—		12,940			—		5,730
Consumer		712		1,158			503		1,341
Total non-performing loans	$	7,412	$	29,765		$	5,427	$	21,413
Real estate owned:
Land				2,620					2,029
Commercial real estate				2,425					1,507
One- to four-family				306					355
Total real estate owned				5,351					3,891
Total non-performing assets			$	42,528				$	30,731
Troubled Debt Restructurings still accruing and not included above			$	21,954				$	16,047
Ratios:
Non-performing loans to total loans				2.21	%				1.58	%
Non-performing assets to total assets				1.46	%				1.02	%
Allowance for loan losses to total non-performing loans				81	%				115	%
Allowance for loan losses to average loans				1.77	%				1.82	%

13

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Troubled Debt Restructurings:

Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty.  Restructured loans are recorded in accrual status when the loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items. Total troubled debt restructurings were $25,934 and $21,504 at March 31, 2011 and September 30, 2010, respectively.  There were $3,980 and $5,457 in troubled debt restructurings included in non- performing loans at March 31, 2011 and September 30, 2010, respectively.  Troubled debt restructurings still accruing and considered to be performing were $21,954 and $16,047 at March 31, 2011 and September 30, 2010, respectively.  The Company has allocated $312 and $673 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and September 30, 2010 respectively.

The Company has committed to lend additional amounts totaling up to $4,063 and $3,957 as of March 31, 2011 and September 30, 2010 to customers with outstanding loans that are classified as troubled debt restructurings. The commitments to lend on the restructured debt is contingent on clear title and a third party inspection to verify completion of work and is associated with loans that are considered to be performing.

Credit Quality Indicators:

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  As of March 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of gross loans is as follows:

	Special
	Mention		Substandard		Doubtful
Real estate - residential mortgage	$	3,791	$	10,063	$	—
Real estate - commercial mortgage		10,914		33,439		—
Acquisition, development and construction		6,838		63,880		—
Commercial business loans		4,892		3,912		576
Consumer loans		615		2,057		—
Total	$	27,050	$	113,351	$	576

14

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

The following table is made up of gross loans categorized as pass as of March 31, 2011:

	Current		30 - 59 days		60 - 89 days
	Loans		Delinquent		Delinquent
Real estate - residential mortgage	$	396,853	$	230	$	77
Real estate - commercial mortgage		591,286		—		—
Acquisition, development and construction		134,575		—		—
Commercial business loans		195,711		399		—
Consumer loans		223,331		1,018		370
Total	$	1,541,756	$	1,647	$	447

5. Fair value measurements

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

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

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

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

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

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

Investment securities available for sale

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

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

15

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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 a fair value of $9,534.  As of March 31, 2011, these securities have an amortized cost of $5,850 and a fair value of $5,685.  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 March 31, 2011. These securities have a weighted average coupon rate of 2.96%, a weighted average life of 5.06 years, a weighted average 1 month prepayment history of 10.07 years and a weighted average twelve month default rate of 3.21 CDR.  One of the four securities is below investment grade and has an amortized cost of $2,135 and a fair value of $1,947 at March 31, 2011.  The remaining three securities are rated at or above Aa3.

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 March 31, 2011 measured at estimated fair value on a recurring basis were as follows:

	Fair Value
	Measurements
	at
	March 31,
	2011		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury	$	55,027	$	55,027	$	—	$	—
Federal agencies		369,378	��	—		369,378		—
Obligations of states and political subdivisions		184,712		—		184,712		—
Government issued or guaranteed mortgage-backed securities		187,807		—		187,807		—
Privately issued collateralized mortgage obligation		5,685		—		—		5,685
Corporate debt securities		29,662		—		29,662		—
Equities		908		—		908		—
Total investment securities available for sale		833,179		55,027		772,467		5,685
Other assets 1		550		—		550		—
Total assets	$	833,729	$	55,027	$	773,017	$	5,685
Other liabilities2	$	56	$	—	$	56	$	—
Total Liabilities	$	56	$	—	$	56	$	—
1 Interest rate caps and swaps
2 Swaps

16

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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

	Fair Value
	Measurements
	at
	September 30,
	2010		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury and federal agencies	$	418,312	$	418,312	$	—	$	—
Obligations of states and political subdivisions		191,657		—		191,657		—
Government issued or guaranteed mortgage-backed securities		253,618		—		253,618		—
Privately issued collateralized mortgage obligation		5,996		—		—		5,996
Corporate debt securities		30,540		—		30,540		—
Equities		889		—		889		—
Total investment securities available for sale		901,012		418,312		476,704		5,996
Other assets 1		435		—		435		—
Total assets	$	901,447	$	418,312	$	477,139	$	5,996
Other liabilities2	$	173	$	—	$	173	$	—
Total Liabilities	$	173	$	—	$	173	$	—
1 Interest rate caps and swaps
2 Swaps

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending March 31, 2011:

	Privately
	issued
	CMOS
Balance at September 30, 2009	$	10,411
Pay downs		(1,022	)
(Amortization) and accretion, net		2
Change in fair value		(33	)
Balance at March 31, 2010	$	9,358
Balance at September 30, 2010	$	5,996
Pay downs		(504	)
(Amortization) and accretion, net		(1	)
Change in fair value		194
Balance at March 31, 2011	$	5,685

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:

17

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Loans and Loans Held for Sale

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

The Company may record nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans.  Nonrecurring adjustments also include certain impairment amounts for collateral dependant loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for credit losses.  Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan.  Real estate collateral is valued using independent appraisals or other indications of value based upon recent comparable sales of similar properties or assumptions generally observable by market participants.  Any fair value adjustments for loans categorized here are classified as Level 2.  Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classified as Level 3.  Loans subject to nonrecurring fair value measurements were $12,943 and $28,717 which equals the carrying value less the allowance for loan losses allocated to these loans at March 31, 2011 and September 30, 2010, respectively.  Loans subject to nonrecurring fair value measurements have been transferred from Level 2 to Level 3 as of September 30, 2011.  Changes in fair value recognized on the allowance for loan losses allocated on loans held by the Company were $650 and $(2,535) for six months ended March 31, 2011 and 2010, respectively.

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 six months ended March 31, 2011 was  $390.  There was no valuation allowance recorded at March 31, 2011.  A valuation allowance of $54 was recorded at September 30, 2010,  reflecting 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 $580 and $3,891 at March 31, 2011 and September 30, 2010, respectively. There were $100 and $7 changes in fair value recognized through income for those foreclosed assets held by the Company during the six months ending March 31, 2011 and 2010, respectively.

A summary of assets and liabilities at March 31, 2011 measured at estimated fair value on a nonrecurring basis were as follows:

	Fair Value Measurements at March 31, 2011		Level 1		Level 2		Level 3
Real estate - residential mortgage	$	5,526	$	—	$	—	$	5,526
Real estate - commercial mortgage		4,492		—		—		4,492
Acquisition, development and construction		2,138		—		—		2,138
Commercial business loans		272		—		—		272
Consumer loans		515		—		—		515
Total impaired loans with specific allowance allocations	$	12,943	$	—	$	—	$	12,943

18

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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

	Fair Value
	Measurements
	at
	September 30,
	2010		Level 1		Level 2		Level 3
Impaired loans with specific allowance allocations	$	28,717	$	—	$	—	$	28,717
Mortgage servicing rights		1,172		—		—		1,172
Total		29,889		—		—		29,889

Fair values of financial instruments

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

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

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

	March 31, 2011						September 30, 2010
	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value
Financial assets:
Cash and due from banks	$	72,670		$	72,670		$	90,872		$	90,872
Securities available for sale		833,179			833,179			901,012			901,012
Securities held to maturity		28,054			29,203			33,848			35,062
Loans		1,654,697			1,662,156			1,670,698			1,680,939
Loans held for sale		—			—			5,890			5,934
Accrued interest receivable		11,345			11,345			11,069			11,069
FHLB of New York stock		18,179			18,179			19,572			19,572
Financial liabilities:
Non-maturity deposits		(1,741,162	)		(1,741,162	)		(1,765,129	)		(1,765,129	)
Certificates of Deposit		(348,742	)		(350,660	)		(377,573	)		(380,744	)
FHLB and other borrowings		(379,441	)		(428,083	)		(415,247	)		(473,785	)
Mortgage escrow funds		(14,286	)		(14,284	)		(8,198	)		(8,198	)
Accrued interest payable		(1,857	)		(1,857	)		(2,307	)		(2,307	)

19

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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.

(b) Loans

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

(c) FHLB of New York Stock

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

(d) Deposits and Mortgage Escrow Funds

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

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

(e) Borrowings

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

(f) Other Financial Instruments

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

The fair values of the Company’s off-balance sheet financial instruments were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties.  At March 31, 2011 and September 30, 2010, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.

20

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

6. Securities

The following is a summary of securities available for sale:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
March 31, 2011
Mortgage-backed securities-residential
Fannie Mae	$	81,786	$	695	$	(1,088	)	$	81,393
Freddie Mac		39,226		512		(349	)		39,389
Ginnie Mae		37		3		—			40
CMO/Other MBS		74,869		177		(2,376	)		72,670
		195,918		1,387		(3,813	)		193,492
Investment securities
U.S. Government securities		55,855		—		(828	)		55,027
Federal agencies		374,510		178		(5,310	)		369,378
Corporate bonds		29,256		568		(162	)		29,662
State and municipal securities		181,789		4,088		(1,165	)		184,712
Equities		1,146		—		(238	)		908
		642,556		4,834		(7,703	)		639,687
Total available for sale	$	838,474	$	6,221	$	(11,516	)	$	833,179
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

21

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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

	March 31, 2011
	Amortized		Fair
	Cost		Value
Remaining period to contractual maturity
Less than one year	$	3,914	$	3,932
One to five years		455,637		451,020
Five to ten years		121,930		123,108
Greater than ten years		59,929		60,719
Total	$	641,410	$	638,779

Proceeds from sales of securities available for sale totaled $270,351 and $231,019 during the six months ending March 31, 2011 and 2010, respectively. These sales resulted in gross realized gains of $4,950 and $4,408 for the six months ending March 31, 2011 and 2010 respectively, and gross realized losses of $0 and $136 for the six months ending March 31, 2011 and 2010 respectively.

Securities, including some held to maturity securities, with carrying amounts of $224,122 and $228,442 were pledged as collateral for borrowings at March 31, 2011 and September 30, 2010, respectively. Securities with carrying amounts of $384,157 and $490,730 were pledged as collateral for municipal deposits and other purposes at March 31, 2011 and September 30, 2010, respectively.

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

	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
As of March 31, 2011	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities-residential	$	113,103	$	(3,615	)	$	2,260	$	(198	)	$	115,363	$	(3,813	)
U.S. Government and agency securities		383,782		(6,138	)		—		—			383,782		(6,138	)
Corporate bonds		14,745		(162	)		—		—			14,745		(162	)
State and municipal securities		50,114		(1,165	)		—		—			50,114		(1,165	)
Equity securities		102		(3	)		806		(235	)		908		(238	)
Total	$	561,846	$	(11,083	)	$	3,066	$	(433	)	$	564,912	$	(11,516	)

	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
As of September 30, 2010	Value		Losses			Value		Losses			Value		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	)
Corporate bonds		—		—			—		—			—		—
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	)

22

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except 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 March 31, 2011, the Company concluded that it expects to recover the amortized cost basis of its investments and therefore there were no impairment charges. As of March 31, 2011 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 March 31, 2011 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 March 31, 2011. A total of 183 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 $5,850 and a fair value (carrying value) of $5,685 as of March 31, 2011. One of the four securities is below investment grade and has an amortized cost of $2,135 and a fair value of $1,947 at March 31, 2011. The remaining three securities are rated at or above Aa3.

These securities were all performing as of March 31, 2011 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.

23

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Securities Held to Maturity

The following is a summary of securities held to maturity:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
March 31, 2011
Mortgage-backed securities-residential
Fannie Mae	$	1,637	$	88	$	—		$	1,725
Freddie Mac		2,213		108		—			2,321
Ginnie Mae		7		—		—			7
CMO/Other MBS		674		12		—			686
		4,531		208		—			4,739
Investment securities
State and municipal securities		22,523		938		(36	)		23,425
Other		1,000		39		—			1,039
		23,523		977		(36	)		24,464
Total held to maturity	$	28,054	$	1,185	$	(36	)	$	29,203
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

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.

	March 31, 2011
	Amortized		Fair
	Cost		Value
Remaining period to contractual maturity
Less than one year	$	8,036	$	8,076
One to five years		8,522		8,911
Five to ten years		1,796		2,014
Greater than ten years		5,169		5,463
Total	$	23,523	$	24,464

24

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

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

	Continuous Unrealized Loss Position
	Less Than 12 Months				12 Months or Longer					Total
	Fair		Unrealized		Fair		Unrealized			Fair		Unrealized
As of March 31, 2011	Value		Losses		Value		Losses			Value		Losses
State and municipal securities	$		$		$	684	$	(36	)	$	684	$	(36	)
Total	$	—	$	—	$	684	$	(36	)	$	684	$	(36	)

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

All of the unrealized losses on held to maturity securities at March 31, 2011 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 individually had significant dollar amounts at March 31, 2011. There was 1 held-to-maturity security in a continuous unrealized loss position for more than 12 months, and no securities for less than 12 months. For securities with fixed maturities, there were no securities past due nor 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 maturity, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2011.

7. Deposits

Major classifications of deposits are summarized below:

	March 31,		September 30,
	2011		2010
Demand Deposits
Retail	$	174,286	$	174,731
Business		273,876		277,217
Municipal		15,641		77,909
NOW Deposits
Retail		153,388		139,517
Business		34,870		34,105
Municipal		122,153		241,995
Total transaction accounts		774,214		945,474
Savings		420,775		392,321
Money market		546,173		427,334
Certificates of deposit		348,742		377,573
Total deposits	$	2,089,904	$	2,142,702

25

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

Municipal deposits of $414,070 and $513,760 were included in total deposits at March 31, 2011 and September 30, 2010, respectively. Deposits received for tax receipts were approximately $219,000 at September 30, 2010. Listed below are the Company's brokered deposits:

	March 31,		September 30,
	2011		2010
Money market	$	25,001	$	—
Reciprocal CDAR’s1		9,205		7,889
CDAR’s one way		9,153		10,665
Total brokered deposits	$	43,359	$	18,554
1Certificate of deposit account registry service

8. Borrowings

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

	March 31, 2011					September 30, 2010
	Amount		Rate			Amount		Rate
By type of borrowing:
FHLB advances	$	116,784		3.69	%	$	141,251		4.16	%
FHLB Repurchase agreements		211,159		3.37	%		222,500		3.98	%
Senior Debt (FDIC insured)		51,498		2.74	%		51,496		2.75	%
Total borrowings	$	379,441		3.38	%	$	415,247		3.88	%
By remaining period to maturity:
Less than one year	$	66,498		3.00	%	$	44,873		3.82	%
One to two years		—		0.00	%		73,996		3.14	%
Two to three years		40,672		2.08	%		27,708		4.00	%
Three to four years		48,823		1.30	%		25,125		4.14	%
Four to five years		—		0.00	%		20,000		2.96	%
Greater than five years		223,448		4.19	%		223,545		4.19	%
Total borrowings	$	379,441		3.38	%	$	415,247		3.88	%

As a member of the FHLB of New York, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of March 31, 2011 and September 30, 2010, the Bank had pledged mortgages totaling $361,644 and $313,587 respectively. The Bank had also pledged securities with carrying amounts of $224,122 and $228,442 as of March 31, 2011 and September 30, 2010 respectively, to secure borrowings. As of March 31, 2011, 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 $230,044. FHLB advances are subject to prepayment penalties, if repaid prior to maturity.

FHLB borrowings (includes advance and repurchase agreements) of $200,000 and $227,500 at March 31, 2011 and September 30, 2010, 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 6.06 years and 6.16 years and weighted average interest rates of 4.23% and 4.24% at March 31, 2011 and September 30, 2010, respectively. An additional $20 million is putable on a one time basis after initial lockout periods beginning in February 2013 with a weighted average interest rate of 3.57%.

The Company had restructured $89,135 of its FHLBNY advances which had a weighted average rate of 3.69% and a duration of 2.2 years, into new borrowings with a weighted average rate of 2.63%, duration of 1.43 years and an annualized interest expense savings of approximately $945. Prepayment penalties of $5,151, associated with the modifications, are being amortized over the modification period on a level yield basis.

26

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

9. 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 the six months ended March 31, 2011 and March 31, 2010 was a fair value gain of $232 and a fair value loss of $236 respectively. The fair value of the interest rate caps at March 31, 2011, 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 manages this risk by entering into corresponding and offsetting interest rate risk agreements with third parties. The swaps are considered a derivative instrument and must be carried at fair value. As the swaps are not a designated qualifying hedge, the change in fair value is recognized in current earnings, with no offset from any other instrument. There was no net gain or loss recorded in earnings during the second fiscal quarters of 2011 and 2010. Interest rate swaps are recorded on our consolidated statements of financial condition as an other asset or other liability at estimated fair value.

At March 31, 2011, summary information regarding these derivatives is presented below:

						Weighted		Weighted
	Notional			Average		Average		Average
	Amount			Maturity		Rate		Variable Rate	Fair Value
Interest Rate Caps	$	50,000			3.68		3.75	NA	$	494
3rd party interest rate swap		1,166			8.87		6.25	1 m Libor + 2.25%		56
Customer interest rate swap		(1,166	)		8.87		6.25	1 m Libor + 2.25%		(56	)

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.

27

 

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

10. Earnings Per Common Share

The number of shares used in the computation of basic earnings per share excludes unallocated ESOP shares, shares held to fund deferred compensation plans, and unvested shares of restricted stock that have not been released to participants.

Common stock equivalent shares are incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options and unvested RRP shares were exercised or became vested during the periods.

Basic earnings per common share are computed as follows:

	For the Three Months Ended March 31,				For the Six Months Ended March 31,
	2011		2010		2011		2010
Weighted average common shares outstanding (basic), in ‘000s		37,496		38,188		37,525		38,384
Net Income	$	3,573	$	4,167	$	10,293	$	10,333
Basic earnings per common share	$	0.10	$	0.11	$	0.27	$	0.27

Diluted earnings per common share are computed as follows:

	For the Three Months				For the Six Months
	Ended March 31,				Ended March 31,
	2011		2010		2011		2010
Weighted average common shares outstanding (basic), in ‘000s		37,496		38,188		37,525		38,384
Effect of common stock equivalents		1		22		—		47
		37,497		38,210		37,525		38,431
Net Income	$	3,573	$	4,167	$	10,293	$	10,333
Diluted earnings per common share	$	0.10	$	0.11	$	0.27	$	0.27

As of March 31, 2011, 1,891,341 and 1,904,163 weighted average shares were anti-dilutive for the three month period and six month period, respectively.  As of March 31, 2010, 1,824,368 and 1,879,534 weighted average shares were anti-dilutive for the three month period and six month period, respectively.   Anti-dilutive shares are not included in the determination of diluted earnings per share.

11. Guarantor’s Obligations Under Guarantees

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

As of March 31, 2011, the Company had $21,057 in outstanding letters of credit, of which $4,855 are cash secured and $3,601 were secured by collateral.  The carrying values of these obligations are considered immaterial.

28

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

12. Pension and Other Post Retirement Plans

Net post-retirement cost, which is recorded within salaries and employee benefits expense in the consolidated statements of income, is comprised of the following:

	Pension Plan						Other Post Retirement Plans
	Three months Ended March 31,						Three months Ended March 31,
	2011			2010			2011			2010
Service Cost	$	—		$	—		$	7		$	8
Interest Cost		371			384			27			27
Expected return on plan assets		(581	)		(462	)		—			—
Amortization of net transition obligation		—			—			6			6
Amortization of prior service cost		—			—			12			12
Amortization of (gain) or loss		508			377			(24	)		(23	)
	$	298		$	299		$	28		$	30

	Pension Plan						Other Post Retirement Plans
	Six months Ended March 31,						Six months Ended March 31,
	2011			2010			2011			2010
Service Cost	$	—		$	—		$	14		$	16
Interest Cost		749			777			54			54
Expected return on plan assets		(1,079	)		(945	)		—			—
Amortization of net transition obligation		—			—			12			12
Amortization of prior service cost		—			—			24			24
Amortization of (gain) or loss		1,017			755			(48	)		(46	)
	$	687		$	587		$	56		$	60

As of March 31, 2011, contributions totaling $4,400 have been deposited into the pension plan.    The Company has determined no additional contributions will be made during the fiscal year 2011.  On April 1, 2011 the Company made a distribution under its qualified benefit pension plan and expects to record an additional settlement expense of approximately $500 during the third fiscal quarter of 2011.

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 $305 for the six months ended March 31, 2011 (including a settlement charge of $278) and $44 for the six months ended March 31, 2010. As of March 31, 2011 there were $1,083 in contributions to fund benefit payments on an in service withdrawal of $1,083 related to the SERP.

13. 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.  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.

29

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

Forward-Looking Statements

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

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

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

● Legislative and regulatory changes such as the Dodd-Frank Act and its 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;

● 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;

● 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;

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

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

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

● 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.

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

30

Overview

The Company provides financial services to individuals and businesses located principally 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 through its subsidiary, HVIA. 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.

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;

● management’s decision to sell fixed rate conforming residential mortgages into the secondary market in order to reduce interest rate risk;

● 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 increased levels of charge-offs and provisions for loan losses during fiscal years 2010 and 2011.  For the first six months of the current fiscal year we are seeing some of our credit quality indicators reflect a positive trend. Total criticized and classified loans have decreased by $27.7 million over September 30, 2010 levels.  We have seen improvement in our ADC portfolio through strong repayments of $61 million year to date as housing sales on our projects are showing  improvement.  Conversely, nonperforming loans increased $10.3 million from September 30, 2010 levels due mostly to three relationships within ADC portfolio and net charge offs increased 6.7% compared to the six months ended March 31, 2010.   Management of the loan portfolio continues to be a top priority.

We continue to experience pressure on net interest income as low rates continue to have the effect of causing many assets to prepay or to be called. At this time we feel that equilibrium has been reached in our investment portfolio as we are purchasing investment securities at rates equal to the overall investment portfolio yield.  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 certain core deposits, and continuation of our deposit pricing discipline. We restructured $89.1 million in FHLBNY advances which has reduced our long-term borrowing rate from 3.61 percent in the first quarter of 2011 to 3.46 percent in the second quarter of 2011.

Management Strategy

We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional, multi-state and international banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area.  We focus our efforts on core deposit generation, especially transaction accounts and quality loan growth with emphasis on growing commercial loan balances. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs.

Comparison of Financial Condition at March 31, 2011 and September 30, 2010

Total assets as of March 31, 2011 decreased $101.7 million from September 30, 2010 from $3.0 billion to $2.9 billion.  The investment portfolio accounts for $73.6 million of this decrease as there was a net increase in unrealized losses of $26.6 million and cash flows were not fully reinvested.  In addition the loan portfolio decreased $16.7 million as residential sales and refinancing activities outpaced commercial loan growth.

Net loans as of March 31, 2011 were $1.7 billion, essentially unchanged from September 30, 2010.  The composition of the portfolio changed as a result of our emphasis on commercial lending and sales of substantially all new residential mortgage production.  Commercial real estate loans increased $56.4 million, or 9.7%, and Acquisition, Development and Construction loans (ADC) decreased $26.0 million or 11.2% to $205.3 million compared to $231.3 million as of September, 2010. Consumer loans decreased by $10.8 million, or 4.5%, , and residential loans decreased by $23.9 million, or 5.5% during the six months ended March 31, 2011.  Total loan originations, including loans originated for sale were $299.5 million for year to date March 31, 2011, while repayments were $272.9 million and sales of residential mortgages were $37.8 million.  There were decreases in the loan loss reserves for $539,000 in commercial business loans and $1.5 million in ADC, with increases in of $363,000commercial real estate and $952,000 in residential mortgages.  The variances were driven by modifications in reserve factors as well as changes in loan balances.

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Total securities decreased by $73.6 million, to $861.2 million at March 31, 2011 from $934.9 million at September 30, 2010.   Security purchases were $365.2 million, sales of securities were $270.4 million, and maturities, calls, and repayments were $142.2 million.  Carrying values of securities were reduced by $26.6 million due to unrealized losses.

Deposits as of March 31, 2011 were $2.1 billion, a decrease of $52.8 million, or 2.5%, from September 30, 2010.  As of March 31, 2011 transaction accounts were 37.0% of deposits, or $774.2 million compared to $945.5 million or 44.1% at September 30, 2010. Deposits received for tax payments were approximately $219 million at September 30, 2010.  As of March 31, 2011 savings deposits were $ 420.8 million, an increase of $28.5 million or 7.3%.  Money market accounts increased $118.8 million or 27.8% to $546.2 million at March 31, 2011.    Certificate of deposit accounts declined by $28.8 million or 7.6%. As of March 31, 2011 the Company had $43.4 million in wholesale deposits with a weighted average rate of 0.71% included in total deposits.

Borrowings decreased by $35.8 million, or 8.6%, from September 2010, to $379.4 million. Borrowings decreased as $32.3 million in advances matured and seasonal municipal tax deposits were retained.  The Company had restructured $89.1 million of its FHLBNY advances which had a weighted average rate of  3.69% and a duration of 2.2 years, into new borrowings with a weighted average rate of 2.63%, duration of 1.43 years and an annualized interest expense savings of approximately $945,000, assuming no increase in interest rates.  Prepayment penalties of $5.2 million associated with the modifications are being amortized over the modification period on a level yield basis.

Stockholders’ equity decreased $10.7 million from September 30, 2010 to $420.3 million at March 31, 2011. The decrease was due to $5.9 million increase in the Company’s retained earnings, an increase of  $600,000 due to stock based compensation items, a $1.9 million increase in treasury stock and a $15.2 million decrease in accumulated other comprehensive income, after realizing year to date securities gains of $5.0 million.  For the 2011 fiscal year to date, the Company repurchased 208,346 shares of its common stock at a cost of $1.9 million  under the treasury repurchase program.

As of March 31, 2011 the Company had authorization to purchase up to additional 1,025,821 shares of common stock.  Bank Tier I capital to assets was 9.10% at March 31, 2011. Tangible capital as a percentage of tangible assets at the consolidated company level was 9.31%.

Credit Quality (Also see Note 4 to the consolidated financial statements)

Net charge-offs for the six months ended March 31, 2011 were $4.9 million (0.58% of average loans, on an annualized basis) compared to $4.6 million (0.55% of average loans, on an annualized basis) for the same period in the prior year.

Our year-to-date provision of $4.2 million resulted in a small net decrease in the allowance for loan losses of  $713 thousand, from $30.8 million at September 30, 2010 to $30.1 million at March 31, 2011.

Our substandard loans at March 31, 2011 were $113.9 million compared to $131.8 million at September 30, 2010, while special mention  loans went from $37.9 million at September 30, 2010 to $27.1 million at March 31, 2011.  Net declines in ADC and commercial business loan portfolios were offset in part by net increases in commercial mortgages and residential loans.  Special mention loans decreased due to the upgrade of approximately $24.0 million in primarily ADC loans to pass.

Nonperforming loans at March 31, 2011 were $37.2 million compared to $26.8 million at September 30, 2010. At March 31, 2011, the allowance for loan losses was 81% of nonperforming loans and 1.79% of the average loan portfolio.  At September 30, 2010, the allowance for loan losses was 115% of nonperforming loans and 1.82% of the average loan portfolio.  The current weighted average loan to value of mortgage secured non performing loans before and after specific reserves was 85% and 78%, respectively.

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Comparison of Operating Results for the Three Months Ended March 31, 2011 and March 31, 2010

Net income for the three months ended March 31, 2011 was $3.6 million, a decrease of $600,000 compared to $4.2 million for the same period in fiscal 2010.  Excluding the after tax effect of net securities gains the fair value adjustment of interest rate caps earnings and a defined benefit settlement charge net income was $0.09 per diluted share for both of the three months period ending March 31, 2011 and March 31, 2010.  The provision for loan losses for the three months ended March 31, 2011 was $2.1 million, a decrease of $400,000, compared to $2.5 million for the same period in the prior year.  Net interest margin on a tax equivalent basis for the three months ended March 31, 2011, decreased 8 basis points compared to the same period last year from 3.76% to 3.68%.  Non-interest income for the three months ended March 31, 2011, was $5.8 million, a decrease of $318,000, compared to $6.1 million for the same period in fiscal 2010 due to decreases in gains on sales of securities of $1.1 million offset in part by a lower fair value loss on interest rate caps.  Non-interest expense increased $618,000, or 2.9%, to $21.8 million for the three months ended March 31, 2011, compared to $21.2 million for the same period in the prior year primarily due to increased medical benefit expense and the retirement benefit settlement charge.

Earnings excluding securities gains, retirement benefit settlement charge 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.

Non-GAAP disclosures

(In thousands, except share data)

	Three months ended
	March 31,
	2011			2010
Net Income
Net Income	$	3,573		$	4,167
Securities gains1		(444	)		(1,119	)
Retirement benefit settlement charge1		165			—
Fair value loss on interest rate caps1		1			366
Net adjusted income	$	3,295		$	3,414
Earnings per common share
Diluted Earnings per common share	$	0.10		$	0.11
Securities gains1		(0.01	)		(0.03	)
Retirement benefit settlement charge1		—			—
Fair value loss on interest rate caps1		—			0.01
Diluted adjusted earnings per common share	$	0.09		$	0.09
Non-interest income
Total non-interest income	$	5,795		$	6,113
Securities gains		(748	)		(1,884	)
Fair value loss on interest rate caps		2			616
Adjusted non interest-income	$	5,049		$	4,845
Non-interest expense
Total non-interest expense	$	21,791		$	21,173
Retirement benefit settlement charge		(278	)		—
Adjusted non interest-expense	$	21,513		$	21,173

Relevant operating results performance measures follow:

	Three Months Ended
	March 31,
	2011			2010
Per common share:
Basic earnings	$	0.10		$	0.11
Diluted earnings		0.10			0.11
Dividends declared		0.06			0.06
Return on average (annualized):
Assets		0.49	%		0.58	%
Equity		3.45	%		4.00	%

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

	Three Months Ended March 31,
	2011									2010
	Average Outstanding Balance			Interest			Average Yield Rate			Average Outstanding Balance			Interest			Average Yield Rate
Interest earning assets:
Commercial and commercial mortgage loans	$	1,035,490		$	14,079			5.51	%	$	958,513		$	13,607			5.76	%
Consumer loans		234,326			2,571			4.45			248,622			2,771			4.52
Residential mortgage loans		385,232			5,389			5.67			435,163			6,277			5.85
Total loans 1		1,655,048			22,039			5.40			1,642,298			22,655			5.59
Securities-taxable		684,834			3,531			2.09			694,815			4,724			2.76
Securities-tax exempt 2		214,634			2,925			5.53			203,153			2,924			5.84
Federal Reserve excess reserves		18,628			2			0.04			15,257			10			0.27
Other earning assets		20,987			330			6.38			26,031			337			5.27
Total securities and other earning assets		939,083			6,788			2.93			939,256			7,995			3.45
Total interest-earning assets		2,594,131			28,827			4.51			2,581,554			30,650			4.82
Non-interest-earning assets		346,168									337,399
Total assets	$	2,940,299								$	2,918,953
Interest bearing liabilities:
NOW Checking	$	338,503			171			0.20	%	$	298,935			156			0.21	%
Savings, clubs and escrow		416,777			113			0.11			380,600			95			0.10
Money market accounts		490,215			412			0.34			428,605			374			0.35
Certificate accounts		367,099			889			0.98			446,301			1,576			1.43
Total interest-bearing deposits		1,612,594			1,585			0.40			1,554,441			2,201			0.57
Borrowings		420,069			3,708			3.58			500,226			4,492			3.64
Total interest-bearing liabilities		2,032,663			5,293			1.06			2,054,667			6,693			1.32
Non- interest bearing deposits		468,031									419,389
Other non-interest-bearing liabilities		19,758									22,768
Total liabilities		2,520,452									2,496,824
Stockholders’ equity		419,847									422,129
Total liabilities and equity	$	2,940,299								$	2,918,953
Net interest rate spread								3.45	%								3.49	%
Net earning assets	$	561,468								$	526,887
Net interest margin					23,534			3.68	%					23,957			3.76	%
Less tax equivalent adjustment 2					(1,024	)								(1,023	)
Net interest income				$	22,510								$	22,934
Ratio of average interest-earning assets to average interest bearing liabilities		127.62	%								125.64	%

1 Includes non-accrual loans

2 Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate

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

	Three Months Ended March 31,
	2011 vs. 2010
	Increase / (Decrease) Due to
	Volume1			Rate1			Total
Interest earning assets
Commercial and commercial mortgage loans	$	1,084		$	(612	)	$	472
Consumer loans		(157	)		(43	)		(200	)
Residential mortgage loans		(700	)		(188	)		(888	)
Securities-taxable		(67	)		(1,126	)		(1,193	)
Securities-tax exempt2		163			(162	)		1
Federal Reserve excess reserves		2			(10	)		(8	)
Other earning assets		(65	)		58			(7	)
Total interest income		260			(2,083	)		(1,823	)
Interest-bearing liabilities
NOW checking		22			(7	)		15
Savings		9			9			18
Money market		50			(12	)		38
Certificates of deposit		(248	)		(439	)		(687	)
Borrowings		(699	)		(85	)		(784	)
Total interest expense		(866	)		(534	)		(1,400	)
Net interest margin		1,126			(1,549	)		(423	)
Less tax equivalent adjustment2		(58	)		57			(1	)
Net interest income	$	1,068		$	(1,492	)	$	(424	)

1  Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.

2 Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the three months ended March 31, 2011 decreased by $423,000, to $22.5 million, compared to $22.9 million for the quarter ended March 31, 2010. Gross interest income on a tax-equivalent basis decreased by $1.8 million, or 5.9%, to $28.8 million for the quarter ended March 31, 2011, compared to $30.7 million for the same three months in 2010.  General market interest rates have declined from the prior period.  As a result the general levels of yields in the asset and liability structure of the Company’s balance sheet have declined.  Further, as the Company restructured a large portion of its investment portfolio, the reinvestment of proceeds from sales into generally lower yielding securities resulted in additional declines in investment income.  Interest expense decreased by $1.4 million with the primary decrease in certificates of deposit of $687,000 and borrowings of $785,000. The decline in borrowings reflects the FHLBNY advance restructuring discussed in footnote 9.

Provision for Loan Losses.  The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable incurred loan losses inherent in the existing portfolio. The Company recorded $2.1 million in loan loss provisions for the quarter ended March 31, 2011.  Refer to the credit quality section for a discussion on net charge-offs and nonperforming loans. Net charge-offs for the quarter ended March 31, 2011 were $3.0 million, which included $952,000 of reserves recorded in prior periods.

Non-interest income for the three months ended March 31, 2011 decreased by $318,000 to $5.8 million.  The decrease was due mainly to net gains on sales of securities of $748,000 in second quarter fiscal 2011 compared to $1.9 million in second quarter fiscal 2010. The Company realized a portion of the recent appreciation in its securities portfolio, monetizing other comprehensive income and reducing prepayment risk. This decrease was offset in part by a lower fair value loss on interest rate caps, as other categories of noninterest income were relatively stable.

Non-interest expense for the three months ended March 31, 2011 increased by 2.9%, to $21.8 million, primarily due to increased medical benefit expense, the retirement settlement charge, and occupancy expense. These increases were offset in part by lower ATM/debit card expense, intangible amortization and stock-based compensation cost.

Income Tax The effective tax rate for the three months ended March 31, 2011 was 19.1% compared to 22.5% for the same period in the prior year.  The decline is due to tax exempt municipal securities and BOLI income being a larger portion of overall pretax income in the current period.

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Comparison of Operating Results for the Six Months Ended March 31, 2011 and March 31, 2010

Net income for the six months ended March 31, 2011 was $10.3 million, relatively unchanged from  the same period in fiscal 2010.  Net interest income before provision for loan losses for the six months ended March 31, 2011, decreased by $125,000 to $45.7 million, compared to $45.8 million for the same period in the prior year.  The provision for loan losses for the six months ended March 31, 2011 was $4.2 million compared to $5.0 million for the same period in the prior year.  Net interest margin on a tax equivalent basis for the six months ended March 31, 2011, decreased 5 basis points compared to the same period last year from 3.72% to 3.67%.  Non-interest income for the six months ended March 31, 2011, was $15.7 million, an increase of $1.5 million, compared to $14.2 million for the same period last year. The increase was due to higher gains on sale of securities and loans, offset in part by lower deposit fees and service charges.  Non-interest expense increased $2.0 million or 4.9%, to $43.1 million for the six months ended March 31, 2011, compared to $41.1 million for the same period in the prior year. The increase is primarily due to medical and retirement plan expense, staffing and occupancy expenses for new offices in Westchester and Nyack, and professional fees.

Earnings excluding securities gains, retirement benefit settlement charge, 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.

Non-GAAP disclosures

(In thousands, except share data)

	Six months ended March 31,
	2011			2010
Net Income
Net Income	$	10,293			10,333
Securities gains1		(2,940	)		(2,537	)
Retirement benefit settlement charge1		165			—
Fair value (gain) loss on interest rate caps1		(138	)		140
Net adjusted income	$	7,380		$	7,936
Earnings per common share
Diluted Earnings per common share	$	0.27		$	0.27
Securities gains1		(0.08	)		(0.07	)
Retirement benefit settlement charge1		—
Fair value loss on interest rate caps1		—
Diluted adjusted earnings per common share	$	0.20	2	$	0.21	2
Non-interest income
Total non-interest income	$	15,678		$	14,206
Securities gains		(4,950	)		(4,272	)
Fair value (gain) loss on interest rate caps		(232	)		236
Adjusted non interest-income	$	10,496		$	10,170
Non-interest expense
Total non-interest expense	$	43,060		$	41,067
Retirement benefit settlement charge		(278	)		—
Adjusted non interest-income	$	42,782		$	41,067

1After marginal tax effect 40.61%

2 Rounding

Relevant operating results performance measures follow:

	Six Months Ended
	March 31,
	2011			2010
Per common share:
Basic earnings	$	0.27		$	0.27
Diluted earnings		0.27			0.27
Dividends declared		0.12			0.12
Return on average (annualized):
Assets		0.70	%		0.71	%
Equity		4.86	%		4.90	%

36

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

	Six Months Ended March 31,
	2011									2010
	Average						Average			Average						Average
	Outstanding						Yield			Outstanding						Yield
	Balance			Interest			Rate			Balance			Interest			Rate
Interest earning assets:
Commercial and commercial mortgage loans	$	1,037,801		$	28,943			5.59	%	$	956,225		$	27,515			5.77	%
Consumer loans		236,344			5,243			4.45			250,585			5,673			4.54
Residential mortgage loans		394,501			11,058			5.62			443,053			12,867			5.82
Total net loans 1		1,668,646			45,244			5.44			1,649,863			46,055			5.60
Securities-taxable		688,631			7,061			2.06			660,401			9,476			2.88
Securities-tax exempt 2		218,258			5,886			5.41			202,421			5,839			5.79
Federal Reserve excess reserves		13,488			18			0.27			35,934			45			0.25
Other earning assets		22,640			714			6.32			25,369			673			5.32
Total securities and other earning assets		943,017			13,679			2.91			924,125			16,033			3.48
Total interest-earning assets		2,611,663			58,923			4.52			2,573,988			62,088			4.84
Non-interest-earning assets		339,332									328,752
Total assets	$	2,950,995								$	2,902,740
Interest bearing liabilities:
NOW Checking	$	328,076			344			0.21	%	$	295,351			335			0.23	%
Savings, clubs and escrow		410,913			222			0.11			376,713			190			0.10
Money market accounts		461,730			751			0.33			412,988			781			0.38
Certificate accounts		386,885			1,910			0.99			462,010			3,685			1.60
Total interest-bearing deposits		1,587,604			3,227			0.41			1,547,062			4,991			0.65
Borrowings		451,344			7,941			3.53			492,913			9,234			3.76
Total interest-bearing liabilities		2,038,948			11,168			1.10			2,039,975			14,225			1.40
Non- interest bearing deposits		469,468									419,173
Other non-interest-bearing liabilities		18,156									20,347
Total liabilities		2,526,572									2,479,495
Stockholders’ equity		424,423									423,245
Total liabilities and equity	$	2,950,995								$	2,902,740
Net interest rate spread								3.42	%								3.44	%
Net earning assets	$	572,715								$	534,013
Net interest margin					47,755			3.67	%					47,863			3.72	%
Less tax equivalent adjustment 2					(2,060	)								(2,043	)
Net interest income				$	45,695								$	45,820
Ratio of average interest-earning assets to average interest bearing liabilities		128.09	%								126.18	%

1 Includes non-accrual loans

2 Reflects tax equivalent adjustment for tax exempt income based on a 35% federal rate

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

	Six Months Ended March 31,
	2011 vs. 2010
	Increase / (Decrease) Due to
	Volume1			Rate1			Total
Interest earning assets
Commercial and commercial mortgage loans	$	2,306		$	(878	)	$	1,428
Consumer loans		(319	)		(111	)		(430	)
Residential mortgage loans		(1,377	)		(432	)		(1,809	)
Securities-taxable		392			(2,807	)		(2,415	)
Securities-tax exempt2		444			(397	)		47
Federal Reserve excess reserves		(31	)		4			(27	)
Other earning assets		(73	)		114			41
Total interest income		1,342			(4,507	)		(3,165	)
Interest-bearing liabilities
NOW checking		39			(30	)		9
Savings		15			17			32
Money market		84			(114	)		(30	)
Certificates of deposit		(531	)		(1,244	)		(1,775	)
Borrowings		(751	)		(542	)		(1,293	)
Total interest expense		(1,144	)		(1,913	)		(3,057	)
Net interest margin		2,486			(2,594	)		(108	)
Less tax equivalent adjustment2		(154	)		137			(17	)
Net interest income	$	2,332		$	(2,457	)	$	(125	)

1  Changes due to increases in both rate and volume have been allocated proportionately to rate and volume.

3 Reflects tax equivalent adjustment for tax-exempt income based on a 35% federal rate.

Net interest income for the six months ended March 31, 2011 decreased by $125,000 to $45.7 million, compared to $45.8 million for the six months ended March 31, 2010. Net interest income on a tax-equivalent basis decreased by $108,000 to $47.8 million for the six months ended March 31, 2011, compared to $47.9 million for the six months ended March 31, 2010.

Provision for Loan Losses.  The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level necessary to absorb probable incurred loan losses inherent in the existing portfolio. We recorded $4.2 million in loan loss provisions for six months ending March 31, 2011, or $713,000 less than net charge-offs.  Refer to the credit quality section for a discussion on net charge-offs and nonperforming loans.

Non-interest income for the six months ended March 31, 2011 increased due to higher gains on sales of securities and loans.  The Bank has been selling new conforming fixed rate residential mortgage loan originations in the secondary market to control interest rate risk.   Partially offsetting these increases in non interest income were lower deposit fees and service charges.  The decline in fees is primarily related to changes in customer behavior regarding overdrafts.

Non-interest expense for the six months ended March 31, 2011 increased primarily due to increased retirement plan expense, employee medical insurance, staffing for new offices in Westchester and Nyack, professional fees and occupancy costs for new locations.  Offset in part by declines in stock based compensation expense and ATM service charge expense.

Income Tax The effective tax rate was 27.1% and 26.0%, for year to date fiscal 2011 and 2010 respectively.  The increase is mainly due to the elimination of the New York State Thrift bad debt deduction, but was offset in part by tax benefits generated by our captive insurance company.

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Liquidity and Capital Resources

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

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

Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our consolidated financial statements. Our primary investing activities are the origination of commercial real estate and residential one- to four-family loans, and the purchase of investment securities and mortgage-backed securities. During the six months ended March 31, 2011 and 2010, our loan originations totaled $299.5 million and $221.6 million, respectively. Purchases of securities available for sale totaled $357.2 million and $425.5million for the six months ended  March 31, 2011 and 2010, respectively. Purchases of securities held to maturity totaled $8.0 million and $15.6 million for the six months ended March 31, 2011 and 2010, respectively. These activities were funded primarily by sales of securities, by borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $54.7 million at March 31, 2011, and consisted of $38.7 million at adjustable or variable rates and $16.0 million at fixed rates. Unused lines of credit granted to customers were $321.5 million at March 31, 2011. 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 $52.0 million and $50.9 million at March 31, 2011 and September 30, 2010, 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 decrease in total deposits was $52.8 million and $75.3 million for the six months ended March 31, 2011 and 2010, respectively.  Based upon prior experience and our current pricing strategy, management believes that a significant portion of 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 continue to improve during fiscal 2011 when compared to  fiscal 2010.  Credit spreads narrowed steadily during the past year and many are very near historically low levels.  Notwithstanding these improvements loan demand remains muted causing liquidity to increase.   Furthermore, the extremely low interest rate environment has enhanced our deposit growth which has 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.  The preference of depositors to stay short could portend potential liquidity reductions in the future and possibly put pressure on us to raise rates in the future to retain these funds.

We generally remain fully invested and utilize additional sources of funds through Federal Home Loan Bank of New York (“FHLB”) advances and other sources of which $379.4 million was outstanding at March 31, 2011. At March 31, 2011, we had the ability to borrow an additional $200.0 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow up to an additional $230.0 million by pledging securities not required to be pledged for other purposes as of March 31, 2011.   Further, at March 31, 2011 we had only $43.4 million in Brokered Deposits (including certificates of deposit accounts registry service (CDAR’s) reciprocal CD’s of $9.2 million) and have relationships with several brokers to utilize these sources of funding should conditions warrant further sources of funds.

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The Bank provides supplemental reporting of Non-GAAP tangible equity ratios as management believes this information is useful to investors.  As of March 31, 2011, the Company’s tangible capital as a percent of tangible assets decreased  to 9.31%, and its tangible book value decreased  to $6.74 per share, compared to September 30, 2010.  The following table shows the reconciliation of tangible equity and the tangible equity ratio:

	March 31,			September 30,
	2011			2010
Total assets	$	2,919,291		$	3,021,025
Goodwill and other amortizable intangibles		(163,718	)		(164,501	)
Tangible assets	$	2,755,573		$	2,856,524
Stockholders’ equity	$	420,269		$	430,955
Goodwill and other amortizable intangibles		(163,718	)		(164,501	)
Tangible stockholders’ equity	$	256,551		$	266,454
Outstanding Shares		38,072,942			38,262,288
Tangible capital as a % of tangible assets (consolidated)		9.31	%		9.33	%
Tangible book value per share	$	6.74		$	6.96

The Company declared a dividend of $0.06 per share payable on May 19, 2011 to stockholders of record on May 9, 2011.

The following table sets forth the Bank’s regulatory capital position at March 31, 2011 and September 30, 2010, compared to OTS requirements:

						OTS requirements
	Bank actual					Minimum capital adequacy					Classification as well capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2011:
Tangible capital	$	251,338		9.1	%	$	41,450		1.5	%	$	—		—
Tier 1 (core) capital		251,338		9.1			110,532		4.0			138,165		5.0	%
Risk-based capital:
Tier 1		251,338		12.6			—		—			119,730		6.0
Total		276,349		13.8			159,641		8.0	%		199,551		10.0
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

The levels are well above current regulatory capital requirements to be considered well capitalized.  Management is currently studying the impact on capital resulting from the Basel III accords.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial mortgage loans, commercial business loans, ADC 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 our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.

Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NII”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Company and the Bank’s net portfolio value (“NPV”) over a range of interest rate scenarios. NPV 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 NPV and NII.  The table below sets forth, as of March 31, 2011, the estimated changes in our NPV and our NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

Change in				Estimated Increase (Decrease)								Increase (Decrease) in
Interest Rates		Estimated		in NPV						Estimated		Estimated NII
(basis points)		NPV		Amount			Percent			NII		Amount			Percent
(Dollars in thousands)
	+300	$	270,358	$	(49,250	)		-15.4	%	$	90,913	$	4,937			5.7	%
	+200		289,515		(30,093	)		-9.4	%		89,593		3,617			4.2	%
	+100		307,173		(12,435	)		-3.9	%		87,975		1,999			2.3	%
	0		319,608		0			0.0	%		85,976		0			0.0	%
	-100		313,358		(6,250	)		-2.0	%		79,331		(6,645	)		-7.7	%

The table set forth above indicates that at March 31, 2011, in the event of an immediate 200 basis point increase in interest rates, we would be expected to experience a 9.4% decrease in NPV and a 4.2% 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 NPV and NII beyond -100 basis points.

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

During the second quarter of fiscal year 2011, the federal funds target rate remained in a range of 0.00 – 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate.  U.S. Treasury yields in the two year maturities increased by 19 basis points from 0.61% to 0.80% during the second quarter of fiscal year 2011 while the yield on U.S. Treasury 10 year notes increased 17 basis points from 3.30% to 3.47% over the same time period.  The disproportionately greater rate of increase on longer term maturities has resulted in the 2-10 year treasury yield curve being steeper at the end of the first quarter of fiscal 2011 than it was when the year began.  To fight the economic downturn the FOMC declared a willingness to keep the federal funds target low for an “extended period”.  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 than the longer end thereby resulting in margin compression.  We hold $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 net value at risk is $494,000.

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Item 4. Controls and Procedures

The Company’s management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the “Exchange Act”) as of the end of the period covered by this report.  Based upon that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is  properly recorded, processed, summarized and reported within the time frames specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings which, in the aggregate, management believes to be material to the consolidated financial condition and operations of the Company.

Item 1A.  Risk Factors

Not applicable

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

(a)  Not applicable.

(b)  Not applicable

(c)  Issuer Purchases of Equity Securities

	Total Number of shares (or Units) Purchased		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximated Dollar Value) of Shares (or Units) that may yet be Purchased Under the Plans or Programs
January 1 - January 31		—	$	—		—		1,151,565
February 1 - February 28		20,900		9.39		20,900		1,130,665
March 1 - March 31		104,844		9.41		104,844		1,025,821
Total		125,744				125,744

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and reserved).

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number	Description
31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

Provident New York Bancorp

Date:	May  9, 2011	By:	/s/ George Strayton
			George Strayton
			President, Chief Executive Officer and Director
			(Principal Executive Officer)

Date:	May  9, 2011	By:	/s/ Paul A. Maisch
			Paul A. Maisch
			Executive Vice President
			Chief Financial Officer
			Principal Accounting Officer
			(Principal Financial Officer)

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