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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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: 001-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)  
Delaware
42-1547151
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
239 Washington StreetJersey CityNew Jersey07302
(Address of Principal Executive Offices)
(City)(State)
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Symbol(s)
Name of each exchange on which registered
Common
PFS
New York Stock Exchange
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  ý    NO  ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    NO  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  ý
As of May 1, 2020 there were 83,209,293 shares issued and 65,909,039 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 200,089 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.
1



PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page Number
1
Consolidated Statements of Financial Condition as of March 31, 2020 (unaudited) and December 31, 2019
Consolidated Statements of Income for the three months ended March 31, 2020 and 2019 (unaudited)
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019 (unaudited)
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)
2
3
4
1
1A.
2
3
Defaults Upon Senior Securities
4
5
6
Exhibits



2


PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 2020 (Unaudited) and December 31, 2019
(Dollars in Thousands)
 
March 31, 2020December 31, 2019
ASSETS
Cash and due from banks$237,083  $131,555  
Short-term investments133,494  55,193  
Total cash and cash equivalents370,577  186,748  
Available for sale debt securities, at fair value989,833  976,919  
Held to maturity debt securities, net (fair value of $459,224 at March 31, 2020 (unaudited) and $467,966 at December 31, 2019)
445,444  453,629  
Equity securities, at fair value685  825  
Federal Home Loan Bank stock61,198  57,298  
Loans7,372,044  7,332,885  
Less allowance for credit losses75,143  55,525  
Net loans7,296,901  7,277,360  
Foreclosed assets, net4,219  2,715  
Banking premises and equipment, net54,350  55,210  
Accrued interest receivable27,799  29,031  
Intangible assets436,278  437,019  
Bank-owned life insurance195,459  195,533  
Other assets202,143  136,291  
Total assets$10,084,886  $9,808,578  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits$5,523,150  $5,384,868  
Savings deposits990,844  983,714  
Certificates of deposit of $100,000 or more406,122  438,551  
Other time deposits290,644  295,476  
Total deposits7,210,760  7,102,609  
Mortgage escrow deposits28,470  26,804  
Borrowed funds1,213,777  1,125,146  
Other liabilities219,290  140,179  
Total liabilities8,672,297  8,394,738  
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
    
Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,293 shares issued and 65,770,728 shares outstanding at March 31, 2020 and 65,787,900 outstanding at December 31, 2019
832  832  
Additional paid-in capital1,008,582  1,007,303  
Retained earnings686,397  695,273  
Accumulated other comprehensive income14,938  3,821  
Treasury stock(274,044) (268,504) 
Unallocated common stock held by the Employee Stock Ownership Plan(24,116) (24,885) 
Common stock acquired by the Directors’ Deferred Fee Plan(3,666) (3,833) 
Deferred compensation – Directors’ Deferred Fee Plan3,666  3,833  
Total stockholders’ equity1,412,589  1,413,840  
Total liabilities and stockholders’ equity$10,084,886  $9,808,578  
See accompanying notes to unaudited consolidated financial statements.
3


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three months ended March 31, 2020 and 2019 (Unaudited)
(Dollars in Thousands, except per share data)
 
Three months ended March 31,
20202019
Interest income:
Real estate secured loans$54,441  $55,006  
Commercial loans18,672  20,510  
Consumer loans4,172  4,783  
Available for sale debt securities, equity securities and Federal Home Loan Bank Stock7,069  8,409  
Held to maturity debt securities2,940  3,162  
Deposits, Federal funds sold and other short-term investments875  541  
Total interest income88,169  92,411  
Interest expense:
Deposits10,958  10,494  
Borrowed funds5,190  6,910  
Total interest expense16,148  17,404  
Net interest income72,021  75,007  
Provision for credit losses14,717  200  
Net interest income after credit loss expense57,304  74,807  
Non-interest income:
Fees6,529  6,097  
Wealth management income6,251  4,079  
Bank-owned life insurance787  1,696  
Net gain on securities transactions11    
Other income3,413  316  
Total non-interest income16,991  12,188  
Non-interest expense:
Compensation and employee benefits31,195  28,369  
Net occupancy expense6,203  6,857  
Data processing expense4,430  3,969  
FDIC insurance  739  
Amortization of intangibles744  490  
Advertising and promotion expense1,369  883  
Provision for credit losses for off-balance sheet credit exposure1,000    
Other operating expenses9,166  7,109  
Total non-interest expense54,107  48,416  
Income before income tax expense20,188  38,579  
Income tax expense5,257  7,689  
Net income$14,931  $30,890  
Basic earnings per share$0.23  $0.48  
Weighted average basic shares outstanding64,386,138  64,766,619  
Diluted earnings per share$0.23  $0.48  
Weighted average diluted shares outstanding64,457,263  64,912,738  
See accompanying notes to unaudited consolidated financial statements.
4


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2020 and 2019 (Unaudited)
(Dollars in Thousands)
 
Three months ended March 31,
20202019
Net income$14,931  $30,890  
Other comprehensive income (loss), net of tax:
Unrealized gains on available for sale debt securities:
Net unrealized gains arising during the period16,746  7,578  
Reclassification adjustment for gains included in net income    
Total16,746  7,578  
Unrealized losses on derivatives (5,713) (314) 
Amortization related to post-retirement obligations84  (12) 
Total other comprehensive income 11,117  7,252  
Total comprehensive income$26,048  $38,142  

See accompanying notes to unaudited consolidated financial statements.

5


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2019 (Unaudited)
(Dollars in Thousands)
For the three months ended March 31, 2019
COMMON STOCKADDITIONAL PAID-IN CAPITALRETAINED EARNINGSACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOMETREASURYSTOCKUNALLOCATED ESOP SHARESCOMMON STOCK ACQUIRED BY DDFPDEFERRED COMPENSATION DDFPTOTAL STOCKHOLDERS’ EQUITY
Balance at December 31, 2018$832  $1,021,533  $651,099  $(12,336) $(272,470) $(29,678) $(4,504) $4,504  $1,358,980  
Net income—  —  30,890  —  —  —  —  —  30,890  
Other comprehensive income, net of tax—  —  7,252  —  —  —  —  7,252  
Cash dividends paid—  —  (28,964) —  —  —  —  —  (28,964) 
Effect of adopting Accounting Standards Update ("ASU") No. 2016-02—  —  4,350  —  —  —  —  —  4,350  
Distributions from Deferred directors fee plan ("DDFP")—  42  —  —  —  —  167  (167) 42  
Purchases of treasury stock—  —  —  —  (180) —  —  —  (180) 
Purchase of employee restricted shares to fund statutory tax withholding—  —  —  (1,914) —  —  —  (1,914) 
Shares issued dividend reinvestment plan—  307  —  —  533  —  —  —  840  
Stock option exercises—  (11) —  —  26  —  —  —  15  
Allocation of ESOP shares—  370  —  —  —  705  —  —  1,075  
Allocation of Stock Award Plan ("SAP") shares—  1,388  —  —  —  —  —  —  1,388  
Allocation of stock options—  42  —  —  —  —  —  —  42  
Balance at March 31, 2019$832  $1,023,671  $657,375  $(5,084) $(274,005) $(28,973) $(4,337) $4,337  $1,373,816  

See accompanying notes to unaudited consolidated financial statements.













6






PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2020 (Unaudited)
(Dollars in Thousands)


For the three months ended March 31, 2020
COMMON STOCKADDITIONAL PAID-IN CAPITALRETAINED EARNINGSACCUMULATED OTHER COMPREHENSIVE INCOMETREASURY STOCKUNALLOCATED ESOP SHARESCOMMON STOCK ACQUIRED BY DDFPDEFERRED COMPENSATION DDFPTOTAL STOCKHOLDERS’ EQUITY
Balance at December 31, 2019832  1,007,303  695,273  3,821  (268,504) (24,885) (3,833) 3,833  1,413,840  
Net income—  —  14,931  —  —  —  —  —  14,931  
Other comprehensive income, net of tax—  —  —  11,117  —  —  —  —  11,117  
Cash dividends paid—  —  (15,496) —  —  —  —  —  (15,496) 
Effect of adopting ASU No. 2016-13 ("CECL")—  —  (8,311) —  —  —  —  —  (8,311) 
Distributions from DDFP—  37  —  —  —  —  167  (167) 37  
Purchases of treasury stock—  —  —  —  (4,985) —  —  —  (4,985) 
Purchase of employee restricted shares to fund statutory tax withholding—  —  —  —  (956) —  —  —  (956) 
Shares issued dividend reinvestment plan—  50  —  —  401  —  —  —  451  
Stock option exercises—  —  —  —  —  —  —  —  —  
Allocation of ESOP shares—  152  —  —  —  769  —  —  921  
Allocation of SAP shares—  993  —  —  —  —  —  —  993  
Allocation of stock options—  47  —  —  —  —  —  —  47  
Balance at March 31, 2020
$832  $1,008,582  $686,397  $14,938  $(274,044) $(24,116) $(3,666) $3,666  $1,412,589  

See accompanying notes to unaudited consolidated financial statements.
7


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended March 31, 2020 and 2019 (Unaudited)
(Dollars in Thousands)
 
Three months ended March 31,
20202019
Cash flows from operating activities:
Net income$14,931  $30,890  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangibles2,494  2,454  
Provision for credit losses on loans and securities14,717  200  
Provision for credit loss for off-balance sheet credit exposure1,000    
Deferred tax (benefit) expense(1,492) 3,184  
Amortization of operating lease right-of-use assets2,130  2,050  
Income on Bank-owned life insurance(787) (1,696) 
Net amortization of premiums and discounts on securities1,913  1,756  
Accretion of net deferred loan fees(1,521) (1,220) 
Amortization of premiums on purchased loans, net192  160  
Net increase in loans originated for sale(4,022) (3,942) 
Proceeds from sales of loans originated for sale4,335  4,215  
Proceeds from sales and paydowns of foreclosed assets256  585  
ESOP expense921  1,075  
Allocation of stock award shares993  1,388  
Allocation of stock options47  42  
Net gain on sale of loans (313) (273) 
Net gain on securities transactions(11)   
Net gain on sale of premises and equipment(641)   
Net gain on sale of foreclosed assets(29) (57) 
Decrease in accrued interest receivable1,232  295  
(Increase) decrease in other assets(82,099) 4,042  
Decrease (increase) in other liabilities79,111  (13,780) 
Net cash provided by operating activities33,357  31,368  
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of held to maturity debt securities17,225  11,432  
Purchases of held to maturity debt securities(9,674) (5,780) 
Proceeds from maturities and paydowns of available for sale debt securities64,466  40,258  
Purchases of available for sale debt securities(56,172) (50,384) 
Proceeds from redemption of Federal Home Loan Bank stock28,549  31,536  
Purchases of Federal Home Loan Bank stock(32,449) (31,357) 
BOLI claim benefits received1,985    
Net (increase) decrease in loans(39,897) 27,579  
Proceeds from sales of premises and equipment641    
Purchases of premises and equipment(1,664) (593) 
Net cash (used in) provided by investing activities(26,990) 22,691  
Cash flows from financing activities:
Net increase in deposits108,151  73,334  
Increase in mortgage escrow deposits1,666  1,795  
Cash dividends paid to stockholders(15,496) (28,964) 
Shares issued dividend reinvestment plan451  840  
Purchase of treasury stock(4,985) (180) 
Purchase of employee restricted shares to fund statutory tax withholding(956) (1,914) 
8


Three months ended March 31,
20202019
Stock options exercised  15  
Proceeds from long-term borrowings632,554  85,000  
Payments on long-term borrowings(300,159) (213,360) 
Net (decrease) increase in short-term borrowings(243,764) 84,568  
Net cash provided by financing activities177,462  1,134  
Net increase in cash and cash equivalents183,829  55,193  
Cash and cash equivalents at beginning of period186,748  142,661  
Cash and cash equivalents at end of period$370,577  $197,854  
Cash paid during the period for:
Interest on deposits and borrowings$15,819  $17,377  
Income taxes$115  $100  
Non-cash investing activities:
Initial recognition of operating lease right-of-use assets$  $44,946  
Initial recognition of operating lease liabilities$  $46,050  
Transfer of loans receivable to foreclosed assets$2,067  $227  
See accompanying notes to unaudited consolidated financial statements.
9


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly owned subsidiary, Provident Bank (the “Bank,” together with Provident Financial Services, Inc., the “Company”).
In preparing the interim unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and the consolidated statements of income for the periods presented. Actual results could differ from these estimates. The allowance for credit losses and the valuation of deferred tax assets are material estimates that are particularly susceptible to near-term change.
The interim unaudited consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for all of 2020.
Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction with the December 31, 2019 Annual Report to Stockholders on Form 10-K.
B. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the three months ended March 31, 2020 and 2019 (dollars in thousands, except per share amounts):
Three months ended March 31,
20202019
Net
Income
Weighted
Average
Common
Shares
Outstanding
Per
Share
Amount
Net
Income
Weighted
Average
Common
Shares
Outstanding
Per
Share
Amount
Net income$14,931  $30,890  
Basic earnings per share:
Income available to common stockholders$14,931  64,386,138  $0.23  $30,890  64,766,619  $0.48  
Dilutive shares71,125  146,119  
Diluted earnings per share:
Income available to common stockholders$14,931  64,457,263  $0.23  $30,890  64,912,738  $0.48  
Anti-dilutive stock options and awards at March 31, 2020 and 2019, totaling 905,673 shares and 688,655 shares, respectively, were excluded from the earnings per share calculations.
C. Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,” which
replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss
(“CECL”) methodology. The Company used the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period amounts continue to be recorded with previously applicable GAAP. Further information regarding the impact of CECL can be found in Note 3. Investment Securities, Note 4. Loans Receivable and Note 8. Off-balance sheet credit exposures.

10



Note 2. Business Combinations
SB One Bancorp Acquisition
On March 11, 2020, the Company entered into a definitive merger agreement pursuant to which SB One Bancorp ("SB One") will merge with and into the Company, and SB One Bank, a wholly owned subsidiary of SB One, will merge with and into Provident Bank, a wholly owned subsidiary of the Company. The merger agreement has been unanimously approved by the boards of directors of both companies. The actual value of the Company’s common stock to be recorded as consideration in the Merger will be based on the closing price of the Company’s common stock at the time of the Merger completion date. Under the Merger Agreement, each share of SB One common stock will be exchanged for 1.357 shares of the Company's common stock plus cash in lieu of fractional shares. The merger is expected to close in the third quarter of 2020, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of SB One. At December 31, 2019, SB One had $2.0 billion in assets and operated 18 full-service banking offices in New Jersey and New York.
Acquisition of Tirschwell & Loewy, Inc.
On April 1, 2019, Beacon Trust Company ("Beacon") completed its acquisition of certain assets of Tirschwell & Loewy, Inc. ("T&L"), a New York City-based independent registered investment adviser. Beacon is a wholly owned subsidiary of Provident Bank. This acquisition expanded the Company’s wealth management business by $822.4 million of assets under management at the time of acquisition.
The T&L acquisition was accounted for under the acquisition method of accounting. The Company recorded goodwill of $8.2 million, a customer relationship intangible of $12.6 million and $800,000 of other identifiable intangibles related to the acquisition. In addition, the Company recorded a contingent consideration liability at its fair value of $6.6 million. The contingent consideration arrangement requires the Company to pay additional cash consideration to T&L's former stakeholders over a three-year period after the closing date of the acquisition if certain financial and business retention targets are met. The acquisition agreement limits the total additional payment to a maximum of $11.0 million, to be determined based on actual future results. The total cost of the T&L acquisition was $21.6 million, which included cash consideration of $15.0 million and contingent consideration with a fair value of $6.6 million. Tangible assets acquired were nominal, and no liabilities were assumed in the T&L acquisition. The goodwill recorded in the transaction is deductible for tax purposes.
In the fourth quarter of 2019, the Company recognized a $2.8 million increase in the estimated fair value of the contingent consideration liability. While performance of the acquired business has been adversely impacted in the first quarter of 2020 due to worsening economic conditions and declining asset valuations attributable to the COVID-19 pandemic, management has not identified a reduction in assets under management due to a declining customer base. Therefore, the $9.4 million fair value of the contingent liability was unchanged at March 31, 2020, from December 31, 2019, with maximum potential future payments totaling $11.0 million.
Note 3. Investment Securities
At March 31, 2020, the Company had $989.8 million and $445.4 million in available for sale debt securities and held to maturity debt securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, variations in pricing information, regulatory actions, changes in the business environment or any changes in the competitive marketplace could have an adverse effect on the Company’s investment portfolio. The total number of available for sale and held to maturity debt securities in an unrealized loss position at March 31, 2020 totaled 41, compared with 85 at December 31, 2019.
On January 1, 2020, the Company adopted CECL which replaces the incurred loss methodology with an expected loss methodology. The adoption of the new standard resulted in the Company recording a $70,000 increase to the allowance for credit losses on held to maturity debt securities with a corresponding cumulative effect adjustment to decrease retained earnings by $52,000, net of income taxes. (See Adoption of CECL table below for additional detail.)
Management measures expected credit losses on held to maturity debt securities on a collective basis by security type. Management classifies the held-to-maturity debt securities portfolio into the following security types:
Agency obligations;
Mortgage-backed securities;
State and municipal obligations; and
11


Corporate obligations.

All of the agency obligations held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The majority of the state and municipal, and corporate obligations carry no lower than A ratings. At March 31, 2020, the Company had one security rated with a triple-B by Moody’s Investors Service.
The Company adopted CECL using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of CECL.
Available for Sale Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the fair value for available for sale debt securities at March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Mortgage-backed securities$926,561  34,130  (514) 960,177  
State and municipal obligations3,894  155    4,049  
Corporate obligations25,030  614  (37) 25,607  
$955,485  34,899  (551) 989,833  

December 31, 2019
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Mortgage-backed securities$936,196  12,367  (1,133) 947,430  
State and municipal obligations3,907  172    4,079  
Corporate obligations25,032  393  (15) 25,410  
$965,135  12,932  (1,148) 976,919  
The amortized cost and fair value of available for sale debt securities at March 31, 2020, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
March 31, 2020
Amortized
cost
Fair
value
Due in one year or less$    
Due after one year through five years3,002  3,040  
Due after five years through ten years25,922  26,616  
Due after ten years    
$28,924  29,656  
Mortgage-backed securities totaling $926.6 million at amortized cost and $960.2 million at fair value are excluded from the table above as their expected lives are anticipated to be shorter than the contractual maturity date due to principal prepayments.
For the three month periods ended March 31, 2020 and 2019, no securities were sold or called from the available for sale debt securities portfolio.
12


The following tables present the fair values and gross unrealized losses for available for sale debt securities in an unrealized loss position at March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
Less than 12 months12 months or longerTotal
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Mortgage-backed securities$45,567  (510) 14  (4) 45,581  (514) 
Corporate obligations1,990  (37)     1,990  (37) 
$47,557  (547) 14  (4) 47,571  (551) 

December 31, 2019
Less than 12 months12 months or longerTotal
Fair
value
 Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Mortgage-backed securities$136,270  (629) 46,819  (504) 183,089  (1,133) 
Corporate obligations2,013  (15)     2,013  (15) 
$138,283  (644) 46,819  (504) 185,102  (1,148) 
The number of available for sale debt securities in an unrealized loss position at March 31, 2020 totaled 14, compared with 50 at December 31, 2019. The decrease in the number of securities in an unrealized loss position at March 31, 2020 was due to lower current market interest rates compared to rates at December 31, 2019. At March 31, 2020, there was one private label mortgage-backed security in an unrealized loss position, with an amortized cost of $18,000 and an unrealized loss of $4,000.
Held to Maturity Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses and the estimated fair value for held to maturity debt securities at March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Allowance for credit lossesFair
value
Agency obligations$7,417  15      7,432  
Mortgage-backed securities104  4      108  
State and municipal obligations428,691  13,876  (121) (80) 442,366  
Corporate obligations9,319  45  (39) (7) 9,318  
Total held to maturity debt securities$445,531  13,940  (160) (87) 459,224  

December 31, 2019
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Allowance for credit lossesFair
value
Agency obligations$6,599  11  (9)   6,601  
Mortgage-backed securities118  4      122  
State and municipal obligations437,074  14,394  (115)   451,353  
Corporate obligations9,838  58  (6)   9,890  
Total held to maturity debt securities$453,629  14,467  (130)   467,966  
The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. There were no sales of securities from the held to maturity debt securities portfolio for the three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020, proceeds from calls on securities in the held to maturity debt securities portfolio totaled $13.3 million with gross gains of $11,000 and no gross losses. For the three months ended March 31, 2019, proceeds from calls of securities in the held to maturity debt securities portfolio totaled $9.3 million with no gross gains and no gross losses.
13


The gross amortized cost and gross fair value of investment securities in the held to maturity debt securities portfolio at March 31, 2020 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
March 31, 2020
Amortized
cost
Fair
value
Due in one year or less$9,461  9,477  
Due after one year through five years115,043  117,204  
Due after five years through ten years240,321  248,418  
Due after ten years80,602  84,104  
$445,427  459,203  
Mortgage-backed securities totaling $104,000 at amortized cost and $108,000 at fair value are excluded from the table above as their expected lives are anticipated to be shorter than the contractual maturity date due to principal prepayments. Additionally, allowance for credit losses totaling $87,000 is excluded from the table above.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on held to maturity debt securities (in thousands):
January 1, 2020
As reported under CECLPrior to CECLImpact of CECL adoption
Held to Maturity Debt Securities
Allowance for credit losses on corporate securities$6    6  
Allowance for credit losses on municipal securities64    64  
Allowance for credit losses on held to maturity securities$70    70  
For the three months ended March 31, 2020, the Company recorded a $17,000 provision for credit losses on held to maturity debt securities.
The following tables present the fair value and gross unrealized losses for held to maturity debt securities in an unrealized loss position at March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
Less than 12 months12 months or longerTotal
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
State and municipal obligations$10,143  (103) 407  (18) 10,550  (121) 
Corporate obligations3,516  (39)     3,516  (39) 
$13,659  (142) 407  (18) 14,066  (160) 

December 31, 2019
Less than 12 months12 months or longerTotal
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Agency obligations$3,601  (9)     3,601  (9) 
State and municipal obligations7,675  (42) 2,093  (73) 9,768  (115) 
Corporate obligations3,254  (6)     3,254  (6) 
$14,530  (57) 2,093  (73) 16,623  (130) 
The number of held to maturity debt securities in an unrealized loss position at March 31, 2020 totaled 27, compared with 35 at December 31, 2019. The decrease in the number of securities in an unrealized loss position at March 31, 2020 was due to lower current market interest rates compared to rates at December 31, 2019.
14


Credit Quality Indicators. The following table provides the amortized cost of held to maturity debt securities by credit rating as of March 31, 2020 (in thousands):
March 31, 2020
Total PortfolioAAAAAABBBNot RatedTotal
Agency obligations$7,417          7,417  
Mortgage-backed securities104          104  
State and municipal obligations46,868  326,291  54,414  1,118    428,691  
Corporate obligations  3,121  5,423  750  25  9,319  
$54,389  329,412  59,837  1,868  25  445,531  
December 31, 2019
Total PortfolioAAAAAABBBNot RatedTotal
Agency obligations$6,599          6,599  
Mortgage-backed securities118          118  
State and municipal obligations49,316  330,322  56,317  1,119    437,074  
Corporate obligations  3,128  6,335  350  25  9,838  
$56,033  333,450  62,652  1,469  25  453,629  
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. At March 31, 2020, the held to maturity debt securities portfolio was comprised of 12% rated triple-A, 74% rated double-A, 13% rated single-A, and less than 1% either below a single-A rating or not rated by Moody’s Investors Service or Standard and Poor’s. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.
At March 31, 2020, the allowance for credit losses on held to maturity debt securities was $87,000.
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Note 4. Loans Receivable and Allowance for Credit Losses on Loans
On January 1, 2020, the Company adopted CECL, which replaces the incurred loss methodology with an expected loss methodology. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses on loans with a corresponding cumulative effect adjustment to decrease retained earnings by $5.9 million, net of income taxes. (See Adoption of CECL table below for additional detail.)
Loans receivable at March 31, 2020 and December 31, 2019 are summarized as follows (in thousands):
March 31, 2020December 31, 2019
Mortgage loans:
Residential$1,106,670  1,077,689  
Commercial2,555,091  2,578,393  
Multi-family1,222,313  1,225,551  
Construction408,944  429,812  
Total mortgage loans5,293,018  5,311,445  
Commercial loans:
Commercial owner occupied935,669  853,269  
Commercial non-owner occupied719,780  732,277  
Other commercial loans48,220  49,213  
Total commercial loans1,703,669  1,634,759  
Consumer loans379,597  391,360  
Total gross loans7,376,284  7,337,564  
Purchased credit-deteriorated ("PCD") loans737  746  
Premiums on purchased loans2,300  2,474  
Unearned discounts(26) (26) 
Net deferred fees(7,251) (7,873) 
Total loans$7,372,044  7,332,885  
The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCD loans (in thousands):
March 31, 2020
30-59 Days60-89 DaysNon-accrualRecorded
Investment
> 90 days
accruing
Total Past
Due
CurrentTotal Loans
Receivable
Non-accrual loans with no related allowance
Mortgage loans:
Residential$6,240  4,075  6,145    16,460  1,090,210  1,106,670  1,522  
Commercial424    5,264    5,688  2,549,403  2,555,091    
Multi-family          1,222,313  1,222,313    
Construction          408,944  408,944    
Total mortgage loans6,664  4,075  11,409    22,148  5,270,870  5,293,018  1,522  
Commercial loans13,793  1  23,086    36,880  1,666,789  1,703,669  1,344  
Consumer loans1,707  661  844    3,212  376,385  379,597  664  
Total gross loans$22,164  4,737  35,339    62,240  7,314,044  7,376,284  3,530  

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December 31, 2019
30-59 Days60-89 DaysNon-accrualRecorded
Investment
> 90 days
accruing
Total Past
Due
CurrentTotal Loans ReceivableNon-accrual loans with no related allowance
Mortgage loans:
Residential$5,905  2,579  8,543    17,027  1,060,662  1,077,689  2,989  
Commercial    5,270    5,270  2,573,123  2,578,393    
Multi-family          1,225,551  1,225,551    
Construction          429,812  429,812    
Total mortgage loans5,905  2,579  13,813    22,297  5,289,148  5,311,445  2,989  
Commercial loans2,383  95  25,160    27,638  1,607,121  1,634,759  3,238  
Consumer loans1,276  337  1,221    2,834  388,526  391,360  569  
Total gross loans$9,564  3,011  40,194    52,769  7,284,795  7,337,564  6,796  

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $35.3 million and $40.2 million at March 31, 2020 and December 31, 2019, respectively. Included in non-accrual loans were $16.0 million and $13.1 million of loans which were less than 90 days past due at March 31, 2020 and December 31, 2019, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2020 or December 31, 2019.

Management has elected not to measure an allowance for credit losses for accrued interest receivables related to its loan portfolio as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the quarter the loan is moved from an accrual to a non-accrual status.
The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million, for which, based on current information, the Bank does not expect to collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analysis of collateral-dependent loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral-dependent loan and updated annually, or more frequently if required.
A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the collateral’s fair value less cost to sell. A specific allocation of the allowance for credit losses is established for each collateral-dependent loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. At each fiscal quarter end, if a loan is designated as collateral-dependent and the third-party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value. The Company believes there have been no significant time lapses as a result of this process.
At March 31, 2020, there were 158 impaired loans totaling $65.7 million. Included in this total were 129 TDRs related to 125 borrowers totaling $39.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2020. At December 31, 2019, there were 158 impaired loans totaling $70.6 million, of which 147 loans totaling $48.3 million were TDRs. Included in this total were 133 TDRs related to 128 borrowers totaling $42.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2019.
At March 31, 2020 and December 31, 2019, the Company had $15.9 million and $20.4 million of collateral-dependent impaired loans, respectively. The collateral-dependent impaired loans at March 31, 2020 consisted of $12.8 million in commercial loans, $3.0 million in residential real estate loans, and $174,000 in consumer loans. The collateral for these impaired loans was primarily real estate.
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The activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2020 and 2019 was as follows (in thousands):
Three months ended March 31,Mortgage loansCommercial loansConsumer loansTotal Portfolio Segments
2020
Balance at beginning of period$25,511  28,263  1,751  55,525  
Retained earnings (due to initial CECL adoption)14,188  (9,974) 3,706  7,920  
Provision charged (credited) to operations7,710  7,619  (629) 14,700  
Recoveries of loans previously charged-off93  313  123  529  
Loans charged-off(2) (3,380) (149) (3,531) 
Balance at end of period$47,500  22,841  4,802  75,143  
2019
Balance at beginning of period$27,678  25,693  2,191  55,562  
Provision (credited) charged to operations(982) 1,282  (100) 200  
Recoveries of loans previously charged-off230  52  130  412  
Loans charged-off  (676) (145) (821) 
Balance at end of period$26,926  26,351  2,076  55,353  
As a result of the January 1, 2020 adoption of CECL, the Company recorded a $7.9 million increase to the allowance for credit losses on loans. For the three months ended March 31, 2020, the Company recorded a $14.7 million provision for credit losses on loans. The increase in provision for credit losses for the quarter resulted primarily from the impact of reserve build related to the COVID-19 pandemic, with the largest increase in the commercial loans and commercial real estate portfolios.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on the loan portfolio:
January 1, 2020
As reported under CECLPrior to CECLImpact of CECL adoption
Loans
Residential$8,950  3,411  5,539  
Commercial17,118  12,885  4,233  
Multi-family9,519  3,370  6,149  
Construction4,152  5,885  (1,733) 
Total mortgage loans39,739  25,551  14,188  
Commercial loans18,254  28,228  (9,974) 
Consumer loans5,452  1,746  3,706  
Allowance for credit losses on loans$63,445  55,525  7,920  
The following tables summarize loans receivable by portfolio segment and impairment method at March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
Mortgage
loans
Commercial
loans
Consumer
loans
Total Portfolio
Segments
Individually evaluated for impairment$39,592  24,026  2,114  65,732  
Collectively evaluated for impairment5,253,426  1,679,643  377,483  7,310,552  
Total gross loans$5,293,018  1,703,669  379,597  7,376,284  

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December 31, 2019
Mortgage
loans
Commercial
loans
Consumer
loans
Total Portfolio
Segments
Individually evaluated for impairment$39,910  28,357  2,374  70,641  
Collectively evaluated for impairment5,271,535  1,606,402  388,986  7,266,923  
Total gross loans$5,311,445  1,634,759  391,360  7,337,564  
The allowance for credit losses is summarized by portfolio segment and impairment classification as follows (in thousands):
March 31, 2020
Mortgage
loans
Commercial loansConsumer loansTotal
Individually evaluated for impairment$1,590  4,073  36  5,699  
Collectively evaluated for impairment45,910  18,768  4,766  69,444  
Total gross loans$47,500  22,841  4,802  75,143  

December 31, 2019
Mortgage
loans
Commercial loansConsumer
loans
Total
Individually evaluated for impairment$1,580  3,462  25  5,067  
Collectively evaluated for impairment23,931  24,801  1,726  50,458  
Total gross loans$25,511  28,263  1,751  55,525  
Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, management attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
The following tables present the number of loans modified as TDRs during the three months ended March 31, 2020 and 2019, along with their balances immediately prior to the modification date and post-modification as of March 31, 2020 and 2019 (dollars in thousands):
For the three months ended
March 31, 2020March 31, 2019
Troubled Debt RestructuringsNumber of
Loans
Pre-Modification
Outstanding
Recorded 
Investment
Post-Modification
Outstanding
Recorded Investment
Number of
Loans
Pre-Modification
Outstanding
Recorded  Investment
Post-Modification
Outstanding
Recorded  Investment
($ in thousands)
Mortgage loans:
Commercial  $    1  $14,010  14,010  
Total mortgage loans      1  14,010  14,010  
Commercial loans2  746  731  4  2,013  2,013  
Total restructured loans2  $746  $731  5  $16,023  $16,023  
All TDRs are impaired loans, which are individually evaluated for impairment. During the three months ended March 31, 2020 $2.7 million of charge-offs were recorded on collateral-dependent impaired loans. For the three months ended March 31, 2020,
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the allowance for loan losses associated with the TDRs presented in the preceding tables totaled $448,000 and was included in the allowance for loan losses for loans individually evaluated for impairment.
The TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 6.99% compared to a weighted average rate of 7.19% prior to modification, for the three months ended March 31, 2020.
The following table presents loans modified as TDRs within the previous 12 months from March 31, 2020 and 2019, and for which there was a payment default (90 days or more past due) at the quarter ended March 31, 2020 and 2019.
March 31, 2020March 31, 2019
Troubled Debt Restructurings Subsequently DefaultedNumber of LoansOutstanding Recorded InvestmentNumber of LoansOutstanding Recorded 
Investment
($ in thousands)
Commercial loans  $  3  $540  
Total restructured loans  $  3  $540  
There were no loans which had a payment default (90 days or more past due) for loans modified as TDRs within the 12 month period ending March 31, 2020. There were three payment defaults (90 days or more past due) to one borrower for loans modified as TDRs within the 12 month period ending March 31, 2019. For TDR’s that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for credit losses on loans individually evaluated for impairment.
As allowed by CECL, the Company elected to maintain pools of loans accounted for under ASC 310-30. At December 31, 2019, purchased credit impaired (“PCI”) loans totaled $746,000. In accordance with the CECL standard, management did not reassess whether modifications of individually acquired financial assets accounted for in pools were TDRs as of the date of adoption. All loans considered to be PCI prior to January 1, 2020 were converted to purchased credit deteriorated ("PCD") loans on that date. PCD loans totaled $737,000 at March 31, 2020. Subsequent to January 1, 2020, should the Company acquire loans that experience more-than-insignificant deterioration in credit quality since origination, these loans will be classified as PCD.
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The following table presents loans individually evaluated for impairment by class and loan category, excluding PCD loans (in thousands):
March 31, 2020December 31, 2019
Unpaid Principal BalanceRecorded InvestmentRelated AllowanceAverage Recorded InvestmentInterest Income RecognizedUnpaid Principal BalanceRecorded InvestmentRelated AllowanceAverage Recorded InvestmentInterest Income Recognized
Loans with no related allowance
Mortgage loans:
Residential$12,644  10,187  —  10,257  118  13,478  10,739  —  10,910  533  
Commercial14,295  14,180  —  14,183  128      —      
Multi-family    —          —      
Construction    —          —      
Total26,939  24,367  —  24,440  246  13,478  10,739  —  10,910  533  
Commercial loans3,943  2,135  —  3,417  18  3,927  3,696  —  4,015  17  
Consumer loans1,661  1,128  —  1,139  17  2,086  1,517  —  1,491  86  
Total impaired loans$32,543  27,630  —  28,996  281  19,491  15,952  —  16,416  636  
Loans with an allowance recorded
Mortgage loans:
Residential$10,777  10,273  876  10,308  112  10,860  10,326  829  10,454  428  
Commercial4,828  4,828  694  4,832  14  18,845  18,845  751  18,862  569  
Multi-family182  124  20  124              
Construction                    
Total15,787  15,225  1,590  15,264  126  29,705  29,171  1,580  29,316  997  
Commercial loans24,763  21,891  4,073  24,152  104  27,762  24,661  3,462  27,527  444  
Consumer loans997  986  36  8,560  11  868  857  25  878  46  
Total impaired loans$41,547  38,102  5,699  47,976  241  58,335  54,689  5,067  57,721  1,487  
Total impaired loans
Mortgage loans:
Residential$23,421  20,460  876  20,565  230  24,338  21,065  829  21,364  961  
Commercial19,123  19,008  694  19,015  142  18,845  18,845  751  18,862  569  
Multi-family182  124  20  124              
Total42,726  39,592  1,590  39,704  372  43,183  39,910  1,580  40,226  1,530  
Commercial loans28,706  24,026  4,073  27,569  122  31,689  28,357  3,462  31,542  461  
Consumer loans2,658  2,114  36  9,699  28  2,954  2,374  25  2,369  132  
Total impaired loans$74,090  65,732  5,699  76,972  522  77,826  70,641  5,067  74,137  2,123  
Specific allocations of the allowance for credit losses attributable to impaired loans totaled $5.7 million at March 31, 2020 and $5.1 million at December 31, 2019. At March 31, 2020 and December 31, 2019, impaired loans for which there was no related allowance for credit losses totaled $27.6 million and $16.0 million, respectively. The average balance of impaired loans for the three months ended March 31, 2020 and December 31, 2019 was $77.0 million and $74.1 million, respectively.
Management utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with
21


minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Department. The risk ratings are also confirmed through periodic loan review examinations which are currently performed by an independent third-party. Reports by the independent third-party are presented directly to the Audit Committee of the Board of Directors.
In response to the COVID-19 pandemic and its adverse economic impact on both our commercial and retail borrowers, we implemented a short-term modification program to defer principal or principal and interest payments for up to 90 days to borrowers directly impacted by the pandemic and who were not more than 30 days past due as of December 31, 2019 all in accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. As of April 28, 2020, deferred payment relief had been provided to 638 borrowers representing total principal loan balances of $889.0 million.
In addition, the Company participated in the Paycheck Protection Program (“PPP”) through the United States Department of the Treasury and Small Business Administration. As of April 28, 2020 the Company secured 820 PPP loans for its customers totaling $377.5 million.
The following table summarizes the Company's gross loans held for investment by year of origination and internally assigned credit grades:
Total Portfolio as of March 31, 2020
ResidentialCommercial mortgageMulti-familyConstructionTotal
mortgages
CommercialConsumerTotal loans
Special mention$4,075  19,848      23,923  114,858  661  139,442  
Substandard9,050  12,722  124  6,181  28,077  51,689  1,032  80,798  
Doubtful          732    732  
Loss                
Total classified and criticized13,125  32,570  124  6,181  52,000  167,279  1,693  220,972  
Pass/Watch1,093,545  2,522,521  1,222,189  402,763  5,241,018  1,536,390  377,904  7,155,312  
Total gross loans$1,106,670  2,555,091  1,222,313  408,944  5,293,018  1,703,669  379,597  7,376,284  
2020
Special mention$                
Substandard                
Doubtful              
Loss                
Total classified and criticized                
Pass/Watch67,775  99,722  34,785  2,005  204,287  59,721  8,587  272,595  
Total gross loans$67,775  99,722  34,785  2,005  204,287  59,721  8,587  272,595  
2019
Special mention$          1,231    1,231  
Substandard          228    228  
Doubtful              
Loss                
Total classified and criticized          1,459    1,459  
Pass/Watch155,718  505,804  141,727  143,297  946,546  231,465  55,899  1,233,910  
Total gross loans$155,718  505,804  141,727  143,297  946,546  232,924  55,899  1,235,369  
2018
Special mention$          4,656    4,656  
Substandard          757    757  
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Doubtful              
Loss                
Total classified and criticized          5,413    5,413  
Pass/Watch96,683  357,530  115,282  188,523  758,018  195,828  48,203  1,002,049  
Total gross loans$96,683  357,530  115,282  188,523  758,018  201,241  48,203  1,007,462  
2017
Special mention$  220      220  3,204    3,424  
Substandard568  995      1,563  8,264    9,827  
Doubtful              
Loss                
Total classified and criticized568  1,215      1,783  11,468    13,251  
Pass/Watch92,471  399,107  136,620  68,938  697,136  207,256  38,057  942,449  
Total gross loans$93,039  400,322  136,620  68,938  698,919  218,724  38,057  955,700  
2016 and prior
Special mention$4,075  19,628      23,703  105,767  661  130,131  
Substandard8,482  11,727  124  6,181  26,514  42,440  1,032  69,986  
Doubtful        732    732  
Loss                
Total classified and criticized12,557  31,355  124  6,181  50,217  148,939  1,693  200,849  
Pass/Watch680,898  1,160,358  793,775    2,635,031  842,120  227,158  3,704,309  
Total gross loans$693,455  1,191,713  793,899  6,181  2,685,248  991,059  228,851  3,905,158  
Total Portfolio as of December 31, 2019
ResidentialCommercial mortgageMulti-familyConstructionTotal
mortgages
CommercialConsumerTotal loans
Special mention$2,402  46,758      49,160  79,248  286  128,694  
Substandard10,204  13,458    6,181  29,843  57,015  1,668  88,526  
Doubtful          836    836  
Loss                
Total classified and criticized12,606  60,216    6,181  79,003  137,099  1,954  218,056  
Pass/Watch1,065,083  2,518,177  1,225,551  423,631  5,232,442  1,497,660  389,406  7,119,508  
Total gross loans$1,077,689  2,578,393  1,225,551  429,812  5,311,445  1,634,759  391,360  7,337,564  

Note 5. Deposits
Deposits at March 31, 2020 and December 31, 2019 are summarized as follows (in thousands):
March 31, 2020December 31, 2019
Savings$990,844  983,714  
Money market1,782,445  1,738,202  
NOW2,164,779  2,092,413  
Non-interest bearing1,575,926  1,554,253  
Certificates of deposit696,766  734,027  
Total deposits$7,210,760  7,102,609  
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Note 6. Components of Net Periodic Benefit Cost
The Bank has a noncontributory defined benefit pension plan covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003. The pension plan was frozen on April 1, 2003. All participants in the Plan are 100% vested. The pension plan’s assets are invested in investment funds and group annuity contracts currently managed by the Principal Financial Group and Allmerica Financial.
In addition to pension benefits, certain health care and life insurance benefits are currently made available to certain of the Bank’s retired employees. The costs of such benefits are accrued based on actuarial assumptions from the date of hire to the date the employee is fully eligible to receive the benefits. Effective January 1, 2003, eligibility for retiree health care benefits was frozen as to new entrants, and benefits were eliminated for employees with less than ten years of service as of December 31, 2002. Effective January 1, 2007, eligibility for retiree life insurance benefits was frozen as to new entrants and retiree life insurance benefits were eliminated for employees with less than ten years of service as of December 31, 2006.
Net periodic (decrease) increase in benefit cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2020 and 2019 includes the following components (in thousands):
Three months ended March 31,
Pension benefitsOther post-retirement benefits
2020201920202019
Service cost$    20  20  
Interest cost250  300  178  210  
Expected return on plan assets(737) (641)     
Amortization of prior service cost        
Amortization of the net loss (gain)174  254  (62) (207) 
Net periodic (decrease) increase in benefit cost$(313) (87) 136  23  
In its consolidated financial statements for the year ended December 31, 2019, the Company previously disclosed that it does not expect to contribute to the pension plan in 2020. As of March 31, 2020, no contributions have been made to the pension plan.
The net periodic (decrease) increase in benefit cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2020 was calculated using the January 1, 2020 pension and other post-retirement benefits actuarial valuations.
Note 7. Impact of Recent Accounting Pronouncements
Accounting Pronouncements Adopted in 2020
In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief.” This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 had the same effective date as ASU 2016-13 (i.e., the first quarter of 2020). The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In April 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" which clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, recognition and measurement. The most significant provisions of this ASU relate to how companies will estimate expected credit losses under Topic 326 by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. ASU No. 2019-04 is effective for reporting periods beginning January 1, 2020. The adoption of this guidance had no impact related to Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments on the Company’s consolidated financial statements. At January 1, 2020, a $1.3 million allowance was recorded related to extensions on construction loans and is reflected below in the ASU 2016-13 calculation.
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In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Furthermore, ASU 2016-13 will necessitate establishing an allowance for expected credit losses on held to maturity debt securities. This also applies to off-balance sheet credit exposures, which includes loan commitments, unused lines of credit and other similar instruments. The amendments in ASU 2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of this ASU was permitted for fiscal years beginning after December 15, 2018. The adoption of ASU 2016-13 involves changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model (“CECL”), which encompasses allowances for losses expected to be incurred over the life of the portfolio. The Company adopted CECL on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet ("OBS") credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be recorded with previously applicable GAAP. The Company recorded a $7.9 million increase to the allowance for credit losses and a $3.2 million liability for off-balance sheet credit exposures, which resulted in an $8.3 million cumulative effect adjustment decrease, net of tax to retained earnings. With regard to regulatory capital, the Company has elected to utilize the five-year CECL transition, which gives the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay.
Accounting Pronouncements Not Yet Adopted
ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company anticipates this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than the extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on the Company's business operations and consolidated financial statements.
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Note 8. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
On January 1, 2020, the Company adopted CECL, which replaces the incurred loss methodology with an expected loss methodology and applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of this new standard resulted in the Company recording a $3.2 million increase to the allowance for credit losses on off-balance sheet credit exposures with a corresponding cumulative effect adjustment to decrease retained earnings $2.4 million, net of income taxes.
Management analyzes the Company's exposure to credit losses for both on-balance sheet and off-balance sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework. For purposes of estimating the allowance for credit losses for off-balance sheet credit exposures, the exposure at default includes an estimated drawdown of unused credit based on historical credit utilization factors and current loss factors, resulting in a proportionate amount of expected credit losses.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on off-balance sheet credit exposures:
January 1, 2020
As reported under CECLPrior to CECLImpact of CECL adoption
Liabilities
Allowance for credit losses on off-balance sheet credit exposure$3,206    3,206  
For the three months ended March 31, 2020, the Company recorded a $1.0 million provision for credit losses on off-balance sheet credit exposures.
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Note 9. Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, the Company utilizes various valuation techniques to estimate fair value.
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the financial instrument.
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:
Level 1:
Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The valuation techniques described below were used to measure fair value of financial instruments in the table below on a recurring basis as of March 31, 2020 and December 31, 2019.
Available for Sale Debt Securities, at Fair Value
For available for sale debt securities, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third-party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or to comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in an adjustment in the prices obtained from the pricing service.
Equity Securities, at Fair Value
The Company holds equity securities that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs.
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Derivatives
The Company records all derivatives on the statements of financial condition at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company has interest rate derivatives resulting from a service provided to certain qualified borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings.
The Company also uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges, and which satisfy hedge accounting requirements, involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. These derivatives were used to hedge the variable cash outflows associated with FHLBNY borrowings. The change in the fair value of these derivatives is recorded in accumulated other comprehensive income, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
The fair value of the Company's derivatives is determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 inputs.
Assets Measured at Fair Value on a Non-Recurring Basis
The valuation techniques described below were used to estimate fair value of financial instruments measured on a non-recurring basis as of March 31, 2020 and December 31, 2019.
Collateral-Dependent Impaired Loans
For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case-by-case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell between 5% and 10%. The Company classifies these loans as Level 3 within the fair value hierarchy.
Foreclosed Assets
Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated costs, which range between 5% and 10%. Fair value is generally based on independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraisers’ market knowledge and experience, and are classified as Level 3. When an asset is acquired, the excess of the loan balance over fair value less estimated selling costs is charged to the allowance for credit losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.
There were no changes to the valuation techniques for fair value measurements as of March 31, 2020 and December 31, 2019.
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The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of March 31, 2020 and December 31, 2019, by level within the fair value hierarchy:
Fair Value Measurements at Reporting Date Using:
(In thousands)March 31, 2020Quoted Prices in Active  Markets for Identical Assets (Level 1)Significant Other Observable  Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Available for sale debt securities:
Mortgage-backed securities$960,177    960,177    
State and municipal obligations4,049    4,049    
Corporate obligations25,607    25,607    
Total available for sale debt securities$989,833    989,833    
Equity securities685  685      
Derivative assets111,608    111,608    
$1,102,126  685  1,101,441    
Derivative liabilities$120,176    120,176    
Measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral$15,895      15,895  
Foreclosed assets4,219      4,219  
$20,114      20,114  

Fair Value Measurements at Reporting Date Using:
(In thousands)December 31, 2019Quoted Prices in Active  Markets for Identical Assets (Level 1)Significant Other Observable  Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Available for sale debt securities:
Mortgage-backed securities$947,430    947,430    
State and municipal obligations4,079    4,079    
Corporate obligations25,410    25,410    
Total available for sale debt securities$976,919    976,919    
Equity Securities825  825      
Derivative assets39,305    39,305    
$1,017,049  825  1,016,224    
Derivative liabilities$39,356    39,356    
Measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral$20,403      20,403  
Foreclosed assets2,715      2,715  
$23,118      23,118  
There were no transfers between Level 1, Level 2 and Level 3 during the three and three months ended March 31, 2020.
Other Fair Value Disclosures
The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities.
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Cash and Cash Equivalents
For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value. Included in cash and cash equivalents at March 31, 2020 and December 31, 2019 was $128.7 million and $77.0 million, respectively, representing cash collateral pledged to secure loan level swaps and reserves required by banking regulations.
Held to Maturity Debt Securities, Net of Allowance for Credit Losses
For held to maturity debt securities, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analysis of the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy.
Federal Home Loan Bank of New York ("FHLBNY") Stock
The carrying value of FHLBNY stock was its cost. The fair value of FHLBNY stock is based on redemption at par value. The Company classifies the estimated fair value as Level 1 within the fair value hierarchy.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifies the estimated fair value of its loan portfolio as Level 3.
The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. The Company classifies the estimated fair value of its non-performing loan portfolio as Level 3.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits and savings deposits, was equal to the amount payable on demand and classified as Level 1. The estimated fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifies the estimated fair value of its certificates of deposit portfolio as Level 2.
Borrowed Funds
The fair value of borrowed funds was estimated by discounting future cash flows using rates available for debt with similar terms and maturities and is classified by the Company as Level 2 within the fair value hierarchy.
Commitments to Extend Credit and Letters of Credit
The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the
30


counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value estimates of commitments to extend credit and letters of credit are deemed immaterial.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following tables present the Company’s financial instruments at their carrying and fair values as of March 31, 2020 and December 31, 2019. Fair values are presented by level within the fair value hierarchy.
Fair Value Measurements at March 31, 2020 Using:
(Dollars in thousands)Carrying valueFair valueQuoted Prices in Active  Markets for Identical Assets (Level 1)Significant Other Observable  Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents$370,577  370,577  370,577      
Available for sale debt securities:
Mortgage-backed securities960,177  960,177    960,177    
State and municipal obligations4,049  4,049    4,049    
Corporate obligations25,607  25,607    25,607    
Total available for sale debt securities$989,833  989,833    989,833    
Held to maturity debt securities, net of allowance for credit losses
Agency obligations7,417  7,432  7,432      
Mortgage-backed securities104  108    108    
State and municipal obligations428,611  442,366    442,366    
Corporate obligations9,312  9,318    9,318    
Total held to maturity debt securities, net of allowance for credit losses$445,444  459,224  7,432  451,792    
FHLBNY stock61,198  61,198  61,198      
Equity Securities685  685  685      
Loans, net of allowance for credit losses7,296,901  7,513,881      7,513,881  
Derivative assets111,608  111,608    111,608    
Financial liabilities:
Deposits other than certificates of deposits$6,513,994  6,513,994  6,513,994      
Certificates of deposit696,766  696,151    696,151    
Total deposits$7,210,760  7,210,145  6,513,994  696,151    
Borrowings1,213,777  1,223,866    1,223,866    
Derivative liabilities120,176  120,176    120,176    
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Fair Value Measurements at December 31, 2019 Using:
(Dollars in thousands)Carrying valueFair valueQuoted Prices in Active  Markets for Identical Assets (Level 1)Significant Other Observable  Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents$186,748  186,748  186,748      
Available for sale debt securities:
Mortgage-backed securities947,430  947,430    947,430    
State and municipal obligations4,079  4,079    4,079    
Corporate obligations25,410  25,410    25,410    
Total available for sale debt securities$976,919  976,919    976,919    
Held to maturity debt securities:
Agency obligations$6,599  6,601  6,601      
Mortgage-backed securities118  122    122    
State and municipal obligations437,074  451,353    451,353    
Corporate obligations9,838  9,890    9,890    
Total held to maturity debt securities$453,629  467,966  6,601  461,365    
FHLBNY stock57,298  57,298  57,298      
Equity Securities825  825  825      
Loans, net of allowance for credit losses7,277,360  7,296,744      7,296,744  
Derivative assets39,305  39,305    39,305    
Financial liabilities:
Deposits other than certificates of deposits$6,368,582  6,368,582  6,368,582      
Certificates of deposit734,027  734,047    734,047    
Total deposits$7,102,609  7,102,629  6,368,582  734,047    
Borrowings1,125,146  1,127,569    1,127,569    
Derivative liabilities39,356  39,356    39,356    

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Note 10. Other Comprehensive Income
The following table presents the components of other comprehensive income, both gross and net of tax, for the three months ended March 31, 2020 and 2019 (in thousands):
Three months ended March 31,
20202019
Before
Tax
Tax
Effect
After
Tax
Before
Tax
Tax
Effect
After
Tax
Components of Other Comprehensive Income:
Unrealized gains on available for sale debt securities:
Net unrealized gains arising during the period$22,563  (5,817) 16,746  10,417  (2,839) 7,578  
Reclassification adjustment for gains included in net income            
Total22,563  (5,817) 16,746  10,417  (2,839) 7,578  
Unrealized losses on derivatives (cash flow hedges) (7,697) 1,984  (5,713) (432) 118  (314) 
Amortization related to post-retirement obligations112  (28) 84  (16) 4  (12) 
Total other comprehensive income $14,978  (3,861) 11,117  9,969  (2,717) 7,252  

The following tables present the changes in the components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2020 and 2019 (in thousands):
Changes in Accumulated Other Comprehensive Income (Loss) by Component, net of tax
for the three months ended March 31,
20202019
Unrealized
Gains on
Available for Sale Debt Securities
Post- Retirement
Obligations
Unrealized (Losses) Gains on Derivatives (cash flow hedges)Accumulated
Other
Comprehensive
Income
Unrealized
(Losses) Gains on
Available for Sale Debt Securities
Post-  Retirement
Obligations
Unrealized Gains (Losses) on Derivatives (cash flow hedges)Accumulated
Other
Comprehensive
Loss
Balance at
December 31,
$8,746  (5,240) 315  3,821  (9,605) (3,625) 894  (12,336) 
Current - period other comprehensive income (loss)16,746  84  (5,713) 11,117  7,578  (12) (314) 7,252  
Balance at March 31,$25,492  (5,156) (5,398) 14,938  (2,027) (3,637) 580  (5,084) 








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The following tables summarize the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of income for the three months ended March 31, 2020 and 2019 (in thousands):
Reclassifications From Accumulated Other Comprehensive
Income ("AOCI")
Amount reclassified from AOCI for the three months ended March 31,Affected line item in the Consolidated
Statement of Income
20202019
Details of AOCI:
Post-retirement obligations:
Amortization of actuarial losses$112  47  Compensation and employee benefits (1)
(28) (13) Income tax expense
Total reclassification$84  34  Net of tax
(1) This item is included in the computation of net periodic benefit cost. See Note 6. Components of Net Periodic Benefit Cost.

Note 11. Derivative and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.
Non-designated Hedges. Derivatives not designated in qualifying hedging relationships are not speculative and result from a service the Company provides to certain qualified commercial borrowers in loan related transactions and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company executes interest rate swaps with qualified commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third-party, such that the Company minimizes its net risk exposure resulting from such transactions. The interest rate swap agreement which the Company executes with the commercial borrower is collateralized by the borrower's commercial real estate financed by the Company. The collateral exceeds the maximum potential amount of future payments under the credit derivative. As the Company has not elected to apply hedge accounting and these interest rate swaps do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At March 31, 2020 and December 31, 2019, the Company had 116 and 92 interest rate swaps, respectively, with aggregate notional amounts of $1.97 billion and $1.61 billion, respectively.
The Company periodically enters into risk participation agreements ("RPAs") with the Company functioning as either the lead institution, or as a participant when another company is the lead institution on a commercial loan. These RPA's are entered into to manage the credit exposure on interest rate contracts associated with these loan participation agreements. Under the RPA's, the Company will either receive or make a payment if a borrower defaults on the related interest rate contract. At March 31, 2020 and December 31, 2019, the Company had 13 credit derivatives, with aggregate notional amounts of $106.8 million and $106.0 million, respectively, from participations in interest rate swaps as part of these loan participation arrangements. At March 31, 2020 and December 31, 2019, the fair value of these credit derivatives were $90,000 and $47,000, respectively.
Cash Flow Hedges of Interest Rate Risk. The Company’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
Changes in the fair value of derivatives designated and that qualify as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2020 and 2019, such derivatives were used to hedge the variable cash outflows associated with Federal Home Loan Bank borrowings.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $2.1 million will be reclassified as an increase to interest expense. As of March 31, 2020, the Company had nine
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outstanding interest rate derivatives with an aggregate notional amount of $290.0 million that were designated as a cash flow hedge of interest rate risk.
The tables below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at March 31, 2020 and December 31, 2019 (in thousands):
At March 31, 2020
Asset DerivativesLiability Derivatives
Consolidated Statements of Financial ConditionFair
Value
Consolidated Statements of Financial ConditionFair
Value
Derivatives not designated as a hedging instrument:
Interest rate productsOther assets$118,787  Other liabilities120,176  
Credit contractsOther assets90  Other liabilities  
Total derivatives not designated as a hedging instrument$118,877  120,176  
Derivatives designated as a hedging instrument:
Interest rate productsOther assets$(7,269) Other liabilities  
Total derivatives designated as a hedging instrument$(7,269)   

At December 31, 2019
Asset DerivativesLiability Derivatives
Consolidated Statements of Financial ConditionFair
Value
Consolidated Statements of Financial ConditionFair
Value
Derivatives not designated as a hedging instrument:
Interest rate productsOther assets$38,830  Other liabilities39,356  
Credit contractsOther assets47  Other liabilities  
Total derivatives not designated as a hedging instrument$38,877  39,356  
Derivatives designated as a hedging instrument:
Interest rate productsOther assets$428  Other liabilities  
Total derivatives designated as a hedging instrument$428    
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three months ended March 31, 2020 and 2019 (in thousands).
Gain (loss) recognized in income on derivatives for the three months ended
Consolidated Statements of IncomeMarch 31, 2020March 31, 2019
Derivatives not designated as a hedging instrument:
Interest rate productsOther income$(819) (673) 
Credit contractsOther income(1) (4) 
Total$(820) (677) 
Derivatives designated as a hedging instrument:
Interest rate productsInterest expense$106  162  
Total$106  162  
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The Company has agreements with certain of its dealer counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
In addition, the Company has agreements with certain of its dealer counterparties that contain a provision that if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
At March 31, 2020, the Company had four dealer counterparties. The Company had a net liability position with respect to all four of the counterparties. The termination value for this net liability position, which includes accrued interest, was $127.7 million at March 31, 2020. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $128.7 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2020, it could have been required to settle its obligations under the agreements at the termination value.
Note 12. Revenue Recognition
The Company generates revenue from several business channels. The guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606) does not apply to revenue associated with financial instruments, including interest income on loans and investments, which comprise the majority of the Company's revenue. For the three months ended March 31, 2020 and 2019, the out-of-scope revenue related to financial instruments was 84% and 88% of the Company's total revenue, respectively. Revenue-generating activities that are within the scope of Topic 606, are components of non-interest income. These revenue streams can generally be classified into wealth management revenue and banking service charges and other fees.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2020 and 2019:
Three months ended March 31,
(in-thousands)20202019
Non-interest income
In-scope of Topic 606:
Wealth management fees$6,251  4,079  
Banking service charges and other fees:
Service charges on deposit accounts2,977  3,191  
Debit card and ATM fees1,210  1,307  
Total banking service charges and other fees4,187  4,498  
Total in-scope non-interest income10,438  8,577  
Total out-of-scope non-interest income6,553  3,611  
Total non-interest income$16,991  12,188  
Wealth management fee income represents fees earned from customers as consideration for asset management, investment advisory and trust services. The Company’s performance obligation is generally satisfied monthly and the resulting fees are recognized monthly. The fee is generally based upon the average market value of the assets under management ("AUM") for the month and the applicable fee rate. For customers acquired in the April 1, 2019, T&L transaction, the fee is based upon AUM at the end of the preceding quarter and the applicable fee rate. The monthly accrual of wealth management fees is recorded in other assets on the Company's Consolidated Statements of Financial Condition. Fees are received from the customer either on a quarterly or monthly basis. The Company does not earn performance-based incentives. To a lesser extent, optional services such as tax return preparation and estate settlement are also available to existing customers. The Company’s performance obligation for these transaction-based services are generally satisfied, and related revenue recognized, at either a point in time when the service is completed, or in the case of estate settlement, over a relatively short period of time, as each service component is completed.
Service charges on deposit accounts include overdraft service fees, account analysis fees and other deposit related fees. These fees are generally transaction-based, or time-based services. The Company's performance obligation for these services are generally satisfied, and revenue recognized, at the time the transaction is completed, or the service rendered. Fees for these services are generally received from the customer either at the time of transaction, or monthly. Debit card and ATM fees are
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generally transaction-based. Debit card revenue is primarily comprised of interchange fees earned when a customer's Company card is processed through a card payment network. ATM fees are largely generated when a Company cardholder uses a non-Company ATM, or a non-Company cardholder uses a Company ATM. The Company's performance obligation for these services is satisfied when the service is rendered. Payment is generally received at time of transaction or monthly.
Out-of-scope non-interest income primarily consists of Bank-owned life insurance and net fees on loan level interest rate swaps, along with gains and losses on the sale of loans and foreclosed real estate, loan prepayment fees and loan servicing fees. None of these revenue streams are subject to the requirements of Topic 606.
Note 13. Leases
On January 1, 2019, the Company adopted ASU 2016-02, "Leases" (Topic 842) and all subsequent ASU's that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. The Company elected the modified retrospective transition option effective with the period of adoption, elected not to recast comparative periods presented when transitioning to the new leasing standard and adjustments, if required, are made at the beginning of the period through a cumulative-effect adjustment to opening retained earnings. The Company also elected practical expedients, which allowed the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. The adoption of the new standard resulted in the Company recording a right-of-use asset and an operating lease liability of $44.9 million and $46.1 million, respectively, based on the present value of the expected remaining lease payments at January 1, 2019.
Also, on January 1, 2019, the Company had $5.9 million of net deferred gains associated with several sale and leaseback transactions executed prior to the adoption of ASU 2016-02. In accordance with the guidance, these net deferred gains were adjusted, net of income tax, as a cumulative-effect adjustment to opening retained earnings.
All of the leases in which the Company is the lessee are classified as operating leases and are primarily comprised of real estate properties for branches and administrative offices with terms extending through 2040.
The following table represents the consolidated statements of financial condition classification of the Company’s right-of use-assets and lease liabilities at March 31, 2020 (in thousands):
ClassificationMarch 31, 2020December 31, 2019
Lease Right-of-Use Assets:
Operating lease right-of-use assetsOther assets$40,110  $41,754  
Lease Liabilities:
Operating lease liabilitiesOther liabilities$41,144  $42,815  
The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company considers the first renewal option to be reasonably certain and includes it in the calculation of the right-of use asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception based upon the term of the lease. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was applied.
At March 31, 2020, the weighted-average remaining lease term and the weighted-average discount rate for the Company's operating leases were 9.4 years and 3.48%, respectively.
The following table represents lease costs and other lease information for the Company's operating leases. The variable lease cost primarily represents variable payments such as common area maintenance and utilities (in thousands):
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(in-thousands)Three months ended March 31, 2020Three months ended March 31, 2019
Lease Costs:
Operating lease cost $2,130  $2,050  
Variable lease cost 607  760  
Total Lease Cost$2,737  $2,810  

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$2,125  $2,044  
During the three months ended March 31, 2020, the Company did not enter into any new lease obligations.
Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2020 were as follows:
(in-thousands)Operating Leases
Twelve months ended:
Remainder of 2020$6,274  
20216,085  
20225,257  
20234,747  
20244,346  
Thereafter22,195  
Total future minimum lease payments48,904  
Amounts representing interest7,760  
Present value of net future minimum lease payments$41,144  


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” "project," "intend," “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those set forth in Item 1A of the Company's Annual Report on Form 10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in accounting policies and practices that may be adopted by the regulatory agencies and the accounting standards setters, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially
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reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our wealth management revenues may decline with continuing market turmoil; we may face the risk of a goodwill write-down due to a decline in our stock price; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.
The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company advises readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not have any obligation to update any forward-looking statements to reflect events or circumstances after the date of this statement.
Acquisition
SB One Bancorp Acquisition
On March 11, 2020, the Company entered into a definitive merger agreement pursuant to which SB One Bancorp ("SB One") will merge with and into the Company, and SB One Bank, a wholly owned subsidiary of SB One, will merge with and into Provident Bank, a wholly owned subsidiary of the Company. The merger agreement has been unanimously approved by the boards of directors of both companies. The actual value of the Company’s common stock to be recorded as consideration in the Merger will be based on the closing price of Company’s common stock at the time of the Merger completion date. Under the Merger Agreement, each share of SB One common stock will be exchanged for 1.357 shares of the Company's common stock plus cash in lieu of fractional shares. The merger is expected to close in the third quarter of 2020, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of SB One. At December 31, 2019, SB One had $2.0 billion in assets and operated 18 full-service banking offices in New Jersey and New York.
Acquisition of Tirschwell & Loewy, Inc.
On April 1, 2019, Beacon Trust Company ("Beacon") completed its acquisition of certain assets of Tirschwell & Loewy, Inc. ("T&L"), a New York City-based independent registered investment adviser. Beacon is a wholly owned subsidiary of Provident Bank. This acquisition expanded the Company’s wealth management business by $822.4 million of assets under management at the time of acquisition.
The T&L acquisition was accounted for under the acquisition method of accounting. The Company recorded goodwill of $8.2 million, a customer relationship intangible of $12.6 million and $800,000 of other identifiable intangibles related to the acquisition. In addition, the Company recorded a contingent consideration liability at its fair value of $6.6 million. The contingent consideration arrangement requires the Company to pay additional cash consideration to T&L's former stakeholders over a three-year period after the closing date of the acquisition if certain financial and business retention targets are met. The acquisition agreement limits the total additional payment to a maximum of $11.0 million, to be determined based on actual future results. The total cost of the T&L acquisition was $21.6 million, which included cash consideration of $15.0 million and contingent consideration with a fair value of $6.6 million. Tangible assets acquired were nominal, and no liabilities were assumed in the T&L acquisition. The goodwill recorded in the transaction is deductible for tax purposes.
In the fourth quarter of 2019, the Company recognized a $2.8 million increase in the estimated fair value of the contingent consideration liability. While performance of the acquired business has been adversely impacted in the first quarter of 2020 due to worsening economic conditions and declining asset valuations attributable to the COVID-19 pandemic, management has not identified a reduction in assets under management due to a declining customer base. Therefore, the $9.4 million fair value of the contingent liability was unchanged at March 31, 2020, from December 31, 2019, with maximum potential future payments totaling $11.0 million.
Critical Accounting Policies
The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of
39


operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies:
Adequacy of the allowance for credit losses; and
Valuation of deferred tax assets
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. It also applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses and a $3.2 million liability for off-balance sheet credit exposures. The adoption of the standard did not result in a change to the Company's results of operations upon adoption as it was recorded as an $8.3 million cumulative effect adjustment, net of income taxes, to retained earnings.
The calculation of the allowance for credit losses is a critical accounting policy of the Company. CECL requires the use of projected macroeconomic factors. The Company's current forecast period is six quarters, with a four quarter reversion period to macroeconomic variables’ means. The Company's economic forecast is approved by the Company's Asset-Liability Committee. The allowance for credit losses is a valuation account that reflects management’s evaluation of the current expected credit losses in the loan portfolio. The Company maintains the allowance for credit losses through provisions for credit losses that are charged to income. Charge-offs against the allowance for credit losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses.
Management performs a quarterly evaluation of the adequacy of the allowance for credit losses. The analysis of the allowance for credit losses has two elements: loans collectively evaluated for impairment and loans individually evaluated for impairment. As part of its evaluation of the adequacy of the allowance for credit losses, each quarter Management prepares an analysis that segments the entire loan portfolio by loan type into groups of loans that share common attributes and risk characteristics. The allowance for credit losses collectively evaluated for impairment consists of a quantitative loss factor and a qualitative adjustment component. Management estimates the quantitative component by segmenting the loan portfolio and employing a discounted cash flow ("DCF") model framework to estimate the allowance for credit losses on the loan portfolio. The CECL estimate incorporates life-of-loan aspects through this DCF approach. For each segment, this approach compares each loan’s amortized cost to the present value of its contractual cash flows adjusted for projected credit losses, prepayments and curtailments to determine the appropriate reserve for that loan. Quantitative loss factors will be evaluated at least annually. Management completed its initial development and evaluation of its quantitative loss factors at January 1, 2020. Qualitative adjustments give consideration to other qualitative factors such as trends in industry conditions, effects of changes in credit concentrations, changes in the Company’s loan review process, changes in the Company's loan policies and procedures, economic forecast uncertainty and model imprecision. Qualitative adjustments reflect risks in the loan portfolio not captured by the quantitative loss factors. Qualitative adjustments are recalibrated at least annually and evaluated quarterly. The reserves resulting from the application of both of these sets of loss factors are combined to arrive at the allowance for credit losses on loans collectively evaluated for impairment.
The allowance for credit losses on loans individually evaluated for impairment is based upon loans that have been identified through the Company’s normal loan review process. This process includes the review of delinquent and problem loans at the Company’s Delinquency, Credit, Credit Risk Management and Allowance Committees. Generally, the Company only evaluates loans individually for impairment if the loan is non-accrual, non-homogeneous and the balance is at least $1.0 million, or if the loan was modified in a troubled debt restructuring.
Management believes the primary risks inherent in the portfolio are a general decline in the economy, a decline in real estate market values, rising unemployment or a protracted period of elevated unemployment, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, credit losses and higher levels of provisions. Accordingly, the Company has provided for current expected credit losses at the current expected level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for credit losses to total loans at an acceptable level given current and forecasted economic conditions, interest rates and the composition of the portfolio.
Although management believes that the Company has established and maintained the allowance for credit losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment and economic forecast. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to forecasted economic factors, historical loss experience and other factors. Such estimates and assumptions are
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adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy in general can combine to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for credit losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for credit losses remains an estimate that is subject to significant judgment and short-term change.
The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities and estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company did not require a valuation allowance at March 31, 2020 or December 31, 2019.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2020 AND DECEMBER 31, 2019
Total assets at March 31, 2020 were $10.08 billion, a $276.3 million increase from December 31, 2019. The increase in total assets was primarily due to a $183.8 million increase in cash and cash equivalents, a $65.9 million increase in other assets, a $39.2 million increase in total loans and an $8.5 million increase in total investments. The increase in other assets was largely due to an increase in the valuation of the Company's derivative portfolio.
The Company’s loan portfolio increased $39.2 million to $7.37 billion at March 31, 2020, from $7.33 billion at December 31, 2019. For the three months ended March 31, 2020, loan originations, excluding advances on lines of credit, totaled $354.9 million, compared with $293.9 million for the same period in 2019. During the three months ended March 31, 2020, the loan portfolio had net increases of $68.9 million in commercial loans and $29.0 million in residential mortgage loans, partially offset by net decreases of $23.3 million in commercial mortgage loans, $20.9 million in construction loans, $11.8 million in consumer loans and $3.2 million in multi-family mortgage loans. Commercial real estate, commercial and construction loans represented 79.8% of the loan portfolio at March 31, 2020, compared to 80.0% at December 31, 2019.
The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNCs”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $219.5 million and $115.9 million, respectively, at March 31, 2020, compared to $213.2 million and $105.3 million, respectively, at December 31, 2019. No SNCs were 90 days or more delinquent at March 31, 2020.
The Company had outstanding junior lien mortgages totaling $140.5 million at March 31, 2020. Of this total, 7 loans totaling $182,000 were 90 days or more delinquent. These loans were allocated total loss reserves of $32,000.
The following table sets forth information regarding the Company’s non-performing assets as of March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020December 31, 2019
Mortgage loans:
Residential$6,145  8,543  
Commercial5,264  5,270  
Total mortgage loans11,409  13,813  
Commercial loans23,086  25,160  
Consumer loans844  1,221  
Total non-performing loans35,339  40,194  
Foreclosed assets4,219  2,715  
Total non-performing assets$39,558  42,909  
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The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020December 31, 2019
Mortgage loans:
Residential$4,075  2,579  
Total mortgage loans4,075  2,579  
Commercial loans 95  
Consumer loans661  337  
Total 60-89 day delinquent loans$4,737  3,011  
At March 31, 2020, the allowance for credit losses totaled $75.1 million, or 1.02% of total loans, compared to $55.5 million, or 0.76% of total loans, prior to the adoption of CECL at December 31, 2019. Total non-performing loans were $35.3 million, or 0.48% of total loans at March 31, 2020, compared to $40.2 million, or 0.55% of total loans at December 31, 2019. The $4.9 million decrease in non-performing loans consisted of a $2.4 million decrease in non-performing residential loans, a $2.1 million decrease in non-performing commercial loans and a $377,000 decrease in non-performing consumer loans. Non-performing loans do not include $737,000 of purchased credit deteriorated ("PCD") loans acquired from Team Capital Bank in 2014.
At March 31, 2020 and December 31, 2019, the Company held $4.2 million and $2.7 million of foreclosed assets, respectively. During the three months ended March 31, 2020, there were two additions to foreclosed assets with an aggregate carrying value of $2.1 million, valuation charges of $353,000 and one property sold with a carrying value of $227,000. Foreclosed assets at March 31, 2020 consisted of $2.0 million of residential real estate, $500,000 of commercial real estate and $1.8 million of commercial vehicles.
Non-performing assets totaled $39.6 million, or 0.39% of total assets at March 31, 2020, compared to $42.9 million, or 0.44% of total assets at December 31, 2019.
Cash and cash equivalents were $370.6 million at March 31, 2020, a $183.8 million increase from December 31, 2019 as a result of increases in cash collateral pledged to secure loan level swaps and short-term investments.
Total investments were $1.50 billion at March 31, 2020, an $8.5 million increase from December 31, 2019. This increase was largely due to purchases of mortgage-backed and municipal securities and an increase in unrealized gains on available for sale debt securities, partially offset by repayments of mortgage-backed securities, and maturities and calls of certain municipal and agency bonds.
Total deposits increased $108.2 million during the three months ended March 31, 2020 to $7.21 billion. Total core deposits, consisting of savings and demand deposits, increased $145.4 million to $6.51 billion at March 31, 2020, while total time deposits decreased $37.3 million to $696.8 million at March 31, 2020. The increase in core deposits was attributable to a $72.4 million increase in interest bearing demand deposits, a $44.2 million increase in money market deposits, a $21.7 million increase in non-interest bearing demand deposits and a $7.1 million increase in savings deposits. The decrease in time deposits was the result of a $23.1 million decrease in retail time deposits and a $14.2 million decrease in brokered deposits. Core deposits represented 90.3% of total deposits at March 31, 2020, compared to 89.7% at December 31, 2019.
Borrowed funds increased $88.6 million during the three months ended March 31, 2020, to $1.21 billion. The increase in borrowings for the period was a function of asset funding requirements. Borrowed funds represented 12.0% of total assets at March 31, 2020, a increase from 11.5% at December 31, 2019.
Stockholders’ equity decreased $1.3 million during the three months ended March 31, 2020, to $1.41 billion, primarily due to dividends paid to stockholders, the adoption of CECL on January 1, 2020 and the related charge to equity of $8.3 million, net of tax, to establish initial allowances against credit losses and off-balance sheet credit exposures under the new accounting standard and common stock repurchases, partially offset by net income earned for the period and an increase in unrealized gains on available for sale debt securities. For the three months ended March 31, 2020, common stock repurchases totaled 286,816 shares at an average cost of $20.72, of which 48,038 shares, at an average cost of $19.89, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At March 31, 2020, 1.3 million shares remained eligible for repurchase under the current stock repurchase authorization.
Book value per share and tangible book value per share at March 31, 2020 were $21.48 and $14.84, respectively, compared with $21.49 and $14.85, respectively, at December 31, 2019. Tangible book value per share is a non-GAAP financial measure.
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The following table reconciles book value per share to tangible book value per share and the associated calculations (in thousands, except per share data):
March 31, 2020December 31, 2019
Total stockholders' equity$1,412,589  1,413,840  
Less: Total intangible assets436,278  437,019  
Total tangible stockholders' equity$976,311  976,821  
Shares outstanding at March 31, 2020 and December 31, 201965,770,728  65,787,900  
Book value per share (total stockholders' equity/shares outstanding)$21.48  21.49  
Tangible book value per share (total tangible stockholders' equity/shares outstanding)$14.84  14.85  
Liquidity and Capital Resources. Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases, deposit outflows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLBNY and approved broker-dealers.
Cash flows from loan payments and maturing investment securities are generally fairly predictable sources of funds. Changes in interest rates, local economic conditions and the competitive marketplace can influence the repayment of loan principal, loan prepayments, prepayments on mortgage-backed securities and deposit flows.

In response to the COVID-19 pandemic, the Company has escalated the monitoring of deposit behavior, utilization of credit lines, and borrowing capacity with the FHLBNY and FRBNY, and is maximizing its collateral position with these funding sources.
The Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effective January 1, 2015. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopted a uniform minimum leverage capital ratio at 4%, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out was exercised. The Company exercised the option to exclude unrealized gains and losses from the calculation of regulatory capital. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer,” of 2.5% in addition to the amount necessary to meet its minimum risk-based capital requirements.
In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital as compared to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five year transition in total). In connection with its adoption of CECL on January 1, 2020, the Company has elected to utilize the five-year CECL transition.
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As of March 31, 2020, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:
March 31, 2020
RequiredRequired with Capital Conservation BufferActual
AmountRatioAmountRatioAmountRatio
(Dollars in thousands)
Bank:(1)
Tier 1 leverage capital$379,792  4.00 %$379,792  4.00 %$880,226  9.27 %
Common equity Tier 1 risk-based capital354,583  4.50  551,573  7.00  880,226  11.17  
Tier 1 risk-based capital472,777  6.00  669,768  8.50  880,226  11.17  
Total risk-based capital630,370  8.00  827,360  10.50  944,310  11.98  
Company:
Tier 1 leverage capital$379,831  4.00 %$379,831  4.00 %$969,965  10.21 %
Common equity Tier 1 risk-based capital354,622  4.50  551,634  7.00  969,965  12.31  
Tier 1 risk-based capital472,829  6.00  669,841  8.50  969,965  12.31  
Total risk-based capital630,438  8.00  827,451  10.50  1,033,910  13.12  
(1) Under the FDIC's prompt corrective action provisions, the Bank is considered well capitalized if it has: a leverage (Tier 1) capital ratio of at least 5.00%; a common equity Tier 1 risk-based capital ratio of 6.50%; a Tier 1 risk-based capital ratio of at least 8.00%; and a total risk-based capital ratio of at least 10.00%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
General. The Company reported net income of $14.9 million, or $0.23 per basic and diluted share for the three months ended March 31, 2020, compared to net income of $30.9 million, or $0.48 per basic and diluted share for the three months ended March 31, 2019.
The Company’s earnings for the three months ended March 31, 2020 were adversely impacted by elevated provisions for credit losses primarily due to the adoption of CECL, the new accounting standard that requires the current recognition of allowances for losses expected to be incurred over the life of covered assets. These provisions were exacerbated by the current weak economic forecast attributable to the COVID-19 pandemic. For the three months ended March 31, 2020, provisions for credit losses and off-balance sheet credit exposures totaled $15.7 million. Current quarter earnings were further impacted by $463,000 of costs related to the Company's planned acquisition of SB One Bancorp.
Net Interest Income. Total net interest income decreased $3.0 million to $72.0 million for the quarter ended March 31, 2020, from $75.0 million for the quarter ended March 31, 2019. Interest income for the quarter ended March 31, 2020 decreased $4.2 million to $88.2 million, from $92.4 million for the same period in 2019. Interest expense decreased $1.3 million to $16.1 million for the quarter ended March 31, 2020, from $17.4 million for the quarter ended March 31, 2019. The decline in net interest income for the three months ended March 31, 2020, compared with the three months ended March 31, 2019, was primarily due to period-over-period compression in the net interest margin resulting from a decline in the yields on interest-earning assets. This was tempered by growth in lower-costing average interest-bearing and non-interest bearing core deposits. Borrowing volume and rates were also lower, which further reduced the Company’s cost of funds.
The net interest margin decreased 20 basis points to 3.20% for the quarter ended March 31, 2020, compared to 3.40% for the quarter ended March 31, 2019. The weighted average yield on interest-earning assets decreased 28 basis points to 3.92% for the quarter ended March 31, 2020, compared with 4.20% for the quarter ended March 31, 2019, while the weighted average cost of interest bearing liabilities decreased 9 basis points to 0.95% for the quarter ended March 31, 2020, compared to 1.04% for the quarter ended March 31, 2019. The average cost of interest bearing deposits for the quarter ended March 31, 2020 was 0.78%, unchanged from the first quarter of 2019. Average non-interest bearing demand deposits totaled $1.50 billion for the quarter ended March 31, 2020, compared to $1.44 billion at March 31, 2019. The average cost of borrowed funds for the quarter ended March 31, 2020 was 1.80%, compared to 2.07% for the same period last year.
Interest income on loans secured by real estate decreased $565,000 to $54.4 million for the three months ended March 31, 2020, from $55.0 million for the three months ended March 31, 2019. Commercial loan interest income decreased $1.8 million to $18.7 million for the three months ended March 31, 2020, from $20.5 million for the three months ended March 31, 2019. Consumer loan interest income decreased $611,000 to $4.2 million for the three months ended March 31, 2020, from $4.8
44


million for the three months ended March 31, 2019. For the three months ended March 31, 2020, the average balance of total loans increased $124.4 million to $7.26 billion, compared to the same period in 2019. The average yield on total loans for the three months ended March 31, 2020 decreased 28 basis points to 4.23%, from 4.51% for the same period in 2019.
Interest income on held to maturity debt securities decreased $222,000 to $2.9 million for the quarter ended March 31, 2020, compared to the same period last year. Average held to maturity debt securities decreased $24.7 million to $449.1 million for the quarter ended March 31, 2020, from $473.8 million for the same period last year.
Interest income on available for sale debt securities, equity securities and FHLBNY stock decreased $1.3 million to $7.1 million for the quarter ended March 31, 2020, from $8.4 million for the quarter ended March 31, 2019. The average balance of available for sale debt securities, equity securities and FHLBNY stock decreased $81.1 million to $1.06 billion for the three months ended March 31, 2020, compared to the same period in 2019.
The average yield on total securities decreased to 2.57% for the three months ended March 31, 2020, compared with 2.87% for the same period in 2019.
Interest expense on deposit accounts increased $464,000 to $11.0 million for the quarter ended March 31, 2020, compared with $10.5 million for the quarter ended March 31, 2019. The average cost of interest bearing deposits was 0.78% for the first quarter of 2020, unchanged from the three months ended March 31, 2019. The average balance of interest bearing core deposits for the quarter ended March 31, 2020 increased $242.1 million to $4.89 billion. Average time deposit account balances decreased $6.2 million, to $771.2 million for the quarter ended March 31, 2020, from $777.4 million for the quarter ended March 31, 2019.
Interest expense on borrowed funds decreased $1.7 million to $5.2 million for the quarter ended March 31, 2020, from $6.9 million for the quarter ended March 31, 2019. The average cost of borrowings decreased to 1.80% for the three months ended March 31, 2020, from 2.07% for the three months ended March 31, 2019. Average borrowings decreased $195.0 million to $1.16 billion for the quarter ended March 31, 2020, from $1.35 billion for the quarter ended March 31, 2019.
Provision for Credit Losses. Provisions for credit losses are charged to operations in order to maintain the allowance for credit losses at a level management considers necessary to absorb projected credit losses that may arise over the expected term of each loan in the portfolio. In determining the level of the allowance for credit losses, management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for credit losses on a quarterly basis and makes provisions for credit losses, if necessary, in order to maintain the adequacy of the allowance.
The Company recorded provisions for credit losses of $14.7 million under CECL for the three months ended March 31, 2020. This compared with provisions for credit losses of $200,000 for the three months ended March 31, 2019 under the incurred loss model. For the three months ended March 31, 2020, the Company had net charge-offs of $3.0 million, compared to net charge-offs of $409,000, for the same period in 2019. At March 31, 2020, the Company’s allowance for credit losses was $75.1 million, or 1.02% of total loans, compared with $55.5 million, or 0.76% of total loans at December 31, 2019. The first quarter of 2020 included elevated provisions for credit losses primarily due to the current weak economic forecast attributable to the COVID-19 pandemic. In addition, a gross allowance for credit losses of $7.9 million and a related deferred tax asset were recorded against equity upon the January 1, 2020 adoption of CECL. Future credit loss provisions are subject to significant uncertainty given the undetermined nature of prospective changes in economic conditions, as the impact of COVID-19 unfolds. The effectiveness of medical advances, government programs, and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions and reserve requirements.
Non-Interest Income. Non-interest income totaled $17.0 million for the quarter ended March 31, 2020, an increase of $4.8 million, compared to the same period in 2019. Other income increased $3.1 million to $3.4 million for the three months ended March 31, 2020, compared to the quarter ended March 31, 2019, primarily due to a $3.0 million increase in net fees on loan-level interest rate swap transactions. Wealth management income increased $2.2 million to $6.3 million for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to fees earned from assets under management acquired in the April 1, 2019 Tirschwell & Loewy ("T&L") transaction. Fee income increased $432,000 to $6.5 million for the three months ended March 31, 2020, compared to the same period in 2019, largely due to a $352,000 increase in commercial loan prepayment fees and a $150,000 increase in revenue from sales of non-deposit investment products. Partially offsetting these increases, income from Bank-owned life insurance ("BOLI") decreased $909,000 to $787,000 for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to a decrease in benefit claims and lower equity valuations.
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Non-Interest Expense. For the three months ended March 31, 2020, non-interest expense totaled $54.1 million, an increase of $5.7 million, compared to the three months ended March 31, 2019. Compensation and benefits expense increased $2.8 million to $31.2 million for the three months ended March 31, 2020, compared to $28.4 million for the same period in 2019. This increase was principally due to additional compensation expense associated with the T&L acquisition and an increase in executive severance costs. Other operating expenses increased $2.1 million to $9.2 million for the three months ended March 31, 2020, compared to the same period in 2019, largely due to increases in consulting and legal expenses, which included $463,000 related to the pending acquisition of SB One Bancorp, and a market valuation adjustment on foreclosed real estate. Credit loss expense for off-balance sheet credit exposures related to the adoption of CECL was $1.0 million for the three months ended March 31, 2020. Data processing expense increased $461,000 to $4.4 million for the three months ended March 31, 2020, primarily due to increases in software subscription service expense and online banking costs, while the amortization of intangibles increased $254,000 for the three months ended March 31, 2020, compared with the same period in 2019, mainly due to an increase in the amortization of customer relationship intangibles attributable to the acquisition of T&L. Partially offsetting these increases, FDIC insurance decreased $739,000 due to the receipt of the small bank assessment credit for the fourth quarter of 2019. Also, net occupancy expense decreased $654,000 largely due to a reduction in snow removal expense.
Income Tax Expense. For the three months ended March 31, 2020, the Company’s income tax expense was $5.3 million, compared with $7.7 million, for the three months ended March 31, 2019. The Company’s effective tax rate was 26.0% for the three months ended March 31, 2020, compared to 19.9% for the three months ended March 31, 2019. The increase in the Company's effective tax rate for the three months ended March 31, 2020 was attributable to the effects of a technical bulletin published by the New Jersey Division of Taxation in the second quarter of 2019 that specifies the tax treatment of real estate investment trusts in connection with combined reporting for New Jersey corporate business tax purposes. In addition, the effective tax rate in the current quarter was impacted by a discrete item related to the vesting of stock awards at a market value below the fair value used for expense recognition.

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Analysis. Interest rate risk is the exposure of a bank’s current and future earnings and capital arising from adverse movements in interest rates. The guidelines of the Company’s interest rate risk policy seek to limit the exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. To minimize interest rate risk, the Company generally sells all 20- and 30-year fixed-rate residential mortgage loans at origination. The Company retains residential fixed rate mortgages with terms of 15 years or less and biweekly payment residential mortgages with a term of 30 years or less. Commercial real estate loans generally have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the Prime rate, the Federal Funds rate or LIBOR. Investment securities purchases generally have maturities of five years or less, and mortgage-backed securities have weighted average lives between three and five years.
The Asset/Liability Committee meets on at least a monthly basis to review the impact of interest rate changes on net interest income, net interest margin, net income and the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net income.
The Company’s strategy for liabilities has been to maintain a stable core-funding base by focusing on core deposit account acquisition and increasing products and services per household. The Company’s ability to retain maturing time deposit accounts is the result of its strategy to remain competitively priced within its marketplace. The Company’s pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLBNY during periods of pricing dislocation.
Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation models. The analysis captures changes in net interest income using flat rates as a base, a most likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to policy limits for acceptable change. The Company periodically reviews historical deposit re-pricing activity and makes modifications to certain assumptions used in its income simulation model regarding the interest rate sensitivity of deposits without maturity dates. These modifications are made to more closely reflect the most likely results under the various interest rate change scenarios. Since it is inherently difficult to predict the sensitivity of interest bearing deposits to changes in interest rates, the changes in net interest income due to changes in interest rates cannot be precisely predicted. There are a variety of reasons that may cause actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes.
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Specific assumptions used in the simulation model include:
Parallel yield curve shifts for market rates;
Current asset and liability spreads to market interest rates are fixed;
Traditional savings and interest-bearing demand accounts move at 10% of the rate ramp in either direction;
Retail Money Market and Business Money Market accounts move at 25% and 75% of the rate ramp in either direction respectively, subject to certain interest rate floors; and
Higher-balance demand deposit tiers and promotional demand accounts move at 50% to 75% of the rate ramp in either direction, subject to certain interest rate floors.
The following table sets forth the results of a twelve-month net interest income projection model as of March 31, 2020 (dollars in thousands):
Change in interest rates (basis points) - Rate RampNet Interest Income
Dollar AmountDollar ChangePercent Change
-100$262,245  $(8,214) (3.0)%
Static270,459  —  — %
+100
271,097  638  0.2 %
+200
271,636  1,177  0.4 %
+300
271,848  1,389  0.5 %
The preceding table indicates that, as of March 31, 2020, in the event of a 300 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would increase 0.5%, or $1.4 million. In the event of a 100 basis point decrease in interest rates, net interest income would decrease 3.0%, or $8.2 million over the same period.

Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained interest rate shocks. The following table illustrates the result of the economic value of equity model as of March 31, 2020 (dollars in thousands):
  Present Value of EquityPresent Value of Equity as Percent of Present Value of Assets
Change in interest rates (basis points)Dollar AmountDollar ChangePercent
Change
Present Value
 Ratio
Percent
Change
-100$1,302,785  $(173,052) (11.7)%13.0 %(13.5)%
Flat1,475,837  —  — %15.0 %— %
+100
1,508,401  32,564  2.2 %15.7 %4.4 %
+200
1,518,524  42,687  2.9 %16.2 %7.6 %
+300
1,509,395  33,558  2.3 %16.4 %9.4 %

The preceding table indicates that as of March 31, 2020, in the event of a sustained increase of 300 basis point, Present Value of Equity is projected to increase 2.3%, or $33.6 million. In the event of a sustained 100 basis points decrease in rates, Present Value of Equity would decrease 11.7%, or $173.1 million.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the use of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
 
47



Item 4.
CONTROLS AND PROCEDURES.
Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) were evaluated at the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. The Company’s internal control over financial reporting was modified due to the January 1, 2020 adoption of CECL, while all other controls remained unchanged.

PART II—OTHER INFORMATION
 

Item 1.
Legal Proceedings
The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition.

Item 1A.
Risk Factors
The risk factors that were previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, have been supplemented by the Company for the quarter ended March 31, 2020, as follows:

The economic impact of the COVID-19 outbreak has adversely affected, and is likely to continue to adversely affect, the Company's business and results of operations.
In December 2019, a coronavirus was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic. On March 12, 2020 the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 30 million people have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused the Company to modify their business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many employees working remotely, and may take further actions if required by government authorities that are in the best interests of its employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on the Company's business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material adverse effect on its respective business, financial condition, liquidity, and results of operations:
demand for our products and services may decline, making it difficult to grow assets and income;
if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charge-offs and reduced loan repayments impacting cash flows and liquidity;
collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
as a result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on the Company's assets may decline to a greater extent than the decline in the cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
the Company’s investment portfolio may suffer a substantial decrease in value;
the Company’s wealth management revenues may decline with continuing market turmoil;
the Company’s cyber security risks are increased as the result of an increase in the number of employees working remotely; and
the Company's reliance on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on the Company.
These factors, among others, together or in combination with other events or occurrences not yet known or anticipated, could adversely affect the operations of the Company.
We may fail to realize the anticipated benefits of the proposed merger of SB One Bank into Provident Bank.
On March 11, 2020, we announced the proposed merger of SB One Bancorp with the Company, and the merger of SB One Bank, a wholly owned subsidiary of SB One Bancorp, with and into Provident Bank, the Company’s wholly owned subsidiary. The proposed merger remains subject to regulatory approvals, as well as approval by the stockholders of SB One Bancorp. We anticipate completing the merger in the third quarter of 2020. The success of the proposed merger will depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of SB One Bank and Provident Bank in a manner that does not materially disrupt the customer relationships of both banks. If we are unable to successfully achieve these objectives, the anticipated benefits of the proposed merger may not be realized fully or at all or may take longer to realize than expected.
The Company and SB One Bancorp have operated and, until completion of the merger, will continue to operate, independently. It is possible that the integration process related to the proposed merger may result in the loss of key personnel, the disruption of our business or inconsistencies in standards, controls, procedures and policies that may adversely impact our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the proposed merger.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Period(a) Total Number of Shares
Purchased
(b) Average
Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1)
January 1, 2020 through January 31, 202040,178  $22.79  40,178  1,554,553  
February 1, 2020 through February 29, 2020161,200  22.45  161,200  1,393,353  
March 1, 2020 through March 31, 202085,438  16.39  85,438  1,307,915  
Total286,816  20.69  286,816  
(1) On December 20, 2012, the Company’s Board of Directors approved the purchase of up to 3,017,770 shares of its common stock under an eighth general repurchase program which commenced upon completion of the previous repurchase program. The repurchase program has no expiration date.

Item 3.
Defaults Upon Senior Securities.
Not Applicable 

Item 4.
Mine Safety Disclosures
Not Applicable

Item 5.
Other Information.
None
49




Item 6.
Exhibits.
The following exhibits are filed herewith:
2.1  
3.1  
3.2  
4.1  
31.1  
31.2  
32  
101  
The following financial statements from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104  
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 has been formatted in iXBRL.

50


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
PROVIDENT FINANCIAL SERVICES, INC.
Date:May 11, 2020By:/s/ Christopher Martin
Christopher Martin
Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date:May 11, 2020By:/s/ Thomas M. Lyons
Thomas M. Lyons
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date:May 11, 2020By:/s/ Frank S. Muzio
Frank S. Muzio
Executive Vice President and Chief Accounting Officer

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