Sterling Bancorp (STL) 10-K 2011 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended September 30, 2011

OR

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

For the transition period from                     to                     

Commission File Number: 0-25233

PROVIDENT NEW YORK BANCORP

(Exact name of Registrant as Specified in its Charter)

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

(845) 369-8040

(Registrant’s Telephone Number including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Class	Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share	The NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    YES  ¨    NO  x

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days  YES  x    NO  ¨

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

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

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

Large Accelerated Filer	¨	Accelerated Filer	x
Non-Accelerated Filer	¨	Smaller Reporting Company	¨

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of March 31, 2011 was $343,678,848.

As of December 5, 2011 there were outstanding 37,883,008 shares of the Registrant’s common stock.

DOCUMENT INCORPORATED BY REFERENCE

Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s fiscal year ended September 30, 2011.

PROVIDENT NEW YORK BANCORP

FORM 10-K TABLE OF CONTENTS

September 30, 2011

PART I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	35
ITEM 1B.	Unresolved Staff Comments	41
ITEM 2.	Properties	41
ITEM 3.	Legal Proceedings	41
ITEM 4.	Removed and Reserved	41
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	42
ITEM 6.	Selected Financial Data	44
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	64
ITEM 8.	Financial Statements and Supplementary Data	65
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	128
ITEM 9A.	Controls and Procedures	128
ITEM 9B.	Other Information	128
PART III
ITEM 10.	Directors, Executive Officers, and Corporate Governance	129
ITEM 11.	Executive Compensation	129
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	129
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	129
ITEM 14.	Principal Accountant Fees and Services	129
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	130
SIGNATURES		133

PART I

ITEM 1. Business

Provident New York Bancorp

Provident New York Bancorp (“Provident Bancorp” or the “Company”) is a Delaware corporation that owns all of the outstanding shares of common stock of Provident Bank (the “Bank”). At September 30, 2011, Provident Bancorp had, on a consolidated basis, assets of $3.1 billion, deposits of $2.3 billion and stockholders’ equity of $431.1 million. As of September 30, 2011, Provident Bancorp had 37,864,008 shares of common stock outstanding.

Provident Bank

Provident Bank, an independent, full-service bank founded in 1888, is headquartered in Montebello, New York and is the principal bank subsidiary of Provident Bancorp. With $3.1 billion in assets and 513 full-time equivalent employees, Provident Bank accounts for substantially all of Provident Bancorp’s consolidated assets and net income. We operate 37 full servicing banking offices consisting of 30 retail branches and 7 commercial banking centers which serve the Hudson Valley region. There are 13 offices located in Rockland, New York, 14 offices in Orange County, New York, 8 offices in contiguous Sullivan, Ulster, Westchester and Putnam Counties in New York, and two offices in Bergen County, New Jersey which operate under the name PBNY Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, community business (small business) and retail banking products and services. Additionally, the Company announced on October 31, 2011 its intention to expand into New York City, with the employment of a market area president and intends to staff a commercial banking center with several teams of relationship bankers servicing middle market clients commercial business.

We also offer deposit services to municipalities located in the State of New York through Provident Bank’s wholly-owned subsidiary, Provident Municipal Bank.

Provest Services Corporation I is a wholly-owned subsidiary of Provident Bank, holding an investment in a limited partnership that operates an assisted-living facility. A percentage of the units in the facility are for low-income individuals. Provest Services Corp. II is a wholly-owned subsidiary of Provident Bank that has engaged a third-party provider to sell annuities, life and health insurance products to Provident Bank’s customers. The activities of these subsidiaries have had an insignificant effect on our consolidated financial condition and results of operations to date. Provident REIT, Inc. and WSB Funding are subsidiaries in the form of real estate investment trusts and hold commercial real estate loans. Also, the Bank maintains several corporations which hold foreclosed properties acquired by Provident Bank.

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

Non-Bank Subsidiaries

In addition to Provident Bank, the Company owns Hardenburgh Abstract Company, Inc. (“Hardenburgh”) that was acquired in connection with the acquisition of Warwick Community Bancorp (“WSB”) and Hudson Valley Investment Advisors, LLC, an investment advisory firm that generates investment management fees. Hardenburgh had gross revenue from title insurance policies and abstracts of $1.2 million and net income of

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$220,000 in 2011, Hudson Valley Investment Advisors, LLC generated $2.4 million in fee income in 2011 and net income of $276,000 and Provident Risk Management, Inc. a captive insurance company, generated $1.2 million in intercompany revenues and $980,000 in net income.

Provident Municipal Bank

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

Forward-Looking Statements

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

Market Area

We operate 37 full servicing banking offices consisting of 30 retail branches and 7 commercial banking centers which serve the Hudson Valley region. There are 13 offices located in Rockland, New York, 14 offices in Orange County, New York, 8 offices in contiguous Sullivan, Ulster, Westchester and Putnam Counties in New York, and two offices in Bergen County, New Jersey which operate under the name PBNY Bank, a division of Provident Bank, New York. Provident Bank offers a complete line of commercial, community business (small business) and retail banking products and services. Additionally, the Company announced on October 31, 2011 its intention to expand into New York City, with the employment of a market area president and intend to staff a commercial banking center with several teams of relationship bankers servicing middle market client’s commercial business.

Our primary lending area consists of Rockland and Orange Counties as well as contiguous counties. Rockland and Orange Counties represent a suburban area with a broad employment base. These counties also serve as bedroom communities for nearby New York City and other suburban areas including Westchester County and northern New Jersey. According to data published by the Federal Deposit Insurance Corporation (“FDIC”) as of June 30, 2011, Provident Bank holds the #2 share of deposits in Rockland County and #3 share of deposits in Orange County, and overall has the combined #2 share of deposits in Rockland and Orange Counties, New York.

Management Strategy

We operate as an independent 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 focusing on core deposit generation, especially transaction accounts and quality loan growth with emphasis on growing commercial loan balances which provides a favorable platform for long-term sustainable growth. 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. Imperatives for the Company will be to grow revenue and earnings by expanding client acquisitions, continuing to improve credit metrics and to significantly improve efficiency levels. To achieve these goals we will focus on high value client

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segments, expand delivery channels and distribution to increase client acquisitions, execute effectively by creating a highly productive performance culture, reduce operating costs, and to proactively manage enterprise risk. Highlights of management’s business strategy are as follows:

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

Enhancing Customer Service.We are committed to providing superior customer service as a way to differentiate us from our competition. As part of our commitment to service, we have been engaged in Sunday banking since 1995. In addition, we offer multiple access channels to our customers, including our branch and ATM network, internet banking, our Customer Care Telephone Center and our Automated Voice Response system. We reinforce in our employees a commitment to customer service through extensive training, recognition programs and measurement of service standards. Initiated in 2006, our Service Excellence Program is an active part of the culture of the bank, designed to maintain the highest level of service to our customer base.

Growing and maintaining a Diversified Loan Portfolio.We offer a broad range of loan products to commercial businesses, real estate owners, developers and individuals. To support this activity, we maintain commercial, consumer and residential loan departments staffed with experienced professionals to promote the continued growth and prudent management of loan assets. We have experienced consistent and significant growth in our commercial loan portfolio while continuing to provide our residential mortgage and consumer lending services. As a result, we believe that we have developed a high quality diversified loan portfolio with a favorable mix of loan types, maturities and yields. We have currently deemphasized acquisition and development lending for residential housing development of single family homes, as this area has been the most affected by the economy of the region.

Expanding our Banking Franchise.Management intends to continue the expansion of the banking franchise and to increase the number of customers served and products used by businesses and consumers in our market area. Our strategy is to deliver exceptional customer service, which depends on up-to-date technology and multiple access channels, as well as courteous personal contact from a trained and motivated workforce. This approach has resulted in a relatively high level of core deposits, which drives a lower overall cost of funds. Management intends to maintain this strategy, which will require ongoing investment in banking locations and technology to support exceptional service levels for Provident Bank’s customers. Recent expansion efforts have been focused on the greater New York area through the addition of commercial teams. We intend to concentrate on certain segments of the market, in particular focusing on business with revenues of $5 million to $100 million, small business with revenues of $500,000 to $5 million and financially savvy families.

Lending Activities

General.The loans we originate in our general market are; primarily commercial real estate loans, multifamily real estate, commercial business loans, and are deemphasizing acquisition, development and construction loans (“loan portfolio”). We also originate loans in our market area on a fixed-rate and adjustable-rate (“ARM”) basis residential mortgage loans collateralized by one- to four-family residential real estate, and consumer loans such as home equity lines of credit, homeowner loans and personal loans. We retain most of the loans we originate, although we may sell longer-term one- to four-family residential loans and participations in some commercial loans.

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Commercial Real Estate Lending.We originate real estate loans secured predominantly by first liens on commercial real estate. The commercial properties are predominantly non-residential properties such as office buildings, shopping centers, retail strip centers, industrial and warehouse properties and, to a lesser extent, more specialized properties such as assisted living and nursing homes, churches, mobile home parks, restaurants and motel/hotels. We may, from time to time, purchase commercial real estate loan participations. Recently we began seeking multifamily properties to diversify the portfolio. We target commercial real estate loans with initial principal balances between $1.0 million and $15.0 million. At September 30, 2011, loans secured by commercial real estate totaled $703.4 million, or 41.4% of our total loan portfolio and consisted of 982 loans outstanding, although there are a large number of loans with balances substantially greater than the average. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

The majority of our commercial real estate loans are written as five-year adjustable-rate or ten-year fixed-rate mortgages and typically have balloon maturities up to ten years. Amortization on these loans is typically based on 25-year payout schedules. Margins generally range from 200 basis points to 300 basis points above the applicable Federal Home Loan Bank advance rate.

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

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

Commercial Business Loans.We make various types of secured and unsecured commercial loans to customers in our market area for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to seven years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index. At September 30, 2011, we had 1,871 commercial business loans outstanding with an aggregate balance of $209.9 million, or 12.3% of the total loan portfolio. As of September 30, 2011, the average commercial business loan balance was approximately $111,800, although there are a large number of loans with balances substantially greater than this average.

Commercial credit decisions are based on a credit assessment of the loan applicant. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. An evaluation is made of the applicant to determine character and capacity to manage. Personal guarantees of the principals are generally required, except in the case of not-for-profit corporations. In addition to an evaluation of the loan applicant’s financial statements, a determination is made of the probable adequacy of the primary and secondary sources of repayment to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness. Checking with other banks and trade investigations may also be conducted. Collateral supporting a secured transaction also is analyzed to determine its marketability. For small business loans and lines of credit, generally those not exceeding $100,000, we use a modified credit scoring system that enables us to process the loan requests more quickly and efficiently.

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Commercial business loans generally bear higher interest rates than residential loans of like duration because they involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of collateral, if any. .

One-To Four-Family Real Estate Lending.We offer conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally up to $1.1 million that are fully amortizing with monthly or bi-weekly loan payments. This portfolio totaled $389.8 million, or 22.9% of our total loan portfolio at September 30, 2011.

One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as acceptable for purchase. Loans that conform to such guidelines are referred to as “conforming loans.” We generally originate fixed-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently $417,000 for single-family homes or higher in certain areas as determined by the Federal Housing Finance Agency. Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. In order to reduce exposure to rising interest rates, we sold or securitized a portion of conforming fixed rate 1-4 family residential loans originated, totaling $52.5 million and $49.0 million in proceeds for the fiscal years ending September 30, 2011 and 2010, respectively.

We also originate loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to substantially the same credit standards as conforming loans. These loans are generally intended to be held in our portfolios.

We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and our capital and liquidity position, we may retain all of our newly originated longer term fixed-rate residential mortgage loans, or from time to time we may decide to sell all or a portion of such loans in the secondary mortgage market to government sponsored entities such as Fannie Mae and Freddie Mac or other purchasers. Our bi-weekly one- to four-family residential mortgage loans that are retained in our portfolio result in shorter repayment schedules than conventional monthly mortgage loans, and are repaid through an automatic deduction from the borrower’s savings or checking account. As of September 30, 2011, bi- weekly loans totaled $89.5 million, or 23% of our residential loan portfolio. We retain the servicing rights on a large majority of loans sold to generate fee income and reinforce our commitment to customer service, although we may also sell non-conforming loans to mortgage banking companies, generally on a servicing-released basis. As of September 30, 2011, loans serviced for others, excluding loan participations, totaled $173.8 million.

We currently offer several ARM loan products secured by residential properties with rates that are fixed for a period ranging from six months to ten years. After the initial term, if the loan is not already refinanced, the interest rate on these loans generally resets every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. At September 30, 2011, our ARM portfolio included $2.2 million in loans that re-price every six months, $42.5 million in loans that re-price once a year, $19.1 million in loans that re-price periodically after an initial fixed-rate period of one year or more and $429,000 that re-price based upon other miscellaneous re-pricing terms. Our adjustable rate loans do not have interest-only or negative amortization features. We do not nor have we in the past originated “subprime” loans, i.e., loans to borrowers with subprime credit scores combined with either high loan-to-value or high debt-to-income ratios.

We require title insurance on all of our one- to four-family mortgage loans, and we also require that borrowers maintain fire and extended coverage or all risk casualty insurance (and, if appropriate, flood insurance) in an

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amount at least equal to the lesser of the loan balance or the replacement cost of the improvements, but in any event in an amount calculated to avoid the effect of any coinsurance clause. Nearly all residential first mortgage loans are required to have a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance.

Acquisition, Development and Construction Loans.Historically, we originated land acquisition, development and construction (“ADC”) loans to builders in our market area. In the past year, we have deemphasized this lending due to the economic slow down and declines in the real estate market. Effective August 2011, our policy is to consider acquisition or development loans only on an exception basis. These loans totaled $175.9 million, or 10.3% of our total loan portfolio at September 30, 2011, a decline of $55.3 million as we have de-emphasized this business. Acquisition loans help finance the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income property. In some cases, we may make an acquisition loan before the borrower has received approval to develop the land as planned. In general, the maximum loan-to-value ratio for a land acquisition loan is 50% of the appraised value of the property, although for certain borrowers we deem to be our lowest risk, higher loan-to-value ratios may be allowed. We also make development loans to builders in our market area to finance improvements to real estate, consisting mainly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum amount loaned is generally limited to the cost of the improvements plus limited approval of soft costs. In general, we do not originate loans with interest reserves. A portion of our ADC loans acquired through the purchase of participations do carry interest reserves. The total of these ADC participation loans with interest reserves at September 30, 2011 were $12.6 million. Advances are made in accordance with a schedule reflecting the cost of the improvements.

We also make construction loans to area builders which are not affected by our new policy. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers except in cases of owner occupied construction loans. Owner occupied commercial construction loans totaled $6.9 million at September 30, 2011. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We commit to provide the permanent mortgage financing on most of our construction loans on income-producing property. Collateral coverage and risk profile is maintained by restricting the number of model or speculative units in each project.

ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. In recent years as a result of the economic downturn, most projects have performed behind schedule, requiring the borrowers to carry these projects for a longer period than was originally contemplated when we approved the credit facilities. As a result many of the borrowers have been utilizing other sources to maintain debt service or have been unable to maintain debt service requirements. As of September 30, 2011 $11.7 million of acquisition and development loans are being amortized from outside sources of cash flow.

Consumer Loans.We originate a variety of consumer and other loans, including homeowner loans, home equity lines of credit, new and used automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. As of September 30, 2011, consumer loans totaled $224.8 million, or 13.1% of the total loan portfolio.

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We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity lines of credit secured by junior liens on residential properties. As of September 30, 2011, homeowner loans totaled $41.0 million or 2.4% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $174.5 million, or 10.2% of our total loan portfolio at September 30, 2011, with $129.0 million remaining undisbursed.

Other consumer loans include personal loans and loans secured by new or used automobiles. As of September 30, 2011, these loans totaled $9.3 million, or less than 1% of our total loan portfolio. We originate consumer loans directly to our customers or on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee. Personal loans also include secured and unsecured installment loans for other purposes. Unsecured installment loans, which include most personal loans, generally have shorter terms than secured consumer loans, and generally have higher interest rates than rates charged on secured installment loans with comparable terms. We also offer overdraft lines of credit on an unsecured basis; outstanding balances on these loans included above totaled $4.2 million with additional undrawn lines totaling $14.2 million.

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

Consumer loans generally entail greater risk than residential mortgage loans. Loans secured by junior liens have been more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy than a single family mortgage loan.

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

	September 30,
	2011						2010						2009						2008						2007
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
One-to four-family residential mortgage loans	$	389,765			22.9	%	$	434,900			25.5	%	$	460,728			27.0	%	$	513,381			29.6	%	$	500,825			30.6
Commercial real estate loans		703,356			41.4			579,232			34.0			546,767			32.6			554,811			32.0			535,003			32.8
Commercial business loans		209,923			12.3			217,927			12.8			242,629			14.2			243,642			14.1			207,156			12.6
Acquisition, development, construction		175,931			10.3			231,258			13.6			201,611			11.4			170,979			9.9			153,074			9.3
Total commercial loans		1,089,210			64.0			1,028,417			60.4			991,007			58.2			969,432			56.0			895,233			54.7
Home equity lines of credit		174,521			10.2			176,134			10.4			180,205			10.6			166,491			9.6			162,669			9.9
Homeowner loans		40,969			2.4			48,941			2.9			54,941			3.2			58,569			3.4			59,705			3.6
Other consumer loans		9,334			0.5			13,149			0.8			16,376			1.0			23,680			1.4			19,626			1.2
Total consumer loans		224,824			13.1			238,224			14.1			251,522			14.8			248,740			14.4			242,000			14.7
Total loans		1,703,799			100.0	%		1,701,541			100.0	%		1,703,257			100.0	%		1,731,553			100.0	%		1,638,058			100.0
Allowance for loan losses		(27,917	)					(30,843	)					(30,050	)					(23,101	)					(20,389	)
Total loans, net	$	1,675,882					$	1,670,698					$	1,673,207					$	1,708,452					$	1,617,669

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2011. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Weighted average rates are computed based on the rate of the loan at September 30, 2011.

	Residential Mortgage					Commercial Real Estate					Commercial Business					ADC					Consumer					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending September 30,
2012	$	7,097		4.44	%	$	30,413		5.20	%	$	56,728		4.09	%	$	119,055		4.48	%	$	1,800		5.92	%	$	215,093		4.49	%
2013 to 2016		24,016		5.06			255,305		5.66			85,200		4.59			50,289		4.23			10,838		8.45			425,648		5.31
2016 and beyond		358,652		5.40			417,638		5.61			67,995		4.49			6,587		3.20			212,186		4.67			1,063,058		5.26
Total	$	389,765		5.56	%	$	703,356		5.60	%	$	209,923		4.42	%	$	175,931		4.14	%	$	224,824		4.87	%	$	1,703,799		5.20	%

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The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2011 that are contractually due after September 30, 2012.

	Fixed		Adjustable		Total
	(Dollars in thousands)
Residential mortgage loans	$	323,446	$	59,222	$	382,668
Commercial real estate loans		293,956		378,987		672,943
Commercial business loans		47,962		105,233		153,195
ADC		1,838		55,038		56,876
Total commercial loans		343,756		539,258		883,014
Consumer loans		53,677		169,347		223,024
Total loans	$	720,879	$	767,827	$	1,488,706

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

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

During fiscal year 2011, $3.0 million in loans were sold as participation certificates whereby such loans were retained as mortgage backed securities guaranteed by Freddie Mac. In addition we sold $49.5 million as whole loans to Freddie Mac. We are a qualified loan servicer for both Fannie Mae and Freddie Mac. Our policy generally has been to retain the servicing rights for all conforming loans sold. We therefore continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings, if necessary. We retain a portion of the interest paid by the borrower on the loans as consideration for our servicing activities.

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

The Management Credit Committee (the “MCC”) consists of the President and Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, and other senior lending personnel. The MCC is authorized to approve loans within the existing policy limits established by the Board. For loans that contain any policy exception but are nonetheless deemed desirable, the MCC may recommend approval to the CRC, which in turn may recommend approval to the Board.

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The MCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. The maximum single initial authority for commercial loans is $50,000 ($100,000 for credit-scored small business loans); and for other consumer loans, primarily equity loans, $100,000. All residential lending authority requires dual signatures. Two loan officers with sufficient authority acting together may approve loans up to $1 million.

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

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

Loan Origination Fees and Costs.In addition to interest earned on loans, we receive loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. We defer loan origination fees and costs, and amortize such amounts as an adjustment to yield over the term of the loan by use of the level yield method. Deferred loan origination costs (net of deferred fees) were $308,000 at September 30, 2011.

To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale. The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid. Originated mortgage servicing rights with an amortized cost of $1.5 million are included in other assets at September 30, 2011. See also Notes 2 and 5 of the “Notes to Consolidated Financial Statements”.

Loans to One Borrower.At September 30, 2011, our five largest aggregate amounts loaned to any one borrower and certain related interests (including any unused lines of credit) consisted of secured and unsecured financing of $22.5 million, $19.5 million, $17.6 million, $16.6 million and $16.0 million. See “Regulation — Regulation of Provident Bank — Loans to One Borrower” for a discussion of applicable regulatory limitations.

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

Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans.A computer-generated late notice is sent by the 16th day after the payment due date on a loan requesting the payment due plus any late charge that was assessed. Accounts are distributed to a collector or account officer to contact borrowers, determine the reason for delinquency and seek payment, and accounts are monitored electronically for receipt of payments. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If payment is not received within 60 days of the due date,

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loans are generally accelerated and payment in full is demanded. Failure to pay within 90 days of the original due date generally results in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are generally charged-off after 120 days. For commercial loans, procedures vary depending upon individual circumstances.

Loans Past Due and Non-Performing Assets.Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due, unless well secured and in the process of collection. In addition, loans are placed on non-accrual status when, in the opinion of management, there is sufficient reason to question the borrower’s ability to continue to meet principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income related to current year income and charged to the allowance for loan losses with respect to income that was recorded in the prior fiscal year. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower’s financial condition and payment record. Appraisals are performed at least annually on criticized/classifieds loans. At September 30, 2011, we had non-accrual loans of $36.5 million and $4.1 million of loans 90 days past due and still accruing interest, which were well secured and in the process of collection. At September 30, 2010 we had non-accrual loans of $21.4 million and $5.4 million of loans 90 days past due and still accruing interest.

Impaired Loans. 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 are based on one of three measures — the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at its measured value. Impaired loans substantially consist of non-performing loans and accruing and performing troubled debt restructured loans. At September 30, 2011, we had $55.0 million in impaired loans with $3.8 million in specific allowances.

Other Real Estate Owned.Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned (“REO”) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of book value or fair value less cost to sell. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2011 we had 17 foreclosed properties with a recorded balance of $5.4 million. In addition, $9.8 million in loan balances was considered troubled debt restructures which are still accruing interest income.

Troubled Debt Restructure.The Company may modify loans to certain borrowers who are experiencing financial difficulty. If the terms of the modification include a concession, as defined by US GAAP guidance, the loan as modified is considered a trouble debt restructuring (“TDR”). Nearly all these loans are secured by real estate. Total TDR’s were $17.6 million at September 30, 2011, of which $7.8 million were classified as nonaccrual and $9.1 million were performing according to terms and still accruing interest income. TDR’s still accruing interest income were modified for a troubled borrower, who was still performing in accordance with the terms of their loan. The majority of TDR’s consisted of four relationships totaling $8.0 million, $3.6 million, $1.0 million and $853,000 respectively. Included in the total of $13.5 million of these four relationships are $6.6 million of non performing loans. The loan modifications included actions such as extension of maturity date or the lowering of interest rates and monthly payments. The amount of commitments to lend borrowers with loans that have been modified is $4.2 million at September 30, 2011. 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.

Classification of Assets.Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the

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obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are charged off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, designated as “special mention”. As of September 30, 2011, we had $23.0 million of assets designated as “special mention”.

Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2011, classified assets consisted of substandard assets of $94.0 million and there were not any classified as doubtful.

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

	Loans Delinquent For
	30-89 Days				90 Days & over still accruing & non- accrual				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)
At September 30, 2011
Real estate — residential mortgage		8	$	1,212		40	$	7,976		48	$	9,188
Real estate — commercial mortgage		4		1,105		18		9,655		22		10,760
Real estate — commercial mortgage (CBL)		—		—		16		3,559		16		3,559
Commercial business loans		2		490		2		168		4		658
Commercial business loans (CBL)		—		—		1		75		1		75
Acquisition, development & construction loans		4		4,265		24		16,984		28		21,249
Consumer, including home equity loans		20		794		26		2,150		46		2,944
Total		38	$	7,866		127	$	40,567		165	$	48,433
At September 30, 2010
Real estate — residential mortgage		1	$	113		36	$	8,033		37	$	8,146
Real estate — commercial mortgage		4		1,469		26		9,857		30		11,326
Commercial business loans		2		3,403		6		1,376		8		4,779
Acquisition, development & construction loans		2		6,681		11		5,730		13		12,411
Consumer, including home equity loans		27		681		22		1,844		49		2,525
Total		36	$	12,347		101	$	26,840		137	$	39,187
At September 30, 2009
Real estate — residential mortgage		2	$	390		32	$	7,357		34	$	7,747
Real estate — commercial mortgage		2		398		24		6,803		26		7,201
Commercial business loans		18		999		8		457		26		1,456
Acquisition, development & construction loans		1		366		20		11,270		21		11,636
Consumer, including home equity loans		22		494		13		582		35		1,076
Total		45	$	2,647		97	$	26,469		142	$	29,116
At September 30, 2008
Real estate — residential mortgage		19	$	4,106		19	$	4,218		38	$	8,324
Real estate — commercial mortgage		8		1,666		12		3,832		20		5,498
Commercial business loans		29		1,318		35		2,811		64		4,129
Acquisition, development & construction loans		—		—		9		5,596		9		5,596
Consumer, including home equity loans		43		435		41		421		84		856
Total		99	$	7,525		116	$	16,878		215	$	24,403
At September 30, 2007
Real estate — residential mortgage		28	$	4,829		15	$	1,899		43	$	6,728
Real estate — commercial mortgage		31		3,387		8		2,586		39		5,973
Commercial business loans		9		357		19		1,683		28		2,040
Acquisition, development & construction loans		—		—		2		689		2		689
Consumer, including home equity loans		49		835		30		401		79		1,236
Total		117	$	9,408		74	$	7,258		191	$	16,666

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

	September 30,
	2011			2010			2009			2008			2007
	Non- Accrual			Non- Accrual			Non- Accrual			Non- Accrual			Non- Accrual
Non-performing loans:
Real estate — residential mortgage	$	7,485		$	6,080		$	4,425		$	1,731		$	—
Real estate — commercial mortgage		8,016			6,886			5,826			3,100			1,099
Real estate — commercial mortgage (CBL)		3,209			—			—			—			—
Commercial business loans		168			1,376			457			2,811			1,637
Commercial business loans CBL)		75			—			—			—			—
Acquisition, land and development		16,538			5,730			10,830			5,596			644
Consumer, including home equity loans		986			1,341			371			351			129
Accruing loans past due 90 days or more		4,090			5,427			4,560			3,289			3,749
Total non-performing loans	$	40,567		$	26,840		$	26,469		$	16,878		$	7,258
Foreclosed properties		5,391			3,891			1,712			84			139
Total non-performing assets	$	45,958		$	30,731		$	28,181		$	16,962		$	7,397
Troubled Debt Restructures still accruing and not included above	$	8,470		$	16,047		$	674		$	—		$	—
Ratios:
Non-performing loans to total loans		2.38	%		1.58	%		1.55	%		0.97	%		0.44	%
Non-performing assets to total assets		1.46	%		1.02	%		0.93	%		0.57	%		0.26	%

For the year ended September 30, 2011, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the year amounted to $1.8 million. Interest income actually recognized on such loans totaled $1.1 million.

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

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

• trends in volume and terms of loans;

• effects of any changes in lending policies and procedures;

• experience, ability, and depth of lending management and staff;

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• national and local economic trends and conditions;

• concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and

• for commercial loans, trends in risk ratings.

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

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

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

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

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

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Allowance for Loan Losses by Year. The following table sets forth activity in our allowance for loan losses for the years indicated.

	2011			2010			2009			2008			2007
Balance at beginning of year	$	30,843		$	30,050		$	23,101		$	20,389		$	20,373
Charge-offs:
Real estate — residential mortgage		(2,140	)		(749	)		(461	)		(97	)		—
Real estate — Commercial mortgage		(819	)		(416	)		(669	)		(627	)		—
Real estate — Commercial mortgage (CBL) ¹		(983	)		(571	)		(233	)		—			—
Commercial business loans		(366	)		(1,666	)		(601	)		(3,596	)		(2,164	)
Commercial business loans (CBL) ¹		(5,034	)		(4,912	)		(6,670	)		—			—
Acquisition Development & Construction loans		(8,939	)		(848	)		(1,515	)		—			—
Consumer, including home equity loans		(1,989	)		(1,168	)		(1,140	)		(609	)		(329	)
		(20,270	)		(10,330	)		(11,289	)		(4,929	)		(2,493	)
Recoveries:
Real estate — residential mortgage		15			3			2			—			—
Real estate — Commercial mortgage		2			8			—			—			—
Real estate — Commercial mortgage (CBL) ¹		—			15			—			—			—
Commercial business loans		232			306			80			291			581
Commercial business loans (CBL) ¹		373			364			169			—			—
Acquisition Development & Construction loans		10			261			200			—			—
Consumer, including home equity loans		128			166			187			150			128
		760			1,123			638			441			709
Net charge-offs		(19,510	)		(9,207	)		(10,651	)		(4,488	)		(1,784	)
Provision for loan losses		16,584			10,000			17,600			7,200			1,800
Balance at end of year	$	27,917		$	30,843		$	30,050		$	23,101		$	20,389
Ratios:
Net charge-offs to average loans outstanding		1.17	%		0.56	%		0.62	%		0.28	%		0.12	%
Allowance for loan losses to non-performing loans		69	%		115	%		114	%		137	%		281	%
Allowance for loan losses to total loans		1.64	%		1.81	%		1.76	%		1.33	%		1.24	%

¹ Community Business Loan (CBL) information is not available for 2008 and 2007

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

	September 30,
	2011							2010							2009
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate — residential mortgage	$	3,498	$	389,765		22.88	%	$	2,641	$	434,900		25.55	%	$	3,106	$	460,728		27.04	%
Real estate — commercial mortgage		4,533		610,379		35.82	%		5,060		481,632		28.31	%		4,824		460,649		27.05	%
Real estate — commercial mortgage (CBL)		1,035		92,977		5.46	%		855		97,599		5.74	%		2,871		86,118		5.06	%
Commercial business loans		1,331		134,399		7.89	%		3,262		125,766		7.39	%		3,917		142,908		8.39	%
Commercial business loans (CBL)		4,614		75,524		4.43	%		5,708		92,162		5.42	%		5,011		99,721		5.85	%
Acquisition, development & construction		9,895		175,931		10.33	%		9,752		231,258		13.59	%		7,680		201,611		11.84	%
Consumer, including home equity loans		3,011		224,824		13.19	%		3,565		238,224		14.00	%		2,641		251,522		14.77	%
Total	$	27,917	$	1,703,799		100.00	%	$	30,843	$	1,701,541		100.00	%	$	30,050	$	1,703,257		100.00	%

	September 30,
	2008							2007
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate — residential mortgage	$	1,494	$	513,381		29.60	%	$	668	$	500,825		30.60	%
Real estate — commercial mortgage		5,793		554,811		32.00	%		8,157		535,003		32.70	%
Commercial business loans		7,051		243,642		14.10	%		5,223		207,156		12.60	%
Acquisition, development & construction		6,841		170,979		9.90	%		4,743		153,074		9.30	%
Consumer, including home equity loans		1,922		248,740		14.40	%		1,598		242,000		14.80	%
Total	$	23,101	$	1,731,553		100.00	%	$	20,389	$	1,638,058		100.00	%

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Securities Investments

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

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

FASB ASC Topic #320, Investments, Debt and Equity securities requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability to hold and our intent. Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. We do not have a trading portfolio. Excluding mortgage backed securities and CMO’s management sold $325.7 million at amortized cost in investment securities and realized net gains of $5.4 million the market yields associated with the securities sold were below levels management believed justifying retaining such securities.

Government and Agency Securities.At September 30, 2011, we held government and agency securities available for sale with a fair value of $204.6 million, consisting primarily of agency obligations with maturities of more than one year through ten years. In addition, we held $30.0 million in government and agency securities as held to maturity at amortized cost. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes and as collateral for borrowings and municipal deposits.

Corporate and Municipal Bonds and Notes.At September 30, 2011, we held $17.1 million in corporate debt securities. Corporate bonds have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this risk, our policy limits investments in corporate bonds to securities with maturities of ten years or less and rated “A” or better by at least one nationally recognized rating agency at time of purchase, and to a total investment of no more than $2.0 million per issuer and a total corporate bond portfolio limit of 5% of assets. The policy also limits investments in municipal bonds to securities with maturities of 20 years or less and rated as investment grade by at least one nationally recognized rating agency at the time of purchase, and favors issues that are insured, however we also purchase securities that are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In addition, the policy generally imposes an investment limitation of $5.0 million per municipal issuer

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and a total municipal bond portfolio limit of 10% of assets. At September 30, 2011, we held $207.3 million in bonds issued by states and political subdivisions, $18.6 million of which were classified as held to maturity at amortized cost and are mainly unrated and $188.7 million of which were classified as available for sale at fair value. At September 30, 2011 we did not hold any obligations that were rated less than “A” as available for sale.

Equity Securities.At September 30, 2011, our equity securities available for sale had a fair value of $1.2 million. We also held $17.6 million (at cost) of Federal Home Loan Bank of New York (“FHLBNY”) common stock, a portion of which must be held as a condition of membership in the Federal Home Loan Bank System, with the remainder held as a condition to our borrowing under the Federal Home Loan Bank advance program. Dividends on FHLBNY stock recorded in the year ended September 30, 2011 amounted to $1.1 million. We held no preferred shares of Freddie Mac or Fannie Mae for the year ended September 30, 2011. We also held no “auction rate securities” or “pooled trust preferred securities” during the year ended September 30, 2011. We held approximately $837,000 in fair value of equity securities in a local bank. We recorded $278,000 in other than temporary impairment as the fair value of these securities has been less that original cost for a period of over two years

Mortgage-Backed Securities.We purchase mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower credit risk as a result of the guarantees provided by Freddie Mac and Fannie Mae; (iii) increase liquidity, and (iv) maintain our status as a thrift for charter and income tax purposes. We invest primarily in mortgage-backed securities issued or sponsored by Freddie Mac, and Fannie Mae or private issuers for CMOs. To a lesser extent, we also invest in securities backed by agencies of the U.S. Government, such as Ginnie Mae. At September 30, 2011, our mortgage-backed securities portfolio totaled $381.2 million, consisting of $328.3 million available for sale at fair value and $60.0 million held to maturity at amortized cost. The total mortgage-backed securities portfolio includes CMOs of $108.2 million, consisting of $82.4 million available for sale at fair value and $25.8 million held to maturity at amortized cost. Within this total, $5.4 million at amortized cost and $4.9 million fair value were issued by private issuers, including $1.9 million at amortized cost below investment grade, to which we have recorded $75,000 in other than temporary impairment.

Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as us, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk in addition to the guarantee of repayment of principal outstanding that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We review prepayment estimates for our mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. As a result of our reviews, we anticipated an acceleration of prepayments. Management sold $204.8 million in mortgage backed securities, including CMO’s, at amortized cost and realized $4.6 million in net gains on the sales. Such proceeds were reinvested in securities with yields which were lower than the recorded yields of the securities sold and a more diversified risk profile.

A portion of our mortgage-backed securities portfolio is invested in CMOs, including Real Estate Mortgage Investment Conduits (“REMICs”), backed by Fannie Mae and Freddie Mac and certain private issuers. CMOs and REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The

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cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime rate caps, prepayment risk, and interest rates.

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

	September 30,
	2011				2010				2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Investment Securities:
U.S. Government securities	$	—	$	—	$	71,071	$	72,293	$	20,893	$	21,076
Federal agency obligations		199,741		204,648		344,154		346,019		186,301		186,700
Corporate Bonds		16,984		17,062		29,406		30,540		25,245		25,823
State and municipal securities		177,666		188,684		180,879		191,657		158,007		167,584
Equity securities		1,192		1,192		1,146		889		1,145		885
Total investment securities available for sale		395,583		411,586		626,656		641,398		391,591		402,068
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae		136,699		139,991		149,084		153,188		238,723		243,063
Freddie Mac		98,511		100,675		56,632		58,452		92,885		94,506
Ginnie Mae		4,973		5,180		9,047		9,315		26,586		26,929
CMOs and REMICs		81,170		82,412		38,338		38,659		66,784		66,017
Total mortgage-backed securities available for sale		321,353		328,258		253,101		259,614		424,978		430,515
Total securities available for sale	$	716,936	$	739,844	$	879,757	$	901,012	$	816,569	$	832,583

At September 30, 2011, our available for sale federal agency securities portfolio, at fair value, totaled $204.6 million, or 6.5% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of one year or less, and $199.7 million had maturities of between one and ten years and a weighted average yield of 1.89%. The agency securities portfolio currently includes both callable debentures and non callable debentures.

At September 30, 2011, our available for sale state and municipal notes securities portfolio, at fair value totaled $188.7 million or 6.0% of total assets. Of the state and municipal note securities portfolio, based on amortized cost, had $4.4 million in securities with a final maturity of one year or less and a weighted average yield of 2.01%; $10.9 million maturing in one to five years with a weighted average yield of 3.3%; $116.5 million maturing in five to ten years with a weighted average yield of 3.54% and $45.9 million maturing in greater than ten years with a weighted average yield of 4.14%. Equity securities available for sale at September 30, 2011 had a fair value of $1.2 million.

At September 30, 2011, $328.3 million of our available for sale mortgage-backed securities, at fair value, consisted of pass-through securities, which totaled 10.5% of total assets and $82.4 million of CMO securities, at fair value. The total amortized cost of these pass- through securities was $240.2 million and consisted of $136.7 million, $98.5 million and $5.0 million of Fannie Mae, Freddie Mac and Ginnie Mae mortgage backed securities, respectively, with respective weighted averages yields of 2.76%, 2.82% and 2.89%. At the same date, the fair

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value of our available for sale CMO portfolio totaled $82.4 million, or 2.6% of total assets, and consisted of CMOs issued by government sponsored agencies such as Fannie Mae, Freddie Mac and $5.4 million sold by private party issuers. The amortized cost of these CMOs result in a weighted average yield of 2.38%. We own both fixed-rate and floating-rate CMOs. The underlying mortgage collateral for our portfolio of CMOs available for sale at September 30, 2011 had contractual maturities of over five years. However, as with mortgage-backed pass-through securities, the actual maturity of a CMO may be less than its stated contractual maturity due to prepayments of the underlying mortgages and the terms of the CMO tranche owned.

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

	September 30,
	2011				2010				2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Investment Securities:
Federal agencies	$	29,973	$	29,857	$	—	$	—	$	—	$	—
State and municipal securities		18,583		19,691		27,879		28,815		37,162		38,055
Other		1,500		1,539		1,000		1,038		1,000		1,034
Total investment securities held to maturity		50,056		51,087		28,879		29,853		38,162		39,089
Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae		1,298		1,361		1,835		1,931		2,713		2,823
Freddie Mac		32,858		32,841		2,389		2,513		2,834		2,916
Ginnie Mae		—		—		16		17		45		45
CMOs and REMICs		25,828		25,983		729		748		860		866
Total mortgage-backed securities held to maturity		59,984		60,185		4,969		5,209		6,452		6,650
Total securities held to maturity	$	110,040	$	111,272	$	33,848	$	35,062	$	44,614	$	45,739

At September 30, 2011, our held to maturity federal agency securities portfolio, at amortized cost, totaled $30.0 million, or 1.0% of total assets. Of the federal agency portfolio, based on amortized cost, none had maturities of five years or less, and $30.0 million had maturities of between five and ten years and a weighted average yield of 2.019%. The agency securities portfolio currently includes only callable debentures.

State and municipal securities totaled $18.6 million at amortized cost (primarily unrated obligations) and consisted of $5.8 million, with a final maturity of one year or less and a weighted average yield of 2.51%; $6.2 million, maturing in one to five years, with a weighted average yield of 3.53%; $3.0 million maturing in five to ten years, with a weighted average yield of 4.39% and $3.6 million, maturing in greater than ten years, with a weighted average yield of 4.48%.

At September 30, 2011, our held to maturity mortgage-backed securities portfolio totaled $60.0 million at amortized cost, consisting of: none with contractual maturities of one year or less, $223,000 with a weighted average yield of 5.15% and contractual maturities within five years, and $306,000 with a weighted average yield of 5.96% and contractual maturities of five to ten years and $59.5 million with a weighted average yield of 2.39% with contractual maturities of greater than ten years; CMOs of $25.8 million are included in this portfolio. While the contractual maturity of the CMOs underlying collateral is greater than ten years, the actual period to maturity of the CMOs may be shorter due to prepayments on the underlying mortgages and the terms of the CMO tranche owned.

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Portfolio Maturities and Yields. The following table summarizes the composition and maturities of the investment debt securities portfolio and the mortgage backed securities portfolio at September 30, 2011. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis. ($ in thousands)

	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years					More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Available for Sale:
Mortgage-Backed Securities
Fannie Mae	$	—		—	%	$	6,889		2.47	%	$	53,626		2.49	%	$	76,184		2.97	%	$	136,699	$	139,991		2.76	%
Freddie Mac		—		—			1,566		3.89			—		—			96,945		2.80			98,511		100,675		2.82
Ginnie Mae		—		—			—		—			—		—			4,973		2.88			4,973		5,180		2.89
CMOs and REMICs		—		—			—		—			411		4.43			80,759		2.37			81,170		82,412		2.38
Total		—		—			8,455		2.73			54,037		2.51			258,861		2.72			321,353		328,258		2.68
Investment Securities
U.S. Government and agency securities		—		—			169,766		1.84			29,975		2.15			—		—			199,741		204,648		1.89
Corporate		—		—			16,856		2.43			128		6.88			—		—			16,984		17,062		2.46
State and municipal		4,410		2.01			10,854		3.33			116,531		3.54			45,871		4.14			177,666		188,684		3.65
Total		4,410		2.01			197,476		1.97			146,634		3.26			45,871		4.14			394,391		410,394		2.70
Total debt securities available for sale	$	4,410		2.01	%	$	205,931		2.00	%	$	200,671		3.06	%	$	304,732		2.93	%	$	715,744	$	738,652		2.69	%
Held to Maturity:
Mortgage-Backed Securities
Fannie Mae	$	—		—	%	$	223		5.15	%	$	—		—	%	$	1,075		2.31	%	$	1,298	$	1,361		2.80	%
Freddie Mac		—		—			—		—			306		5.96			32,552		2.54			32,858		32,841		2.57
Ginnie Mae		—		—			—		—			—		—			—		—			—		—		—
CMOs and REMICs		—		—			—		—			—		—			25,828		2.21			25,828		25,983		2.21
Total		—		—			223		5.15			306		5.96			59,455		2.39			59,984		60,185		2.42
Investment Securities
U.S. Government and agency securities												29,973		2.01			—		—			29,973		29,857		2.01
State and municipal		5,813		2.51			6,196		3.53			2,982		4.39			3,592		4.48			18,583		19,691		3.53
Other		—		—			1,500		2.36			—		—			—		—			1,500		1,539		2.36
Total		5,813		2.51			7,696		3.30			32,955		2.23			3,592		4.48			50,056		51,087		2.59
Total debt securities held to maturity	$	5,813		2.51	%	$	7,919		3.35	%	$	33,261		2.26	%	$	63,047		2.51	%	$	110,040	$	111,272		2.50	%

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Sources of Funds

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

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

At September 30, 2011, our deposits totaled $2.3 billion. Interest-bearing deposits totaled $1.6 billion, and non-interest-bearing demand deposits totaled $651.2 million. NOW, savings and money market deposits totaled $1.3 billion at September 30, 2011. Also at that date, we had a total of $303.7 million in certificates of deposit, of which $250.8 million had maturities of one year or less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, our management monitors activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of such accounts upon maturity, although we may have to match competitive rates to retain many of these accounts.

Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our favorable locations, customer service and competitive pricing to attract and retain these deposits. While we accept certificates of deposit in excess of $100,000 for which we may provide preferential rates, we do not actively solicit such deposits as they are more difficult to retain than core deposits. Our limited purpose commercial bank subsidiary, Provident Municipal Bank, accepts municipal deposits. Municipal time accounts (certificates of deposit) are generally obtained through a bidding process, and tend to carry higher average interest rates than retail certificates of deposit of similar term.

Management utilizes brokered deposits on a limited basis as a diversification of wholesale funding on an unsecured basis. Management maintains limits for the use of wholesale deposit and other short term funding in general less than 10% of total assets. Most of the brokered deposit funding maintained by the bank has a maturity to coincide with the anticipated inflows of deposits through municipal tax collections.

Listed below are the Company’s brokered deposits (in thousands):

	September 30, 2011		September 30, 2010
Money market	$	5,725	$	—
Reciprocal CDAR’s 1		2,746		7,889
CDAR’s one way		3,366		10,665
Total brokered deposits	$	11,837	$	18,554

¹  Certificate of deposit account registry service

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

	For the year ended September 30,
	2011					2010					2009
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Demand deposits:
Retail	$	194,299		8.5	%	$	174,731		8.2	%	$	169,122		8.1	%
Commercial & municipal		456,927		19.8			355,126		16.6			323,112		15.5
Total demand deposits		651,226		28.3			529,857		24.8			492,234		23.6
Business & municipal NOW deposits		237,865		10.4			276,100		12.9			225,046		10.8
Personal NOW deposits		164,637		7.2			139,517		6.5			127,595		6.1
Savings deposits		429,825		18.7			392,321		18.3			357,814		17.2
Money market deposits		509,483		22.2			427,334		19.9			384,632		18.5
Subtotal		1,993,036		86.8			1,765,129		82.4			1,587,321		76.2
Certificates of deposit		303,659		13.2			377,573		17.6			494,961		23.8
Total deposits	$	2,296,695		100.0	%	$	2,142,702		100.0	%	$	2,082,282		100.0	%

As of September 30, 2011 and September 30, 2010 the Company had $614.8 million and $513.8 million, respectively, in municipal deposits. Of these amounts, $284.0 million and $219.0 million were deposits related to school district tax deposits due on September 30, 2011 and 2010, respectively, which we generally retain only for a short period. The following table sets forth the distribution of average deposit accounts by account category with the average rates paid at the dates indicated.

	September 30,
	2011							2010							2009
	Average Balance		Interest		Average Rate Paid			Average Balance		Interest		Average Rate Paid			Average Balance		Interest		Average Rate Paid
	(Dollars in thousands)
Non interest bearing deposits	$	472,388	$	—		—		$	429,655	$	—		—		$	380,571	$	—		—
NOW deposits		315,623		595		0.19	%		280,304		579		0.21	%		232,164		670		0.29	%
Savings deposits (1)		432,227		444		0.10	%		397,760		403		0.10	%		366,355		758		0.21	%
Money market deposits		489,347		1,595		0.33	%		419,152		1,456		0.35	%		374,507		2,707		0.72	%
Certificates of deposit		373,142		3,470		0.93	%		451,509		6,079		1.35	%		577,723		14,240		2.46	%
Total interest bearing deposits		1,610,339	$	6,104		0.38	%		1,548,725	$	8,517		0.55	%		1,550,749	$	18,375		1.18	%
Total deposits	$	2,082,727						$	1,978,380						$	1,931,320

⁽¹⁾  Includes club accounts and mortgage escrow balances

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

	At September 30, 2011
	Period to Maturity													Total at September 30,
	Less than One Year		One to Two Years		Two to Three Years		More than Three Years		Total		Percent of Total			2010		2009
	(Dollars in thousands)
Interest Rate Range:
1.00% and below	$	233,780	$	10,134	$	978	$	885	$	245,777		80.9	%	$	285,923	$	150,138
1.01% to 2.00%		6,446		3,383		2,143		3,052		15,024		4.9	%		35,527		172,536
2.01% to 3.00%		4,783		1,024		4,450		6,585		16,842		5.5	%		21,261		72,483
3.01% to 4.00%		2,099		2,469		5,958		—		10,526		3.5	%		17,092		77,720
4.01% to 5.00%		3,465		5,482		6,055		—		15,002		4.9	%		17,115		21,439
5.01% to 6.00%		196		292		—		—		488		0.2	%		655		645
Total	$	250,769	$	22,784	$	19,584	$	10,522	$	303,659		100	%	$	377,573	$	494,961

Certificates of Deposit by Time to Maturity. The following table sets forth certificates of deposit by time remaining until maturity as of September 30, 2011.

	Maturity
	3 months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
	(Dollars in thousands)
Certificates of deposit less than $100,000	$	75,255	$	61,014	$	49,199	$	35,847	$	221,315
Certificates of deposit of $100,000 or more(¹)		30,821		17,336		17,144		17,043		82,344
	$	106,076	$	78,350	$	66,343	$	52,890	$	303,659

⁽¹⁾  The weighted interest rates for these accounts, by maturity period, are 0.46% for 3 months or less; 0.61% for 3 to 6 months; 0.79% for 6 to 12 months; and 2.85% for over 12 months. The overall weighted average interest rate for accounts of $100,000 or more was 1.06%

Short-term Borrowings. Our short-term borrowings (less than one year) consist of advances and overnight borrowings, and in 2011 includes $51.5 million of debt guaranteed by the FDIC maturing in February 2012. At September 30, 2011, we had access to additional Federal Home Loan Bank advances of up to an additional $200 million or more in overnight advances on a collateralized basis. The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates and for the years indicated.

	At or For the Years Ended September 30,
	2011			2010			2009
	(Dollars in thousands)
Balance at end of year	$	61,500		$	44,873		$	62,677
Average balance during year		55,098			91,442			91,985
Maximum outstanding at any month end		128,200			184,040			293,608
Weighted average interest rate at end of year		2.96	%		3.82	%		4.09	%
Weighted average interest rate during year		1.67	%		2.33	%		3.38	%

Competition

We face significant competition in both originating loans and attracting deposits. The New York metropolitan area has a high concentration of financial institutions, many of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions,

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insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. We have emphasized personalized banking and the advantage of local decision-making in our banking business and this strategy appears to have been well received in our market area. We do not rely on any individual, group, or entity for a material portion of our deposits. Although we have not done so in the past, net interest income could be adversely affected should competitive pressures cause us to increase our interest rates paid on deposits in order to maintain our market share.

Employees

As of September 30, 2011, we had 465 full-time employees and 85 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.

Regulation

General

As a savings and loan holding company, Provident Bancorp is supervised and regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Its federal savings bank subsidiary, Provident Bank, is supervised and regulated by the Office of the Comptroller of the Currency (“OCC”). As a state-chartered, FDIC-insured bank, Provident Municipal Bank is regulated by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation (“FDIC”). Because it is an FDIC-insured institution, Provident Bank also is subject to regulation by the FDIC. Provident Bank’s relationship with its depositors and borrowers is governed to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of Provident Bank’s loan documents. As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the continuation and growth of our businesses. The Federal Reserve, OCC, FDIC, SEC, and other regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations.

Certain federal banking laws have been amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). See “Regulation — Financial Reform Legislation” below. Among the more significant changes made by the Dodd-Frank Act, effective July 21, 2011, the Office of Thrift Supervision (“OTS”) ceased to exist as a separate entity and was merged into the OCC. The OCC has assumed the OTS’ role as primary federal regulator and supervisor of Provident Bank. The Federal Reserve has become the primary supervisor and regulator with respect to Provident Bancorp.

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

In addition, Provident Bancorp and its subsidiaries are subject to examination by regulators, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine,

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among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations.

Holding Company Regulation

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

Provident Bancorp must generally limit its activities to those permissible for (i) financial holding companies under section 4(k) of the Bank Holding Company Act, or (ii) multiple savings and loan holding companies under the Savings and Loan Holding Company Act. Activities in which a financial holding company may engage are those considered financial in nature or those incidentals or complementary to financial activities. These activities include lending, trust and investment advisory activities, insurance agency activities, and securities and insurance underwriting activities. Activities permitted to multiple savings and loan holding companies include certain real estate investment activities, and other activities permitted to bank holding companies under the Bank Holding Company Act.

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

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

Dividends

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

• the savings association would be undercapitalized or worse following the dividend;

• the proposed dividend raises safety and soundness concerns; or

• the dividend would violate a prohibition contained in any statute, regulation, enforcement action, or agreement with or condition imposed by an appropriate federal banking agency.

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

As of October 1, 2011, the maximum amount of dividends that could be declared by Provident Bank for fiscal year 2011, without regulatory approval, is net retained income for calendar year 2011, plus $8.5 million.

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Capital Requirements

As a federal savings association, Provident Bank is subject to OCC capital requirements. The OCC regulations require savings associations to meet three minimum capital standards: at least an 8% risk-based capital ratio, a 4% leverage ratio (3% for institutions receiving the highest supervisory rating), and at least a 1.5% tangible capital ratio.

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

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

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

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

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

If an institution fails to meet these capital requirements, progressively more severe restrictions are placed on the institution’s operations, management and capital distributions, depending on the capital category in which an institution is placed. Any institution that is “adequately capitalized” is, absent a waiver from the FDIC, prohibited from accepting or renewing brokered deposits. Any institution that is determined to be “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to raise additional capital and may not accept or renew brokered deposits. In addition, numerous mandatory supervisory

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actions become immediately applicable to the insured depository institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The federal banking agencies also may take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the replacement of senior executive officers and directors. The agencies also may appoint a receiver or conservator for a savings association that is “critically undercapitalized”.

At September 30, 2011, the capital of Provident Bank and Provident Municipal Bank exceeded all applicable capital requirements, and each met the requirements to be treated as a “well-capitalized” institution.

Deposit Insurance

The FDIC insures deposit accounts in Provident Bank and Provident Municipal Bank generally up to a maximum of $250,000 per ownership category of each separately-insured depositor. As FDIC-insured depository institutions, Provident Bank and Provident Municipal Bank are required to pay deposit insurance premiums based on the risk each institution poses to the Deposit Insurance Fund. Currently, the annual FDIC assessment rate ranges from $0.025 to $0.45 (not including the depository institution debt adjustment) per $100 of the institution’s assessment base, based on the institution’s relative risk to the Deposit Insurance Fund, as measured by the institution’s regulatory capital position and other supervisory factors. The FDIC also has the authority to raise or lower assessment rates on insured deposits, subject to limits, and to impose special additional assessments.

The Dodd-Frank Act also temporarily increases the maximum amount of federal deposit insurance coverage for non-interest bearing transaction accounts to an unlimited amount from December 31, 2010 through December 31, 2012. The Dodd-Frank Act also broadens the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity of an insured depository institution. In addition, the Dodd-Frank Act raises the minimum designated reserve ratio, which the FDIC is required to set each year for the Deposit Insurance Fund, to 1.35% and requires that the Deposit Insurance Fund meets that minimum ratio by September 30, 2020. It eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The FDIC is required to offset the effect of the increased reserve ratio for depository institutions with assets of less than $10 billion. The FDIC has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. There is no implementation deadline for the 2% ratio.

In addition, the FDIC collects funds from insured institutions sufficient to pay interest on debt obligations of the Financing Corporation (FICO). FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. For the quarter ended September 30, 2011, the annualized FICO assessment was equal to $0.01 for each $100 of insured domestic deposits maintained at an institution.

Regulation of Provident Bank

Business Activities.As a federal savings association, Provident Bank derives its deposit, lending and investment powers from the Home Owners’ Loan Act (the “HOLA”) and the regulations of the OCC. Under these laws and regulations, Provident Bank may offer any type of deposit accounts, make or invest in mortgage loans secured by residential and commercial real estate, make and invest in commercial and consumer loans, certain types of debt securities and certain other loans and assets, subject in certain cases to certain limits. Provident Bank also may establish and operate subsidiaries that engage in activities permissible for Provident Bank, as well as service corporation subsidiaries that engage in activities not permissible for Provident Bank to engage in directly (such as real estate investment, and securities and insurance brokerage). Pursuant to this authority, Provident Bank operates certain subsidiaries, including Provest Services Corp. I, which holds an investment in a limited partnership that operates an assisted living facility; Provest Services Corp. II, a licensed insurance agency, which

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contracts with LPL Financial Corp. in order to offer annuities and insurance products to customers of Provident Bank. Provident Bank also controls Provident REIT, Inc. and WSB Funding Corp. to hold residential and commercial real estate loans and the Bank maintains several corporations which hold foreclosed properties acquired by Provident Bank. Certain of Provident Bank’s subsidiaries are subject to separate regulatory requirements, such as those applicable to insurance agencies and investment advisors. Hardenburgh Abstract Company Inc., a title insurance agency; Provident Risk Management Inc., a captive insurance company insuring Provident affiliated risk; and Hudson Valley Investment Advisors, LLC, an investment advisory firm are subsidiaries of Provident Bancorp.

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

At September 30, 2011, Provident Bank maintained approximately 72.3% of its portfolio assets in qualified thrift investments, and satisfied the QTL test.

Loans to One Borrower.Provident Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2011, Provident Bank was in compliance with the loans-to-one-borrower limitations.

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

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

The Dodd-Frank Act imposes further restrictions on transactions with affiliates and extensions of credit to executive officers, director and principal shareholders, by, among other things, expanding the types of

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transactions covered by the law to include securities lending, repurchase agreement and derivatives activities with affiliates. These changes will become effective on July 21, 2012. See “Regulation — Financial Reform Legislation”.

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

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

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

Federal Home Loan Bank System. Provident Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Provident Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of New York in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of September 30, 2011, Provident Bank was in compliance with this requirement.

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

• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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• Home Mortgage Disclosure Act, requiring financial institutions to provide certain information about home mortgage and refinanced loans;

• Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

• Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

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

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

Recent Regulatory Initiatives

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

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

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

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Financial Reform Legislation

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

One change that has been particularly significant to Provident Bancorp and Provident Bank is the abolition of the OTS, their historical federal financial institution regulator, on July 21, 2011. Supervision and regulation of Provident Bancorp has moved to the Federal Reserve and supervision and regulation of Provident Bank has moved to the OCC. The HOLA remains the main statute applicable to Provident Bancorp and Provident Bank, but it has been amended by the Dodd-Frank Act, as described below and by the implementing regulations that are being amended and interpreted by the Federal Reserve and the OCC, respectively.

The Dodd-Frank Act contains a number of provisions intended to strengthen capital. For example, the federal banking agencies are directed to establish minimum leverage and risk-based capital requirements that are at least as stringent as those currently in effect. Provident Bancorp for the first time will be subject to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank.

The Dodd-Frank Act also expands the affiliate transaction rules in Sections 23A and 23B of the Federal Reserve Act to broaden the definition of affiliate and to apply to securities lending, repurchase agreement and derivatives activities that Provident Bank may have with an affiliate, as well as to strengthen collateral requirements and limit Federal Reserve exemptive authority. Also, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders is being expanded to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction. These expansions will be effective on July 21, 2012. At this time, we do not anticipate that being subject to any of these provisions will have a material effect on Provident Bancorp or Provident Bank.

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

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

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau, which took over responsibility over the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others, on July 21, 2011. Institutions that have assets of $10 billion or less, such as the Bank, will continue to be supervised in this area by their primary federal regulators (in the case of Provident Bank, the OCC). The Act also gives the CFPB expanded data collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. The Dodd-Frank Act also provides that the same standards for federal preemption of state laws apply to both national banks and federal savings banks. As a result it is likely the Bank would be subject to a wider array of State laws going forward. In addition, as required by the Dodd-Frank Act, the Federal Reserve has adopted a rule that places restrictions on interchange fees applicable to debit card transactions. Effective October 1, 2011, interchange fees on debit card transactions

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are limited to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the Federal Reserve. Issuers that, together with their affiliates, have less than $10 billion in assets, such as Provident Bank, are exempt from the debt card interchange fee standards.

The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Act on Provident Bancorp or Provident Bank at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. Nor can we predict the impact or substance of other future legislation or regulation. However, it is expected that they at a minimum will increase our operating and compliance costs.

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ITEM 1A. Risk Factors

Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business.

The Dodd-Frank Act is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.

One change that has been particularly significant to us is the abolition of the OTS, our historical federal financial institution regulator, which was effective on July 21, 2011. Supervision and regulation of Provident Bancorp has moved to the Federal Reserve and supervision and regulation of Provident Bank has moved to the OCC. Except as described below, however, the laws and regulations applicable to us have not generally changed — the Home Owners Loan Act and the regulations issued under the Dodd-Frank Act generally still apply (although these laws and regulations are interpreted by the Federal Reserve and the OCC, respectively). However, the application of the laws and regulations may vary as administered by the Federal Reserve and the OCC. It is possible that the OCC may rate the activities of Provident Bank in ways that are more restrictive than the OTS has. This might cause us to incur increased costs or become more restrictive in certain activities than we have in the past.

In addition, Provident Bancorp for the first time will be subject to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank. It is possible such requirements may limit our capacity to pay dividends or repurchase shares. Provident Bank also will be subject to the same lending limits as national banks. In addition, the affiliate transaction rules in Section 23A of the Federal Reserve Act will apply to securities lending, repurchase agreement and derivatives activities that Provident Bank may have with an affiliate.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. The FDIC insures deposits at FDIC-insured financial institutions, including Provident Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. The Bank’s FDIC insurance premiums increased substantially beginning in 2009, and we expect to pay significantly higher premiums in the future. Current economic conditions have increased bank failures and additional failures are expected, all of which decrease the DIF. In order to restore the DIF to its statutorily mandated minimum of 1.15% over a period of several years, the FDIC increased deposit insurance premium rates at the beginning of 2009 and imposed a special assessment on June 30, 2009. The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The FDIC has issued regulations to implement these provisions of the Dodd Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. There is no implementation deadline for the 2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the statutory target level. Any increase in our FDIC premiums could have an adverse effect on Provident Bank’s profits and financial condition.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau which took over responsibility for the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Savings Act, among others, July 21, 2011. Institutions such as Provident Bank, which have assets of $10 billion or less, will continue to be supervised in this area by their primary federal regulators (in the case of Provident Bank, the OCC). In addition, as required by the Dodd-Frank Act, the Federal Reserve has adopted a rule that places restrictions on interchange fees applicable to debit card transactions and is thus expected to lower fee income generated from this source. Effective October 1, 2011, interchange fees on debit card transactions are limited to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the Federal Reserve. Although technically this rule only applies to institutions with assets in excess of $10 billion, it is expected that smaller institutions, such as Provident Bank, may also be impacted.

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

The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. However, it is expected that at a minimum they will increase our operating and compliance costs.

Difficult market conditions have adversely affected our industry.

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

• Loan delinquencies could increase further;

• Problem assets and foreclosures could increase further;

• Demand for our products and services could decline;

• Collateral for loans made by us, especially real estate, could decline further in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans; and

• Investments in mortgage-backed securities could decline in value as a result of performance of the underlying loans or the diminution of the value of the underlying real estate collateral pressing the government sponsored agencies to honor its guarantees to principal and interest.

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

We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent

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

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

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

Acquisition, development, and construction (ADC) loans, commercial real estate and commercial and industrial loans expose us to increased risk.

We consider our commercial real estate loans, commercial and industrial loans and ADC loans to be the higher risk categories in our loan portfolio. These loans are particularly sensitive to economic conditions. At September 30, 2011, our portfolio of commercial real estate loans totaled $703.4 million, or 41.4% of total loans, our commercial and industrial business loan portfolio totaled $209.9 million, or 12.3% of total loans, and our portfolio of ADC loans totaled $175.9 million, or 10.3% of total loans. We plan to emphasize the origination of these types of loans other than ADC loans, which we now make only on an exception basis. In addition, many of our borrowers also have more than one commercial real estate, commercial business or ADC loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk of loss. In particular, many of our ADC loans continue to pose higher risk levels than the levels expected at origination. Many projects are stalled or are selling at prices lower than expected. While we continue to seek pay downs on loans with or without sales activity, this portfolio may cause us to incur additional bad debt expense even if losses are not realized. Additionally, the balance on over half of our ADC loans is maturing within one year, which may expose us to greater risk of loss.

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

The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2011 the net present value of Provident Bancorp shares exceed recorded book value by 2%. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

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

Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the New York metropolitan area in general. Unlike large banks that are more geographically diversified, we provide banking and financial services to customers primarily in Rockland and Orange Counties, New York. We also have a branch presence in Ulster, Sullivan, Westchester and Putnam Counties in New York and in Bergen County, New Jersey. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would affect the local economic conditions and could adversely affect our financial condition and results of operations.

Changes in market interest rates could adversely affect our financial condition and results of operations.

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

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

Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At September 30, 2011, our investment and mortgage-backed securities available for sale totaled $739.8 million. Unrealized gains on securities available for sale, net of tax, amounted to $13.6 million and are reported as part of other comprehensive income, included as a separate component of stockholders’ equity. Further, decreases in the fair value of securities available for sale, therefore, could have an adverse effect on stockholders’ equity.

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

Provident Bancorp is a separate legal entity from its subsidiary, Provident Bank, and does not have significant operations of its own. The availability of dividends from Provident Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Provident Bank and other factors that Provident Bank’s regulator could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, under the Dodd-Frank Act, Provident Bancorp will be subjected to consolidated capital requirements and will be required to serve as a source of strength to Provident Bank. If Provident Bank is

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unable to pay dividends to Provident Bancorp or Provident Bancorp is required to retain capital or contribute capital to Provident Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.

A breach of information security could negatively affect our earnings.

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

We are subject to extensive regulatory oversight.

We and our subsidiaries are subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place are flawless. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Our failure to comply with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions, and legal proceedings.

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

In addition, recently enacted, proposed and future legislation and regulations (including the Dodd-Frank Act, which is discussed above), have had, will continue to have or may have significant impact on the financial services industry. Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, could cause us to change or limit some of our products and services or the way we operate our business, and could limit our ability to pursue business opportunities.

We are subject to competition from both banks and non-banking companies.

The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks, other savings banks and savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, real estate investment trusts (REITs), private issuers of debt obligations, venture capital firms, and suppliers of other

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investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as we are and have advantages over us in providing certain services. Many of our competitors are significantly larger than we are and have greater access to capital and other resources. Also, our ability to compete effectively is dependent on our ability to adapt successfully to technological changes within the banking and financial services industry.

Various factors may make takeover attempts more difficult to achieve.

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

(a) Certificate of Incorporation and statutory provisions.

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

(b) Required change in control payments and issuance of stock options and recognition and retention plan shares

We have entered into employment agreements with executive officers, which require payments to be made to them in the event their employment is terminated following a change in control of Provident Bancorp or Provident Bank. We have issued stock grants and stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan. In the event of a change in control, the vesting of stock and option grants accelerate. In 2006 we adopted the Provident Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not covered by separate agreements if they are terminated in connection with a change in control of the Company. These payments and the acceleration of grants would increase the cost of acquiring Provident Bancorp, thereby discouraging future takeover attempts.

Our ability to make opportunistic acquisitions and participation in FDIC-assisted acquisitions or assumption of deposits from a troubled institution is subject to significant risks, including the risk that regulators will not provide the requisite approvals.

We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time to time that we expect may further business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, diversion of management’s attention from other business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even

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pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into operations. Ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.

Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.

Announcements of deficiencies in foreclosure documentation by several large seller/servicer financial institutions have raised various concerns relating to mortgage foreclosure practices in the U.S. A group of state attorneys general and state bank and mortgage regulators in all 50 states and the District of Columbia is currently reviewing foreclosure practices and a number of mortgage sellers/servicers have temporarily suspended foreclosure proceedings in some or all states in which they do business in order to evaluate their foreclosure practices and underlying documentation. These foreclosure process issues and the potential legal and regulatory responses could impact the foreclosure process and timing to completion of foreclosures for residential mortgage lenders, including the Company. Over the past few years, foreclosure timelines have increased due to, among other reasons, delays associated with the significant increase in the number of foreclosure cases as a result of the economic downturn, additional consumer protection initiatives related to the foreclosure process and voluntary and, in some cases, mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure. Further increases in the foreclosure timeline may have an adverse effect on collateral values and our ability to minimize our losses.

ITEM 1B. Unresolved Staff Comments

Not Applicable.

ITEM 2. Properties

We maintain our executive offices, commercial lending division and investment management and trust department at a leased facility located at 400 Rella Boulevard, Montebello, NY consisting of 48,973 square feet. At September 30, 2011, we conducted our business through 37 full-service banking offices consisting of 30 retail branches and 7 commercial banking centers. Of our 37 branches, 14 are located in Orange County, NY, 13 in Rockland County, NY, 2 in Ulster County, NY, 2 in Sullivan County, NY, 1 in Putnam County, NY, 3 in Westchester County and 2 in Bergen County, NJ. Additionally, 18 of our branches are owned and 18 are leased.We have announced plans to consolidate two offices and have recorded a charge of $2.1 million reflecting the costs to exit the existing leases and write off the unamortized leasehold improvements.

In addition to our branch network and corporate headquarters we lease 2 and own 1 additional properties which are held for general corporate purposes and 15 foreclosed properties located in Putnam, Orange, Rockland, Sullivan and Ulster counties. See Note 7 of the “Notes to Consolidated Financial Statements” for further detail on our premises and equipment.

ITEM 3. Legal Proceedings

Provident Bancorp is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts that are believed by management to be immaterial to Provident Bancorp’s financial condition and results of operations.

ITEM 4. [Removed and Reserved]

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PART II

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

(A)

The shares of common stock of Provident Bancorp are quoted on the NASDAQ Global Select (“NASDAQ”) under the symbol “PBNY.” As of September 30, 2011, Provident Bancorp had 41 registered market makers, 5,445 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 37,864,008 shares outstanding.

Market Price and Dividends. The following table sets forth market price and dividend information for the common stock for the past two fiscal years.

Quarter Ended	High		Low		Cash Dividends Declared
September 30, 2011	$	8.49	$	5.82	$	0.06
June 30, 2011		10.15		8.26		0.06
March 31, 2011		10.93		9.11		0.06
December 31, 2010		10.64		8.48		0.06
September 30, 2010	$	10.03	$	7.92	$	0.06
June 30, 2010		10.40		8.42		0.06
March 31, 2010		9.57		8.01		0.06
December 31, 2009		9.41		8.00		0.06

Payment of dividends on Provident Bancorp’s common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, legal, and regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. Repurchases of the Company’s shares of common stock during the fourth quarter of the fiscal year ended September 30, 2011 are detailed in (C) below. There were no sales of unregistered securities during the quarter ended September 30, 2011.

Set forth below is a stock performance graph comparing the yearly total return on our shares of common stock, commencing with the closing price on September 30, 2006, with (a) the cumulative total return on stocks included in the NASDAQ Composite Index, and (b) the cumulative total return on stocks included in the SNL Mid-Atlantic Thrift Index.

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There can be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance.

PROVIDENT NEW YORK BANCORP

	Period Ending
Index	09/30/06		09/30/07		09/30/08		09/30/09		09/30/10		09/30/11
Provident New York Bancorp		100.00		97.21		99.86		73.98		66.73		47.57
NASDAQ Composite		100.00		120.52		94.10		96.49		108.79		112.05
SNL Mid-Atlantic Thrift Index		100.00		99.90		85.82		63.59		71.87		56.41

This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that Provident New York Bancorp specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

(B)

Not Applicable

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(C)

Issuer Purchases of Equity Securities

	Total Number of Shares (or Units) Purchased (1)		Average Price Paid per share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(2)		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased Under the Plans or Programs (2)
Period (2011)
July 1 — July 31		—	$	—		—		959,713
August 1 — August 31		183,000		6.68		183,000		776,713
September 1 — September 30		3,728		5.82		—		776,713
Total		186,728	$	6.66		183,000

¹ The total number of shares purchased during the periods includes shares deemed to have been received from employees who exercised stock options by submitting previously acquired shares of common stock in satisfaction of the exercise price, or shares withheld for tax purposes ($22,697, or 3,728 shares), as is permitted under the Company’s stock benefit plans and shares repurchased as part of a previously authorized repurchase program.

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

ITEM 6. Selected Financial Data

The following financial condition data and operating data are derived from the audited consolidated financial statements of Provident Bancorp. Additional information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included as Item 7 and Item 8 of this report, respectively.

		$3,137,402		$3,137,402		$3,137,402		$3,137,402		$3,137,402
	At September 30,
	2011		2010		2009		2008		2007
	(Dollars in thousands)
Selected Financial Condition Data:
Total assets	$	3,137,402	$	3,021,025	$	3,021,893	$	2,984,371	$	2,802,099
Loans, net (1)		1,675,882		1,670,698		1,673,207		1,708,452		1,617,669
Securities available for sale		739,844		901,012		832,583		791,688		794,997
Securities held to maturity		110,040		33,848		44,614		43,013		37,446
Deposits		2,296,695		2,142,702		2,082,282		1,989,197		1,713,684
Borrowings		323,522		363,751		430,628		566,008		661,242
Equity		431,134		430,955		427,456		399,158		405,089

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		$3,137,402		$3,137,402		$3,137,402		$3,137,402		$3,137,402
	Years Ended September 30,
	2011		2010		2009		2008		2007
	(Dollars in thousands)
Selected Operating Data:
Interest and dividend income	$	112,614	$	119,774	$	131,590	$	148,982	$	151,626
Interest expense		21,324		26,440		37,720		53,642		66,888
Net interest income		91,290		93,334		93,870		95,340		84,738
Provision for loan losses		16,584		10,000		17,600		7,200		1,800
Net interest income after provision for loan losses		74,706		83,334		76,270		88,140		82,938
Non-interest income		29,951		27,201		39,953		21,042		19,845
Non-interest expense		90,111		83,170		80,187		75,500		74,590
Income before income tax expense		14,546		27,365		36,036		33,682		28,193
Income tax expense		2,807		6,873		10,175		9,904		8,566
Net income	$	11,739	$	20,492	$	25,861	$	23,778	$	19,627

	At or For the Years Ended September 30,
	2011			2010			2009			2008			2007
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)		0.40	%		0.70	%		0.89	%		0.84	%		0.70	%
Return on equity (ratio of net income to average equity)		2.75			4.82			6.22			5.88			4.82
Average interest rate spread(2)		3.42			3.51			3.46			3.49			2.97
Net interest margin(3)		3.65			3.78			3.81			3.96			3.57
Efficiency ratio(4)		71.00			68.96			65.11			61.20			66.40
Non-interest expense to average total assets		3.06			2.85			2.77			2.68			2.68
Ratio of average interest-earning assets to average interest-bearing liabilities		128.36			126.66			123.54			122.26			122.34
Per Share Related Data:
Basic earnings per share	$	0.31			0.54			0.67		$	0.61		$	0.48
Diluted earnings per share		0.31			0.54			0.67			0.61			0.48
Dividends per share		0.24			0.24			0.24			0.24			0.20
Book value per share(6)		11.39			11.26			10.81			10.03			9.82
Dividend payout ratio(5)		77.42	%		44.44	%		35.82	%		39.34	%		41.67	%
Asset Quality Ratios:
Non-performing assets to total assets(1)		1.46	%		1.02	%		0.93	%		0.57	%		0.26	%
Non-performing loans to total loans(1)		2.38			1.58			1.55			0.97			0.44
Allowance for loan losses to non-performing loans		69			115			114			137			281
Allowance for loan losses to total loans		1.64			1.81			1.76			1.33			1.24
Capital Ratios:
Equity to total assets at end of year		13.74	%		14.27	%		14.15	%		13.37	%		14.46	%
Average equity to average assets		14.49			14.60			14.36			14.34			14.61
Tier 1 leverage ratio (bank only)		8.1			8.4			8.6			8.0			8.1
Other Data:
Number of full service offices		37			35			33			33			33

45

⁽¹⁾ Excludes loans held for sale.

⁽²⁾  The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.

⁽³⁾  The net interest margin represents net interest income as a percent of average interest-earning assets for the period. Net interest income is commonly presented on a tax-equivalent basis. This is to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g. was received as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices.

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

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

⁽⁶⁾  Book value per share is based on total stockholders’ equity and 37,864,008, 38,262,288, 39,547,207, 39,815,213 and 41,230,618 outstanding common shares at September 30, 2011, 2010, 2009, 2008 and 2007, respectively. For this purpose, common shares include unallocated employee stock ownership plan shares but exclude treasury shares.

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

Overview

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

Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities. The Federal Reserve Board, through a series of reductions to the federal funds target rate to an unprecedented 0-25 basis points has acted to increase liquidity in the credit markets. This target rate has been in effect since December 2008. These rate reductions significantly lowered yields on the short end of the treasury yield curve more so than the long end of the curve, resulting in a steeper yield curve than existed at the prior fiscal year-end.

As described in greater detail below, the key factors that have affected our results over the last three years include:

• the effects of the economic downturn on our asset quality, which has led to higher levels of provisions for loan losses than historically had been the case;

• the current low interest rate environment, which has contributed to margin pressure on net interest income;

• management’s decision to take advantage of the interest rate environment and realize securities gains to reduce future interest rate exposure; and

• limited opportunities to make loans that meet our credit standards and pricing criteria

The last recession and slow recovery over the past two years have resulted in borrowers experiencing higher levels of stress, which resulted in our increased levels of charge-offs and provisions for loan losses. In particular, small businesses and borrowers involved in Acquisition, Development and Construction projects have been affected. During the year our net charge-offs exceeded our provisions by $2.9 million. Management of our loan portfolio continues to be a top priority. We were able to grow commercial real estate loans, which was substantially offset by declines in one-to-four family residential mortgages as we sold a substantial portion of our new production.

In addition, we continue to experience pressure on net interest income. Low rates continue to have the effect of causing many assets to prepay or to be called. In anticipation of this, we have also been selling certain investment securities based on market conditions. Reinvestment of cash is necessarily made at lower interest rates or in extended maturity. Many of our liabilities are at rates that are either fixed or already very low, so maintaining net interest margin is a function of loan growth, growth in non-interest bearing deposits, and continuation of our deposit pricing discipline. Transaction accounts grew 11.4% during the year, non-time deposits grew as well, while CDs declined. This helped support our net interest margin which was 3.65% this year compared to 3.78% last year.

47

On August 9, 2011, Provident Bank (the “Bank”) announced a workforce reduction to improve efficiency and reduce operating expenses to better position the Bank for enhanced revenue growth. The Bank expects the workforce reduction together with other expense reductions to yield annual savings by the end of 2012 of approximately $10.0 million, including approximately $4.2 million in personnel salary and benefits from eliminated positions. Of the $10.5 million expense reduction the company intends to redeploy approximately $5.0 million to revenue generating initiatives designed to improve efficiency and enhance customer experience. Costs associated with the restructuring are estimated to be approximately $3.3 million. The charges the Bank expects to incur in connection with the workforce reduction are subject to a number of assumptions, and actual results may differ. The Bank may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the workforce reduction.

Operating expenses increased 8.3% primarily due to restructuring charges and charges related to CEO transitioning including defined benefit settlements. Fee income excluding securities gains, declined slightly. Deposit fees declined primarily due to changed customer behavior partially offset in other categories.

Net income for the year ended September 30, 2011 decreased 43% to $11.7 million, or $0.31 per diluted share from $20.5 million, or $0.54 per diluted share for the year ended September 30, 2010. Net interest income on a tax equivalent basis decreased $2.2 million or 2.3% for the year ended September 30, 2011 as compared to the year ended 2010. Net interest margin decreased 13 basis points to 3.65% at September 30, 2011 from 3.78% at September 30, 2010. Average loans increased $9.3 million to $1.67 billion at September 30, 2011 from $1.66 billion at September 30, 2010. The net increase in average loans is due to increases in commercial lending activities virtually offsetting the refinancing of residential loans as well as the sale of residential loans to the secondary market and decline in ADC loans due to management deemphasizing this type of lending . The provision for loan losses increased $6.6 million from September 30, 2010 to $16.6 million for the year ended September 30, 2011 primarily related to one ADC borrower.

Non-interest income increased $2.8 million to $30 million for the year ended September 30, 2011 from $27.2 million for the year ended September 30, 2010, primarily resulting from an increase of $1.9 million in net securities gains, $909,000 decrease in the fair value loss on interest rate caps, and a decrease of $417,000 in deposit fees and service charges.

Non-interest expense increased $6.9 million to $90.1 million for the year ended September 30, 2011 from $83.2 million for the year ended September 30, 2010 primarily from restructuring charges and charges relating to the CEO transition including defined benefit settlements, staffing for new offices, occupancy expense associated with the new offices and professional fees.

Total assets increased $116.4 million to $3.1 billion for the year ended September 30, 2011. Net loans remained relatively unchanged increasing by 0.3% as commercial lending increases in outstanding balances were offset by decreases in all other categories. Residential loans decreased as a result of residential originations of $49.8 million being sold in the secondary market during fiscal year 2011 and ADC loans decreased by $55.3 million. Deposits increased $154.0 million in 2011 primarily in business and retail transaction accounts, municipal NOW accounts, savings, and money market deposit accounts partially offset by declines in certificate of deposit balances as customers are less willing to maintain term deposits in this relatively low interest rate environment.

The Company had significant fourth quarter items as new strategies designed to drive growth in revenues and earnings have been implemented. There was a $2.1 million charge associated with the consolidation of two branches; this consolidation will result in an annual pre-tax savings of $900,000. In addition there was $1.1 million of severance expense associated with the workforce realignment established to improve efficiency and reduce operating expense to better position the Bank for enhanced revenue growth. This workforce realignment will result in an annual savings of $4.2 million in salaries and benefits.

48

Additional fourth quarter items were net gains on sales of securities totaled $4.5 million offsetting the restructuring charges mentioned above. Most of the securities sold had low current market yields and were reinvested in securities through modest extension of duration at comparable book yields thereby not causing further declines in net interest margin. Credit costs also impacted the quarter as ADC loans included a charge of $6.7 million for two relationships and a $1.2 million loss was incurred on a sale of non-performing loans

The following is an analysis of the financial condition and results of the Company’s operations. This item should be read in conjunction with the consolidated financial statements and related notes filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of the Company’s business filed here within Part I, Item 1, “Business.”

Critical Accounting Policies

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

Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, and review their risk components as a part of that evaluation. See Note 1, “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” in our “Notes to Consolidated Financial Statements” for a discussion of the risk components. We consistently review the risk components to identify any changes in trends. At September 30, 2011 Provident has recorded $27.9 million in its allowance for loan losses.

Goodwill and Other Intangible Assets. The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of September 30, 2011 the estimated net present value of Provident Bancorp shares exceed recorded book value by 2%. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired. Other intangible assets have been recorded in connection with the acquisition of HVIA for non-competition and customer intangibles. At September 30, 2011 the bank had $2.4 million in naming rights net of amortization included in other intangibles related to Provident Bank Ball Park and $1.5 million in mortgage servicing rights included in other assets. At September 30, 2011, the Company had $4.6 million recorded in core deposit and other intangibles.

49

Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. At September 30, 2011, Provident Bancorp has net deferred tax assets of $1.9 million.

Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on non-accrual status when payments are contractually past due 90 days or more, or when management has determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful. At September 30, 2011, Provident has $36.5 million in loans in non-accrual status.

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

Total assets as of September 30, 2011 were $3.1 billion, an increase of $116.4 million compared to September 30, 2010. Cash and due from banks increased $190.6 million to $281.5 million at September 30, 2011 due primarily to deposits received on September 30, 2011 and high levels of balances maintained at the Federal Reserve in 2011 due to municipal tax collection activity. Core deposit and other intangibles increased by $1.0 million resulting from naming rights acquired on Provident Ballpark stadium. Goodwill was unchanged. The Company had $4.2 million in loans held for sale as of September 30, 2011 and $5.9 million at September 30, 2010. Premises and equipment decreased $2.7 million primarily related to depreciation and amortization exceeding new investment in premises and equipment.

Net loans as of September 30, 2011 were $1.7 billion, an increase of $5.2 million, or 0.3%, over net loan balances of $1.7 billion at September 30, 2010. Commercial real estate loans increased $124.1 million, or 21.4%, and ADC loans decreased $55.3 million or 23.9% to $175.9 million compared to $231.3 million as of September, 2010. Consumer loans decreased by $13.4 million, or 5.6%, during the fiscal year ended September 30, 2011, residential loans decreased by $45.1 million, or 10.4%. Total loan originations, excluding loans originated for sale were $578.6 million for the fiscal year ended September 30, 2011, while repayments were $553.2 million for the fiscal year ended September 30, 2011. The allowance for loan loss decreased from $30.8 million to $27.9 million as a result of provisions to loan losses of $16.6 million and net charge offs of $19.5 million. There were increases in the reserves for ADC, commercial business loans and home equity lines of credit, with decreases in commercial real estate and residential mortgages. The variances were driven by modifications in reserve factors as well as changes in loan balances.

Total securities decreased by $85.0 million, to $849.9 million at September 30, 2011 from $934.9 million at September 30, 2010. Security purchases were $716.3 million, sales of securities were $540.5 million, and maturities, calls, and repayments were $269.0 million.

Goodwill and other intangibles totaled $165.5 million at September 30, 2011 an increase of $989,000. The increase is a result of Provident Bank entering into a naming rights contract for $2.4 million in May 2011 partially offset by amortization.

50

Deposits as of September 30, 2011 were $2.3 billion, an increase of $154.0 million, or 7.2%, from September 30, 2010. Included in deposits for September 30, 2011 were approximately $284.0 million in short-term seasonal municipal deposits compared to $212.0 million at September 30, 2010. As of September 30, 2011 transaction accounts were 45.9% of deposits, or $1.1 billion compared to $945.5 million or 44.1% at September 30, 2010. As of September 30, 2011, savings deposits were $429.8 million, an increase of $37.5 million or 9.56%. Money market accounts increased $82.1 million or 19.2% to $509.5 million at September 30, 2011. Offsetting the increases in savings and money market accounts was a decrease of $73.9 million, or 19.6% in certificates of deposits as the Company, while maintaining competitive rate structures, did not compete with the highest pricing in the market place. The Company attributes the change in mix and net increases to customers unwilling to place significant amounts of deposits in term maturities in the current rate environment as well as the success of its marketing efforts.

Borrowings decreased by $40.2 million, or 9.7%, from September 2010, to $375.0 million. The decrease is related to the borrowings being paid down by maturing investment securities and deposits.

Stockholders’ equity increased $179,000 from September 30, 2010 to $431.1 million at September 30, 2011. The increase was due to $2.8 million increase in the Company’s retained earnings and a $12,000 improvement in accumulated other comprehensive income, after realizing securities gains in the fiscal year of $10.0 million. During fiscal 2011, the Company repurchased 457,454 shares of its common stock at a cost of $3.8 million under the treasury repurchase program and issued a net 47,046 shares from its stock based compensation plans.

As of September 30, 2011 the Company had authorization to purchase up to additional 776, 713 shares of common stock. Bank Tier I capital to assets was 8.14% at September 30, 2011. Tangible capital as a percentage of tangible assets at the holding company level was 8.94%.

Credit Quality

The Allowance for Loan Losses decreased from $30.8 million to $27.9 million as net charge-offs exceeded provisions by $3.0 million . Net charge-offs for the year ended September 30, 2011 were $19.4 million, or 1.17% of average loans, compared to net charge-offs of $9.2 million, or .56% of average loans for the prior year. The increase in net charge-offs came about as we recorded $8.9 million of charges in our ADC portfolio, including $7.5 million in one relationship. Sales activity in a residential housing subdivision dropped sharply in the second half of the year, causing us to re-evaluate cash flow expectations and collateral values in the related projects. We also experienced net charge-offs of $4.6 million in the C&I portion of our Community Business Loan portfolio and $2.3 million in our Residential Mortgage Loan portfolio. During September 2011 we completed the sale of $1.2 million in NPL residential mortgages, which accounted for $1.1 million of the residential charge-off total.

Non-performing Loans (“NPLs”) increased from $26.8 million to $40.6 million primarily driven by an increase in the ADC portfolio of $11.3 million. As at September 30, 2011, NPLs consisted of ADC loans of $17.0 million, Commercial mortgages including CBL of $13.2 million, residential mortgages of $8.0 million, consumer of $2.2 million and $243,000 in commercial business loans. In addition, other real estate owned consisted of 17 properties totaling $5.4 million dollars. However, we were able to reduce classified (substandard/doubtful) loans during the year from $132.1 million at September 30, 2010 to $94.0 million at September 30 2011. Loans carried as criticized (special mention) similarly went from $37.9 million down to $23.0 million at September 30 2011.

Impaired loans increased from $42.1 million at September 30, 2010 to $55.0 million at September 30, 2011. At September 30, 2011 impaired loans with no related valuation allowance totaled $35.2 million and impaired loans with a valuation allowance were $19.8 million before specific reserves of $3.8 million. Included in impaired loans are $9.3 million of Troubled Debt Restructured Loans at September 30, 2011 that are in performing status compared to $16.0 million at prior fiscal year end. The decrease was caused by moving the ADC relationship referred to above to non-performing status offset in part by new troubled debt restructure.

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

	Years Ended September 30,
	2011								2010								2009
	Average Outstanding Balance		Interest			Yield/Rate			Average Outstanding Balance		Interest			Yield/Rate			Average Outstanding Balance		Interest			Yield/Rate
	(Dollars in thousands)
Interest Earning Assets:
Loans (1)	$	1,665,360	$	89,500			5.37	%	$	1,656,016	$	92,542			5.59	%	$	1,700,383	$	97,149			5.71	%
Securities taxable		695,961		14,493			2.08			662,914		18,208			2.75			592,071		25,552			4.32
Securities-tax exempt		213,450		11,448			5.36			216,119		11,959			5.53			194,028		11,569			5.96
Federal Reserve Bank		14,044		32			0.23			20,009		52			0.26			56,639		144			0.25
Other		20,933		1,148			5.48			25,007		1,198			4.79			27,061		1,225			4.53
Total Interest-earnings assets		2,609,748		116,621			4.47			2,580,065		123,959			4.80			2,570,182		135,639			5.28
Non-interest earning assets		339,503								333,495								325,322
Total assets	$	2,949,251							$	2,913,560							$	2,895,504
Interest Bearing Liabilities:
NOW deposits	$	315,623		595			0.19		$	280,304		579			0.21		$	232,164		670			0.29
Savings deposits (2)		432,227		444			0.10			397,760		403			0.10			366,355		758			0.21
Money market deposits		489,347		1,595			0.33			419,152		1,456			0.35			374,507		2,707			0.72
Certificates of deposit		373,142		3,470			0.93			451,509		6,079			1.35			577,723		14,240			2.46
Senior Debt		51,498		2,017			3.92			51,495		2,029			3.94			32,730		1,269			3.88
Borrowings		371,318		13,203			3.56			436,835		15,894			3.64			496,884		18,076			3.64
Total interest-bearing liabilities		2,033,155		21,324			1.05			2,037,055		26,440			1.30			2,080,363		37,720			1.81
Non-interest bearing deposits		472,388								429,655								380,571
Other non-interest bearing liabilities		16,418								21,442								18,683
Total liabilities		2,521,961								2,488,152								2,479,617
Stockholders’ equity		427,290								425,408								415,887
Total liabilities and Stockholders’ equity	$	2,949,251							$	2,913,560							$	2,895,504
Net interest rate spread (3)							3.42	%							3.51	%							3.46	%
Net Interest-earning assets (4)	$	576,593							$	543,010							$	489,819
Net interest margin (5)				95,297			3.65	%				97,519			3.78	%				97,919			3.81	%
Less tax equivalent adjustment				(4,007	)							(4,185	)							(4,049	)
Net Interest income			$	91,290							$	93,334							$	93,870
Ratio of interest-earning assets to interest bearing liabilities				128.36	%							126.66	%							123.54	%

⁽¹⁾ Balances include the effect of net deferred loan origination fees and costs, the allowance for the loan losses, and non accrual loans. Includes prepayment fees and late charges.

⁽²⁾  Includes club accounts and interest-bearing mortgage escrow balances.

⁽³⁾ Net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽⁴⁾ Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

⁽⁵⁾ Net interest margin represents net interest income (tax equivalent) divided by average total interest-earning assets.

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The following table presents the dollar amount of changes in interest income (on a fully tax-equivalent basis) and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	670		$	(3,712	)	$	(3,042	)	$	(2,546	)	$	(2,061	)	$	(4,607	)
Securities taxable		878			(4,593	)		(3,715	)		2,786			(10,130	)		(7,344	)
Securities tax exempt		(147	)		(364	)		(511	)		1,260			(870	)		390
Federal Reserve Bank		(15	)		(5	)		(20	)		(98	)		6			(92	)
Other earning assets		(191	)		141			(50	)		(127	)		100			(27	)
Total interest-earning assets		1,195			(8,533	)		(7,338	)		1,275			(12,955	)		(11,680	)
Interest-bearing
Liabilities:
NOW deposits		73			(57	)		16			121			(212	)		(91	)
Savings deposits		41			—			41			63			(418	)		(355	)
Money market deposits		229			(90	)		139			286			(1,537	)		(1,251	)
Certificates of deposit		(934	)		(1,675	)		(2,609	)		(2,662	)		(5,499	)		(8,161	)
Senior Debt		—			(12	)		(12	)		740			20			760
Borrowings		(2,347	)		(344	)		(2,691	)		(2,182	)		—			(2,182	)
Total interest-bearing liabilities		(2,938	)		(2,178	)		(5,116	)		(3,634	)		(7,646	)		(11,280	)
Less tax equivalent adjustment		(51	)		(127	)		(178	)		441			(305	)		136
Change in net interest income	$	4,184		$	(6,228	)	$	(2,044	)	$	4,468		$	(5,004	)	$	(536	)

Analysis of Net Interest Income

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

Comparison of Operating Results for the Years Ended September 30, 2011 and September 30, 2010

Net income for the year ended September 30, 2011 was $11.7 million or $0.31 per diluted share. This compares to net income of $20.5 million, or $0.54 per diluted share for the year ended September 30, 2010. Excluding net securities gains, the fair value adjustment of interest caps, CEO transition expenses and restructuring charges adjusted net income was $9.4 million or $0.25 per diluted share for the year ended September 30, 2011. Excluding net securities gains and the fair value adjustment of interest caps adjusted net income was $16.3 million or $0.43 per diluted share for the year ended September 30, 2010.

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

(In thousands, except share data)
	Twelve months ended September 30,
	2011			2010
Net Income
Net Income	$	11,739		$	20,492
Securities gains, net of OTTI 1		(5,780	)		(4,844	)
Defined benefit settlement charge/CEO transition 1		1,052			—
Restructuring charges 1		2,243			—
Fair value loss on interest rate caps 1		117			657
Net adjusted income	$	9,371		$	16,305
Earnings per common share
Diluted earnings per common share	$	0.31		$	0.54
Securities gains, net of OTTI 1		(0.15	)		(0.13	)
Defined benefit settlement charge/CEO transition 1		0.03			—
Restructuring charges 1		0.06			—
Fair value loss on interest rate caps 1		—			0.02
Diluted adjusted earnings per common share	$	0.25		$	0.43
Non-interest income
Total non-interest income	$	29,951		$	27,201
Securities gains, net of OTTI		(9,733	)		(8,157	)
Fair value loss, net of OTTI on interest rate caps		197			1,106
Adjusted non interest-income	$	20,415		$	20,150
Non-interest expense
Total non-interest expense	$	90,111		$	83,170
Restructuring charges 1		(3,201	)		—
Defined benefit settlement charge/CEO transition 1		(1,772	)		—
Adjusted non interest-expense	$	85,138		$	83,170

¹  After marginal tax effect 40.61%

Interest Income. Interest income on a tax equivalent basis for the year ended September 30, 2011 decreased to $116.6 million, a decrease of $7.3 million, or 5.9%, compared to the prior year. The decrease was primarily due to declines in general market interest rates on new lending activity, impact of loans being classified as non accrual, sales of taxable securities in which gains of $9.7 million were realized and the proceeds reinvested at lower rates. Average interest-earning assets for the year ended September 30, 2011 were $2.6 billion, an increase of $29.7 million, or 1.2%, over average interest-earning assets for the year ended September 30, 2010. Average loan balances increased by $9.3 million, average balances at the Federal Reserve Bank decreased $6.0 million and average balances of other earning assets decreased by $4.1 million, primarily FHLB stock. On a tax-equivalent basis, average yields on interest earning assets decreased by 33 basis points to 4.47% for the year ended September 30, 2011, from 4.80% for the year ended September 30, 2010. Loan activity, the sale of securities with subsequent reinvestment and lower loan balances were the primary reasons for the decrease in asset yields.

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Interest income on loans for the year ended September 30, 2011 decreased $3.0 million to $89.5 million from $92.5 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2011 increased to $57.4 million, as compared to commercial loan interest income of $56.5 million for the prior fiscal year. Average balances of commercial loans grew $63.1 million to $1.0 billion, with a 26 basis point decrease in the average yield. There was no change in the prime rate during fiscal year 2011. Commercial loans adjustable with the prime rate totaled $290.0 million at September 30, 2011. Interest income on consumer loans decreased to $10.5 million, as compared to consumer loan interest income of $11.1 million for the prior fiscal year. Average balances of consumer loans decreased $13.3 million to $233.2 million, with no change in basis point in the average yield. Consumer loans adjustable with the prime rate totaled $169.6 million at September 30, 2011. Income earned on residential mortgage loans was $21.6 million for the year ended September 30, 2011, down $3.3 million, from the prior year as a result of refinancing activity and lower outstanding average balances.

Tax-equivalent interest income on securities, balances at Federal Reserve Bank and other earning assets decreased to $27.1 million for the year ended September 30, 2011, compared to $31.4 million for the prior year. This was due to a tax-equivalent decrease of 53 basis points in yields. The Company sold $540.5 million in securities and recorded $10.0 million in gains on the sales. Further during fiscal 2011, proceeds totaling $269.0 million in security maturities and repayments were reinvested at current market rates with a minor increase in duration.

Interest Expense. Interest expense for the year ended September 30, 2011 decreased by $5.1 million to $21.3 million, a decrease of 19.3% compared to interest expense of $26.4 million for the prior fiscal year. The decrease in interest expense was primarily due to the significant decrease in the average rates paid on interest-bearing deposits for the year ended September 30, 2011. Rates paid on interest bearing liabilities decreased to 1.05% from 1.30% in fiscal 2010. The average interest rate paid on certificates of deposit decreased by 42 basis points to .93% for the year ended September 30, 2011, from 1.35% for the prior year. The rates paid on NOW accounts and money market accounts each decreased 2 basis points for fiscal 2011 as compared to fiscal 2010. The average cost of borrowings decreased to 3.56% at September 30, 2011 from 3.64% in 2010, with average balances also decreased by $65.5 million. Further, during the year, the bank restructured $89.0 million in FHLB advances and paid $5.2 million in prepayment fees as part of the modification. This modification resulted in a decrease of 106 basis points in the average cost of the $89.1 million in restructured borrowings.

Net Interest Income for the fiscal year ended September 30, 2011 was $91.3 million, compared to $93.3 million for the year ended September 30, 2010. The tax equivalent net interest margin decreased by 13 basis points to 3.65%, while the net interest spread decreased by 9 basis points to 3.42%. The Bank’s average cost of interest-bearing liabilities has decreased, although the average asset yields decreased faster due to lending activity, impact of non accrual loan increases and sales of securities during 2011. Further, the greater increase of interest earning assets compared to interest bearing liabilities partially offset the decline in net interest income.

Provision for Loan Losses.We recorded $16.6 million in loan loss provisions for the year ended September 30, 2011 compared to $10.0 million in the prior year, an increase of $6.6 million. We increased the provision due to increased net charge-offs, which were $19.5 million at September 30, 2011 compared to $9.2 million in the previous year. Our charge-offs were centered in our ADC portfolio, which incurred $8.9 million on average outstandings of $224.1 million Of the $8.9 million in ADC charge-offs one relationship accounted for $7.5 million due to a dramatic reduction in sales activity in the second half of our fiscal year on a particular property which resulted in a reduction in collateral value. We incurred $5.6 million in net charge-offs in our CBL C&I portfolio on average outstanding of $84.3 million. The other significant component of net charge-offs was our residential mortgage portfolio, in which we recorded $2.1 million in net charge-offs as the foreclosure process has extended on average to three or more years, home prices have continued to be weak, and taxes continue to accrue. We sold a portion of these loans in foreclosure to reduce a portion of this exposure. We recorded a loss of $1.1 million included above, on the sale of $1.3 million in the book value of loans.

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Net charge-offs exceeded our provision by $2.9 million for the year ended September 30, 2011. During the year, our special mention loans decreased from $37.9 million at September 30, 2010 to $23.0 million at September 30, 2011, while our substandard and doubtful loans decreased from $132.1 million to $94.0 million respectively. All significant loans classified substandard or special mention are reviewed for impairment. As a result of our review we may establish a specific reserve, which totaled $3.8 million at September 30, 2011. A specific reserve is established when current information indicates that the carrying value of a loan is probably not recoverable, but there is sufficient uncertainty about the actual occurrence of a loss, or the amount thereof.

Non-interest income consists primarily of income on securities sales, banking fees and service charges, net increases in the cash surrender value of bank-owned life insurance (“BOLI”) contracts, title insurance fees and investment management fees. Non-interest income was $30.0 million for the fiscal year ended September 30, 2011 compared to $27.2 million at September 30, 2010. During the year ended September 30, 2011, the Company recorded gains on sales of investment securities totaling $10.0 million compared to $8.2 million for the prior year. Deposit fees and service charges decreased by $417,000, or 3.71%. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $67,000 due to an increase in residential mortgage originations. Investment management fees increased $10,000 which is related to increased market values on assets under management. During fiscal 2011 the Company originated and sold $49.8 million in residential mortgage loans and recorded $1.0 million in gains compared to $52.8 million in loans sold with $867,000 in gains at September 30, 2010.

Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization, data processing expenses and FDIC/other regulatory assessments. Non-interest expense for the fiscal year ended September 30, 2011 increased by $6.9 million, or 8.3% to $90.1 million, compared to $83.2 million for the same period in 2010. The increase was primarily attributable to $3.2 million in restructuring charge and $1.8 million from charges relating to the CEO transition, including defined benefit settlements. The $3.2 million in restructuring charge consisted of $1.1 million in severances which are expected to result in a pretax savings in salaries and benefits of $4.2 million, and $2.1 million related to the consolidation of two branches, which will result in an annual pre-tax savings of $900,000. Occupancy and office operations increased $1.1 million, or 8.0%, a full year of operations in the Yonkers and Nyack offices during the fiscal year 2011. Professional fees increased $370,000 due to increased consulting fees as well as elevated external costs of collection for problem loans. Stock-based compensation decreased by $381,000 mainly due to the vesting of stock based compensation awards in addition to lower ESOP expense. FDIC insurance decreased by $765,000 or 20.8% due to declines in FDIC assessments.

Income Taxes. Income tax expense was $2.8 million for the fiscal year ended September 30, 2011 compared to $6.9 million for fiscal 2010, representing effective tax rates of 19.3% and 25.1%, respectively. The lower tax rate in 2011 was primarily due to the high proportion of tax-free income, BOLI and insurance relative to the total levels of pre-tax income and the full year of the captive insurance company.

Comparison of Operating Results for the Years Ended September 30, 2010 and September 30, 2009

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

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

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

¹  After marginal tax effect 40.61%

Interest Income. Interest income on a tax equivalent basis for the year ended September 30, 2010 decreased to $124.0 million, a decrease of $11.7 million, or 8.6%, compared to the prior year. The decrease was primarily due to declines in general market interest rates on variable rate loans, lower loan balances, sales of taxable securities in which gains of $8.2 million were realized and the proceeds reinvested at lower rates. Average interest-earning assets for the year ended September 30, 2010 were $2.6 billion, an increase of $9.9 million, or 0.4%, over average interest-earning assets for the year ended September 30, 2009. Average loan balances decreased by $44.4 million, balances at the Federal Reserve Bank decreased $36.6 million and average balances of other earning assets decreased by $2.1 million, primarily FHLB stock. On a tax-equivalent basis, average yields on interest earning assets decreased by 48 basis points to 4.80% for the year ended September 30, 2010, from 5.28% for the year ended September 30, 2009. The re-pricing of floating rate assets, the sale of securities with subsequent reinvestment and lower loan balances were the primary reasons for the decrease in asset yields.

Interest income on loans for the year ended September 30, 2010 decreased $4.6 million to $92.5 million from $97.1 million for the prior fiscal year. Interest income on commercial loans for the year ended September 30, 2010 decreased to $56.5 million, as compared to commercial loan interest income of $56.6 million for the prior fiscal year. Average balances of commercial loans grew $15.7 million to $976.9 million, with a 10 basis point decrease in the average yield. There was no change in the prime rate during fiscal year 2010. Commercial loans adjustable with the prime rate totaled $363.9 million at September 30, 2010. Interest income on consumer loans decreased to $11.1 million, as compared to consumer loan interest income of $11.9 million for the prior fiscal year. Average balances of consumer loans decreased $5.8 million to $246.6 million, with a 20 basis point decrease in the average yield. Consumer loans adjustable with the prime rate totaled $171.1 million at September 30, 2010. Income earned on residential mortgage loans was $24.9 million for the year ended September 30, 2010, down $3.8 million, from the prior year as a result of refinancing activity and lower outstanding average balances.

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Tax-equivalent interest income on securities, balances at Federal Reserve Bank and other earning assets decreased to $31.4 million for the year ended September 30, 2010, compared to $38.5 million for the prior year. This was due to a tax-equivalent decrease of 103 basis points in yields. The Company sold $443.4 million in securities and recorded $8.2 million in gains on the sales. Further during fiscal 2010, $362.8 million in securities matured and the proceeds were reinvested at current market rates with a shorter duration.

Interest Expense. Interest expense for the year ended September 30, 2010 decreased by $11.3 million to $26.4 million, a decrease of 29.9% compared to interest expense of $37.7 million for the prior fiscal year. The decrease in interest expense was primarily due to the significant decrease in the average rates paid on interest-bearing deposits for the year ended September 30, 2010. Rates paid on interest bearing liabilities decreased to 1.30% from 1.81% in fiscal 2009. The average interest rate paid on certificates of deposit decreased by 111 basis points to 1.35% for the year ended September 30, 2010, from 2.46% for the prior year. The average interest rate paid on savings decreased to 0.1% or 11 basis points for the year ended September 30, 2010 from 0.21% paid during fiscal 2009. The average rate paid on money market rates also declined 37 basis points to 0.35% for the year ended September 30, 2010. The rates paid on NOW accounts decreased 8 basis points for fiscal 2010 as compared to fiscal 2009. The average cost of borrowings remained flat at 3.64% at September 30, 2010 and 2009, although average balances decreased $60.1 million.

Net Interest Income for the fiscal year ended September 30, 2010 was $93.3 million, compared to $93.9 million for the year ended September 30, 2009. The tax equivalent net interest margin decreased by 3 basis points to 3.78%, while the net interest spread increased by 5 basis points to 3.51%. The Bank’s average cost of interest-bearing liabilities has decreased, although the average asset yields decreased faster due to lower volume of loans and the lower rates earned on variable rate loans and sales of securities during 2010. Further, the greater increase of interest earning assets compared to interest bearing liabilities partially offset the decline in net interest income.

Provision for Loan Losses.We recorded $10.0 million and $17.6 million in loan loss provisions for the years ended September 30, 2010 and September 30, 2009, respectively. Provision for loan losses decreased $7.6 million to $10.0 million as the allowance is now at target levels. At September 30, 2010, the allowance for loan losses totaled $30.8 million, or 1.81% of the loan portfolio, compared to $30.1 million, or 1.76% of the loan portfolio at September 30, 2009. Net charge-offs for the years ended September 30, 2010 and 2009 were $9.2 million and $10.7 million, respectively (an annual rate of 0.56% and 0.62%, respectively, of the average loan portfolio). Our credit-scored small business loan portfolio continued to account for the single largest share of our net charge-offs. During the year we recorded net charge-offs of $4.5 million in this portfolio, on average outstanding balances of $97.1 million.

At September 30, 2010, substandard loans totaled $131.8 million, up from $89.4 million at September 30, 2009. Doubtful loans increased from $0 to $300,000 at September 30, 2010 compared to September 30, 2009. The bulk of the increase came from downgrades in the ADC portfolio, as home sales remain depressed and more borrowers are feeling stress in liquidity resources. The substandard classification for many of these loans is due to delayed progress in the projects and stress on liquidity reserves or expected outside (non-project related) cash flows. These loans, however, continue to pay interest on a current basis and do not otherwise warrant a non-accrual classification. All significant loans classified substandard or special mention are reviewed for impairment, under applicable accounting and regulatory standards. Specific reserves for impairment were $2.3 million at September 30, 2009 and $2.4 million September 30, 2010. Specific reserves are established when current information indicates that the carrying value of a loan is probably not recoverable, but there is sufficient uncertainty about the actual occurrence of a loss or the amount of any loss to be incurred. Our non-performing loans increased to $26.8 million at September 30, 2010 from $26.5 million at September 30, 2009, an increase of $300,000. Loans transferred from the non-performing category into other real estate owned during fiscal 2010 totaled $3.6 million.

Non-interest income consists primarily of income on securities sales, banking fees and service charges, net increases in the cash surrender value of bank-owned life insurance (“BOLI”) contracts, title insurance fees and

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investment management fees. Non-interest income was $27.2 million for the fiscal year ended September 30, 2010 compared to $40.0 million at September 30, 2009. During the year ended September 30, 2010, the Company recorded gains on sales of investment securities totaling $8.2 million compared to $18.1 million for the prior year. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. As a result of our reviews, we anticipated an acceleration of prepayments, management sold $279.4 million in mortgage backed securities and realized $6.4 million in gains on the sales. The proceeds were reinvested in securities with yields lower than the recorded yields of the securities sold. This activity also provided greater diversification in the portfolio. Deposit fees and service charges decreased by $1.2 million, or 9.4%. Income derived from the Company’s BOLI investments decreased by $711,000, or 25.8%, due to $723 thousand in death benefit proceeds received in 2009. Title insurance fee income derived from the Hardenburgh Abstract Company, Inc. increased $152,000 due to an increase in residential mortgage originations. Investment management fees increased $494,000 which is related to increased market values on assets under management. During fiscal 2010 the Company originated and sold $52.8 million in residential mortgage loans and recorded $867,000 in gains compared to $50.7 million in loans sold with $961,000 in gains at September 30, 2009.

Non-interest expense consists primarily of salaries and employee benefits, stock-based compensation, occupancy and office expenses, advertising and promotion expense, professional fees, intangible assets amortization, data processing expenses and FDIC/other regulatory assessments. Non-interest expense for the fiscal year ended September 30, 2010 increased by $3.0 million, or 3.7% to $83.2 million, compared to $80.2 million for the same period in 2009. The increase was primarily attributable to compensation and employee benefits of $4.1 million resulting from annual merit raises and increases in incentive compensation. Further, the Company opened offices in Yonkers and Nyack during the fiscal year 2010, as well as, experiencing a full year of salary expense for the White Plains office. Occupancy and office operations increased $632,000, or 4.9%, as the Company invested in new branch locations and automation in 2010. Professional fees increased $929,000 due to increased consulting fees as well as elevated external costs of collection for problem loans. Stock-based compensation decreased by $1.4 million mainly due to the vesting of stock based compensation awards in addition to lower ESOP expense. FDIC insurance decreased by $582,000 or 13.7% due to declines in FDIC assessments and ATM debit card expense decreased $514,000 or 3.2%.

Income Taxes. Income tax expense was $6.9 million for the fiscal year ended September 30, 2010 compared to $10.2 million for fiscal 2009, representing effective tax rates of 25.1% and 28.2%, respectively. The lower tax rate in 2010 was primarily due to the high proportion of tax-free income, BOLI and insurance relative to the total levels of pre-tax income and the set up of a captive insurance company.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

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

The Company’s off-balance sheet arrangements, which principally include lending commitments, are described below. At September 30, 2011 and 2010, the Company had no interests in non-consolidated special purpose entities.

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

For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements, or for development and construction in the case of real estate

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businesses. For retail customers, loan commitments are generally lines of credit secured by residential property. At September 30, 2011, commercial and retail loan commitments totaled $127.3 million. Approved closed undrawn lines of credit totaled $96.1 million, $129.0 million and $14.3 million for commercial, retail accounts, and overdraft protection lines, respectively. Letters of credit totaled $17.0 million. Letters of credit issued by the Company generally are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor’s completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Standby letters of credit are conditional commitments to support performance, typically of a contract or the financial integrity, of a customer to a third party, and represent an independent undertaking by the Company to the third party.

Provident Bank applies essentially the same credit policies and standards as it does in the lending process when making these commitments. See Note 15 to “Consolidated Financial Statements” in Item 8 hereof for additional information regarding lending commitments.

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

Payments Due by Period. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2011. The payment amounts represent those amounts due to the recipient.

	Payments Due by Period
Contractual Obligations	Less than One Year		One to Three Years		Three to Five Years		More Than Five Years		Total
	(Dollars in thousands)
FHLB and other borrowings	$	61,500	$	5,066	$	35,795	$	272,660	$	375,021
Time deposits		250,769		22,784		19,584		10,522		303,659
Letters of credits		6,786		2,353		387		7,446		16,972
Undrawn lines of credit		239,387		—		—		—		239,387
Operating leases		2,579		2,411		2,175		18,997		26,162
Total	$	561,021	$	32,614	$	57,941	$	309,625	$	961,201
Commitments to extend credit	$	100,041		26,653		613		—	$	127,307

Impact of Inflation and Changing Prices

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

Liquidity and Capital Resources

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

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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 years ended September 30, 2011, 2010 and 2009, our loan originations totaled $578.6 million, $472.1 million and $450.6 million, respectively. Purchases of securities available for sale totaled $622.6 million, $830.6 million and $708.7 million for the years ended September 30, 2011, 2010 and 2009, respectively. Purchases of securities held to maturity totaled $93.8 million $23.0 million and $25.1 million for the years ended September 30, 2011, 2010 and 2009, respectively. These activities were funded primarily by borrowings and by principal repayments on loans and securities. Loan origination commitments totaled $127.3 million at September 30, 2011, and consisted of $113.4 million at adjustable or variable rates and $13.9 million at fixed rates. Unused lines of credit granted to customers were $239.4 million at September 30, 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 $57.0 million and $50.9 million at September 30, 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 increase / (decrease) in total deposits was $154.0 million, $60.4 million, and $93.1 million for the years ended September 30, 2011, 2010 and 2009, respectively. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2011 totaled $250.8 million. Based upon prior experience and our current pricing strategy, management believes that a significant portion of such deposits will remain with us, although we may be required to compete for many of the maturing certificates in a highly competitive environment.

Credit markets continued to improve in fiscal 2011 from the extreme conditions that existed for fiscal 2009. Credit spreads narrowed steadily during the past year and many are very near historical levels, as many financial institutions return to lending while loan demand remains at levels below that of a vibrant economy. This lack of fundamental economic vitality is causing an increase in liquidity as businesses and individuals remain uncommitted to investment. 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 and non-maturity deposit accounts. 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 $375.0 million was outstanding at September 30, 2011. At September 30, 2011, we had the ability to borrow an additional $344.1 million under our credit facilities with the Federal Home Loan Bank. The Bank may borrow up to an additional $41.1 million by pledging securities not required to be pledged for other purposes as of September 30, 2011. Further, at September 30, 2011 we had only $11.8 million in Brokered Certificates of Deposit (including certificates of deposit accounts registry service (CDAR’s) reciprocal CD’s of $2.7 million and Money Market of $5.7 million) and have relationships with several brokers to utilize these sources of funding should conditions warrant further sources of funds. Provident Bank is subject to regulatory capital requirements that are discussed in “Capital Requirements” under “Regulation”.

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Cash and short-term borrowing capacity at September 30, 2011 is summarized below:

Cash and Due from Banks	$	281,512
Unpledged investment Securities		41,096
Unpledged mortgage collateral		344,090
Total immediate funding	$	666,698

The Company’s tangible capital to tangible asset ratio is a strong 8.94%. Further, the Company has a common stock repurchase program with 776,713 shares remaining under its current board authorization. The Bank’s regulatory capital ratios were as follows:

Tier I leverage	8.1	%
Tier I risk based capital	11.8	%
Total risk based capital	13.0	%

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.

62

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

We make statements in this Report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting Provident 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 implementing regulations that adversely affect our business including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;

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

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

• our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the 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;

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

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

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

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

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

63

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

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

We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial mortgage loans, commercial 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 September 30, 2011, the estimated changes in our (1) NPV that would result from the designated instantaneous changes in the forward rates curve, and (2) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

Interest Rates (basis points)	Estimated NPV		in NPV						Estimated NII		Estimated NII
			Amount			Percent					Amount			Percent
(Dollars in thousands)
+300	$	297,054	$	(45,133	)		-13.2	%	$	95,736	$	8,359			9.6	%
+200		314,826		(27,361	)		-8.0	%		93,619		6,242			7.1	%
+100		330,866		(11,321	)		-3.3	%		90,752		3,375			3.9	%
0		342,187		0			0.0	%		87,377		0			0.0	%
-100		338,189		(3,998	)		-1.2	%		80,831		(6,546	)		-7.5	%

The table set forth above indicates that at September 30, 2011, in the event of an immediate 200 basis point increase in interest rates, we would be expected to experience an 8.0% decrease in NPV and a 7.1% 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.

64

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.

Since December 2008, the federal funds target rate remained in a range of 0.00 – 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities decreased by 17 basis points from 0.42% to 0.25% during fiscal year 2011 while the yield on U.S. Treasury 10 year notes decreased 61 basis points from 2.53% to 1.92% over the same time period. The disproportional greater rate of decrease on longer term maturities has resulted in the 2-10 year treasury yield curve being flatter at the end of the past fiscal year than it was when the year began. The overall lower yield curve caused a significant reduction in rates paid on deposits and short-term borrowings as well as rates charged on loans and other assets. To fight the economic downturn the FOMC declared a willingness to keep the federal funds target low for an “extended period”. Furthermore, during the fourth quarter of the current fiscal year the FOMC stated that it anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. However, should economic conditions improve, the FOMC could reverse direction and increase the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionably more 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 derivative value at risk is $65,000.

ITEM 8. Financial Statements and Supplementary Data

The following are included in this item:

(A) Report of Management on Internal Control Over Financial Reporting

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

(C) Report of Independent Registered Public Accounting Firm on Financial Statements

(D) Consolidated Statements of Financial Condition as of September 30, 2011 and 2010

(E) Consolidated Statements of Income for the years ended September 30, 2011, 2010 and 2009

(F) Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2011, 2010 and 2009

(G) Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009

(H) Notes to Consolidated Financial Statements

The supplementary data required by this item (selected quarterly financial data) is provided in Note 21 of the Notes to Consolidated Financial Statements.

65

Report of Management on Internal Control Over Financial Reporting

Board of Directors and Stockholders

Provident New York Bancorp:

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

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

Management assessed the Company’s internal control over financial reporting as of September 30, 2011. This assessment was based on criteria for effective internal control over financial reporting established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September 30, 2011, the Company’s internal control over financial reporting is effective.

The Company’s independent registered public accounting firm has issued an audit report on the effective operation of the Company’s internal control over financial reporting as of September 30, 2011. This report appears on the following page.

By:	/s/ Jack Kopnisky
	Jack Kopnisky
	President and Chief Executive Officer
	(Principal Executive Officer)
	December 13, 2011

By:	/s/ Paul Maisch
	Paul Maisch
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)
	December 13, 2011

66

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

Board of Directors and Stockholders

Provident New York Bancorp

We have audited Provident New York Bancorp’s (“the Company”) internal control over financial reporting as of September 30, 2011, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Provident New York Bancorp’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

In our opinion, Provident New York Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Provident New York Bancorp and subsidiaries as of September 30, 2011 and 2010 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years ended September 30, 2011 and our report dated December 13, 2011 expressed an unqualified opinion on those consolidated financial statements.

/s/ Crowe Horwath LLP

Livingston, New Jersey

December 13, 2011

67

Report of Independent Registered Public Accounting Firm on Financial Statements

Board of Directors and Stockholders

Provident New York Bancorp

We have audited the accompanying consolidated statements of financial condition of Provident New York Bancorp and subsidiaries (“the Company”) as of September 30, 2011 and 2010 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Provident New York Bancorp and subsidiaries as of September 30, 2011 and 2010 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2011 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Provident New York Bancorp’s internal control over financial reporting as of September 30, 2011, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 13, 2011 expressed an unqualified opinion thereon.

/s/ Crowe Horwath LLP

Livingston, New Jersey

December 13, 2011

68

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands, except per share data)

	September 30,
	2011			2010
ASSETS
Cash and due from banks	$	281,512		$	90,872
Securities (including $644,910 and $719,172 pledged as collateral for borrowings and deposits in 2011 and 2010, respectively):
Available for sale, at fair value (note 3)		739,844			901,012
Held to maturity, at amortized cost (fair value of $111,272 and $35,062 in 2011 and 2010, respectively) (note 4)		110,040			33,848
Total securities		849,884			934,860
Loans held for sale		4,176			5,890
Gross loans (note 5)		1,703,799			1,701,541
Allowance for loan losses		(27,917	)		(30,843	)
Total loans, net		1,675,882			1,670,698
Federal Home Loan Bank (“FHLB”) stock, at cost		17,584			19,572
Accrued interest receivable (note 6)		9,904			11,069
Premises and equipment, net (note 7)		40,886			43,598
Goodwill (note 2)		160,861			160,861
Core deposit and other intangible assets (note 2)		4,629			3,640
Bank owned life insurance		56,967			50,938
Foreclosed properties (note 5)		5,391			3,891
Other assets (notes 11 and 12)		29,726			25,136
Total assets	$	3,137,402		$	3,021,025
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits (note 8)	$	2,296,695		$	2,142,702
FHLB and other borrowings (including repurchase agreements of $211,694 and $222,500 in 2011 and 2010, respectively) (note 9)		323,522			363,751
Borrowing senior unsecured note (FDIC insured) (note 9)		51,499			51,496
Mortgage escrow funds (note 5)		9,701			8,198
Other (note 11)		24,851			23,923
Total liabilities		2,706,268			2,590,070
Commitments and Contingent liabilities (note 16)		—			—
STOCKHOLDERS’ EQUITY (note 14):
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; 37,864,008 and 38,262,288 shares outstanding in 2011 and 2010 respectively)		459			459
Additional paid-in capital		357,063			356,912
Unallocated common stock held by employee stock ownership plan (“ESOP”) (note 12)		(6,138	)		(6,637	)
Treasury stock, at cost (8,065,544 shares in 2011 and 7,667,264 shares in 2010)		(90,585	)		(87,336	)
Retained earnings		165,199			162,433
Accumulated other comprehensive income, net of taxes of $3,522 in 2011 and $3,577 in 2010 (note 11)		5,136			5,124
Total stockholders’ equity		431,134			430,955
Total liabilities and stockholders’ equity	$	3,137,402		$	3,021,025

See accompanying notes to consolidated financial statements.

69

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Consolidated Statements of Income

For the years ended September 30,

(Dollars in thousands, except per share data)

	2011			2010			2009
Interest and dividend income:
Loans, including fees	$	89,500		$	92,542		$	97,149
Taxable securities		14,493			18,208			25,552
Non-taxable securities		7,441			7,774			7,520
Other earning assets		1,180			1,250			1,369
Total interest and dividend income		112,614			119,774			131,590
Interest expense:
Deposits		6,104			8,517			18,375
Borrowings		15,220			17,923			19,345
Total interest expense		21,324			26,440			37,720
Net interest income		91,290			93,334			93,870
Provision for loan losses		16,584			10,000			17,600
Net interest income after provision for loan losses		74,706			83,334			76,270
Non-interest income:
Deposit fees and service charges		10,811			11,228			12,393
Net gain on sale of securities		10,011			8,157			18,076
Other than temporary impairment on securities		(278	)		—			—
Title insurance fees		1,224			1,157			1,005
Bank owned life insurance		2,049			2,044			2,755
Gain (loss) on sale of premises and equipment		—			(54	)		517
Net gain on sales of loans		1,027			867			961
Investment management fees		3,080			3,070			2,576
Fair value loss on interest rate caps		(197	)		(1,106	)		—
Other		2,224			1,838			1,670
Total non-interest income		29,951			27,201			39,953
Non-interest expense:
Compensation and employee benefits		43,662			43,589			39,520
Defined benefit settlement charge / CEO transition		1,772			—			—
Restructuring charge (severance / branch relocation)		3,201			—			—
Stock-based compensation plans		1,162			1,543			2,942
Occupancy and office operations		14,508			13,434			12,802
Advertising and promotion		3,328			3,252			3,093
Professional fees		4,389			4,019			3,090
Data and check processing		2,763			2,285			2,284
Amortization of intangible assets		1,426			1,849			2,185
ATM/debit card expense		1,584			1,601			2,115
Foreclosed property expense		1,171			137			207
FDIC insurance and regulatory assessments		2,910			3,675			4,257
Other		8,235			7,786			7,692
Total non-interest expense		90,111			83,170			80,187
Income before income tax expense		14,546			27,365			36,036
Income tax expense		2,807			6,873			10,175
Net income	$	11,739		$	20,492		$	25,861
Weighted average common shares:
Basic		37,452,596			38,161,180			38,537,881
Diluted		37,453,542			38,185,122			38,705,837
Earnings per common share (note 13)
Basic	$	0.31		$	0.54		$	0.67
Diluted	$	0.31		$	0.54		$	0.67

See accompanying notes to consolidated financial statements.

70

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended September 30, 2011, 2010 and 2009

(Dollars in thousands, except per share data)

	Number of Shares			Common Stock		Additional Paid-in Capital			Unallocated ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Stockholders’ Equity
Balance at October 1, 2008		39,815,213		$	459	$	352,882		$	(7,635	)	$	(75,687	)	$	138,720		$	(9,581	)	$	399,158
Net income																25,861						25,861
Other comprehensive income																			12,058			12,058
Total comprehensive income																						37,919
Deferred compensation transactions		—			—		128			—			—			—			—			128
Stock option transactions, net		181,969			—		1,066			—			2,182			(2,009	)		—			1,239
ESOP shares allocated or committed to be released for allocation (49,932 shares)		—			—		(11	)		499			—			—			—			488
Vesting of RRP shares		—			—		1,688			—			—			—			—			1,688
Other RRP transactions		(34,164	)		—		—			—			(326	)		—			—			(326	)
Purchase of treasury stock		(415,811	)		—		—			—			(3,459	)		—			—			(3,459	)
Cash dividends paid ($0.24 per common share)		—			—		—			—			—			(9,379	)		—			(9,379	)
Balance at September 30, 2009		39,547,207			459		355,753			(7,136	)		(77,290	)		153,193			2,477			427,456
Net income																20,492						20,492
Other comprehensive income																			2,647			2,647
Total comprehensive income																						23,139
Deferred compensation transactions		—			—		87			—			—			—			—			87
Stock option transactions, net		249,953			—		247			—			3,016			(2,036	)		—			1,227
ESOP shares allocated or committed to be released for allocation (49,932 shares)		—			—		(58	)		499			—			—			—			441
Vesting of RRP shares		—			—		883			—						—			—			883
Other RRP transactions		(18,949	)		—		—			—			(177	)		—			—			(177	)
Purchase of treasury stock		(1,515,923	)		—		—			—			(12,885	)		—			—			(12,885	)
Cash dividends paid ($0.24 per common share)		—			—		—			—			—			(9,216	)		—			(9,216	)
Balance at September 30, 2010		38,262,288			459		356,912			(6,637	)		(87,336	)		162,433			5,124			430,955
Net income																11,739						11,739
Other comprehensive income																			12			12
Total comprehensive income																						11,751
Deferred compensation transactions		—			—		45			—			—			—			—			45
Stock option transactions, net		—			—		558			—			—			—			—			558
ESOP shares allocated or committed to be released for allocation (49,932 shares)		—			—		(59	)		499			—			—			—			440
RRP awards		63,870			—		(561	)		—			561			—			—			—
Vesting of RRP shares		—			—		168			—			—			—			—			168
Other RRP transactions		(4,696	)		—		—			—			(30	)		—			—			(30	)
Purchase of treasury stock		(457,454	)		—		—			—			(3,780	)		—			—			(3,780	)
Cash dividends paid ($0.24 per common share)		—			—		—			—			—			(8,973	)		—			(8,973	)
Balance at September 30, 2011		37,864,008		$	459	$	357,063		$	(6,138	)	$	(90,585	)	$	165,199		$	5,136		$	431,134

See accompanying notes to consolidated financial statements.

71

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended September 30, 2011, 2010 and 2009

(Dollars in thousands)

	2011			2010			2009
Cash flows from operating activities:
Net income	$	11,739		$	20,492		$	25,861
Adjustments to reconcile net income to net cash provided by operating activities
Provisions for loan losses		16,584			10,000			17,600
(Gain) loss on other real estate owned		869			(18	)		186
Depreciation of premises and equipment		6,177			5,144			4,675
Amortization of intangibles		1,426			1,849			2,185
Net gain on sale of securities		(10,011	)		(8,157	)		(18,076	)
Other than temporary impairment (credit loss)		278			—			—
Fair value loss on interest rate cap		197			1,106			—
Net gains on loans held for sale		(1,027	)		(867	)		(961	)
(Gain) loss on sale of premises and equipment		—			54			(517	)
Net amortization of premium and discounts on securities		3,181			3,209			1,715
Accrued restructuring expense		3,201			—			—
Accretion of premiums on borrowings (includes calls on borrowings)		(30	)		(223	)		(440	)
Amortization of payment fees on restructured borrowings		1,033			—			—
ESOP and RRP expense		607			1,325			2,178
ESOP forfeitures		(3	)		(29	)		(4	)
Stock option compensation expense		558			247			768
Originations of loans held for sale		(49,807	)		(52,839	)		(50,677	)
Proceeds from sales of loans held for sale		52,548			49,029			49,653
Increase in cash surrender value of bank owned life insurance		(2,049	)		(1,327	)		(1,961	)
Deferred income tax (benefit) expense		118			26			(1,640	)
Net changes in accrued interest receivable and payable		674			(1,536	)		(585	)
Other adjustments (principally net changes in other assets and other liabilities)		(9,785	)		(5,624	)		(9,273	)
Net cash provided by operating activities		26,478			21,861			20,687
Cash flows from investing activities:
Purchases of securities:
Available for sale		(622,551	)		(830,613	)		(708,727	)
Held to maturity		(93,764	)		(23,023	)		(25,095	)
Proceeds from maturities, calls and other principal payments on securities
Available for sale		251,774			328,993			153,585
Held to maturity		17,220			33,780			22,548
Proceeds from sales of securities available for sale		540,145			443,389			556,796
Proceeds from sales of securities held to maturity		357			—			625
Loan originations		(578,631	)		(472,066	)		(450,551	)
Loan principal payments		553,235			461,632			469,157
Purchase of interest rate cap derivatives		—			(1,368	)		—
Proceeds from sale of FHLB stock, net		1,988			3,605			5,498
Proceeds from sales of other real estate owned		301
Purchases of premises and equipment		(3,465	)		(8,152	)		(8,852	)
Proceeds from the sale of fixed assets		—			48			718
Purchases of bank owned life insurance		(3,980	)		—			—
Net cash provided by (used in) investing activities		62,629			(63,775	)		15,702

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows Continued

Years Ended September 30, 2011, 2010 and 2009

(Dollars in thousands)

	2011			2010			2009
Cash flows from financing activities
Net increase in transaction, savings and money market deposits		227,907			177,808			124,037
Net decrease in time deposits		(73,914	)		(117,388	)		(30,952	)
Net decrease in short-term borrowings		(34,840	)		(62,500	)		(153,791	)
Gross repayments of long-term borrowings		(1,238	)		(4,152	)		(3,995	)
Gross proceeds from long-term borrowings		—			—			22,840
Net increase in borrowings senior unsecured note		—			—			51,500
Payments of pre-payment fees on FHLBNY advances		(5,151	)		—			—
Net (decrease) increase in mortgage escrow funds		1,503			(207	)		1,133
Treasury shares purchased		(3,810	)		(13,062	)		(3,785	)
Stock option transactions		4			1,008			473
Other stock-based compensation transactions		45			87			128
Cash dividends paid		(8,973	)		(9,216	)		(9,379	)
Net cash provided by (used in) financing activities		101,533			(27,622	)		(1,791	)
Net increase (decrease) in cash and cash equivalents		190,640			(69,536	)		34,598
Cash and cash equivalents at beginning of year		90,872			160,408			125,810
Cash and cash equivalents at end of year	$	281,512		$	90,872		$	160,408
Supplemental cash flow information:
Interest payments	$	21,815		$	27,379		$	38,714
Income tax payments		9,070			7,993			11,739
Loans transferred to real estate owned		1,932			2,943			1,815
Net change in unrealized gains recorded on securities available for sale		1,653			5,241			25,900
Change in deferred taxes on unrealized gains on securities available for sale		(671	)		(2,122	)		(10,506	)
Issuance of RRP shares		561			—			—

See accompanying notes to consolidated financial statements.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the years ended September 30, 2011, 2010, and 2009

(in thousands, except share data)

	2011			2010			2009
Net income:	$	11,739		$	20,492		$	25,861
Other comprehensive income:
Net unrealized holding gains on securities available for sale net of related tax expense of $4,624, $5,435, and $17,834		6,762			7,963			26,142
Less:
Reclassification adjustment for net unrealized gains included in net income, net of related income tax expense of $4,065, $3,313 and $7,328		5,946			4,844			10,748
Reclassification adjustment for other than temporary losses included in net income, net of related income tax benefit of $113, $0, and $0		(165	)		—			—
		981			3,119			15,394
Change in funded status of defined benefit plans, net of related income tax expense of $665, $327, and $2,280		(969	)		(472	)		(3,336	)
		12			2,647			12,058
Total comprehensive income	$	11,751		$	23,139		$	37,919

See accompanying notes to consolidated financial statements.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of Provident New York Bancorp (“Provident Bancorp” or “the Company”), Hardenburgh Abstract Title Company, which provides title searches and insurance for residential and 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, and (iv) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers and (v) Limited Liability Companies, which hold foreclosed properties acquired by the bank. Intercompany transactions and balances are eliminated in consolidation.

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

(a)Nature of Business

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

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

The Bank is a community bank offering financial services to individuals and businesses primarily in Rockland and Orange Counties, New York and the contiguous Sullivan, Ulster, Westchester and Putnam Counties, New York and Bergen County, New Jersey. In October 2011, the Company announced its plans to expand into the New York City market. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. The Bank is a federally-chartered savings association and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). The Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Bank is the primary regulator for Provident Bancorp. Of the Bank’s loans 87% are collateralized or dependent on real estate.

(b)Use of estimates

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. An estimate that is particularly susceptible to significant near-term change is the allowance for loan losses, which is discussed below. Also subject to change are estimates involving goodwill impairment evaluations, mortgage servicing rights, benefit plans, deferred income taxes and fair values of financial instruments.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(c)Cash Flows

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

(d)Long Term Assets

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

(e)Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. (See note 18)

(f)Adoption of New Accounting Standards

Accounting Standards Update (ASU) 2009-16,Transfers and Servicing (Topic 860)-Accounting for Transfers of Financial Assetshas been issued. ASU 2009-16 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. This standard was effective for the Company October 1, 2010 and did not have a material effect on the Company’s consolidated financial statements.

ASC 2009-17,Consolidations (Topic 810)-Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entitieshas been issued. ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This standard was effective for the Company October 1, 2010 did not have a material effect on the Company’s consolidated financial statements.

ASC 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements has been issued. ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The effect of adopting this new guidance was immaterial.

ASU 2010-20,Receivables (Topic 310)-Disclosures abut the Credit Quality of Financing Receivables and the Allowance for Credit Lossesrequires significantly more information about credit quality in a financial institution’s portfolio. This statement addresses only disclosures and does not seek to change recognition or measurement. The effect of adopting this new guidance was immaterial.

Accounting Standards Update (ASU) 2011-02,Receivables (Topic 310)-A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuringhas 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 was effective for the Company July 1, 2011 and did not have a material effect on the Company’s consolidated financial statements.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(g)Securities

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

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

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

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

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

Premiums and discounts on debt securities are recognized in interest income on a level yield basis over the period to maturity. Amortization of premiums and accretion of discounts on mortgage backed securities are based on the estimated cash flows of the mortgage backed securities, periodically adjusted for changes in estimated lives, on a level yield basis. The cost of securities sold is determined using the specific identification method. The Company uses a discounted cash flow (“DCF”) analysis to provide an estimate of an other than temporary impairment (“OTTI”) loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over collateralization tests, interest coverage tests and other factors. Expected default and deferral rates are weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate is based upon the yield expected from the related securities. Unrealized losses are charged to earnings when management determines that the decline in fair value of a security is other than temporary.

Securities are evaluated at least quarterly, and more frequently when economic and market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition of the issuer. Management also assesses whether it intends to sell, or is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either criteria regarding intent to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. If the Company does not expect to recover the entire amortized cost basis of the security, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary impairment is separated into a) the amount representing the credit loss and b) the amount related to all other factors. The amount of other than temporary impairment related to credit loss is recognized in earnings while the amount related to other factors is recognized in other comprehensive income, net of applicable taxes. The cost basis of individual equity securities is written down to estimated fair value through a charge to earnings when declines in value

77

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

below cost are considered to be other than temporary. As of September 30, 2011 the Company does not intend to sell nor is it more likely than not that it would be required to sell any of its debt securities with unrealized losses prior to recovery of its amortized cost basis less any current-period credit loss.

(h)Loans Held For Sale

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

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

(i)Servicing Rights

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and are included with other income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Servicing fees totaled $623, $507 and $13 for the years ended September 30, 2011, 2010 and 2009, respectively. Late fees and ancillary fees related to loan servicing are not material.

(j)Loans

Loans where management has the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held for sale) are reported at amortized cost less the allowance for loan losses. Interest income on loans is accrued on the level yield method.

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

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(k)Allowance for Loan Losses

The allowance for loan losses is established through provisions for losses charged to earnings. Losses on loans (including impaired loans) are charged to the allowance for loan losses when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized.

The allowance for loan losses is an amount that management believes is necessary to absorb probable incurred losses on existing loans that may become uncollectible. Management’s evaluations, which are subject to periodic review by the Company’s primary regulator, take into consideration factors such as the Company’s past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions that may affect the borrowers’ ability to pay. Future adjustments to the allowance for loan losses may be necessary, based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other factors. The process of assessing the adequacy of the allowance for loan loss is subjective, particularly in times of economic downturns. It is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates. As such there can be no assurance that future charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.

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

(l) Troubled Debt Restructuring

Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty. Restructured loans are recorded in accrual status when said loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items.

(m) Federal Home Loan Bank Stock

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

(n) Premises and Equipment

Land is reported at cost, while premises and equipment are reported at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of

79

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

(o) Goodwill and Other Intangible Assets

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

The Company accounts for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level. There are two steps to the process:

1. Identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Goodwill is not considered impaired as long as the fair value of the reporting unit is greater than its carrying value. The second step is only required if a potential impairment to goodwill is identified in step one.

2. Compare the implied fair value of goodwill to its carrying amount, where the implied fair value of goodwill is computed on a residual basis, that is, by subtracting the sum of the fair values of the individual asset categories (tangible and intangible) from the indicated fair value of the reporting unit as determined under step one. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair value, and it must be presented as a separate line item on financial statements.

The Company estimated the fair value of the its primary reporting unit, Provident Bank, utilizing four valuation methodologies including, (1) the Comparable Transactions approach based on pricing ratios recently paid in the sale or merger of comparable banking franchises; (2) the Control Premium approach based on the Company’s trading price followed by the application of an industry based control premium; (3) the Public Market Peers approach based on the trading prices of similar publicly-traded companies as measured by standard valuation ratios followed by application of an industry based control premium; and, (4) the Discounted Cash Flow approach where value is estimated based on the present value of projected dividends and a terminal value. These approaches were weighted to determine if impairment existed and the Company determined as of September 30, 2011 the aggregate fair value of the reporting unit exceeded the carrying value and therefore no impairment was recorded and the step two analysis for determining the impairment was not necessary. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

The core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives of approximately eight years. Intangibles related to HVIA are amortized over 10

80

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

years on a straight-line basis. Intangibles related to the naming rights on Provident Bank Ball Park are amortized over 10 years on a straight-line basis. Impairment losses on intangible assets are charged to expense, if and when they occur.

(p) Real Estate Owned

Real estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with any resulting write-down charged to the allowance for loan losses. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and other available information. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Gains and losses on sales of real estate owned are recognized upon disposition. Foreclosed properties totaled $5.4 million and $3.9 million at September 30, 2011 and 2010, respectively.

(q) Securities Repurchase Agreements

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

(s)Income Taxes

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

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

The Company evaluates uncertain tax positions in a two step process. The first step is recognition, which requires a determination of whether it is more likely than not that a tax position will be sustained upon examination. The second step is measurement. Under the measurement step, a tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax position that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company did not have any such position as of September 30, 2011. See note 11 of the “Notes to Consolidated Financial Statements”.

(r) (Bank Owned Life Insurance (BOLI)

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

(s) Stock-Based Compensation Plans

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

The Company applies FASB ASC Topic 718 “Compensation- Stock Based” in accounting for its stock option plan. During 2011, 2010 and 2009, the Company issued 119,526, 321,976 and 88,861 new stock-based option awards and recognized total non-cash stock-based compensation cost of $558, $247 and $768. As of September 30, 2011, the total remaining unrecognized compensation cost related to non-vested stock options was $413. Options granted in 2011 have a four year vesting period.

The Company also has a restricted stock plan in which shares awarded are transferred from treasury stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The expense is amortized over the vesting period of the awards. The Company issued 63,870 shares during 2011 and none during 2010 and 2009. The recognized total restricted stock compensation cost recognized during 2011, 2010 and 2009 was $168, $883, and $1,687, respectively. As of September 30, 2011, the total remaining unrecognized compensation cost related to restricted stock was $478. Options granted in 2011 have a two through four year vesting periods.

The Company’s stock-based compensation plans allow for accelerated vesting when employees retire under circumstances in accordance with the terms of the plans. Grants issued subsequent to adoption of FASB ASC Topic 718 (October 1, 2005), which are subject to such accelerated vesting, are expensed over the shorter of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be less than the vesting period expressed in the option agreement, depending upon the age of the grantee. As of September 30, 2011, 1,000 restricted shares and 34,300 stock options were potentially subject to accelerated vesting, and have been fully expensed. The Company did not recognize expense associated with the acceleration of restricted shares in 2011, 2010 and 2009. The Company recognized expense associated with the acceleration of 0, 27,000 and 0 stock option shares in 2011, 2010 and 2009, respectively.

(t) Earnings Per Share

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

(u) Segment Information

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

(2) Acquisitions

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

	HVIA		HSBC			WSB		ENB		NBF		Total
At Acquisition Date
Number of shares issued		208,331		—			6,257,896		3,969,676		—		10,435,903
Loans acquired	$	—	$	2,045		$	284,522	$	213,730	$	23,112	$	523,409
Deposits assumed		—		23,319			475,150		327,284		88,182		913,935
Cash paid/(received)		2,500		(18,938	)		72,601		36,773		28,100		121,036
Goodwill		2,531		—			91,576		51,794		13,063		158,964
Core deposit/other intangibles		2,830		1,690			10,395		6,624		1,787		23,326
At September 30, 2011
Goodwill	$	3,279	$	—		$	92,145	$	52,101	$	13,336	$	160,861
Accumulated core deposit/other amortization		1,509		1,651			9,479		6,624		1,787		21,050
Net core deposit/other intangible		1,321		39			916		—		—		2,276

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Future Amortization of Core Deposit and Other Intangible Assets. The following table sets forth the future amortization of core deposit and other intangible assets, including naming rights of $2.3 million at September 30, 2011:

Amoritization Schedule	September 30, 2011		September 30, 2010
Less than one year	$	1,183	$	1,364
One to two years		821		941
Two to three years		524		580
Three to four years		524		283
Four to five years		430		283
Beyond five years		1,147		189
Total	$	4,629	$	3,640

* In addition to the above, the Company also carries $1,456 in mortgage servicing rights included in other assets at September 30, 2011

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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(3) Securities Available for Sale

The following is a summary of securities available for sale:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2011
Mortgage-backed securities-residential
Fannie Mae	$	136,699	$	3,292	$	—		$	139,991
Freddie Mac		98,511		2,205		(41	)		100,675
Ginnie Mae		4,973		207		—			5,180
CMO/Other MBS		81,170		1,764		(522	)		82,412
		321,353		7,468		(563	)		328,258
Investment securities
Federal agencies		199,741		4,986		(79	)		204,648
Corporate bonds		16,984		257		(179	)		17,062
State and municipal securities		177,666		11,018		—			188,684
Equities		1,192		—		—			1,192
		395,583		16,261		(258	)		411,586
Total available for sale	$	716,936	$	23,729	$	(821	)	$	739,844
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

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

	September 30, 2011
	Amortized		Fair
	Cost		Value
Remaining period to contractual maturity
Less than one year	$	4,410	$	4,442
One to five years		197,476		203,113
Five to ten years		146,634		154,212
Greater than ten years		45,871		48,627
Total investment securities		394,391		410,394
Mortgage backed securities-residential		321,353		328,258
Total available for sale securities	$	715,744	$	738,652

Proceeds from sales of securities available for sale during the years ended September 30, 2011, 2010 and 2009 totaled $540,145, $443,389 and $556,796 respectively. These sales resulted in gross realized gains of $10,000, $8,518, and $18,043 for the years ended September 30, 2011, 2010, and 2009 respectively, and gross realized losses of $7, $361 and $0, in fiscal years 2011, 2010, and 2009 respectively. The Company’s accumulated other income included in stockholders equity at September 30, 2011 and 2010 consist of net unrealized gain, on available for sale securities of $13,603 and $12,621, respectively, net of tax liabilities of $9,302 and $8,630 respectively.

Securities, including held to maturity securities, with carrying amounts of $206,829 and $228,442 were pledged as collateral for borrowings at September 30, 2011 and 2010, respectively. Securities with carrying amounts of $438,081 and $490,730 were pledged as collateral for municipal deposits and other purposes at September 30, 2011 and 2010, respectively.

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

	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
As of September 30, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Freddie Mac	$	10,262	$	(41	)	$	—	$	—		$	10,262	$	(41	)
CMO/Other MBS		3,037		(257	)		1,813		(265	)		4,850		(522	)
Total mortgage backed securities — residential		13,299		(298	)		1,813		(265	)		15,112		(563	)
U.S. Government and agency securities		9,914		(79	)		—		—			9,914		(79	)
Corporate bonds		1,886		(179	)		—		—			1,886		(179	)
Total	$	25,099	$	(556	)	$	1,813	$	(265	)	$	26,912	$	(821	)

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
As of September 30, 2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Fannie Mae	$	124	$	(1	)	$	—	$	—		$	124	$	(1	)
CMO’s		486		(7	)		5,511		(352	)		5,997		(359	)
Total Mortgage-backed securities-residential		610		(8	)		5,511		(352	)		6,121		(360	)
U.S. Government and agency securities		40,638		(54	)		—		—			40,638		(54	)
State and municipal securities		1,541		(20	)		—		—			1,541		(20	)
Equity securities		99		(6	)		790		(251	)		889		(257	)
Total	$	42,888	$	(88	)	$	6,301	$	(603	)	$	49,189	$	(691	)

The Company, as of June 30, 2009 adopted the provisions under FASB ASC Topic 320 —Investments- Debt and Equity Securities which requires a forecast of recovery of cost basis through cash flow collection on all debt securities with a fair value less than its amortized cost less any current period credit loss with an assertion on the lack of intent to sell (or requirement to sell prior to recovery of cost basis). Based on a review of each of the securities in the investment portfolio in accordance with FASB ASC 320 at September 30, 2011, the Company concluded that it expects to recover the amortized cost basis of its investments on all but one private label CMO security and one equity security for which incurred impairment charges of $75 and $203, respectively, were recognized. As of September 30, 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 applicable credit losses.

The losses related to privately issued residential CMOs were recognized in light of deterioration of housing values in the residential real estate market and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The Company uses a DCF analysis to provide an estimate of an OTTI loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over collateralization tests, interest coverage tests and other factors. Expected default and deferral rates were weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate was based upon the yield expected from the related securities. The loss related to the equity securities were recognized as a result of the length of time and the extent to which the market value has been less than cost. The decline in value on these securities is thought to be affected by general market conditions which reflect prospects for the economy as a whole.

Substantially all of the unrealized losses at September 30, 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 September 30, 2011. A total of 11 available for sale securities were in a continuous unrealized loss position for less than 12 months and 4 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 $5,372 and a fair value (carrying value) of $4,851 as of September 30, 2011. One of the four securities is considered to be impaired as noted above and is below investment grade. The impaired private label CMO has an amortized cost of $1,940 and a fair value of $1,683 at September 30, 2011. The remaining three securities are rated at or above B. The remaining three securities in this category are performing as of September 30, 2011 and are expected to perform based on current information.

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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.

(4) Securities Held to Maturity

The following is a summary of securities held to maturity:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2011
Mortgage-backed securities-residential
Fannie Mae	$	1,298	$	63	$	—		$	1,361
Freddie Mac		32,858		103		(120	)		32,841
CMO/Other MBS		25,828		155		—			25,983
		59,984		321		(120	)		60,185
Investment securities
Federal agencies		29,973		25		(141	)		29,857
State and municipal securities		18,583		1,108		—			19,691
Other		1,500		39		—			1,539
		50,056		1,172		(141	)		51,087
Total held to maturity	$	110,040	$	1,493	$	(261	)	$	111,272
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

88

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

	September 30, 2011
	Amortized Cost		Fair Value
Remaining period to contractual maturity
Less than one year	$	5,813	$	5,840
One to five years		7,696		8,022
Five to ten years		32,955		33,226
Greater than ten years		3,592		3,999
Total investment securities		50,056		51,087
Mortgage backed securities-residential		59,984		60,185
Total held to maturity securities	$	110,040	$	111,272

Proceeds from sales of securities held to maturity during the years ended September 30, 2011, 2010 and 2009 totaled $357, $0, and $625 respectively. These sales resulted in gross realized gains of $18, $0, and $33 for the years ended September 30, 2011, 2010, and 2009 respectively, and no gross realized losses in fiscal years 2011, 2010, and 2009. These securities can be considered maturities per FASB ASC Topic #320,Investments — Debt & Equity securities, as the sale of the securities occurred after at least 85% of the principal outstanding had been collected since acquisition.

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

	Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer				Total
As of September 30, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Freddie Mac MBS-residential	$	25,770	$	(120	)	$	—	$	—	$	25,770	$	(120	)
Federal Agencies		24,831		(141	)		—		—		24,831		(141	)
Total	$	50,601	$	(261	)	$	—	$	—	$	50,601	$	(261	)

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

All of the unrealized losses on held to maturity securities at September 30, 2011 are attributable to changes in market interest rates and credit risk spreads subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at September 30, 2011. There were 8 held-to-maturity securities in a continuous unrealized loss position for less than 12 months, and 0 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

89

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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 September 30, 2011.

(5) Loans

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

	September 30,
	2011			2010
One- to four-family residential mortgage loans:
Fixed rate	$	325,837		$	374,251
Adjustable rate		63,928			60,649
		389,765			434,900
Commercial real estate loans		703,356			579,232
Commercial business loans		209,923			217,927
Acquisition, development & construction loans		175,931			231,258
		1,089,210			1,028,417
Consumer loans:
Home equity lines of credit		174,521			176,134
Homeowner loans		40,969			48,941
Other consumer loans, including overdrafts		9,334			13,149
		224,824			238,224
Total loans		1,703,799			1,701,541
Allowance for loan losses		(27,917	)		(30,843	)
Total loans, net	$	1,675,882		$	1,670,698

Total loans include net deferred loan origination costs of $308 and $720 at September 30, 2011 and September 30, 2010, respectively.

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

90

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Activity in the allowance for loan losses and the recorded investments in loans by portfolio segment based on impairment method for September 30, 2011 are summarized below:

	For the year ended September 30, 2011
	Beginning Allowance for loan losses		Charge-offs			Recoveries		Net Charge-offs			Provision for losses			Ending Allowance for Loan Losses
Loans by segment:
Real estate — residential mortgage	$	2,641	$	(2,140	)	$	15	$	(2,125	)	$	2,982		$	3,498
Real estate — commercial mortgage		5,060		(819	)		2		(817	)		290			4,533
Real estate — commercial mortgage (CBL)		855		(983	)		—		(983	)		1,163			1,035
Commercial business loans		3,262		(366	)		232		(134	)		(1,797	)		1,331
Commercial business loans (CBL)		5,708		(5,034	)		373		(4,661	)		3,567			4,614
Acquisition Development & Construction		9,752		(8,939	)		10		(8,929	)		9,072			9,895
Consumer, including home equity		3,565		(1,989	)		128		(1,861	)		1,307			3,011
Total Loans	$	30,843	$	(20,270	)	$	760	$	(19,510	)	$	16,584		$	27,917
Net charge-offs to average loans outstanding															1.17	%

	September 30, 2011
	Individually evaluated for impairment		Collectivey evaluated for impairment		Total ending loans balance
Loans by segment:
Real estate — residential mortgage	$	8,573	$	381,192	$	389,765
Real estate — commercial mortgage		10,653		599,726		610,379
Real estate — commercial mortgage (CBL)		4,477		88,500		92,977
Commercial business loans		531		133,868		134,399
Commercial business loans (CBL)		—		75,524		75,524
Acquisition Development & Construction		28,233		147,708		175,931
Consumer, including home equity		2,504		222,320		224,824
Total Loans	$	54,961	$	1,648,838	$	1,703,799

	September 30, 2011
	Individually evaluated for impairment		Collectivey evaluated for impairment		Total allowance balance
Ending allowance by segment:
Real estate — residential mortgage	$	1,069	$	2,429	$	3,498
Real estate — commercial mortgage		474		4,059		4,533
Real estate — commercial mortgage (CBL)		594		441		1,035
Commercial business loans		—		1,331		1,331
Commercial business loans (CBL)		—		4,614		4,614
Acquisition Development & Construction		1,409		8,486		9,895
Consumer, including home equity		260		2,751		3,011
Total allowance	$	3,806	$	24,111	$	27,917

91

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Activity in the allowance for loan losses and the recorded investments in loans by portfolio segment based on impairment method for September 30, 2010 are summarized below:

	Twelve months ended September 30, 2010
	Beginning Allowance for loan losses		Charge-offs			Recoveries		Net Charge-offs			Provision for losses			Ending Allowance for Loan Losses
Loans by segment:
Real estate — residential mortgage	$	3,106	$	(749	)	$	3	$	(746	)	$	281		$	2,641
Real estate — commercial mortgage		4,824		(416	)		8		(408	)		644			5,060
Real estate — commercial mortgage (CBL)		2,871		(571	)		15		(556	)		(1,460	)		855
Commercial business loans		3,917		(1,666	)		306		(1,360	)		705			3,262
Commercial business loans (CBL)		5,011		(4,912	)		364		(4,548	)		5,245			5,708
Acquisition Development & Construction		7,680		(848	)		261		(587	)		2,659			9,752
Consumer, including home equity		2,641		(1,168	)		166		(1,002	)		1,926			3,565
Total Loans	$	30,050	$	(10,330	)	$	1,123	$	(9,207	)	$	10,000		$	30,843
Net charge-offs to average loans outstanding															0.56	%

Loans as of September 30, 2010:
Individually evaluated for impairment	$	42,082
Collectively evaluated for impairment		1,659,459
Total ending loans balance	$	1,701,541

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 non-performing 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.

92

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The following table presents loans individually evaluated for impairment by segment of loans as of September 30, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		YTD Average Impaired Loans		Interest Income Recognized		Cash-basis Interest Income Recognized
With no related allowance recorded:
Real estate — residential mortgage	$	2,437	$	2,577	$	—	$	2,702	$	92	$	51
Real estate — commercial mortgage		6,753		6,823		—		6,769		332		146
Real estate — commercial mortgage (CBL)		2,012		2,050		—		2,148		165		102
Acquisition, development and construction		20,914		21,316		—		26,111		1,892		1,454
Commercial business loans		531		531		—		862		42		42
Commercial business loans (CBL)		—		—		—		—		—		—
Consumer loans, including home equity		1,879		1,885		—		1,860		61		13
Subtotal		34,526		35,182		—		40,452		2,584		1,808
With an allowance recorded:
Real estate — residential mortgage		5,836		5,996		1,069		6,319		159		159
Real estate — commercial mortgage		3,741		3,830		474		3,843		108		108
Real estate — commercial mortgage (CBL)		2,283		2,427		594		2,662		91		36
Acquisition, development and construction		6,900		6,907		1,409		6,963		114		96
Commercial business loans		—		—		—		—		—		—
Commercial business loans (CBL)		—		—		—		—		—		—
Consumer loans, including home equity		619		619		260		642		33		22
Subtotal		19,379		19,779		3,806		20,429		505		421
Total	$	53,905	$	54,961	$	3,806	$	60,881	$	3,089	$	2,229

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses 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, including home equity		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, including home equity		1,663		1,664		570
Subtotal		31,297		31,763		3,046
Total	$	41,419	$	42,082	$	3,046

93

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Average impaired loans for the twelve months ending September 30, 2011 were $60,881. Listed below are the interest income recognized during impairment and cash received for interest during impairment for the twelve months ending September 30, 2011 and September 30, 2010, respectively.

	September 30, 2011		September 30, 2010
Interest income recognized during impairment	$	3,089	$	1,975
Cash-basis interest income recognized		2,229		1,157

The following tables set forth the amounts and status of the Company’s loans, troubled debt restructurings and other real estate owned at September 30, 2011 and September 30, 2010.

	September 30, 2011
	Current Loans		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non- Accrual			Total Loans
Non-performing loans:
Real estate — residential mortgage	$	380,577	$	868	$	344	$	491	$	7,485		$	389,765
Real estate — commercial mortgage		599,619		768		337		1,639		8,016			610,379
Real estate — commercial mortgage (CBL)		89,418		—		—		350		3,209			92,977
Commercial business loans		133,741		490		—		—		168			134,399
Commercial business loans (CBL)		75,449		—		—		—		75			75,524
Acquisition, development and construction loans		154,682		3,859		406		446		16,538			175,931
Consumer, including home equity loans		221,880		494		300		1,164		986			224,824
Total	$	1,655,366	$	6,479	$	1,387	$	4,090	$	36,477		$	1,703,799
Total troubled debt restructurings included above	$	9,060	$	266	$	—	$	446	$	7,792		$	17,564
Non Performing Assets:
Loans 90+ and still accruing									$	4,090
Nonaccrual loans										36,477
Total non performing loans										40,567
Other real estate owned:
Land										1,926
Commercial real estate										2,163
Acquisition, development & construction loans										745
One- to four-family										557
Total other real estate owned										5,391
Total non-performing assets									$	45,958
Ratios:
Non-performing loans to total loans										2.38	%
Non-performing assets to total assets										1.46	%
Allowance for loan losses to total non-performing loans										69	%
Allowance for loan losses to average loans										1.68	%

94

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

	September 30, 2010
	Current Loans		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non- Accrual			Total Loans
Non-performing loans:
Real estate — residential mortgage	$	426,754	$	113	$	—	$	1,953	$	6,080		$	434,900
Real estate — commercial mortgage		475,532		616		853		1,866		5,061			483,928
Real estate — commercial mortgage (CBL)		92,374		—		—		1,105		1,825			95,304
Commercial business loans		121,301		3,403		—		—		1,061			125,765
Commercial business loans (CBL)		91,847		—		—		—		315			92,162
Acquisition, development and construction loans		218,847		3,982		2,699		—		5,730			231,258
Consumer, including home equity loans		235,700		375		305		503		1,341			238,224
Total	$	1,662,355	$	8,489	$	3,857	$	5,427	$	21,413		$	1,701,541
Total troubled debt restructurings included above	$	16,047	$	—	$	—	$	—	$	5,457		$	21,504
Non Performing Assets:
Loans 90+ and still accruing									$	5,427
Nonaccrual loans										21,413
Total non performing loans										26,840
Other real estate owned:
Land										2,029
Commercial real estate										1,507
One- to four-family										355
Total other real estate owned										3,891
Total non-performing assets									$	30,731
Ratios:
Non-performing loans to total loans										1.58	%
Non-performing assets to total assets										1.02	%
Allowance for loan losses to total non-performing loans										115	%
Allowance for loan losses to average loans										1.82	%

Troubled Debt Restructurings:

Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the company’s internal underwriting policy. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of the loan were for period ranging from 3 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 3months to 30 years. Restructured loans are recorded in accrual status when the loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant items. Total troubled debt restructurings were $17,564 and $21,504 at September 30, 2011 and September 30, 2010,

95

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

respectively. There were $8,238 and $5,457 in troubled debt restructurings included in non-performing loans at September 30, 2011 and September 30, 2010, respectively. Troubled debt restructurings still accruing and considered to be performing were $9,326 and $16,047 at September 30, 2011 and September 30, 2010, respectively. The Company has allocated $409 and $673 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011 and September 30, 2010 respectively. Troubled debt restructurings resulted in $7.5 million charge offs for the fiscal year ending September 30, 2011.

The Company has committed to lend additional amountg1s totaling up to $4,225 and $3,957 as of September 30, 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.

The following table presents loans by segment modified as troubled debt restructurings that occurred during the twelve months ended September 30, 2011.

	Number		Recorded Investment
			Pre- Modification		Post- Modification
Restructured Loans:
Real estate — residential mortgage		6	$	1,892	$	1,892
Real estate — commercial mortgage		2		1,439		1,439
Acquisition, development and construction loans		26		26,180		26,180
Consumer, including home equity loans		1		169		169
Total restructured loans		35	$	29,680	$	29,680

A loan is considered to be in default once it is 90 days contractually past due under the modified terms. There were 5 troubled debt restructurings that subsequently defaulted totaling $6.6 million in the ADC loan segment. Charge offs related to these loans totaled $2.3 million.

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 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.

96

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed as of September 30, 2011 and September 30, 2010, the risk category of loans by segment of gross loans is as follows:

	September 30, 2011
	Special Mention		Substandard		Doubtful
Real estate — residential mortgage	$	3,701	$	8,525	$	—
Real estate — commercial mortgage		10,175		25,952		—
Real estate — commercial mortgage (CBL)		897		4,044		—
Acquisition, development and construction		5,170		49,294		—
Commercial business loans		1,915		3,501		—
Commercial business loans (CBL)		557		150		—
Consumer loans, including home equity loans		611		2,523		—
Total	$	23,026	$	93,989	$	—

	September 30, 2010
	Special Mention		Substandard		Doubtful
Real estate — residential mortgage	$	243	$	8,557	$	—
Real estate — commercial mortgage		6,278		21,648		—
Real estate — commercial mortgage (CBL)		—		3,171		—
Acquisition, development and construction		27,985		74,957		—
Commercial business loans		3,044		21,097		—
Commercial business loans (CBL)		103		498		300
Consumer loans, including home equity loans		248		1,825		—
Total	$	37,901	$	131,753	$	300

(6) Accrued Interest Receivable

The components of accrued interest receivable were as follows:

	September 30,
	2011		2010
Loans	$	5,458	$	5,728
Securities		4,446		5,341
Total accrued interest receivable	$	9,904	$	11,069

97

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(7) Premises and Equipment, Net

Premises and equipment are summarized as follows:

	September 30,
	2011			2010
Land and land improvements	$	7,331		$	7,505
Buildings		31,511			31,480
Leasehold improvements		7,858			8,965
Furniture, fixtures and equipment		36,869			34,857
		83,569			82,807
Accumulated depreciation and amortization		(42,683	)		(39,209	)
Total premises and equipment, net	$	40,886		$	43,598

(8) Deposits

Deposit balances and weighted average interest rates at September 30, 2011 and 2010 are summarized as follows:

	September 30,
	2011					2010
	Amount		Rate			Amount		Rate
Demand Deposits
Retail	$	194,299		—	%	$	174,731		—	%
Commercial		296,505		—			277,217		—
Municipal		160,422		—			77,909		—
Total Non-interest bearing deposits		651,226					529,857
NOW Deposits
Retail		164,637		0.05			139,517		0.05
Commercial		37,092		0.23			34,105		0.31
Municipal		200,773		0.19			241,995		0.23
Total Transaction deposits		1,053,728					945,474
Savings deposits		429,825		0.07			392,321		0.11
Money market deposits		509,483		0.30			427,334		0.29
Certificates of deposit		303,659		0.94			377,573		1.12
Total deposits	$	2,296,695		0.23	%	$	2,142,702		0.31	%

Municipal deposits held by PMB totaled$614,834 and $513,760 at September 30, 2011 and September 30, 2010, respectively. See Note 3, “Securities Available for Sale,” for the amount of securities that are pledged as collateral for municipal deposits and other purposes. Municipal deposits received for tax receipts were approximately $284,000 and $219,000 at September 30, 2011 and 2010, respectively.

98

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

	September 30,
	2011		2010
Remaining period to contractual maturity:
Less than one year	$	250,769	$	316,096
One to two years		22,784		24,844
Two to three years		19,584		13,273
Three to four years		7,203		16,623
Four to five years		3,319		6,737
Total certificates of deposit	$	303,659	$	377,573

Certificate of deposit accounts with a denomination of $100 or more totaled $82,345 and $105,717 at September 30, 2011 and 2010, respectively. Listed below are the Company’s brokered deposits:

	September 30, 2011		September 30, 2010
Money market	$	5,725	$	—
Reciprocal CDAR’s 1		2,746		7,889
CDAR’s one way		3,366		10,665
Total brokered deposits	$	11,837	$	18,554

¹  Certificate of deposit account registry service

Interest expense on deposits is summarized as follows:

	Years ended September 30,
	2011		2010		2009
Savings deposits	$	444	$	403	$	758
Money market and NOW deposits		2,190		2,035		3,377
Certificates of deposit		3,470		6,079		14,240
Total interest expense	$	6,104	$	8,517	$	18,375

99

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(9) FHLB and Other Borrowings

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

	September 30,
	2011					2010
	Amount		Rate			Amount		Rate
By type of borrowing:
Advances	$	111,828		3.83	%	$	141,251		4.16	%
Repurchase agreements		211,694		3.61	%		222,500		3.98	%
Senior unsecured debt (FDIC insured)		51,499		2.75	%		51,496		2.75	%
Total borrowings	$	375,021		3.56	%	$	415,247		3.88	%
By remaining period to maturity:
Less than one year	$	61,500		2.96	%	$	44,873		3.82	%
One to two years		5,066		4.04	%		73,996		3.14	%
Two to three years		35,795		2.37	%		27,708		4.00	%
Three to four years		49,312		2.28	%		25,125		4.14	%
Four to five years		211		5.32	%		20,000		2.96	%
Greater than five years		223,137		4.18	%		223,545		4.19	%
Total borrowings	$	375,021		3.56	%	$	415,247		3.88	%

As a member of the FHLB, the Bank may borrow in the form of term and overnight borrowings up to the amount of eligible residential mortgage loans and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 2011 and 2010, the Bank had pledged residential mortgage loans totaling $464,900 and $313,587, respectively. The Bank had also pledged securities with carrying amounts of $206,829 and $228,442 as of September 30, 2011 and September 30, 2010, respectively, to secure repurchase agreements. As of September 30, 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 $344,090. FHLB advances are subject to prepayment penalties if repaid prior to maturity.

Securities repurchase agreements had weighted average remaining terms to maturity of approximately 4.77 years and 5.38 years at September 30, 2011 and 2010, respectively. Average borrowings under securities repurchase agreements were $216,875 and $224,375 during the years ended September 30, 2011 and 2010, respectively, and the maximum outstanding month-end balance was $222,500 and $230,000, respectively.

FHLB borrowings (includes advance and repurchase agreements) of $200,000 and $227,500 at September 30, 2011 and 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 5.56 year and 6.16 years and weighted average interest rates of 4.23% and 4.24% at September 30, 2011 and 2010, respectively. An additional $20 million are putable on a one time basis after initial lockout period in February 2013 with a weighted average interest rate of 3.57% and a weighted average remaining term to contractual maturity of 6.42 years.

During 2011 the Company restructured $89,135 of its FHLBNY advances which had a weighted average rate of 3.69% and 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 net of prepayment fees. Prepayment fees of $5,151 associated with the modifications are being amortized over the new duration of 1.43 years on a level yield basis.

100

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(10) Derivatives

The Company purchased two interest rate caps in the first quarter of fiscal 2010 to assist in offsetting a portion of interest rate exposure should short term rate increases lead to rapid increases in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.50% and 4.0%. These caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings, the amount for fiscal year 2011 is a loss of $197 and a loss of $1,106 in fiscal 2010. The fair value of the interest rate caps at September 30, 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 fiscal year 2011. Interest rate swaps are recorded on our consolidated statements of financial condition as an other asset or other liability at estimated fair value.

At September 30, 2011, summary information regarding these derivatives is presented below:

	September 30, 2011
	Notional Amount			Average Maturity		Weighted Average Rate Fixed			Weighted Average Variable Rate			Fair Value
Interest Rate Caps	$	50,000			3.18		3.75	%		NA	%	$	65
3rd party interest rate swap		12,009			10.23		5.28			1 m Libor + 2.15	%		1,114
Customer interest rate swap		(12,009	)		10.23		5.28			1 m Libor + 2.15	%		(1,114	)

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

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

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

101

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(11) Income Taxes

Income tax expense consists of the following:

	Years ended September 30,
	2011			2010			2009
Current tax expense:
Federal	$	1,912		$	5,410		$	10,369
State		777			1,437			1,446
		2,689			6,847			11,815
Deferred tax expense (benefit):
Federal		282			375			(1,567	)
State		(164	)		(349	)		(73	)
		118			26			(1,640	)
Total income tax expense	$	2,807		$	6,873		$	10,175

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

	Years ended September 30,
	2011			2010			2009
Tax at Federal statutory rate of 35%	$	5,090		$	9,578		$	12,612
State income taxes, net of Federal tax benefit		430			652			892
Tax-exempt interest		(2,551	)		(2,645	)		(2,536	)
BOLI income		(714	)		(715	)		(964	)
Non deductible compensation expense		594			—			—
Other, net		(42	)		3			171
Actual income tax expense	$	2,807		$	6,873		$	10,175
Effective income tax rate		19.3	%		25.1	%		28.2	%

102

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

	September 30,
	2011		2010
Deferred tax assets:
Allowance for loan losses	$	11,362	$	12,525
Deferred compensation		3,011		3,370
Purchase accounting adjustments		—		13
Accrued post retirement expense		1,343		1,121
Core deposit intangibles		198		(32	)
Other comprehensive income (defined benefits)		5,780		5,053
Goodwill		117		(53	)
Other		1,497		190
Total deferred tax assets		23,308		22,187
Deferred tax liabilities:
Undistributed earnings of subsidiary not consolidated for tax return purposes (REIT Income)		5,801		6,138
Prepaid pension costs		4,846		3,592
Purchase accounting fair value adjustments		193		165
Depreciation of premises and equipment		486		743
Other comprehensive income (securities)		9,302		8,630
Other		810		876
Total deferred tax liabilities		21,438		20,144
Net deferred tax asset	$	1,870	$	2,043

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

Based on management’s consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at September 30, 2011 and 2010.

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

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

103

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Unrecognized Tax Benefits

The Company does not have unrecognized tax benefits as of September 2011 or September 2010.

The total amount of interest and penalties recorded in the consolidated statement of income in income tax expense (benefit) for the years ended September 30, 2011, 2010, and 2009 were $0, $0 and ($89) respective, respectively.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of New York and various other state income taxes. The tax years that are currently open for audit are 2007 and later for federal and 2009 and later for New York State income tax.

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

(a)Pension Plans

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

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

	September 30,
	2011			2010
Changes in projected benefit obligation:
Beginning of year	$	31,109		$	27,963
Service cost		—			—
Interest cost		1,498			1,555
Actuarial loss		647			3,296
Benefits and distributions paid		(2,642	)		(1,705	)
End of year		30,612			31,109
Changes in fair value of plan assets:
Beginning of year		26,796			25,503
Actual gain (loss) on plan assets		(242	)		2,498
Employer contributions		4,400			500
Benefits and distributions paid		(2,642	)		(1,705	)
End of year		28,312			26,796
Funded status at end of year	$	(2,300	)	$	(4,313	)

104

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Included in the $2,642 benefit and distributions paid was $490 in settlement charges related the retirement of prior CEO of the Company.

Amounts recognized in accumulated other comprehensive income (loss) at September 30, 2011 and 2010 consisted of:

	2011			2010
Unrecognized actuarial loss	$	(14,234	)	$	(13,159	)
Deferred tax asset		5,780			5,344
Net amount recognized in accumulated other comprehensive income (loss)	$	(8,454	)	$	(7,815	)

Discount rates of 5.00%, 5.00% and 5.75% were used in determining the actuarial present value of the projected benefit obligation at September 30, 2011, 2010 and 2009, respectively. No compensation increases were used as the plan is frozen. The weighted average long-term rate of return on plan assets was 7.75 % for fiscal years ended 2011 and 2010. The accumulated benefit obligation was $30,612 and $31,109 at year end September 30, 2011 and 2010 respectively. The discount rate used in the determination of net periodic pension expense were 5.00%, 5.75% and 7.00%, for the years ending September 30, 2011, 2010 and 2009, respectively.

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

2012	$	1,400
2013		1,465
2014		1,536
2015		1,998
2016		1,791
2017 - 2019		9,593

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

	Years ended September 30,
	2011			2010			2009
Service cost	$	—		$	—		$	—
Interest cost		1,498			1,555			1,593
Expected return on plan assets		(2,343	)		(1,890	)		(1,778	)
Amortization of unrecognized loss		1,667			1,509			826
Settlement Charge		490			—			—
Net periodic pension expense	$	1,312		$	1,174		$	641

Unrecognized actuarial loss and prior service cost totaling $2.3 million is expected to be amortized to pension expense during the next fiscal year ending September 30, 2012.

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

105

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The fair value of the plan assets consisting of various mutual funds and pooled investment funds at September 30, 2011, by asset category, is as follows:

	Fair Value Measurements at September 30, 2011		Level 1		Level 2		Level 3
Asset Category
Large U.S. equity	$	13,549	$	—	$	13,549	$	—
Small Mid U.S. equity		3,238		—		3,238		—
International Equity		2,607		—		2,607		—
Total Equity		19,394		—		19,394		—
High yield bond		914		—		914		—
Intermediate term bond		6,447		—		6,447		—
Inflation protected bond		1,557		—		1,557		—
Total Fixed Income		8,918		—		8,918		—
Cash		—		—		—		—
Total Assets	$	28,312	$	—	$	28,312	$	—

The fair value of the plan assets consisting of various mutual funds and pooled investment funds at September 30, 2010, by asset category, is as follows:

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

The Company’s policy is to invest the pension plan assets in a prudent manner for the purpose of providing benefit payments to participants and mitigating reasonable expenses of administration. The Company’s investment strategy is designed to provide a total return that, over the long-term, places a strong emphasis on the preservation of capital. The strategy attempts to maximize investment returns on assets at a level of risk deemed appropriate by the Company while complying with applicable regulations and laws. The Plan’s investment policy prohibits the direct investment in real estate but does allow the Plan’s mutual funds to include a small percentage of real estate related investments. The investment strategy utilizes asset allocation as a principal determinant for establishing an appropriate risk profile. Weighted-average pension

106

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

plan asset allocations based on the fair value of such assets at September 30, 2011, and September 30, 2010 and target allocations for 2012, by asset category, are as follows:

	September 30, 2010			September 30, 2011			Target Allocation Range 2012			Weighted Average Expected Rate of Return
Large U.S. equity securities		54	%		48	%					7.00	%
Small mid U.S. equity securities		11	%		11	%					15.00	%
International equity securities		10	%		9	%					12.00	%
Total equity securities		75	%		68	%		40	% - 85%		8.84	%
High yield bond		4	%		3	%					8.00	%
Intermediate term bond		17	%		23	%					6.00	%
Inflation protected bond		4	%		6	%					3.00	%
Total fixed income		25	%		32	%		20	% - 40%		5.85	%
Cash		0	%		0	%		0	% - 20%		0	%

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

There were no pension plan assets consisting of Provident Bancorp equity securities (common stock) at September 30, 2011 or at September 30, 2010.

The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. At this time, the Company has not determined whether contributions in 2012 will be made.

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 $44, $87 and $94 for the years ended September 30, 2011, 2010 and 2009, respectively. Additionally, a settlement charge of $278 in 2011 was recorded reflecting the partial settlement of the defined benefit portion of the SERP relating to the former CEO benefit obligation. The actuarial present value of the projected benefit obligation was $912 and $1,763 at September 30, 2011 and 2010, respectively, and the vested benefit obligation was $912 and $1,763 for the same periods, respectively, all of which is unfunded. Discount rates of 4.75% and 4.50% were used in determining the actuarial projected benefit at September 30, 2011 and 5.00% for September 30, 2010.

(b) Other Postretirement Benefit Plans

The Company’s postretirement plans, which are unfunded, provide optional medical, dental and life insurance benefits to retirees or death benefit payments to beneficiaries of employees covered by the

107

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Company and Bank Owned Life Insurance policies. The Company has elected to amortize the transition obligation for accumulated benefits to retirees as an expense over a 20-year period.

Data relating to the postretirement benefit plan follows:

	September 30,
	2011			2010
Change in accumulated postretirement benefit obligation:
Beginning of year	$	2,261		$	2,041
Service cost		38			28
Interest cost		107			107
Actuarial loss		209			183
Plan participants’ contributions		—			—
Amendments		—			—
Benefits paid		(106	)		(98	)
End of year	$	2,509		$	2,261
Changes in fair value of plan assets:
Beginning of year	$	—		$	—
Employer contributions		106			98
Plan participants’ contributions		—			—
Benefits paid		(106	)		(98	)
End of year	$	—		$	—
Funded status	$	(2,509	)	$	(2,261	)

Components of net periodic benefit expense (benefit):

	For years ended September 30,
	2011			2010			2009
Service Cost	$	38		$	28		$	22
Interest Cost		107			107			118
Amortization of transition obligation		24			24			24
Amortization of prior service cost		48			49			49
Amortization of net actuarial gain		(60	)		(95	)		(119	)
Total	$	157		$	113		$	94

There is $22 unrecognized actuarial gain and prior service cost expected to be amortized out of accumulated other comprehensive income in 2012.

Estimated Future Benefit Payments

The following benefit payments are expected to be paid in future years:

2012	138
2013	143
2014	145
2015	149
2016	151
2017 - 2019	838

108

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Assumptions used for plan	2011			2010
Medical trend rate next year		4.50	%		4.50	%
Ultimate trend rate		4.50	%		4.50	%
Discount rate		4.25	%		4.50	%
Discount rate used to value periodic cost		4.50	%		5.50	%

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

Amounts recognized in accumulated other comprehensive income (loss) at September 30, 2011 and 2010 consisted of:

	2011			2010
Post retirement plan unrecognized gain	$	771		$	1,047
Post retirement plan unrecognized service cost		(364	)		(412	)
Post retirement unrecognized transition obligation		(41	)		(51	)
Post retirement SERP		(244	)		(306	)
Post employment BOLI		(144	)		(152	)
Subtotal		(22	)		126
Deferred tax asset (liability)		9			(51	)
Net amount recognized in accumulated other comprehensive income (loss)	$	(13	)	$	75

(c) Employee Savings Plan

The Company also sponsors a defined contribution plan established under Section 401(k) of the IRS Code. Eligible employees may elect to contribute up to 50% of their compensation to the plan. The Company currently makes matching contributions equal to 50% of a participant’s contributions up to a maximum matching contribution of 3% of eligible compensation. Effective after September 30, 2006, the Bank amended the plan to include a profit sharing component which was 3% of eligible compensation, in addition to the matching contributions for 2011. Voluntary matching and profit sharing contributions are invested, in accordance with the participant’s direction, in one or a number of investment options. Savings plan expense was $1,875, $1,751 and $1,594 for the years ended September 30, 2011, 2010 and 2009, respectively.

(d) Employee Stock Ownership Plan

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

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

ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative

109

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years. Any forfeited shares were allocated to other participants in the same proportion as contributions through 2006 and beginning in 2007 are used by the plan to reduce debt service. A total of $4, $29 and $4 related to plan forfeitures were reversed against expense for the years ended September 30, 2011, 2010, and 2009 respectively.

ESOP expense (net of forfeitures) was $436, $413, and $484 for the years ended September 30, 2011, 2010 and 2009, respectively. Through September 30, 2011 and 2010, a cumulative total of 1,755,010 and 1,705,078 shares, respectively, have been allocated to participants or committed to be released for allocation, respectively. The cost of ESOP shares that have not yet been allocated to participants or committed to be released for allocation is deducted from stockholders’ equity; 613,758 shares with a cost of $6,138 and a fair value of approximately $3,572 at September 30, 2011 and 663,690 shares with a cost of $6,637 and a fair value of approximately $5,568 at September 30, 2010, respectively.

A supplemental savings plan has also been established for certain senior officers to compensate executives for benefits provided under the Bank’s tax qualified plans (employee’s savings plan and ESOP) that are limited by the IRS Code. Expense recognized for this plan including the defined benefit component was $340, $146, and $212, for the years ended September 30, 2011, 2010 and 2009, respectively. Amounts accrued and recorded in other liabilities at September 30, 2011 and 2010, including the defined benefit component were $1.6 million and $3.1 million respectively.

(e) Recognition and Retention Plan

In February 2000, the Company’s stockholders approved the Provident Bank 2000 Recognition and Retention Plan (the RRP). The principal purpose of the RRP is to provide executive officers and directors a proprietary interest in the Company in a manner designed to encourage their continued performance and service. The awards vested at a rate of 20% on each of five annual vesting dates, the first of which was September 30, 2000. As of February 2010, 27,413 shares remaining from this plan were no longer eligible to be granted.

In January 2005, the Company’s stockholders approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, under the terms of which the Company is authorized to issue up to 798,920 shares of common stock as restricted stock awards. Employees who retire under circumstances in accordance with the terms of the Plan may be entitled to accelerate the vesting of individual awards. Such acceleration would require a charge to earnings for the award shares that would then vest. As of September 30, 2011, 1,000 shares were potentially subject to accelerated vesting.

Under the 2004 restricted stock plan, 27,120 shares of authorized but un-issued shares remain available for future grant at September 30, 2011. Forfeited shares are available for re-issuance. The Company also can fund the restricted stock plan with treasury stock. The fair market value of the shares awarded under the restricted stock plan is being amortized to expense on a straight-line basis over the vesting period of the underlying shares. In addition, 41,370 shares of restricted stock were issued as inducement shares, which have three and four year vesting periods. Compensation expense related to the restricted stock plan was $168, $883, and $1.7 million for the years ended September 30, 2011, 2010 and 2009, respectively. The remaining unearned compensation cost of $478 as of September 30, 2011 is recorded as a reduction of additional paid in capital and will be expensed over 4 years. On grant date, shares awarded under the restricted stock plan were transferred from treasury stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable.

110

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

A summary of restricted stock award activity under the plan for the year ended September 30, 2011, is presented below:

	Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested shares at September 30, 2010		6,250		$	13.51
Granted		63,870			8.79
Vested		(12,600	)		11.19
Forfeited		—			—
Nonvested shares at September 30, 2011		57,520		$	8.77

The total fair value of restricted stock vested for fiscal year ended September 30, 2011, 2010 and 2009 was $73, $575, and $1.3 million, respectively.

(f) Stock Option Plan

The Company’s stockholders approved the Provident Bank 2000 Stock Option Plan (the Stock Option Plan) in February 2000. A total of 1,712,640 shares of authorized but unissued common stock was reserved for issuance under the Stock Option Plan, although the Company may also fund option exercises using treasury shares. The Company’s stockholders also approved the Provident Bancorp, Inc. 2004 Stock Incentive Plan, in February 2005. Under this plan 207,607 shares of authorized but unissued remain available for future grant at September 30, 2011. Under terms of the plan, a total of 1,997,300 shares of authorized but un-issued common stock were reserved for issuance under the Stock Option Plan. Under both plans, options have a ten-year term and may be either non-qualified stock options or incentive stock options. Reload options may be granted under the terms of the 2000 Stock Option Plan and provide for the automatic grant of a new option at the then-current market price in exchange for each previously owned share tendered by an employee in a stock-for-stock exercise. In February 2010, the 2000 Stock Option Plan expired with 338,594 options un-granted and no longer eligible for grant. The 2004 Plan options do not contain reload options. However, the 2004 plan allows for the grant of stock appreciation rights. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date. Employees who retire under circumstances, in accordance with the terms of the Plan, may be entitled to accelerate the vesting of individual awards. In addition, 107,526 shares of stock options were issued as inducement shares, which have a four year vesting period. As of September 30, 2011, 34,300 shares were potentially subject to accelerated vesting. Substantially, all stock options outstanding are expected to vest. Compensation expense related to stock option plans was $558, $247 and $768 for the years ended September 30, 2011, 2010 and 2009, respectively.

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

	Shares subject to option			Weighted Average exercise price
Outstanding at September 30, 2010		1,922,844		$	12.47
Granted		119,526			8.30
Exercised		—			—
Forfeited		(136,350	)		12.55
Outstanding shares at September 30, 2011		1,906,020		$	12.20

111

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The total intrinsic value of stock options vested (exercisable) for fiscal years ended September 30, 2011, 2010 and 2009 was $0, $0 and $4.1 million, respectively. The unrecognized compensation cost associated with stock options was $413 as of September 30, 2011 and is expected to be recognized in expense over a period of 4 years.

At September 30, 2011 and 2010, respectively, there were 207,607 and 93,257 shares available for future grant. The aggregate intrinsic value of options outstanding as of September 30, 2011 was $0. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading date of the year ended September 30, 2011 and the exercise price, multiplied by the number of in the money options). The cash received from option exercises was $0 and $984 for fiscal 2011 and 2010, respectively. There was no tax benefit recorded in the results of operations to the Company from the exercise of options for either fiscal 2011 or fiscal 2010.

A summary of stock options at September 30, 2011 follows:

	Outstanding						Exercisable
			Weighted-Average						Weighted-Average
	Number of Stock Options		Exercise Price		Life (in Years)		Number of Stock Options		Exercise Price		Life (in Years)
Range of Exercise Price
$6.86 to $11.85		465,590	$	9.99		7.6		228,314	$	10.86		7.6
$11.85 to $12.84		1,222,600		12.84		3.3		1,218,600		12.84		3.3
$13.18 to $15.66		217,830		13.35		5.7		160,430		13.38		5.7
		1,906,020	$	12.20		4.6		1,607,344	$	12.61		4.6

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

The Company uses an option pricing model to estimate the grant date fair value of stock options granted. The weighted-average estimated value per option granted was $2.27 in 2011, $2.69 in 2010, and $1.97 in 2009. The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:

	2011			2010			2009
Risk-free interest rate(1)		2.2	%		2.2	%		1.9	%
Expected stock price volatility		34.5	%		33.2	%		61.5	%
Dividend yield(2)		2.8	%		1.9	%		3.3	%
Expected term in years		5.9			7.7			.91

⁽¹⁾ represents the yield on a risk free rate of return (either the US Treasury curve or the SWAP curve, in periods with high volatility in US Treasury securities) with a remaining term equal to the expected option term

⁽²⁾ represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date

112

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(13) Earnings Per Common Share

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

	Years ended September 30,
	2011		2010		2009
Net income	$	11,739	$	20,492	$	25,861
Weighted average common shares outstanding for computation of basic EPS(1)		37,453		38,161		38,538
Common-equivalent shares due to the dilutive effect of stock options(2)		1		24		168
Weighted average common shares for computation of diluted EPS		37,454		38,185		38,706
Earnings per common share:
Basic	$	0.31	$	0.54	$	0.67
Diluted	$	0.31	$	0.54	$	0.67

⁽¹⁾ Excludes unallocated ESOP shares.

⁽²⁾ Represents incremental shares computed using the treasury stock method.

As of September 30, 2011, 2010 and 2009 there were 1,871,299, 1,826,519 and 1,934,637 stock options, respectively, that were considered anti-dilutive for these periods and were not included in common-equivalent shares.

(14) Stockholders’ Equity

(a) Regulatory Capital

OCC regulations require banks to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%.

Under its prompt corrective action regulations, the OCC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements.

The regulations establish a framework for the classification of banks into five categories: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 (core) capital to total adjusted assets ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%.

The foregoing capital ratios are based, in part, on specific quantitative measures of assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OCC about capital components, risk weightings and other factors. These capital requirements apply only to the Bank, and do not consider additional capital retained by Provident Bancorp.

113

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Management believes that, as of September 30, 2011 and 2010 the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OCC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification.

The following is a summary of the Bank’s actual regulatory capital amounts and ratios at September 30, 2011 and 2010, compared to the OCC requirements for minimum capital adequacy and for classification as a well-capitalized institution. PMB is also subject to certain regulatory capital requirements, which it satisfied as of September 30, 2011 and 2010.

						OCC requirements
	Bank actual					Minimum capital adequacy					Classification as  well capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2011:
Tangible capital	$	241,196		8.1	%	$	44,460		1.5	%	$	—		—
Tier 1 (core) capital		241,196		8.1			118,559		4.0			148,199		5.0	%
Risk-based capital:
Tier 1		241,196		11.8			—		—			122,126		6.0
Total		265,307		13.0			162,835		8.0			203,544		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

Tangible and Tier 1 capital amounts represent the stockholder’s equity of the Bank, less intangible assets and after-tax net unrealized gains (losses) on securities available for sale and any other disallowed assets, such as deferred income taxes. Total capital represents Tier 1 capital plus the allowance for loan losses up to a maximum amount equal to 1.25% of risk-weighted assets.

The following is a reconciliation of the Bank’s total stockholder’s equity under accounting principles generally accepted in the United States of America (“GAAP”) and its regulatory capital:

	September 30,
	2011			2010
Total GAAP stockholder’s equity (Provident Bank)	$	405,638		$	403,630
Goodwill and certain intangible assets		(159,306	)		(158,127	)
Unrealized gains on securities available for sale included in other accumulated comprehensive income		(13,604	)		(12,770	)
Other Comprehensive loss		8,468			7,497
Tangible, tier 1 core and
Tier 1 risk-based capital		241,196			240,230
Allowance for loan losses		24,111			24,918
Total risk-based capital	$	265,307		$	265,148

114

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(b) Dividend Payments

OCC regulations limit the amount of cash dividends that can be made by the Bank to the Company. Furthermore, because the Bank is a subsidiary of a holding company, it must file a notice with the Federal Reserve at least 30 days before the Bank’s Board of Directors declares a dividend. This notice may be disapproved if the Federal Reserve finds that:

• the savings association would be undercapitalized or worse following the dividend;

• the proposed dividend raises safety and soundness concerns; or

• the dividend would violate a prohibition contained in any statute, regulation, enforcement action, or agreement with or condition imposed by an appropriate federal banking agency.

Under OCC regulations, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to the sum of net income for the current calendar year and net income retained for the two preceding calendar years. Dividend payments in excess of this amount require OCC approval. After September 30, 2011 the amount that can be paid to Provident Bancorp by Provident Bank is $8.5 million plus earnings for the remainder of calendar year 2011. The Bank paid $10.0 million in dividends to Provident Bancorp during the fiscal year ended September 30, 2011 ($29.4 million during the year ended 2010 and $10.5 million during the year ended September 30, 2009).

Unlike the Bank, Provident Bancorp is not subject to OCC regulatory limitations on the payment of dividends to its stockholders.

(c) Stock Repurchase Programs

The Company announced its fifth stock repurchase program on December 17, 2009, authorizing the repurchase of 2,000,000 shares, of which 776,713 shares remain available to be purchased at September 30, 2011.

The total number of shares repurchased under repurchase programs during the fiscal year ended September 30, 2011, 2010, and 2009, was 457,454, 1,515,923 and 415,811, respectively at a total cost of $3.8 million, $12.9 million, and $3.5 million, respectively.

(d) Liquidation Rights

Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with OCC regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s ownership interest in the retained earnings of Provident Federal as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The liquidation account is reduced annually on September 30 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. At September 30, 2011 the liquidation account had a balance of $16.0 million. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount of the liquidation account.

115

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(15) Off-Balance-Sheet Financial Instruments

In the normal course of business, the Company is a party to off-balance-sheet financial instruments that involve, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated financial statements. The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance-sheet financial instruments, are summarized as follows:

	September 30,
	2011		2010
Lending-related instruments:
Loan origination commitments	$	127,307	$	114,822
Unused lines of credit		239,387		282,428
Letters of credit		16,972		23,104

As of September 30, 2011 and 2010, 88%, and 86%, respectively of lending related off balance sheet instruments were at variable rates.

The contractual amounts of loan origination commitments, unused lines of credit and letters of credit represent the Company’s maximum potential exposure to credit loss, assuming (i) the instruments are fully funded at a later date, (ii) the borrowers do not meet the contractual payment obligations, and (iii) any collateral or other security proves to be worthless. The contractual amounts of these instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. Substantially all of these lending-related instruments have been entered into with customers located in the Company’s primary market area described in Note 5 (“Loans”).

Loan origination commitments are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments have fixed expiration dates (generally ranging up to 60 days) or other termination clauses, and may require payment of a fee by the customer. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if any, obtained by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include mortgages on residential and commercial real estate, deposit accounts with the Company, and other property. The Company’s loan origination commitments at September 30, 2011 provide for interest rates ranging principally from 2.06% to 8.00%.

Unused lines of credit are legally-binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the borrower.

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

As of September 30, 2011, the Company had $16,972 in outstanding letters of credit, of which $10,528 were secured by collateral.

116

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(16) Commitments and Contingencies

Certain premises and equipment are leased under operating leases with terms expiring through 2033. The Company has the option to renew certain of these leases for additional terms. Future minimum rental payments due under non-cancelable operating leases with initial or remaining terms of more than one year at September 30, 2011 were as follows (for fiscal years ending September 30^th):

2012	$	2,579
2013		2,411
2014		2,175
2015		2,095
2016		2,027
2017 and thereafter		14,875
	$	26,162

Occupancy and office operations expense include net rent expense of $2,845, $2,802 and $2,726 for the years ended September 30, 2011, 2010 and 2009, respectively. The consolidation of two leased branches resulted in a restructuring charge of $2.1 million at September 30, 2011.

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.

(17) Fair value measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values.

LEVEL 1 — 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.

117

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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. U.S. Treasuries are actively traded and therefore have been classified as Level 1 valuations. As of October 1, 2010 the company determined that government sponsored agencies totaling $346,019 previously reported as Level 1 securities were not classified based on the lowest level within the fair value hierarchy and deemed it appropriate to transfer the securities to Level 2.

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 financial market data and compares them to dealer indicative bids from the Company’s external investment advisor. The Company does not make adjustments to these prices unless it is determined there is limited trading activity. For securities where there is limited trading activity (private label CMO’s) and less observable valuation inputs, the Company has classified such valuations as Level 3.

The Company reviewed the volume and level of activity for its available for sale securities to identify transactions which may not be orderly or reflective of significant activity and volume. Although estimated prices were generally obtained for such securities, there has been a decline in the volume and level of activity in the market for its private label mortgage backed securities. The market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs the Company has classified the valuation of privately issued residential mortgage backed securities as Level 3 as of April 1, 2009 with a fair value of $9,534. As of September 30, 2011, these securities have an amortized cost of $5,372 and a fair value of $4,851. In determining the fair value of these securities the Company utilized unobservable inputs which reflect assumptions regarding the inputs that market participants would use in pricing these securities in an orderly market. Present value estimated cash flow models were used discounted at a rate that was reflective of similarly structured securities in an orderly market. The resultant prices were averaged with prices obtained from two independent third parties to arrive at the fair value as of September 30, 2011. These securities have a weighted average coupon rate of 2.92%, a weighted average life of 5.04 years, a weighted average 1 month prepayment history of 10.98 years and a weighted average twelve month default rate of 3.78 CDR. It was determined that one of these securities with a carrying amount of $1,683 and an amortized cost of $1,940 had an other than temporary loss which resulted in a $75 other than temporary impairment charge.

The investment grades of these securities are as follows:

	Amortized Cost		Fair Value
Investment Rating:
A1	$	352	$	348
Ba1		138		130
B		4,882		4,373
Total private label CMOs	$	5,372	$	4,851

118

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Derivatives

The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2). The Company’s derivatives consist of two interest rate caps and three interest rate swaps (see footnote 10).

Commitments to sell real estate loans

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments and, therefore are carried at estimated fair value on the consolidated balance sheets. The estimated fair values of these commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell to certain government sponsored agencies. The fair values of these commitments generally result in a Level 2 classification. The fair values of these commitments are not considered material.

A summary of assets and liabilities at September 30, 2011 measured at estimated fair value on a recurring basis were as follows:

	Fair Value Measurements at September 30, 2011		Level 1		Level 2		Level 3
Investment securities available for sale:
Mortgage-backed securities-residential
Fannie Mae	$	139,991	$	—	$	139,991	$	—
Freddie Mac		100,675		—		100,675		—
Ginnie Mae		5,180		—		5,180		—
CMO/Other MBS		77,561		—		77,561		—
Privately issued collateralized mortgage obligations		4,851		—		—		4,851
		328,258		—		323,407		4,851
Investment securities
Federal agencies		204,648		—		204,648		—
Corporate debt securities		17,062		—		17,062		—
Obligations of states and political subdivisions		188,684		—		188,684		—
Equities		1,192		—		1,192		—
Total investment securities available for sale		411,586		—		411,586		—
Total available for sale securities		739,844		—		734,993		4,851
Interest rate caps and swaps		1,180		—		1,180		—
Total assets	$	741,024	$	—	$	736,173	$	4,851
Swaps	$	1,114	$	—	$	1,114	$	—
Total Liabilities	$	1,114	$	—	$	1,114	$	—

119

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

A summary of assets and liabilities at September 30, 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:
Mortgage-backed securities-residential
Fannie Mae	$	153,188	$	—	$	153,188	$	—
Freddie Mac		58,452		—		58,452		—
Ginnie Mae		9,315		—		9,315		—
CMO/Other MBS		32,663		—		32,663		—
Privately issued collateralized mortgage obligation		5,996		—		—		5,996
		259,614		—		253,618		5,996
Investment securities
U.S. Government securities		72,293		72,293		—		—
Federal agencies		346,019		346,019		—		—
Corporate debt securities		30,540		—		30,540		—
Obligations of states and political subdivisions		191,657		—		191,657		—
Equities		889		—		889		—
Total investment securities available for sale		641,398		418,312		223,086		—
Total available for sale securities		901,012		418,312		476,704		5,996
Interest rate caps and swaps		435		—		435		—
Total assets	$	901,447	$	418,312	$	477,139	$	5,996
Swaps	$	173	$	—	$	173	$	—
Total Liabilities	$	173	$	—	$	173	$	—

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the period ending September 30, 2011:

	Privately issued CMOS
Balance at September 30, 2009	$	10,411
Pay downs		(1,946	)
(Amortization) and accretion, net		49
Change in fair value		380
Loss recognized on sale		(186	)
Sale		(2,712	)
Balance at September 30, 2010		5,996
Pay downs		(908	)
(Amortization) and accretion, net		1
Credit loss write down (OTTI)		(75	)
Change in fair value		(163	)
Balance at September 30, 2011	$	4,851

120

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances:

Loans Held for Sale and Impaired Loans

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 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the market place and therefore such valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurements were $51,155 and $28,717 which equals the carrying value less the allowance for loan losses allocated to these loans at September 30, 2011 and 2010, respectively. Loans subject to nonrecurring fair value measurements have been transferred from Level 2 to Level 3 as of September 30, 2010. Changes in fair value recognized on provisions on loans held by the Company were $9,492 and $467 for the twelve months ended September 30, 2011 and 2010, respectively.

A summary of impaired loans at September 30, 2011 measured at estimated fair value on a nonrecurring basis were as follows:

	Fair Value Measurements at September 30, 2011		Level 1		Level 2		Level 3
Real estate — residential mortgage	$	6,469	$	—	$	—	$	6,469
Real estate — commercial mortgage		3,741		—		—		3,741
Commercial business loans (CBL)		2,119		—		—		2,119
Acquisition, development and construction		2,126		—		—		2,126
Consumer loans		569		—		—		569
Total impaired loans with specific allowance allocations	$	15,024	$	—	$	—	$	15,024

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

121

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

value of mortgage servicing rights recognized for the twelve months ended September 30, 2011 was $53. There was no valuation allowance recorded at September 30, 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 $5,391 and $3,891 at September 30, 2011 and 2010, respectively. There were $869 and $19 changes in fair value recognized through income for those foreclosed assets held by the Company during the twelve months ending September 30, 2011 and 2010, respectively.

(18) 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.

122

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

	September 30, 2011						September 30, 2010
	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value
Financial assets:
Cash and due from banks	$	281,512		$	281,512		$	90,872		$	90,872
Securities available for sale		739,844			739,844			901,012			901,012
Securities held to maturity		110,040			111,272			33,848			35,062
Loans		1,675,882			1,718,372			1,670,698			1,680,939
Loans held for sale		4,176			4,176			5,890			5,934
Accrued interest receivable		9,904			9,904			11,069			11,069
FHLB of New York stock		17,584			17,584			19,572			19,572
Financial liabilities:
Non-maturity deposits		(1,993,036	)		(1,993,036	)		(1,765,129	)		(1,765,129	)
Certificates of Deposit		(303,659	)		(305,940	)		(377,573	)		(380,744	)
FHLB and other borrowings		(375,021	)		(417,879	)		(415,247	)		(473,785	)
Mortgage escrow funds		(9,701	)		(9,701	)		(8,198	)		(8,198	)
Accrued interest payable		(1,816	)		(1,816	)		(2,307	)		(2,307	)

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

(a) Securities

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

(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

123

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

economic conditions and trends, the future cash flows were adjusted by prepayment assumptions that shortened the estimated remaining time to maturity and therefore affected the fair value estimates.

(c) FHLB of New York Stock

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

(d) Deposits and Mortgage Escrow Funds

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

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

(e) Borrowings

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

(f) Other Financial Instruments

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

The fair values of the Company’s off-balance-sheet financial instruments described in Note 15 (“Off Balance Sheet Financial Instruments”) were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At September 30, 2011 and September 30, 2010, the estimated fair values of these instruments approximated the related carrying amounts, which were insignificant.

(19) Recently Issued Accounting Standards Not Yet Adopted

Accounting Standards Update (ASU) 2011-03,Transfers and Servicing (Topic 860) — Reconsideration of Effective Control for Repurchase Agreementshas been issued, which is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This standard is effective for the Company January 1, 2012 and is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update (ASU) 2011-04,Fair Value Measurement (Topic 820)-Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRShas been issued, which will conform the meaning and disclosure requirements of fair value measurement between U.S. GAAP and in IFRS. This standard is effective for the Company January 1, 2012 and is not expected to have a material effect on the Company’s consolidated financial statements.

124

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Accounting Standards Update (ASU) 2011-05-Presentation of Comprehensive Income (Topic 220) has been issued. This standard was issued to conform U.S. GAAP and IFRS as well as to increase the prominence of items reported in other comprehensive income. This standard is effective for the Company January 1, 2012 and is not expected to have a material effect on the Company’s consolidated financial statements.

See Note 1 for a discussion of adoption of new accounting standards.

(20) Condensed Parent Company Financial Statements

Set forth below are the condensed statements of financial condition of Provident Bancorp and the related condensed statements of income and cash flows:

Condensed Statements of Financial Condition	September 30,
	2011		2010
Assets:
Cash	$	6,692	$	10,020
Loan receivable from ESOP		7,338		7,762
Securities available for sale at fair value		837		790
Investment in Provident Bank		406,838		404,755
Non-bank subsidiaries		9,082		8,104
Other assets		1,680		963
Total assets	$	432,467	$	432,394
Liabilities	$	1,333	$	1,439
Stockholders’ equity		431,134		430,955
Total liabilities & stockholders’ equity	$	432,467	$	432,394

	Year ended September 30,
	2011			2010			2009
Condensed Statements of Income
Interest income	$	304		$	326		$	358
Dividend income on equity securities		31			28			28
Dividends from Provident Bank		10,000			29,400			10,500
Dividends from non-bank subsidiaries		500			400			607
Bank owned life insurance income		91			—			—
Non-interest expense		(1,819	)		(2,262	)		(3,372	)
Income tax benefit		157			321			797
Income before equity in undistributed earnings of subsidiaries		9,264			28,213			8,918
Equity in undistributed (excess distributed) earnings of:
Provident Bank		1,498			(8,257	)		17,076
Non-bank subsidiaries		977			536			(133	)
Net income	$	11,739		$	20,492		$	25,861

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PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

	Year ended September 30,
	2011			2010			2009
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income	$	11,739		$	20,492		$	25,861
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in (undistributed) excess distributed earnings of
Provident Bank		(1,498	)		8,257			(17,076	)
Non-bank subsidiaries		(977	)		(536	)		133
Other adjustments, net		(1,444	)		(1,077	)		(475	)
Net cash provided by operating activities		7,820			27,136			8,443
Cash flows from investing activities:
ESOP loan principal repayments		424			408			392
Net cash provided by investing activities		424			408			392
Cash flows from financing activities:
Capital contribution to subsidiaries		—			(350	)		—
Treasury shares purchased		(3,810	)		(13,062	)		(3,785	)
Cash dividends paid		(8,973	)		(9,216	)		(9,379	)
Stock option transactions including RRP		770			2,196			3,055
Other equity transactions		441			442			488
Net cash used in financing activities		(11,572	)		(19,990	)		(9,621	)
Net increase (decrease) in cash		(3,328	)		7,554			(786	)
Cash at beginning of year		10,020			2,466			3,252
Cash at end of year	$	6,692		$	10,020		$	2,466

126

PROVIDENT NEW YORK BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(21) Quarterly Results of Operations (Unaudited)

The following is a condensed summary of quarterly results of operations for the years ended September 30, 2011 and 2010:

	First quarter		Second quarter		Third quarter			Fourth quarter
Year ended September 30, 2011
Interest and dividend income	$	29,060	$	27,803	$	27,934		$	27,817
Interest expense		5,876		5,292		5,130			5,026
Net interest income		23,184		22,511		22,804			22,791
Provision for loan losses		2,100		2,100		3,600			8,784
Non-interest income		9,883		5,795		5,217			9,056
Non-interest expense		21,269		21,791		22,669			24,382
Income before income tax expense		9,698		4,415		1,752			(1,319	)
Income tax expense		2,978		842		(187	)		(826	)
Net income	$	6,720	$	3,573	$	1,939		$	(493	)
Earnings per common share:
Basic	$	0.18	$	0.10	$	0.05		$	(0.01	)
Diluted	$	0.18	$	0.10	$	0.05		$	(0.01	)
Year ended September 30, 2010
Interest and dividend income	$	30,418	$	29,627	$	30,408		$	29,321
Interest expense		7,532		6,693		6,210			6,005
Net interest income		22,886		22,934		24,198			23,316
Provision for loan losses		2,500		2,500		2,750			2,250
Non-interest income		8,093		6,113		5,281			7,714
Non-interest expense		19,894		21,173		20,741			21,362
Income before income tax expense		8,585		5,374		5,988			7,418
Income tax expense		2,419		1,207		1,232			2,015
Net income	$	6,166	$	4,167	$	4,756		$	5,403
Earnings per common share:
Basic	$	0.16	$	0.11	$	0.12		$	0.14
Diluted	$	0.16	$	0.11	$	0.12		$	0.14

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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

ITEM 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2011, under the supervision and with the participation of Provident Bancorp’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in Provident Bancorp’s periodic SEC reports. There were no changes in the Company’s internal controls over financial reporting during the fourth fiscal quarter of 2011 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting (see “Report of Management on Internal Control Over Financial Reporting”)

Provident Bancorp’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the management of Provident Bancorp’s, including Provident Bancorp’s CEO and CFO, Provident Bancorp conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2011 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which is also referred to as COSO. Based on that evaluation, management of Provident Bancorp concluded that the Company’s internal control over financial reporting was effective as of September 30, 2011. Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

The effectiveness of the Company’s internal control over financial reporting as of September 30, 2011 has been audited by Crowe Horwath LLP, as stated in their report which is included elsewhere herein.

ITEM 9B. Other Information

Not applicable.

128

PART III

ITEM 10. Directors, Executive Officers, and Corporate Governance

“Proposal I — Election of Directors” and “Section 169(a) Beneficial Ownership Reporting Compliance” sections of Provident Bancorp’s Proxy Statement for the Annual Meeting of Stockholders to be held in February 2012 (the “Proxy Statement”) is incorporated herein by reference.

ITEM 11. Executive Compensation

“Proposal I — Election of Directors” section of the Proxy Statement is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Provident Bancorp does not have any equity compensation programs that were not approved by stockholders, other than its employee stock ownership plan.

Set forth below is certain information as of September 30, 2011, regarding equity compensation that has been approved by stockholders.

Equity compensation plans approved by stockholders	Number of securities to be issued upon exercise of outstanding options and rights		Weighted average Exercise  price		Number of securities remaining available for issuance under  plan
Stock Option Plans		1,906,020	$	12.20		207,607
Recognition and Retention Plan(1)		57,520		N/A		27,120
Total(2)		1,963,540		12.20		234,727

⁽¹⁾ Represents shares that have been granted but have not yet vested.

⁽²⁾  Weighted average exercise price represents Stock Option Plan only, since RRP shares have no exercise price.

The “Proposal I — Election of Directors” section of the Proxy Statement is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions and Director Independence

The “Transactions with Certain Related Persons” section of the Proxy Statement is incorporated herein by reference.

ITEM 14. Principal Accountant Fees and Services

The “Independent Registered Public Accounting Firm” section of the proxy statement is incorporated herein by reference.

129

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

(1) Financial Statements

The financial statements filed in Item 8 of this Form 10-K are as follows:

(A) Report of Independent Registered Public Accounting Firm on Financial Statements

(B) Consolidated Statements of Financial Condition as of September 30, 2011 and 2010

(C) Consolidated Statements of Income for the years ended September 30, 2011, 2010 and 2009

(D) Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2011, 2010 and 2009

(E) Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009

(F) Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

(3) Exhibits

3.1	Certificate of Incorporation of Provident Bancorp 1
3.2	Bylaws of Provident Bancorp, as amended 2
10.2	Employment Agreement with George Strayton 3*
10.3	Employment Agreement with Daniel Rothstein 4*
10.4	Deferred Compensation Agreement, as amended and restated 5*
10.5	Provident Amended and Restated 1995 Supplemental Executive Retirement Plan 6*
10.5.1	Provident 2005 Supplemental Executive Retirement Plan 7*
10.6	Executive Officer Incentive Program 8*
10.7	1996 Long-Term Incentive Plan for Officers and Directors, as amended 9*
10.8	Provident Bank 2000 Stock Option Plan 10*
10.9	Provident Bank 2000 Recognition and Retention Plan 11*
10.10	Employment Agreement with Paul A. Maisch 12*
10.11	Provident Bancorp, Inc. 2004 Stock Incentive Plan 13*
10.12	Provident Bank Executive Officer Incentive Plan 14*
10.13	Employment Agreement with Stephen Dormer 15*
10.14	Employment Agreement with Richard Jones 16*
10.15	Employment Agreement with Jack L. Kopnisky 17*
10.16	Letter Agreement with George L. Strayton 18*

130

10.17	Form of Stock Option Agreement between Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011) 19*
10.18	Form of Restricted Stock Award Notice between Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011) 20*
10.19	Form of Performance-based Restricted Stock Award Notice between Provident New York Bancorp and Jack L. Kopnisky (grant date July 6,2011) 21*
10.20	Separation Agreement with Stephen G. Dormer 22*
10.21	Provident Short-term Incentive Plan 23*
10.22	Form of Non-Renewal Notice(filed herewith)
21	Subsidiaries of Registrant(filed herewith)
23	Consent of Crowe Horwath LLP(filed herewith)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed herewith)
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed herewith)
32	Certification Pursuant to 18 U.S.C. Section 1350, as amended by Section 906 of the Sarbanes-Oxley Act of 2002(filed herewith)
101.INS	XBRL Instance Document24 (filed herewith)
101.SCH	XBRL Taxonomy Extension Schema document24 (filed herewith)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document24 (filed herewith)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document24 (filed herewith)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document24 (filed herewith)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document24 (filed herewith)

¹  Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (File No. 333-108795), originally filed with the Commission on September 15,2003.

²  Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on November 3, 2010.

³  Incorporated by reference to Exhibit 10.2 of the 2008 10-K (File No, 0-25233), files with the Commission on December 15, 2008.

⁴  Incorporated by reference to Exhibit 10.3 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.

⁵  Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No 333-63593) filed with the Commission on September 17, 1998.

⁶  Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008

⁷  Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 11, 2008

⁸  Incorporated by reference to Exhibit 10.6 of the 2007 10-K (File No. 0-25233), filed with the Commission on December 13, 2007.

⁹  Incorporated by reference to Exhibit 10.7 of Amendment No. 1 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (File No. 333-63593), filed with the Commission on September 17, 1998.

¹⁰  Incorporated by reference to Appendix A of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.

131

¹¹  Incorporated by reference to Appendix B of the Proxy Statement for the 2000 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 18, 2000.

¹²  Incorporated by reference to Exhibit 10.10 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.

¹³  Incorporated by reference to Appendix A to the Proxy Statement for the 2005 Annual Meeting of Stockholders of Provident Bancorp Inc., (File No. 0-25233), filed with the Commission on January 19, 2005.

¹⁴  Incorporated by reference to Exhibit 10 to the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on December 5, 2005.

¹⁵  Incorporated by reference to Exhibit 10.13 of the 2008 10-K (File No. 0-25233), filed with the Commission on December 15, 2008.

¹⁶  Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on February 6, 2009.

¹⁷  Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on June 21, 2011.

¹⁸  Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on June 21, 2011.

¹⁹  Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 9, 2011.

²⁰  Incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 9, 2011.

²¹  Incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q (File No. 0-25233), filed with the Commission on August 9, 2011.

²²  Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on October 13, 2011.

²³  Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 0-25233), filed with the Commission on November 1, 2011.

²⁴  In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed “not filed” for purposes of section 18 of the exchange Act, and otherwise are not subject to liability under that section.

* Indicates management contract or compensatory plan or arrangement.

132

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: December 13, 2011	By:	/s/ Jack Kopnisky
		Jack Kopnisky
		President, Chief Executive Officer and Director (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/ Jack Kopnisky	By:	/s/ Paul A. Maisch
	Jack Kopnisky		Paul A. Maisch
	President, Chief Executive Officer and		Executive Vice President
	Director		Chief Financial Officer
	Principal Executive Officer		Principal Accounting Officer
Date:	December 13, 2011		Principal Financial Officer
		Date:	December 13, 2011
By:	/s/ William F. Helmer	By:	/s/ Dennis L. Coyle
	William F. Helmer		Dennis L. Coyle
	Chairman of the Board		Vice Chairman
Date:	December 13, 2011	Date:	December 13, 2011

By:	/s/ Navy Djonovic	By:	/s/ Judith Hershaft	By:	/s/ Thomas F. Jauntig, Jr.
	Navy Djonovic		Judith Hershaft		Thomas F. Jauntig, Jr.
	Director		Director		Director
Date:	December 13, 2011	Date:	December 13, 2011	Date:	December 13, 2011
By:	/s/ Thomas G. Kahn	By:	/s/ R. Michael Kennedy	By:	/s/ Victoria Kossover
	Thomas G. Kahn		R. Michael Kennedy		Victoria Kossover
	Director		Director		Director
Date:	December 13, 2011	Date:	December 13, 2011	Date:	December 13, 2011
By:	/s/ Donald T. McNelis	By:	/s/ Carl Rosenstock	By:	/s/ George Strayton
	Donald T. McNelis		Carl Rosenstock		George Strayton
	Director		Director		Director
Date:	December 13, 2011	Date:	December 13, 2011	Date:	December 13, 2011
By:	/s/ Burt Steinberg
	Burt Steinberg
	Director
Date	December 13, 2011

133