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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q | | | | | |
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended 6/30/2021 |
or | | | | | |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| For the transition period from to
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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.) |
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239 Washington Street | Jersey City | New Jersey | 07302 |
(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 August 2, 2021 there were 83,209,012 shares issued and 77,998,689 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 152,109 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.
PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
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Item Number | Page Number |
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1 | | |
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| Consolidated Statements of Financial Condition as of June 30, 2021 (unaudited) and December 31, 2020 | |
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| Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020 (unaudited) | |
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| Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (unaudited) | |
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| Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (unaudited) | |
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| Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited) | |
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2 | | |
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3 | | |
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4 | | |
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1 | | |
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1A. | | |
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2 | | |
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3 | Defaults Upon Senior Securities | |
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4 | | |
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5 | | |
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6 | Exhibits | |
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PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 2021 (Unaudited) and December 31, 2020
(Dollars in Thousands)
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
ASSETS | | | | |
Cash and due from banks | | $ | 530,663 | | | $ | 404,355 | |
Short-term investments | | 179,490 | | | 127,998 | |
Total cash and cash equivalents | | 710,153 | | | 532,353 | |
Available for sale debt securities, at fair value | | 1,556,613 | | | 1,105,489 | |
Held to maturity debt securities, net (fair value of $454,241 at June 30, 2021 (unaudited) and $472,529 at December 31, 2020) | | 437,704 | | | 450,965 | |
Equity securities, at fair value | | 1,094 | | | 971 | |
Federal Home Loan Bank stock | | 37,415 | | | 59,489 | |
Loans | | 9,539,862 | | | 9,822,890 | |
Less allowance for credit losses | | 80,959 | | | 101,466 | |
Net loans | | 9,458,903 | | | 9,721,424 | |
Foreclosed assets, net | | 2,350 | | | 4,475 | |
Banking premises and equipment, net | | 76,800 | | | 75,946 | |
Accrued interest receivable | | 42,219 | | | 46,450 | |
Intangible assets | | 464,490 | | | 466,212 | |
Bank-owned life insurance | | 236,632 | | | 234,607 | |
Other assets | | 192,582 | | | 221,360 | |
Total assets | | $ | 13,216,955 | | | $ | 12,919,741 | |
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Deposits: | | | | |
Demand deposits | | $ | 8,329,578 | | | $ | 7,395,508 | |
Savings deposits | | 1,418,354 | | | 1,348,147 | |
Certificates of deposit of $100,000 or more | | 421,179 | | | 717,216 | |
Other time deposits | | 420,873 | | | 376,958 | |
Total deposits | | 10,589,984 | | | 9,837,829 | |
Mortgage escrow deposits | | 39,780 | | | 34,298 | |
Borrowed funds | | 693,337 | | | 1,175,972 | |
Subordinated debentures | | 25,211 | | | 25,135 | |
Other liabilities | | 191,009 | | | 226,710 | |
Total liabilities | | 11,539,321 | | | 11,299,944 | |
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, 83,209,012 shares issued and 77,841,528 shares outstanding at June 30, 2021 and 77,611,107 outstanding at December 31, 2020 | | 832 | | | 832 | |
Additional paid-in capital | | 965,470 | | | 962,453 | |
Retained earnings | | 775,235 | | | 718,090 | |
Accumulated other comprehensive income | | 14,082 | | | 17,655 | |
Treasury stock | | (59,307) | | | (59,018) | |
Unallocated common stock held by the Employee Stock Ownership Plan | | (18,678) | | | (20,215) | |
Common stock acquired by the Directors' Deferred Fee Plan | | (4,213) | | | (4,549) | |
Deferred Compensation - Directors' Deferred Fee Plan | | 4,213 | | | 4,549 | |
Total stockholders’ equity | | 1,677,634 | | | 1,619,797 | |
Total liabilities and stockholders’ equity | | $ | 13,216,955 | | | $ | 12,919,741 | |
See accompanying notes to unaudited consolidated financial statements.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three and six months ended June 30, 2021 and 2020 (Unaudited)
(Dollars in Thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Interest income: | | | | | | | | |
Real estate secured loans | | $ | 62,877 | | | $ | 49,297 | | | $ | 124,893 | | | $ | 103,738 | |
Commercial loans | | 25,173 | | | 18,944 | | | 51,316 | | | 37,616 | |
Consumer loans | | 3,412 | | | 3,547 | | | 6,904 | | | 7,719 | |
Available for sale debt securities, equity securities and Federal Home Loan Bank stock | | 5,722 | | | 6,279 | | | 11,334 | | | 13,348 | |
Held to maturity debt securities | | 2,700 | | | 2,885 | | | 5,484 | | | 5,825 | |
Deposits, Federal funds sold and other short-term investments | | 660 | | | 585 | | | 1,144 | | | 1,460 | |
Total interest income | | 100,544 | | | 81,537 | | | 201,075 | | | 169,706 | |
Interest expense: | | | | | | | | |
Deposits | | 6,782 | | | 7,641 | | | 14,199 | | | 18,599 | |
Borrowed funds | | 2,553 | | | 4,068 | | | 5,362 | | | 9,258 | |
Subordinated debt | | 304 | | | — | | | 609 | | | — | |
Total interest expense | | 9,639 | | | 11,709 | | | 20,170 | | | 27,857 | |
Net interest income | | 90,905 | | | 69,828 | | | 180,905 | | | 141,849 | |
Provision for credit losses | | (10,704) | | | 10,900 | | | (25,705) | | | 25,617 | |
Net interest income after provision for credit losses | | 101,609 | | | 58,928 | | | 206,610 | | | 116,232 | |
Non-interest income: | | | | | | | | |
Fees | | 8,467 | | | 4,914 | | | 15,659 | | | 11,443 | |
Wealth management income | | 7,859 | | | 5,977 | | | 14,993 | | | 12,228 | |
Insurance agency income | | 2,849 | | | — | | | 5,576 | | | — | |
Bank-owned life insurance | | 1,523 | | | 1,859 | | | 4,090 | | | 2,646 | |
Net gains on securities transactions | | 34 | | | 44 | | | 231 | | | 55 | |
Other income | | 424 | | | 1,571 | | | 2,244 | | | 4,984 | |
Total non-interest income | | 21,156 | | | 14,365 | | | 42,793 | | | 31,356 | |
Non-interest expense: | | | | | | | | |
Compensation and employee benefits | | 34,871 | | | 29,200 | | | 70,183 | | | 60,395 | |
Net occupancy expense | | 7,907 | | | 6,166 | | | 17,208 | | | 12,369 | |
Data processing expense | | 5,409 | | | 4,983 | | | 9,802 | | | 9,413 | |
FDIC insurance | | 1,570 | | | 768 | | | 3,340 | | | 768 | |
Amortization of intangibles | | 918 | | | 711 | | | 1,890 | | | 1,455 | |
Advertising and promotion expense | | 927 | | | 632 | | | 1,804 | | | 2,001 | |
Credit loss expense for off-balance sheet credit exposures | | 2,050 | | | 5,289 | | | 1,175 | | | 6,289 | |
Other operating expenses | | 9,046 | | | 7,518 | | | 19,149 | | | 16,684 | |
Total non-interest expense | | 62,698 | | | 55,267 | | | 124,551 | | | 109,374 | |
Income before income tax expense | | 60,067 | | | 18,026 | | | 124,852 | | | 38,214 | |
Income tax expense | | 15,278 | | | 3,715 | | | 31,504 | | | 8,972 | |
Net income | | $ | 44,789 | | | $ | 14,311 | | | $ | 93,348 | | | $ | 29,242 | |
Basic earnings per share | | $ | 0.58 | | | $ | 0.22 | | | $ | 1.22 | | | $ | 0.45 | |
Weighted average basic shares outstanding | | 76,643,546 | | | 64,315,547 | | | 76,580,364 | | | 64,350,790 | |
Diluted earnings per share | | $ | 0.58 | | | $ | 0.22 | | | $ | 1.22 | | | $ | 0.45 | |
Weighted average diluted shares outstanding | | 76,753,442 | | | 64,400,548 | | | 76,667,471 | | | 64,428,854 | |
See accompanying notes to unaudited consolidated financial statements.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2021 and 2020 (Unaudited)
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Net income | | $ | 44,789 | | | $ | 14,311 | | | $ | 93,348 | | | $ | 29,242 | |
Other comprehensive income, net of tax: | | | | | | | | |
Unrealized gains and losses on available for sale debt securities: | | | | | | | | |
Net unrealized gains (losses) arising during the period | | 2,440 | | | (930) | | | (6,579) | | | 15,816 | |
Reclassification adjustment for gains included in net income | | — | | | — | | | (171) | | | — | |
Total | | 2,440 | | | (930) | | | (6,750) | | | 15,816 | |
Unrealized (losses) gains on derivatives | | (1,224) | | | (1,284) | | | 3,397 | | | (6,997) | |
Amortization related to post-retirement obligations | | (111) | | | 70 | | | (220) | | | 154 | |
Total other comprehensive income (loss) | | 1,105 | | | (2,144) | | | (3,573) | | | 8,973 | |
Total comprehensive income | | $ | 45,894 | | | $ | 12,167 | | | $ | 89,775 | | | $ | 38,215 | |
See accompanying notes to unaudited consolidated financial statements.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three and six months ended June 30, 2020 (Unaudited)
(Dollars in Thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2020 | | COMMON STOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED EARNINGS | | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | | TREASURYSTOCK | | UNALLOCATED ESOP SHARES | | COMMON STOCK ACQUIRED BY DEFERRED COMP PLANS | | DEFERRED COMPENSATION PLANS | | TOTAL STOCKHOLDERS’ EQUITY |
Balance at March 31, 2020 | | $ | 832 | | | $ | 1,008,582 | | | $ | 686,397 | | | $ | 14,938 | | | $ | (274,044) | | | $ | (24,116) | | | $ | (3,666) | | | $ | 3,666 | | | $ | 1,412,589 | |
Net income | | — | | | — | | | 14,311 | | | — | | | — | | | — | | | — | | | — | | | 14,311 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | (2,144) | | | — | | | — | | | — | | | — | | | (2,144) | |
Cash dividends paid | | — | | | — | | | (15,199) | | | — | | | — | | | — | | | — | | | — | | | (15,199) | |
| | | | | | | | | | | | | | | | | | |
Distributions from DDFP | | — | | | 15 | | | — | | | — | | | — | | | — | | | 168 | | | (168) | | | 15 | |
Purchases of treasury stock | | — | | | — | | | — | | | — | | | (1,310) | | | — | | | — | | | — | | | (1,310) | |
Purchase of employee restricted shares to fund statutory tax withholding | | — | | | — | | | — | | | — | | | (5) | | | — | | | — | | | — | | | (5) | |
Shares issued dividend reinvestment plan | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock option exercises | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Allocation of ESOP shares | | — | | | (168) | | | — | | | — | | | — | | | 769 | | | — | | | — | | | 601 | |
Allocation of Stock Award Plan ("SAP") shares | | — | | | 1,502 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,502 | |
| | | | | | | | | | | | | | | | | | |
Allocation of stock options | | — | | | 47 | | | — | | | — | | | — | | | — | | | — | | | — | | | 47 | |
Balance at June 30, 2020 | | $ | 832 | | | $ | 1,009,978 | | | $ | 685,509 | | | $ | 12,794 | | | $ | (275,359) | | | $ | (23,347) | | | $ | (3,498) | | | $ | 3,498 | | | $ | 1,410,407 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2020 | | COMMONSTOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINEDEARNINGS | | ACCUMULATED OTHER COMPREHENSIVE INCOME | | TREASURYSTOCK | | UNALLOCATED ESOP SHARES | | COMMON STOCK ACQUIRED BY DEFERRED COMP PLANS | | DEFERRED COMPENSATION PLANS | | TOTAL STOCKHOLDERS’ EQUITY |
Balance at December 31, 2019 | | $ | 832 | | | $ | 1,007,303 | | | $ | 695,273 | | | $ | 3,821 | | | $ | (268,504) | | | $ | (24,885) | | | $ | (3,833) | | | $ | 3,833 | | | $ | 1,413,840 | |
Net income | | — | | | — | | | 29,242 | | | — | | | — | | | — | | | — | | | — | | | 29,242 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | 8,973 | | | — | | | — | | | — | | | — | | | 8,973 | |
Cash dividends paid | | — | | | — | | | (30,695) | | | — | | | — | | | — | | | — | | | — | | | (30,695) | |
Effect of adopting Accounting Standards Update No. 2016-13 ("CECL") | | — | | | — | | | (8,311) | | | — | | | — | | | — | | | — | | | — | | | (8,311) | |
Distributions from DDFP | | — | | | 52 | | | — | | | — | | | — | | | — | | | 335 | | | (335) | | | 52 | |
Purchases of treasury stock | | — | | | — | | | — | | | — | | | (6,295) | | | — | | | — | | | — | | | (6,295) | |
Purchase of employee restricted shares to fund statutory tax withholding | | — | | | — | | | — | | | — | | | (961) | | | — | | | — | | | — | | | (961) | |
Shares issued dividend reinvestment plan | | — | | | 50 | | | — | | | — | | | 401 | | | — | | | — | | | — | | | 451 | |
Stock option exercises | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Allocation of ESOP shares | | — | | | (16) | | | — | | | — | | | — | | | 1,538 | | | — | | | — | | | 1,522 | |
Allocation of SAP shares | | — | | | 2,495 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,495 | |
| | | | | | | | | | | | | | | | | | |
Allocation of stock options | | — | | | 94 | | | — | | | — | | | — | | | — | | | — | | | — | | | 94 | |
Balance at June 30, 2020 | | $ | 832 | | | $ | 1,009,978 | | | $ | 685,509 | | | $ | 12,794 | | | $ | (275,359) | | | $ | (23,347) | | | $ | (3,498) | | | $ | 3,498 | | | $ | 1,410,407 | |
See accompanying notes to unaudited consolidated financial statements.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three and six months ended June 30, 2021 (Unaudited)
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2021 | | COMMON STOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED EARNINGS | | ACCUMULATED OTHER COMPREHENSIVE INCOME | | TREASURY STOCK | | UNALLOCATED ESOP SHARES | | COMMON STOCK ACQUIRED BY DEFERRED COMP PLANS | | DEFERRED COMPENSATION PLANS | | TOTAL STOCKHOLDERS’ EQUITY |
Balance at March 31, 2021 | | 832 | | | 963,556 | | | 748,574 | | | 12,977 | | | (59,261) | | | (19,447) | | | (4,381) | | | 4,381 | | | 1,647,231 | |
Net income | | — | | | — | | | 44,789 | | | — | | | — | | | — | | | — | | | — | | | 44,789 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | 1,105 | | | — | | | — | | | — | | | — | | | 1,105 | |
Cash dividends paid | | — | | | — | | | (18,128) | | | — | | | — | | | — | | | — | | | — | | | (18,128) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Distributions from DDFP | | — | | | 41 | | | — | | | — | | | — | | | — | | | 168 | | | (168) | | | 41 | |
Purchases of treasury stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchase of employee restricted shares to fund statutory tax withholding | | — | | | — | | | — | | | — | | | (46) | | | — | | | — | | | — | | | (46) | |
Shares issued dividend reinvestment plan | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock option exercises | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Allocation of ESOP shares | | — | | | 317 | | | — | | | — | | | — | | | 769 | | | — | | | — | | | 1,086 | |
Allocation of SAP shares | | — | | | 1,507 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,507 | |
| | | | | | | | | | | | | | | | | | |
Allocation of stock options | | — | | | 49 | | | — | | | — | | | — | | | — | | | — | | | — | | | 49 | |
Balance at June 30, 2021 | | $ | 832 | | | $ | 965,470 | | | $ | 775,235 | | | $ | 14,082 | | | $ | (59,307) | | | $ | (18,678) | | | $ | (4,213) | | | $ | 4,213 | | | $ | 1,677,634 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2021 | | COMMONSTOCK | | ADDITIONAL PAID-IN CAPITAL | | RETAINED EARNINGS | | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | | TREASURY STOCK | | UNALLOCATED ESOP SHARES | | COMMON STOCK ACQUIRED BY DEFERRED COMP PLANS | | DEFERRED COMPENSATION PLANS | | TOTAL STOCKHOLDERS’ EQUITY |
Balance at December 31, 2020 | | $ | 832 | | | $ | 962,453 | | | $ | 718,090 | | | $ | 17,655 | | | $ | (59,018) | | | $ | (20,215) | | | $ | (4,549) | | | $ | 4,549 | | | $ | 1,619,797 | |
Net income | | — | | | — | | | 93,348 | | | — | | | — | | | — | | | — | | | — | | | 93,348 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | (3,573) | | | — | | | — | | | — | | | — | | | (3,573) | |
Cash dividends paid | | — | | | — | | | (36,203) | | | — | | | — | | | — | | | — | | | — | | | (36,203) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Distributions from DDFP | | — | | | 69 | | | — | | | — | | | — | | | — | | | 336 | | | (336) | | | 69 | |
Purchases of treasury stock | | — | | | — | | | — | | | — | | | (48) | | | — | | | — | | | — | | | (48) | |
Purchase of employee restricted shares to fund statutory tax withholding | | — | | | — | | | — | | | — | | | (961) | | | — | | | — | | | — | | | (961) | |
Shares issued dividend reinvestment plan | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock option exercises | | — | | | (82) | | | — | | | — | | | 720 | | | — | | | — | | | — | | | 638 | |
Allocation of ESOP shares | | — | | | 462 | | | — | | | — | | | — | | | 1,537 | | | — | | | — | | | 1,999 | |
Allocation of SAP shares | | — | | | 2,466 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,466 | |
| | | | | | | | | | | | | | | | | | |
Allocation of stock options | | — | | | 102 | | | — | | | — | | | — | | | — | | | — | | | — | | | 102 | |
Balance at June 30, 2021 | | $ | 832 | | | $ | 965,470 | | | $ | 775,235 | | | $ | 14,082 | | | $ | (59,307) | | | $ | (18,678) | | | $ | (4,213) | | | $ | 4,213 | | | $ | 1,677,634 | |
See accompanying notes to unaudited consolidated financial statements.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six months ended June 30, 2021 and 2020 (Unaudited)
(Dollars in Thousands)
| | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2021 | | 2020 |
Cash flows from operating activities: | | | | |
Net income | | $ | 93,348 | | | $ | 29,242 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization of intangibles | | 6,422 | | | 4,910 | |
Provision (benefit) charge for credit losses on loans and securities | | (25,705) | | | 25,617 | |
Credit loss expense for off-balance sheet credit exposure | | 1,175 | | | 6,289 | |
Deferred tax expense (benefit) | | 6,211 | | | (7,531) | |
Amortization of operating lease right-of-use assets | | 5,142 | | | 4,262 | |
| | | | |
Income on Bank-owned life insurance | | (4,090) | | | (2,646) | |
Net amortization of premiums and discounts on securities | | 6,613 | | | 4,016 | |
Accretion of net deferred loan fees | | (3,436) | | | (3,709) | |
Amortization of premiums on purchased loans, net | | 418 | | | 475 | |
Net increase in loans originated for sale | | (21,781) | | | (6,382) | |
Proceeds from sales of loans originated for sale | | 22,730 | | | 6,938 | |
Proceeds from sales and paydowns of foreclosed assets | | 1,368 | | | 1,843 | |
ESOP expense | | 1,999 | | | 1,552 | |
Allocation of stock award shares | | 2,466 | | | 2,495 | |
Allocation of stock options | | 102 | | | 94 | |
| | | | |
Net gain on sale of loans | | (949) | | | (556) | |
Net gain on securities transactions | | (231) | | | (55) | |
Net gain on sale of premises and equipment | | (35) | | | (647) | |
Net gain on sale of foreclosed assets | | (199) | | | (582) | |
Increase in accrued interest receivable | | (4,231) | | | (4,778) | |
Decrease (increase) in other assets | | 36,729 | | | (93,832) | |
(Decrease) increase in other liabilities | | (35,701) | | | 96,638 | |
Net cash provided by operating activities | | 88,365 | | | 63,653 | |
Cash flows from investing activities: | | | | |
Proceeds from maturities, calls and paydowns of held to maturity debt securities | | 29,046 | | | 30,713 | |
Purchases of held to maturity debt securities | | (16,630) | | | (17,523) | |
Proceeds from sales of securities | | 9,442 | | | — | |
Proceeds from maturities and paydowns of available for sale debt securities | | 181,327 | | | 148,324 | |
Purchases of available for sale debt securities | | (656,314) | | | (101,619) | |
Proceeds from redemption of Federal Home Loan Bank stock | | 24,379 | | | 52,959 | |
Purchases of Federal Home Loan Bank stock | | (2,305) | | | (53,541) | |
| | | | |
BOLI claim benefits received | | 2,080 | | | 4,734 | |
Purchases of loans | | (1,500) | | | — | |
Net decrease (increase) in loans | | 287,111 | | | (432,788) | |
| | | | |
Proceeds from sales of premises and equipment | | 35 | | | 1,412 | |
Purchases of premises and equipment | | (5,664) | | | (3,565) | |
Net cash used in investing activities | | (148,993) | | | (370,894) | |
Cash flows from financing activities: | | | | |
Net increase in deposits | | 752,155 | | | 557,457 | |
Increase in mortgage escrow deposits | | 5,482 | | | 4,156 | |
| | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2021 | | 2020 |
Cash dividends paid to stockholders | | (36,203) | | | (30,695) | |
Shares issued dividend reinvestment plan | | — | | | 451 | |
Purchase of treasury stock | | (48) | | | (6,295) | |
Purchase of employee restricted shares to fund statutory tax withholding | | (961) | | | (961) | |
Stock options exercised | | 638 | | | — | |
Proceeds from long-term borrowings | | 550,000 | | | 1,172,553 | |
Payments on long-term borrowings | | (1,027,265) | | | (860,214) | |
Net decrease in short-term borrowings | | (5,370) | | | (262,196) | |
Net cash provided by financing activities | | 238,428 | | | 574,256 | |
Net increase in cash and cash equivalents | | 177,800 | | | 267,015 | |
Cash and cash equivalents at beginning of period | | 532,353 | | | 186,748 | |
Cash and cash equivalents at end of period | | $ | 710,153 | | | $ | 453,763 | |
Cash paid during the period for: | | | | |
Interest on deposits and borrowings | | $ | 19,962 | | | $ | 27,631 | |
Income taxes | | $ | 18,210 | | | $ | 4,835 | |
Non-cash investing activities: | | | | |
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Transfer of loans receivable to foreclosed assets | | $ | 434 | | | $ | 2,516 | |
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See accompanying notes to unaudited consolidated financial statements.
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 and six months ended June 30, 2021 are not necessarily indicative of the results of operations that may be expected for all of 2021.
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, 2020 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 and six months ended June 30, 2021 and 2020 (dollars in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | |
| | 2021 | | 2020 | |
| | Net Income | | Weighted Average Common Shares Outstanding | | Per Share Amount | | Net Income | | Weighted Average Common Shares Outstanding | | Per Share Amount | |
Net income | | $ | 44,789 | | | | | | | $ | 14,311 | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 44,789 | | | 76,643,546 | | | $ | 0.58 | | | $ | 14,311 | | | 64,315,547 | | | $ | 0.22 | | |
Dilutive shares | | | | 109,896 | | | | | | | 85,001 | | | | |
Diluted earnings per share: | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 44,789 | | | 76,753,442 | | | $ | 0.58 | | | $ | 14,311 | | | 64,400,548 | | | $ | 0.22 | | |
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| | Six months ended June 30, | |
| | 2021 | | 2020 | |
| | Net Income | | Weighted Average Common Shares Outstanding | | Per Share Amount | | Net Income | | Weighted Average Common Shares Outstanding | | Per Share Amount | |
Net income | | $ | 93,348 | | | | | | | $ | 29,242 | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 93,348 | | | 76,580,364 | | | $ | 1.22 | | | $ | 29,242 | | | 64,350,790 | | | $ | 0.45 | | |
Dilutive shares | | | | 87,107 | | | | | | | 78,064 | | | | |
Diluted earnings per share: | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 93,348 | | | 76,667,471 | | | $ | 1.22 | | | $ | 29,242 | | | 64,428,854 | | | $ | 0.45 | | |
Anti-dilutive stock options and awards at June 30, 2021 and 2020, totaling 1.0 million shares and 1.2 million 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 replaced the incurred loss methodology with the current expected credit loss methodology (“CECL”). 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.
Going forward, the impact of utilizing the CECL approach to calculate the allowance for credit losses on loans will be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company’s reported earnings. For the three and six months ended June 30, 2021, the improved economic outlook and the resulting lower allowance requirements led to reductions to the provisions for credit losses and off-balance sheet credit exposures. See Note 4 to the Consolidated Financial Statements for more information on the allowance for credit losses on loans.
Note 2. Business Combinations
SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans and $1.76 billion to total deposits, and 18 full-service banking offices in New Jersey and New York. As part of the acquisition, the addition of SB One Insurance Agency expanded the Company's product offerings to its customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outstanding SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid for the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired totaled $22.4 million and was recorded as goodwill.
The calculation of goodwill is subject to change for up to one year after the closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available. It is not anticipated that any material adjustment to the recorded carrying values will be made.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition from SB One, net of cash consideration paid (in thousands):
| | | | | | | | |
| | At July 31, 2020 |
Assets acquired: | | |
Cash and cash equivalents, net | | $ | 78,089 | |
Available for sale debt securities | | 231,645 | |
Held to maturity debt securities | | 12,381 | |
Federal Home Loan Bank stock | | 11,216 | |
Loans | | 1,766,115 | |
Allowance for credit losses on PCD loans | | (13,586) | |
Loans, net | | 1,752,529 | |
Bank-owned life insurance | | 37,237 | |
Banking premises and equipment | | 16,620 | |
Accrued interest receivable | | 8,947 | |
Goodwill | | 22,439 | |
Other intangibles assets | | 9,965 | |
Foreclosed assets, net | | 2,441 | |
Other assets | | 12,199 | |
Total assets acquired | | $ | 2,195,708 | |
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Liabilities assumed: | | |
Deposits | | 1,757,777 | |
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Borrowed funds | | 201,582 | |
Subordinated debentures | | 25,074 | |
Other liabilities | | 30,447 | |
Total liabilities assumed | | $ | 2,014,880 | |
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Net assets acquired | | $ | 180,828 | |
Fair Value Measurement of Assets Assumed and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the SB One acquisition were as follows:
Securities Available for Sale
The estimated fair values of the available for sale debt securities, primarily comprised of U.S. Government agency mortgage-backed securities and U.S. government agencies and municipal bonds carried on SB One's balance sheet was confirmed using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities and a fair value adjustment was not recorded on the investments.
Held to Maturity Debt Securities
The estimated fair values of the held to maturity debt securities, primarily comprised of municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value premium of $133,000 was recorded on the investments.
Loans
Loans acquired in the SB One acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from SB One were estimated using the discounted cash flow method based on the remaining maturity and repricing terms. Cash flows were adjusted for expected losses and prepayments. Projected cash flows were then discounted to present value based on: the relative risk of the cash flows, taking into account the loan type, liquidity risk, the maturity of the loans, servicing costs, and a required return on capital; and monthly principal and interest cash
flows were discounted to present value and summed to arrive at the calculated value of the loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $1.77 billion.
For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into pools based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The loans were valued at the sub-pool level and were pooled at the summary level based on loan type. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these market rates was used as the fair value interest rate that a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $8.4 million.
Loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics.
Additionally for PCD loans, an allowance for credit losses was calculated using management's best estimate of projected losses over the remaining life of the loans in accordance with ASC 326-20. This represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective PCD loan pool, given the outlook and forecasts inclusive of the impact of the COVID-19 pandemic and related fiscal and regulatory interventions. The expected lifetime losses were calculated using historical losses observed at the Bank, SB One and peer banks. A $13.6 million allowance for credit losses was recorded on PCD loans. The interest rate fair value adjustment related to PCD loans will be substantially recognized as interest income on a level yield amortization or straight line method over the expected life of the loans. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.
The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired (in thousands):
| | | | | | | | |
Gross amortized cost basis at July 31, 2020 | | $ | 1,787,057 | |
Interest rate fair value adjustment on all loans | | 455 | |
Credit fair value adjustment on non-PCD loans | | (21,397) | |
Fair value of acquired loans at July 31, 2020 | | 1,766,115 | |
Allowance for credit losses on PCD loans | | (13,586) | |
Fair value of acquired loans at July 31, 2020 | | $ | 1,752,529 | |
The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition as of the closing date (in thousands):
| | | | | | | | |
Gross amortized cost basis at July 31, 2020 | | $ | 315,784 | |
Interest component of expected cash flows (accretable difference) | | (7,988) | |
| | |
Allowance for credit losses on PCD loans | | (13,586) | |
Net PCD loans | | $ | 294,210 | |
Banking Premises and Equipment
The Company acquired 18 branches from SB One, eight of which were owned premises. The fair value of properties acquired was derived by valuations prepared by an independent third party utilizing the sales comparison approach to value the property as improved.
Core Deposit Intangible and Customer Relationship Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates.
The fair value of the customer relationship intangible was determined based on a discounted cash flow analysis using the excess of the future cash inflows (i.e., revenue from existing customer relationships) over the related cash outflows (i.e., operating costs) generated over the useful life of the acquired customer base. These cash flows were discounted to present value using an asset-specific risk-adjusted discount rate. The projected cash flows were developed using projected customer revenue retention rates.
The core deposit intangible totaled $3.2 million and is being amortized over its estimated useful life of approximately 10 years based on dollar weighted deposit runoff on an annualized basis. The insurance agency customer relationship intangible totaled $6.8 million and is being amortized over its estimated useful life of approximately 13 years based on customer revenue attrition on an annualized basis.
Goodwill
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. It is not anticipated that any material adjustment to the recorded carrying values will be made. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purpose.
Bank Owned Life Insurance ("BOLI")
SB One's BOLI cash surrender value was $37.2 million with no fair value adjustment.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $4.3 million is being amortized into income on a level yield amortization method over the contractual life of the deposits.
Borrowings
The fair value of Federal Home Loan Bank of New York ("FHLBNY") advances was determined based on a discounted cash flow analysis using a discount rate commensurate with FHLBNY rates as of July 31, 2020. The cash flows of the advances were projected based on the scheduled payments of the fixed rate of each advance.
Subordinated Debentures
At the valuation date, SB One had one outstanding Trust Preferred and one subordinated debt issuance with an aggregate balance of $27.5 million. The fair value of Trust Preferred and subordinated debt issuances was determined based on a discounted cash flow analysis using a discount rate commensurate with yields and terms of comparable issuances. The cash flows were projected through the remaining contractual term of the Trust Preferred issuance and based on the call date for the subordinated debt issuance.
Note 3. Investment Securities
At June 30, 2021, the Company had $1.56 billion and $437.7 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 June 30, 2021 totaled 100, compared with 49 at December 31, 2020. The increase in the number of securities in an unrealized loss position at June 30, 2021 was due to higher current market interest rates compared to rates at December 31, 2020.
On January 1, 2020, the Company adopted CECL which replaces the incurred loss methodology with an expected loss methodology. The Company did not record an allowance for credit losses on available for sale debt securities as this portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed immaterial. The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods. The Company recorded 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
•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 from the rating agencies at June 30, 2021 and the Company had two securities 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 June 30, 2021 and December 31, 2020 (in thousands):
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| | June 30, 2021 |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | | | | | | | |
U.S. Treasury obligations | | $ | 99,437 | | | 532 | | | — | | | 99,969 | |
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Mortgage-backed securities | | 1,280,375 | | | 23,063 | | | (4,470) | | | 1,298,968 | |
Asset-backed securities | | 46,653 | | | 1,897 | | | — | | | 48,550 | |
State and municipal obligations | | 69,197 | | | 1,198 | | | (32) | | | 70,363 | |
Corporate obligations | | 38,128 | | | 713 | | | (78) | | | 38,763 | |
| | | | | | | | |
| | $ | 1,533,790 | | | 27,403 | | | (4,580) | | | 1,556,613 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | | | | | | | |
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Agency obligations | | $ | 1,001 | | | 8 | | | — | | | 1,009 | |
Mortgage-backed securities | | 910,393 | | | 28,872 | | | (852) | | | 938,413 | |
Asset-backed securities | | 52,295 | | | 1,535 | | | — | | | 53,830 | |
State and municipal obligations | | 69,687 | | | 1,666 | | | (95) | | | 71,258 | |
Corporate obligations | | 40,194 | | | 809 | | | (24) | | | 40,979 | |
| | | | | | | | |
| | $ | 1,073,570 | | | 32,890 | | | (971) | | | 1,105,489 | |
The amortized cost and fair value of available for sale debt securities at June 30, 2021, 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.
| | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Amortized cost | | Fair value |
Due in one year or less | | $ | — | | | — | |
Due after one year through five years | | 56,535 | | | 56,813 | |
Due after five years through ten years | | 84,509 | | | 85,494 | |
Due after ten years | | 65,718 | | | 66,788 | |
| | $ | 206,762 | | | 209,095 | |
Investments which pay principal on a periodic basis totaling $1.33 billion at amortized cost and $1.35 billion at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments.
For the three months ended June 30, 2021, no securities were sold or called from the available for sale debt securities portfolio. For the six months ended June 30, 2021, proceeds from sales on securities in the available for sale debt securities portfolio totaled $9.4 million, with gains of $230,000 and no loss recognized. For the three and six months ended June 30, 2020, no securities were sold or called from the available for sale debt securities portfolio.
The following tables present the fair values and gross unrealized losses for available for sale debt securities in an unrealized loss position at June 30, 2021 and December 31, 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Mortgage-backed securities | | $ | 480,614 | | | (4,443) | | | 7,268 | | | (27) | | | 487,882 | | | (4,470) | |
| | | | | | | | | | | | |
State and municipal obligations | | 11,600 | | | (32) | | | — | | | — | | | 11,600 | | | (32) | |
Corporate obligations | | 6,795 | | | (78) | | | — | | | — | | | 6,795 | | | (78) | |
| | $ | 499,009 | | | (4,553) | | | 7,268 | | | (27) | | | 506,277 | | | (4,580) | |
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| | December 31, 2020 |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| | | | | | | | | | | | |
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Mortgage-backed securities | | $ | 127,600 | | | (824) | | | 8,007 | | | (28) | | | 135,607 | | | (852) | |
State and municipal obligations | | 5,275 | | | (95) | | | — | | | — | | | 5,275 | | | (95) | |
Corporate obligations | | — | | | — | | | 2,000 | | | (24) | | | 2,000 | | | (24) | |
| | $ | 132,875 | | | (919) | | | 10,007 | | | (52) | | | 142,882 | | | (971) | |
The number of available for sale debt securities in an unrealized loss position at June 30, 2021 totaled 62, compared with 42 at December 31, 2020. The increase in the number of securities in an unrealized loss position at June 30, 2021 was due to higher current market interest rates compared to rates at December 31, 2020. At June 30, 2021, there was one private label mortgage-backed security in an unrealized loss position, with an amortized cost of $17,357 and an unrealized loss of $660. This private-label mortgage-backed security was investment grade at June 30, 2021.
Held to Maturity Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the estimated fair value for held to maturity debt securities at June 30, 2021 and December 31, 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | | | Fair value |
Agency obligations | | $ | 10,198 | | | — | | | (55) | | | | | 10,143 | |
Mortgage-backed securities | | 38 | | | 1 | | | — | | | | | 39 | |
State and municipal obligations | | 417,794 | | | 16,824 | | | (302) | | | | | 434,316 | |
Corporate obligations | | 9,747 | | | 54 | | | (58) | | | | | 9,743 | |
| | $ | 437,777 | | | 16,879 | | | (415) | | | | | 454,241 | |
At June 30, 2021, the allowance for credit losses on held to maturity debt securities totaled $73,000.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | | | Fair value |
Agency obligations | | $ | 7,600 | | | 6 | | | (5) | | | | | 7,601 | |
Mortgage-backed securities | | 62 | | | 2 | | | — | | | | | 64 | |
State and municipal obligations | | 433,655 | | | 21,442 | | | (58) | | | | | 455,039 | |
Corporate obligations | | 9,726 | | | 101 | | | (2) | | | | | 9,825 | |
| | $ | 451,043 | | | 21,551 | | | (65) | | | | | 472,529 | |
At December 31, 2020, the allowance for credit losses on held to maturity debt securities totaled $78,000.
The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair value may fluctuate during the investment period. There were no sales of securities from the held to maturity debt securities portfolio for the three and six months ended June 30, 2021 and 2020. For the three and six months ended June 30, 2021, proceeds from calls on securities in the held to maturity debt securities portfolio totaled $6.1 million and $12.9 million, respectively. As to these calls of securities, for the three months ended June 30, 2021, there were gross gains of $33,500 and no gross losses, and for the six months ended June 30, 2021, there were gross gains of $1,000 and no gross losses. For the three and six months ended June 30, 2020, proceeds from calls of securities in the held to maturity debt securities portfolio totaled $12.6 million and $25.9 million, respectively. As to these calls of securities, there were gross gains of $44,000 and no gross losses for the three and six months ended June 30, 2020.
The amortized cost and fair value of investment securities in the held to maturity debt securities portfolio at June 30, 2021 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.
| | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Amortized cost | | Fair value |
Due in one year or less | | $ | — | | | — | |
Due after one year through five years | | 154,182 | | | 157,762 | |
Due after five years through ten years | | 213,637 | | | 224,366 | |
Due after ten years | | 69,920 | | | 72,074 | |
| | $ | 437,739 | | | 454,202 | |
Mortgage-backed securities totaling $38,000 at amortized cost and $39,000 at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments. Additionally, the allowance for credit losses totaling $73,000 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 CECL | | Prior to CECL | | Impact of CECL adoption |
Held to Maturity Debt Securities | | | | | | |
Allowance for credit losses on corporate securities | | $ | 6 | | | — | | | 6 | |
Allowance for credit losses on municipal securities | | 64 | | | — | | | 64 | |
Allowance for credit losses on held to maturity debt securities | | $ | 70 | | | — | | | 70 | |
The following tables present the fair values and gross unrealized losses for held to maturity debt securities in an unrealized loss position at June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 Unrealized Losses |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
Agency obligations | | $ | 7,843 | | | (55) | | | — | | | — | | | 7,843 | | | (55) | |
State and municipal obligations | | 20,602 | | | (287) | | | 406 | | | (15) | | | 21,008 | | | (302) | |
Corporate obligations | | 5,773 | | | (58) | | | — | | | — | | | 5,773 | | | (58) | |
| | $ | 34,218 | | | (400) | | | 406 | | | (15) | | | 34,624 | | | (415) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 Unrealized Losses |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
Agency obligations | | $ | 1,995 | | | (5) | | | — | | | — | | | 1,995 | | | (5) | |
State and municipal obligations | | 4,846 | | | (41) | | | 406 | | | (17) | | | 5,252 | | | (58) | |
Corporate obligations | | 786 | | | (2) | | | — | | | — | | | 786 | | | (2) | |
| | $ | 7,627 | | | (48) | | | 406 | | | (17) | | | 8,033 | | | (65) | |
The number of held to maturity debt securities in an unrealized loss position at June 30, 2021 totaled 38, compared with 7 at December 31, 2020. The increase in the number of securities in an unrealized loss position at June 30, 2021, was due to higher current market interest rates compared to rates at December 31, 2020.
Credit Quality Indicators. The following table provides the amortized cost of held to maturity debt securities by credit rating as of June 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
Total Portfolio | | AAA | | AA | | A | | BBB | | Not Rated | | Total |
Agency obligations | | $ | 10,198 | | | — | | | — | | | — | | | — | | | 10,198 | |
Mortgage-backed securities | | 38 | | | — | | | — | | | — | | | — | | | 38 | |
State and municipal obligations | | 59,101 | | | 306,168 | | | 49,426 | | | 1,115 | | | 1,984 | | | 417,794 | |
Corporate obligations | | — | | | 2,334 | | | 7,088 | | | 300 | | | 25 | | | 9,747 | |
| | $ | 69,337 | | | 308,502 | | | 56,514 | | | 1,415 | | | 2,009 | | | 437,777 | |
| | | | | | | | | | | | |
| | December 31, 2020 |
Total Portfolio | | AAA | | AA | | A | | BBB | | Not Rated | | Total |
Agency obligations | | $ | 7,600 | | | — | | | — | | | — | | | — | | | 7,600 | |
Mortgage-backed securities | | 62 | | | — | | | — | | | — | | | — | | | 62 | |
State and municipal obligations | | 57,830 | | | 311,155 | | | 53,302 | | | 1,115 | | | 10,253 | | | 433,655 | |
Corporate obligations | | — | | | 3,255 | | | 6,446 | | | — | | | 25 | | | 9,726 | |
| | $ | 65,492 | | | 314,410 | | | 59,748 | | | 1,115 | | | 10,278 | | | 451,043 | |
| | | | | | | | | | | | |
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. At June 30, 2021, the held to maturity debt securities portfolio was comprised of 16% rated AAA, 70% rated AA, 13% rated A, and less than 1% either below an 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 June 30, 2021, the allowance for credit losses on held to maturity debt securities was $73,000, a decrease from $78,000 at December 31, 2020.
Note 4. Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted CECL, which replaced 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 June 30, 2021 and December 31, 2020 are summarized as follows (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Mortgage loans: | | | | |
Residential | | $ | 1,253,824 | | | 1,294,702 | |
Commercial | | 3,571,416 | | | 3,458,666 | |
Multi-family | | 1,361,164 | | | 1,484,515 | |
Construction | | 665,884 | | | 541,939 | |
Total mortgage loans | | 6,852,288 | | | 6,779,822 | |
| | | | |
| | | | |
| | | | |
| | | | |
Commercial loans | | 2,354,199 | | | 2,567,470 | |
Consumer loans | | 348,485 | | | 492,566 | |
| | | | |
Total gross loans | | 9,554,972 | | | 9,839,858 | |
Premiums on purchased loans | | 1,257 | | | 1,566 | |
Unearned discounts | | (6) | | | (12) | |
Net deferred fees | | (16,361) | | | (18,522) | |
Total loans | | $ | 9,539,862 | | | 9,822,890 | |
In the first quarter of 2021, $101.7 million of loans acquired in the SB One transaction that were previously classified as consumer loans were classified as commercial mortgage loans, following further analysis of the underwriting documents and operational intent of the borrower. These loans are comprised of term loans and lines of credit secured by 1-4 family residential properties that are held by borrowers to generate rental income.
The following tables summarize the aging of loans receivable by portfolio segment and class of loans (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | 30-59 Days | | 60-89 Days | | Non-accrual | | Recorded Investment > 90 days accruing | | Total Past Due | | Current | | Total Loans Receivable | | Non-accrual loans with no related allowance |
Mortgage loans: | | | | | | | | | | | | | | | | |
Residential | | $ | 5,410 | | | 4,455 | | | 6,875 | | | — | | | 16,740 | | | 1,237,084 | | | 1,253,824 | | | 6,875 | |
Commercial | | 2,109 | | | — | | | 36,312 | | | — | | | 38,421 | | | 3,532,995 | | | 3,571,416 | | | 22,473 | |
Multi-family | | — | | | — | | | — | | | — | | | — | | | 1,361,164 | | | 1,361,164 | | | — | |
Construction | | — | | | — | | | 2,967 | | | — | | | 2,967 | | | 662,917 | | | 665,884 | | | 2,967 | |
Total mortgage loans | | 7,519 | | | 4,455 | | | 46,154 | | | — | | | 58,128 | | | 6,794,160 | | | 6,852,288 | | | 32,315 | |
Commercial loans | | 660 | | | 175 | | | 32,023 | | | — | | | 32,858 | | | 2,321,341 | | | 2,354,199 | | | 27,101 | |
Consumer loans | | 458 | | | 1,272 | | | 1,883 | | | — | | | 3,613 | | | 344,872 | | | 348,485 | | | 1,639 | |
Total gross loans | | $ | 8,637 | | | 5,902 | | | 80,060 | | | — | | | 94,599 | | | 9,460,373 | | | 9,554,972 | | | 61,055 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | 30-59 Days | | 60-89 Days | | Non-accrual | | Recorded Investment > 90 days accruing | | Total Past Due | | Current | | Total Loans Receivable | | Non-accrual loans with no related allowance |
Mortgage loans: | | | | | | | | | | | | | | | | |
Residential | | $ | 15,789 | | | 8,852 | | | 9,315 | | | — | | | 33,956 | | | 1,260,746 | | | 1,294,702 | | | 9,315 | |
Commercial | | 761 | | | 113 | | | 31,982 | | | — | | | 32,856 | | | 3,425,810 | | | 3,458,666 | | | 20,482 | |
Multi-family | | 206 | | | 585 | | | — | | | — | | | 791 | | | 1,483,724 | | | 1,484,515 | | | — | |
Construction | | — | | | — | | | 1,392 | | | — | | | 1,392 | | | 540,547 | | | 541,939 | | | 1,392 | |
Total mortgage loans | | 16,756 | | | 9,550 | | | 42,689 | | | — | | | 68,995 | | | 6,710,827 | | | 6,779,822 | | | 31,189 | |
Commercial loans | | 1,658 | | | 1,179 | | | 42,118 | | | — | | | 44,955 | | | 2,522,515 | | | 2,567,470 | | | 15,541 | |
Consumer loans | | 4,348 | | | 4,519 | | | 2,283 | | | — | | | 11,150 | | | 481,416 | | | 492,566 | | | 2,283 | |
Total gross loans | | $ | 22,762 | | | 15,248 | | | 87,090 | | | — | | | 125,100 | | | 9,714,758 | | | 9,839,858 | | | 49,013 | |
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 $80.1 million and $87.1 million at June 30, 2021 and December 31, 2020, respectively. Included in non-accrual loans were $49.1 million and $35.3 million of loans which were less than 90 days past due at June 30, 2021 and December 31, 2020, respectively. There were no loans 90 days or greater past due and still accruing interest at June 30, 2021 and December 31, 2020.
Management has elected to measure an allowance for credit losses for accrued interest receivables specifically related to any loan that has been deferred as a result of COVID-19. Generally, 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 collateral-dependent 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. 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 fair value of the collateral less any selling costs. 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 selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less estimated selling costs. 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 and evaluated for charge offs. The Company believes there have been no significant time lapses resulting from this process.
At June 30, 2021, there were 168 impaired loans totaling $82.0 million. Included in this total were 113 TDRs related to 109 borrowers totaling $22.0 million that were performing in accordance with their restructured terms and which continued to accrue interest at June 30, 2021. At December 31, 2020, there were 169 impaired loans totaling $86.0 million, of which 135 loans totaling $39.6 million were TDRs. Included in this total were 112 TDRs to 110 borrowers totaling $23.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2020.
At June 30, 2021 and December 31, 2020, the Company had $21.7 million and $26.3 million related to the fair value of underlying collateral-dependent impaired loans, respectively. These collateral-dependent impaired loans at June 30, 2021 consisted of $20.0 million in commercial loans, $1.6 million in residential real estate loans, and $81,000 in consumer loans. The collateral for these impaired loans was primarily real estate.
The activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2021 and 2020 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, | | Mortgage loans | | Commercial loans | | Consumer loans | | Total |
2021 | | | | | | | | |
Balance at beginning of period | | $ | 54,198 | | | 26,302 | | | 5,091 | | | 85,591 | |
Provision (benefit) charge to operations | | 1,080 | | | (10,814) | | | (966) | | | (10,700) | |
| | | | | | | | |
Recoveries of loans previously charged-off | | 191 | | | 5,790 | | | 198 | | | 6,179 | |
Loans charged-off | | — | | | (16) | | | (95) | | | (111) | |
Balance at end of period | | $ | 55,469 | | | 21,262 | | | 4,228 | | | 80,959 | |
| | | | | | | | |
2020 | | | | | | | | |
Balance at beginning of period | | $ | 47,500 | | | 22,841 | | | 4,802 | | | 75,143 | |
Provision charge to operations | | 7,355 | | | 2,285 | | | 1,260 | | | 10,900 | |
Recoveries of loans previously charged-off | | 16 | | | 605 | | | 103 | | | 724 | |
Loans charged-off | | — | | | (447) | | | (61) | | | (508) | |
Balance at end of period | | $ | 54,871 | | | 25,284 | | | 6,104 | | | 86,259 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, | | Mortgage loans | | Commercial loans | | Consumer loans | | Total |
2021 | | | | | | | | |
Balance at beginning of period | | $ | 68,307 | | | 27,084 | | | 6,075 | | | 101,466 | |
| | | | | | | | |
| | | | | | | | |
Provision benefit to operations | | (12,387) | | | (11,281) | | | (2,032) | | | (25,700) | |
Recoveries of loans previously charged-off | | 467 | | | 6,317 | | | 501 | | | 7,285 | |
Loans charged-off | | (918) | | | (858) | | | (316) | | | (2,092) | |
Balance at end of period | | $ | 55,469 | | | 21,262 | | | 4,228 | | | 80,959 | |
| | | | | | | | |
2020 | | | | | | | | |
Balance at beginning of period | | $ | 25,511 | | | 28,263 | | | 1,751 | | | 55,525 | |
Provision charge to operations | | 15,066 | | | 9,904 | | | 630 | | | 25,600 | |
Recoveries of loans previously charged-off | | 108 | | | 918 | | | 226 | | | 1,252 | |
Increase (decrease) due to initial CECL adoption - retained earnings | | 14,188 | | | (9,974) | | | 3,706 | | | 7,920 | |
Loans charged-off | | (2) | | | (3,827) | | | (209) | | | (4,038) | |
Balance at end of period | | $ | 54,871 | | | 25,284 | | | 6,104 | | | 86,259 | |
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 and six months ended June 30, 2021, the Company recorded negative provisions for credit losses on loans of $10.7 million and $25.7 million, respectively. The decrease in the provision for credit losses for the quarter and six months ended June 30, 2021 was the result of an improved current economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak economic forecast and uncertain outlook attributable to COVID-19.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on the allowance for credit losses for the loan portfolio (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2020 |
| | As reported under CECL | | Prior to CECL | | Impact of CECL adoption |
Loans | | | | | | |
Residential | | $ | 8,950 | | | 3,414 | | | 5,536 | |
Commercial | | 17,118 | | | 12,831 | | | 4,287 | |
Multi-family | | 9,519 | | | 3,374 | | | 6,145 | |
Construction | | 4,152 | | | 5,892 | | | (1,740) | |
Total mortgage loans | | 39,739 | | | 25,511 | | | 14,228 | |
Commercial loans | | 18,254 | | | 28,263 | | | (10,009) | |
Consumer loans | | 5,452 | | | 1,751 | | | 3,701 | |
Allowance for credit losses on loans | | $ | 63,445 | | | 55,525 | | | 7,920 | |
The following tables summarize loans receivable by portfolio segment and impairment method (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Mortgage loans | | Commercial loans | | Consumer loans | | Total Portfolio Segments |
Individually evaluated for impairment | | $ | 55,390 | | | 25,292 | | | 1,317 | | | 81,999 | |
Collectively evaluated for impairment | | 6,796,898 | | | 2,328,907 | | | 347,168 | | | 9,472,973 | |
Total gross loans | | $ | 6,852,288 | | | 2,354,199 | | | 348,485 | | | 9,554,972 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Mortgage loans | | Commercial loans | | Consumer loans | | Total Portfolio Segments |
Individually evaluated for impairment | | $ | 48,783 | | | 35,832 | | | 1,431 | | | 86,046 | |
Collectively evaluated for impairment | | 6,731,039 | | | 2,531,638 | | | 491,135 | | | 9,753,812 | |
Total gross loans | | $ | 6,779,822 | | | 2,567,470 | | | 492,566 | | | 9,839,858 | |
The allowance for credit losses is summarized by portfolio segment and impairment classification as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Mortgage loans | | Commercial loans | | Consumer loans | | | | | | Total |
Individually evaluated for impairment | | $ | 3,433 | | | 4,145 | | | 35 | | | | | | | 7,613 | |
Collectively evaluated for impairment | | 52,036 | | | 17,117 | | | 4,193 | | | | | | | 73,346 | |
Total gross loans | | $ | 55,469 | | | 21,262 | | | 4,228 | | | | | | | 80,959 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Mortgage loans | | Commercial loans | | Consumer loans | | | | | | Total |
Individually evaluated for impairment | | $ | 4,220 | | | 4,715 | | | 39 | | | | | | | 8,974 | |
Collectively evaluated for impairment | | 64,087 | | | 22,369 | | | 6,036 | | | | | | | 92,492 | |
Total gross loans | | $ | 68,307 | | | 27,084 | | | 6,075 | | | | | | | 101,466 | |
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 and six months ended June 30, 2021 and 2020, along with their balances immediately prior to the modification date and post-modification as of June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended |
| | June 30, 2021 | | June 30, 2020 |
Troubled Debt Restructurings | | Number 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 |
| | |
Mortgage loans: | | | | | | | | | | | | |
Residential | | 1 | | | $ | 171 | | | $ | 170 | | | 1 | | | $ | 342 | | | $ | 283 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total mortgage loans | | 1 | | | 171 | | | 170 | | | 1 | | | 342 | | | 283 | |
Commercial loans | | 1 | | | 1,580 | | | 1,089 | | | 2 | | | 736 | | | 714 | |
| | | | | | | | | | | | |
Total restructured loans | | 2 | | | $ | 1,751 | | | $ | 1,259 | | | 3 | | | $ | 1,078 | | | $ | 997 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the six months ended |
| | June 30, 2021 | | June 30, 2020 |
Troubled Debt Restructurings | | Number 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 |
| | |
Mortgage loans: | | | | | | | | | | | | |
Residential | | 1 | | | $ | 171 | | | $ | 170 | | | 1 | | | $ | 342 | | | $ | 283 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total mortgage loans | | 1 | | | 171 | | | 170 | | | 1 | | | 342 | | | 283 | |
Commercial loans | | 4 | | | 2,940 | | | 2,363 | | | 4 | | | 1,483 | | | 1,429 | |
| | | | | | | | | | | | |
Total restructured loans | | 5 | | | $ | 3,111 | | | $ | 2,533 | | | 5 | | | $ | 1,825 | | | $ | 1,712 | |
All TDRs are impaired loans, which are individually evaluated for impairment. During the three months ended June 30, 2021, no charge-offs were recorded on collateral-dependent impaired loans, while $1.5 million of charge-offs were recorded on collateral-dependent impaired loans for the six months ended June 30, 2021. During the three and six months ended June 30, 2020, $447,000 and $3.2 million of charge-offs were recorded on collateral-dependent impaired loans, respectively. For the three and six months ended June 30, 2021, the allowance for credit losses associated with the TDRs presented in the preceding tables totaled $14,000, and was included in the allowance for credit losses for loans individually evaluated for impairment. (See page 26 for further discussion related to COVID-19 loan modifications)
For the three and six months ended June 30, 2021, the TDRs presented in the preceding tables had a weighted average modified interest rate of 4.37% and 4.52%, respectively, compared to a weighted average rate of 4.59% and 4.62% prior to modification, for the three and six months ended June 30, 2021, respectively.
There were no loans which had a payment default (90 days or more past due) for loans modified as TDRs within the 12 month periods ending June 30, 2021 and June 30, 2020. For TDRs that subsequently default, the Company determines the amount of the allowance for the respective loans 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, 2020, 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. Loans considered to be PCI prior to January 1, 2020 were converted to PCD loans on that date. Any additional loans
acquired by the Company after January 1, 2020, that experience more-than-insignificant deterioration in credit quality after origination, will be classified as PCD loans.
The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition as of the July 31, 2020 closing date (in thousands):
| | | | | | | | |
Gross amortized cost basis at July 31, 2020 | | $ | 315,784 | |
Interest component of expected cash flows (accretable difference) | | (7,988) | |
Fair value of PCD loans | | 307,796 | |
Allowance for credit losses on PCD loans | | (13,586) | |
Net PCD loans | | $ | 294,210 | |
At June 30, 2021, the balance of PCD loans totaled $264.8 million with a related allowance for credit losses of $11.0 million. The balance of PCD loans at December 31, 2020 was $296.6 million with a related allowance for credit losses of $13.1 million.
The following table presents loans individually evaluated for impairment by class and loan category (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
Loans with no related allowance | | | | | | | | | | | | | | | | | | | |
Mortgage loans: | | | | | | | | | | | | | | | | | | |
Residential | $ | 12,489 | | | 9,832 | | | — | | | 9,923 | | | 226 | | | 13,981 | | | 11,380 | | | — | | | 11,587 | | | 511 | |
Commercial | 20,500 | | | 19,752 | | | — | | | 19,774 | | | 48 | | | 17,414 | | | 17,414 | | | — | | | 16,026 | | | 60 | |
Multi-family | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Construction | 2,200 | | | 2,190 | | | — | | | 2,127 | | | 23 | | | — | | | — | | | — | | | — | | | — | |
Total | 35,189 | | | 31,774 | | | — | | | 31,824 | | | 297 | | | 31,395 | | | 28,794 | | | — | | | 27,613 | | | 571 | |
Commercial loans | 23,131 | | | 17,677 | | | — | | | 17,976 | | | 11 | | | 15,895 | | | 14,009 | | | — | | | 12,791 | | | 46 | |
Consumer loans | 1,433 | | | 907 | | | — | | | 918 | | | 51 | | | 1,382 | | | 880 | | | — | | | 7 | | | 50 | |
Total impaired loans | $ | 59,753 | | | 50,358 | | | — | | | 50,718 | | | 359 | | | 48,672 | | | 43,683 | | | — | | | 40,411 | | | 667 | |
| | | | | | | | | | | | | | | | | | | |
Loans with an allowance recorded | | | | | | | | | | | | | | | | | | | |
Mortgage loans: | | | | | | | | | | | | | | | | | | |
Residential | $ | 8,059 | | | 7,725 | | | 861 | | | 7,773 | | | 137 | | | 7,950 | | | 7,506 | | | 806 | | | 7,604 | | | 307 | |
Commercial | 18,305 | | | 14,727 | | | 2,272 | | | 15,284 | | | 24 | | | 14,993 | | | 12,483 | | | 3,414 | | | 123 | | | 570 | |
Multi-family | 1,164 | | | 1,164 | | | 300 | | | 1,168 | | | 32 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
Total | 27,528 | | | 23,616 | | | 3,433 | | | 24,225 | | | 193 | | | 22,943 | | | 19,989 | | | 4,220 | | | 7,727 | | | 877 | |
Commercial loans | 8,344 | | | 7,615 | | | 4,145 | | | 11,084 | | | 218 | | | 24,947 | | | 21,823 | | | 4,715 | | | 18,620 | | | 311 | |
Consumer loans | 416 | | | 410 | | | 35 | | | 413 | | | 11 | | | 565 | | | 551 | | | 39 | | | 5 | | | 20 | |
Total impaired loans | $ | 36,288 | | | 31,641 | | | 7,613 | | | 35,722 | | | 422 | | | 48,455 | | | 42,363 | | | 8,974 | | | 26,352 | | | 1,208 | |
| | | | | | | | | | | | | | | | | | | |
Total impaired loans | | | | | | | | | | | | | | | | | | | |
Mortgage loans: | | | | | | | | | | | | | | | | | | |
Residential | $ | 20,548 | | | 17,557 | | | 861 | | | 17,696 | | | 363 | | | 21,931 | | | 18,886 | | | 806 | | | 19,191 | | | 818 | |
Commercial | 38,805 | | | 34,479 | | | 2,272 | | | 35,058 | | | 72 | | | 32,407 | | | 29,897 | | | 3,414 | | | 16,149 | | | 630 | |
Multi-family | 1,164 | | | 1,164 | | | 300 | | | 1,168 | | | 32 | | | — | | | — | | | — | | | — | | | — | |
Construction | 2,200 | | | 2,190 | | | — | | | 2,127 | | | 23 | | | — | | | — | | | — | | | — | | | — | |
Total | 62,717 | | | 55,390 | | | 3,433 | | | 56,049 | | | 490 | | | 54,338 | | | 48,783 | | | 4,220 | | | 35,340 | | | 1,448 | |
Commercial loans | 31,475 | | | 25,292 | | | 4,145 | | | 29,060 | | | 229 | | | 40,842 | | | 35,832 | | | 4,715 | | | 31,411 | | | 357 | |
Consumer loans | 1,849 | | | 1,317 | | | 35 | | | 1,331 | | | 62 | | | 1,947 | | | 1,431 | | | 39 | | | 12 | | | 70 | |
Total impaired loans | $ | 96,041 | | | 81,999 | | | 7,613 | | | 86,440 | | | 781 | | | 97,127 | | | 86,046 | | | 8,974 | | | 66,763 | | | 1,875 | |
Specific allocations of the allowance for credit losses attributable to impaired loans totaled $7.6 million at June 30, 2021 and $9.0 million at December 31, 2020. At June 30, 2021 and December 31, 2020, impaired loans for which there was no related allowance for credit losses totaled $50.4 million and $43.7 million, respectively. The average balance of impaired loans for the six months ended June 30, 2021 and December 31, 2020 was $86.4 million and $66.8 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 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 COVID-19 and its adverse economic impact on both our commercial and retail borrowers, the Company implemented a modification program to defer principal or principal and interest payments for 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.
Loans granted COVID-19 related deferrals or modifications have decreased from a peak level of $1.31 billion, or 16.8% of loans, to $7.3 million of loans as of July 16, 2021, all of which are performing loans. The $7.3 million of loans in deferral consists of $300,000 in a second 90-day deferral period and $7.0 million in a third deferral period. Included in the $7.3 million of total loans in deferral, $3.9 million are secured by hotels, $2.1 million are secured by restaurants, $463,000 is secured by a special-purpose property, $431,000 are secured by retail properties, and $359,000 are secured by residential mortgages. Of the $6.9 million in commercial loans on deferral, all are under principal only deferral and are paying interest. In accordance with the CARES Act, the Company has elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications are not classified as TDRs.
In addition, the Company participated in the Paycheck Protection Program (“PPP”) through the United States Department of the Treasury and Small Business Administration ("SBA"). As of June 30, 2021, the Company secured 2,066 PPP loans for its customers totaling $681.9 million, which includes both the initial round and the second round of PPP. As of June 30, 2021, 1,082 PPP loans totaling $372.5 million were forgiven. The balance at June 30, 2021 for PPP loans was $309.4 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the commercial loan portfolio.
The following table summarizes the Company's gross loans held for investment by year of origination and internally assigned credit grades (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At June 30, 2021 |
Total portfolio | | Residential | | Commercial mortgage | | Multi-family | | Construction | | Total mortgages | | Commercial | | Consumer | | Total Loans (1) |
Special mention | | $ | 4,000 | | | 112,331 | | | 8,825 | | | 26,034 | | | 151,190 | | | 101,830 | | | 1,223 | | | 254,243 | |
Substandard | | 14,461 | | | 91,640 | | | 2,598 | | | 2,967 | | | 111,666 | | | 121,959 | | | 1,914 | | | 235,539 | |
Doubtful | | — | | | 335 | | | — | | | — | | | 335 | | | 5 | | | — | | | 340 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | 18,461 | | | 204,306 | | | 11,423 | | | 29,001 | | | 263,191 | | | 223,794 | | | 3,137 | | | 490,122 | |
Pass/Watch | | 1,235,363 | | | 3,367,110 | | | 1,349,741 | | | 636,883 | | | 6,589,097 | | | 2,130,405 | | | 345,348 | | | 9,064,850 | |
Total | | $ | 1,253,824 | | | 3,571,416 | | | 1,361,164 | | | 665,884 | | | 6,852,288 | | | 2,354,199 | | | 348,485 | | | 9,554,972 | |
| | | | | | | | | | | | | | | | |
2021 | | | | | | | | | | | | | | | | |
Special mention | | $ | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard (2) | | — | | | — | | | — | | | — | | | — | | | 8,598 | | | — | | | 8,598 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | — | | | — | | | — | | | — | | | — | | | 8,598 | | | — | | | 8,598 | |
Pass/Watch | | 155,340 | | | 219,812 | | | 51,777 | | | 44,724 | | | 471,653 | | | 397,753 | | | 23,799 | | | 893,205 | |
Total gross loans | | $ | 155,340 | | | 219,812 | | | 51,777 | | | 44,724 | | | 471,653 | | | 406,351 | | | 23,799 | | | 901,803 | |
| | | | | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | | | | |
Special mention | | $ | — | | | — | | | — | | | 1,980 | | | 1,980 | | | 313 | | | — | | | 2,293 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 2,127 | | | — | | | 2,127 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | — | | | — | | | — | | | 1,980 | | | 1,980 | | | 2,440 | | | — | | | 4,420 | |
Pass/Watch | | 252,991 | | | 635,144 | | | 294,274 | | | 144,186 | | | 1,326,595 | | | 398,800 | | | 36,515 | | | 1,761,910 | |
Total gross loans | | $ | 252,991 | | | 635,144 | | | 294,274 | | | 146,166 | | | 1,328,575 | | | 401,240 | | | 36,515 | | | 1,766,330 | |
| | | | | | | | | | | | | | | | |
2019 | | | | | | | | | | | | | | | | |
Special mention | | $ | 658 | | | 28,711 | | | 676 | | | 16,819 | | | 46,864 | | | 6,195 | | | — | | | 53,059 | |
Substandard | | 479 | | | 515 | | | 1,164 | | | — | | | 2,158 | | | 11,001 | | | 91 | | | 13,250 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | 1,137 | | | 29,226 | | | 1,840 | | | 16,819 | | | 49,022 | | | 17,196 | | | 91 | | | 66,309 | |
Pass/Watch | | 134,657 | | | 622,561 | | | 176,107 | | | 288,843 | | | 1,222,168 | | | 225,881 | | | 41,893 | | | 1,489,942 | |
Total gross loans | | $ | 135,794 | | | 651,787 | | | 177,947 | | | 305,662 | | | 1,271,190 | | | 243,077 | | | 41,984 | | | 1,556,251 | |
| | | | | | | | | | | | | | | | |
2018 | | | | | | | | | | | | | | | | |
Special mention | | $ | — | | | 8,866 | | | — | | | — | | | 8,866 | | | 2,996 | | | 175 | | | 12,037 | |
Substandard | | 1,700 | | | 27,787 | | | — | | | 2,967 | | | 32,454 | | | 8,741 | | | — | | | 41,195 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | 1,700 | | | 36,653 | | | — | | | 2,967 | | | 41,320 | | | 11,737 | | | 175 | | | 53,232 | |
Pass/Watch | | 75,279 | | | 379,166 | | | 193,344 | | | 139,215 | | | 787,004 | | | 216,999 | | | 38,375 | | | 1,042,378 | |
Total gross loans | | $ | 76,979 | | | 415,819 | | | 193,344 | | | 142,182 | | | 828,324 | | | 228,736 | | | 38,550 | | | 1,095,610 | |
| | | | | | | | | | | | | | | | |
2017 and prior | | | | | | | | | | | | | | | | |
Special mention | | $ | 3,342 | | | 74,754 | | | 8,149 | | | 7,235 | | | 93,480 | | | 92,326 | | | 1,047 | | | 186,853 | |
Substandard | | 12,282 | | | 63,338 | | | 1,434 | | | — | | | 77,054 | | | 91,492 | | | 1,824 | | | 170,370 | |
Doubtful | | — | | | 335 | | | — | | | — | | | 335 | | | 5 | | | — | | | 340 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | 15,624 | | | 138,427 | | | 9,583 | | | 7,235 | | | 170,869 | | | 183,823 | | | 2,871 | | | 357,563 | |
Pass/Watch | | 617,096 | | | 1,510,427 | | | 634,239 | | | 19,915 | | | 2,781,677 | | | 890,972 | | | 204,766 | | | 3,877,415 | |
Total gross loans | | $ | 632,720 | | | 1,648,854 | | | 643,822 | | | 27,150 | | | 2,952,546 | | | 1,074,795 | | | 207,637 | | | 4,234,978 | |
| | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| | Residential | | Commercial mortgage | | Multi-family | | Construction | | Total mortgages | | Commercial | | Consumer | | Total loans |
Special mention | | $ | 2,882 | | | 124,631 | | | 29,781 | | | 24,376 | | | 181,670 | | | 157,080 | | | 1,867 | | | 340,617 | |
Substandard | | 26,651 | | | 98,313 | | | 1,568 | | | 4,924 | | | 131,456 | | | 127,092 | | | 6,746 | | | 265,294 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | 52 | | | — | | | 52 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total criticized and classified | | 29,533 | | | 222,944 | | | 31,349 | | | 29,300 | | | 313,126 | | | 284,224 | | | 8,613 | | | 605,963 | |
Pass/Watch | | 1,265,169 | | | 3,235,722 | | | 1,453,166 | | | 512,639 | | | 6,466,696 | | | 2,283,246 | | | 483,953 | | | 9,233,895 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,294,702 | | | 3,458,666 | | | 1,484,515 | | | 541,939 | | | 6,779,822 | | | 2,567,470 | | | 492,566 | | | 9,839,858 | |
(1) Contained within criticized and classified loans at June 30, 2021 are loans that were granted payment deferrals related to COVID-19 totaling $7.3 million.
(2) Includes an $8.5 million restructured loan, initially originated in 2015, which is classified as substandard pending the borrower’s ability to demonstrate a sustained period of payment performance (generally six consecutive months) under the restructured terms. The loan is currently performing in accordance with its restructured terms.
Note 5. Deposits
Deposits at June 30, 2021 and December 31, 2020 are summarized as follows (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Savings | | $ | 1,418,354 | | | 1,348,147 | |
Money market | | 2,413,046 | | | 2,245,412 | |
NOW | | 3,386,064 | | | 2,808,637 | |
Non-interest bearing | | 2,530,468 | | | 2,341,459 | |
Certificates of deposit | | 842,052 | | | 1,094,174 | |
Total deposits | | $ | 10,589,984 | | | 9,837,829 | |
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 (benefit) increase cost for pension benefits and other post-retirement benefits for the three and six months ended June 30, 2021 and 2020 includes the following components (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | Pension benefits | | Other post-retirement benefits | | Pension benefits | | Other post-retirement benefits |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | | $ | — | | | — | | | 9 | | | 20 | | | $ | — | | | — | | | 18 | | | 40 | |
Interest cost | | 198 | | | 250 | | | 106 | | | 178 | | | 396 | | | 500 | | | 212 | | | 356 | |
Expected return on plan assets | | (807) | | | (737) | | | — | | | — | | | (1,614) | | | (1,474) | | | — | | | — | |
Amortization of prior service cost | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Amortization of the net loss (gain) | | 118 | | | 174 | | | (268) | | | (62) | | | 236 | | | 348 | | | (536) | | | (124) | |
Net periodic (decrease) increase in benefit cost | | $ | (491) | | | (313) | | | (153) | | | 136 | | | $ | (982) | | | (626) | | | (306) | | | 272 | |
In its consolidated financial statements for the year ended December 31, 2020, the Company previously disclosed that it does not expect to contribute to the pension plan in 2021. As of June 30, 2021, 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 and six months ended June 30, 2021 were calculated using the January 1, 2021 pension and other post-retirement benefits actuarial valuations.
Note 7. Impact of Recent Accounting Pronouncements
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 a material effect on the Company's business operations and consolidated financial statements.
Note 8. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
On January 1, 2020, the Company adopted CECL, which replaced the incurred loss methodology with an expected loss methodology. This new methodology 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 CECL | | Prior to CECL | | Impact of CECL adoption |
Liabilities | | | | | | |
Allowance for credit losses on off-balance sheet credit exposure | | $ | 3,206 | | | — | | | 3,206 | |
For the three and six months ended June 30, 2021, the Company recorded a $2.1 million and $1.2 million provision for credit losses for off-balance sheet credit exposures, respectively. The provision for credit losses on off-balance sheet credit exposures for the three and six months ended June 30, 2020 totaled $5.3 million and $6.3 million, respectively. The decrease was primarily a function of an improved economic forecast resulting in a decline in projected loss factors, partially offset by an increase in the pipeline of loans that have been approved and awaiting closing.
The allowance for credit losses for off-balance sheet credit exposures was $6.2 million and $5.0 million at June 30, 2021 and December 31, 2020, respectively, and are included in other liabilities on the Consolidated Statements of Financial Condition.
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, Management 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 the 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 June 30, 2021 and December 31, 2020.
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 whom 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 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 Management 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, Management compares the prices received from the pricing service to a secondary pricing source. Additionally, Management 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 generally not 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.
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 which, 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 and brokered demand deposits. 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 June 30, 2021 and December 31, 2020.
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%. Management 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 selling 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 June 30, 2021 and December 31, 2020.
The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of June 30, 2021 and December 31, 2020, by level within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date Using: |
| | June 30, 2021 | | Quoted 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: | | | | | | | | |
U.S. Treasury obligations | | $ | 99,969 | | | 99,969 | | | — | | | — | |
| | | | | | | | |
Mortgage-backed securities | | 1,298,968 | | | — | | | 1,298,968 | | | — | |
Asset-backed securities | | 48,550 | | | — | | | 48,550 | | | — | |
State and municipal obligations | | 70,363 | | | — | | | 70,363 | | | — | |
Corporate obligations | | 38,763 | | | — | | | 38,763 | | | — | |
Total available for sale debt securities | | 1,556,613 | | | 99,969 | | | 1,456,644 | | | — | |
Equity securities | | 1,094 | | | 1,094 | | | — | | | — | |
Derivative assets | | 81,459 | | | — | | | 81,459 | | | — | |
| | $ | 1,639,166 | | | 101,063 | | | 1,538,103 | | | — | |
| | | | | | | | |
Derivative liabilities | | $ | 84,827 | | | — | | | 84,827 | | | — | |
| | | | | | | | |
Measured on a non-recurring basis: | | | | | | | | |
Loans measured for impairment based on the fair value of the underlying collateral | | $ | 21,706 | | | — | | | — | | | 21,706 | |
Foreclosed assets | | 2,350 | | | — | | | — | | | 2,350 | |
| | $ | 24,056 | | | — | | | — | | | 24,056 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date Using: |
| | December 31, 2020 | | Quoted 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: | | | | | | | | |
| | | | | | | | |
Agency obligations | | $ | 1,009 | | | 1,009 | | | — | | | — | |
Mortgage-backed securities | | 938,413 | | | — | | | 938,413 | | | — | |
Asset-backed securities | | 53,830 | | | — | | | 53,830 | | | — | |
State and municipal obligations | | 71,258 | | | — | | | 71,258 | | | — | |
Corporate obligations | | 40,979 | | | — | | | 40,979 | | | — | |
Total available for sale debt securities | | 1,105,489 | | | 1,009 | | | 1,104,480 | | | — | |
Equity Securities | | 971 | | | 971 | | | — | | | — | |
Derivative assets | | 101,079 | | | — | | | 101,079 | | | — | |
| | $ | 1,207,539 | | | 1,980 | | | 1,205,559 | | | — | |
| | | | | | | | |
Derivative liabilities | | $ | 109,148 | | | — | | | 109,148 | | | — | |
| | | | | | | | |
Measured on a non-recurring basis: | | | | | | | | |
Loans measured for impairment based on the fair value of the underlying collateral | | $ | 26,250 | | | — | | | — | | | 26,250 | |
Foreclosed assets | | 4,475 | | | — | | | — | | | 4,475 | |
| | $ | 30,725 | | | — | | | — | | | 30,725 | |
There were no transfers between Level 1, Level 2 and Level 3 during the three and six months ended June 30, 2021.
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.
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 June 30, 2021 and December 31, 2020 was $58.4 million and $114.3 million, respectively, representing cash collateral pledged to secure loan level swaps and reserves required by banking regulations.
Held to Maturity Debt Securities
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 whom 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 to comparable securities. Management evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As management 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, management compares the prices received from the pricing service to a secondary pricing source. Additionally, management 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 generally not 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 is 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 (i.e. exit pricing). 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 counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
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 June 30, 2021 and December 31, 2020. Fair values are presented by level within the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at June 30, 2021 Using: |
(Dollars in thousands) | | Carrying value | | Fair value | | Quoted 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 | | $ | 710,153 | | | 710,153 | | | 710,153 | | | — | | | — | |
Available for sale debt securities: | | | | | | | | | | |
U.S. Treasury obligations | | 99,969 | | | 99,969 | | | 99,969 | | | — | | | — | |
Agency obligations | | — | | | — | | | — | | | — | | | — | |
Mortgage-backed securities | | 1,298,968 | | | 1,298,968 | | | — | | | 1,298,968 | | | — | |
Asset-backed securities | | 48,550 | | | 48,550 | | | | | 48,550 | | | |
State and municipal obligations | | 70,363 | | | 70,363 | | | — | | | 70,363 | | | — | |
Corporate obligations | | 38,763 | | | 38,763 | | | — | | | 38,763 | | | — | |
Total available for sale debt securities | | $ | 1,556,613 | | | 1,556,613 | | | 99,969 | | | 1,456,644 | | | — | |
Held to maturity debt securities, net of allowance for credit losses: | | | | | | | | | | |
Agency obligations | | 10,198 | | | 10,143 | | | 10,143 | | | — | | | — | |
Mortgage-backed securities | | 38 | | | 39 | | | — | | | 39 | | | — | |
State and municipal obligations | | 417,739 | | | 434,316 | | | — | | | 434,316 | | | — | |
Corporate obligations | | 9,729 | | | 9,743 | | | — | | | 9,743 | | | — | |
Total held to maturity debt securities, net of allowance for credit losses | | $ | 437,704 | | | 454,241 | | | 10,143 | | | 444,098 | | | — | |
FHLBNY stock | | 37,415 | | | 37,415 | | | 37,415 | | | — | | | — | |
Equity Securities | | 1,094 | | | 1,094 | | | 1,094 | | | — | | | — | |
Loans, net of allowance for credit losses | | 9,458,903 | | | 9,623,991 | | | — | | | — | | | 9,623,991 | |
Derivative assets | | 81,459 | | | 81,459 | | | — | | | 81,459 | | | — | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits other than certificates of deposits | | $ | 9,747,932 | | | 9,747,932 | | | 9,747,932 | | | — | | | — | |
Certificates of deposit | | 842,052 | | | 845,410 | | | — | | | 845,410 | | | — | |
Total deposits | | $ | 10,589,984 | | | 10,593,342 | | | 9,747,932 | | | 845,410 | | | — | |
Borrowings | | 693,337 | | | 697,982 | | | — | | | 697,982 | | | — | |
Subordinated debentures | | 25,211 | | | 30,088 | | | — | | | 30,088 | | | — | |
Derivative liabilities | | 84,827 | | | 84,827 | | | — | | | 84,827 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2020 Using: |
(Dollars in thousands) | | Carrying value | | Fair value | | Quoted 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 | | $ | 532,353 | | | 532,353 | | | 532,353 | | | — | | | — | |
Available for sale debt securities: | | | | | | | | | | |
U.S. Treasury obligations | | | | — | | | — | | | — | | | — | |
Agency obligations | | 1,009 | | | 1,009 | | | 1,009 | | | — | | | — | |
Mortgage-backed securities | | 938,413 | | | 938,413 | | | — | | | 938,413 | | | — | |
Asset-backed securities | | 53,830 | | | 53,830 | | | | | 53,830 | | | |
State and municipal obligations | | 71,258 | | | 71,258 | | | — | | | 71,258 | | | — | |
Corporate obligations | | 40,979 | | | 40,979 | | | — | | | 40,979 | | | — | |
Total available for sale debt securities | | $ | 1,105,489 | | | 1,105,489 | | | 1,009 | | | 1,104,480 | | | — | |
Held to maturity debt securities: | | | | | | | | | | |
| | | | | | | | | | |
Agency obligations | | $ | 7,600 | | | 7,601 | | | 7,601 | | | — | | | — | |
Mortgage-backed securities | | 62 | | | 64 | | | — | | | 64 | | | — | |
State and municipal obligations | | 433,589 | | | 455,039 | | | — | | | 455,039 | | | — | |
Corporate obligations | | 9,714 | | | 9,825 | | | — | | | 9,825 | | | — | |
Total held to maturity debt securities | | $ | 450,965 | | | 472,529 | | | 7,601 | | | 464,928 | | | — | |
FHLBNY stock | | 59,489 | | | 59,489 | | | 59,489 | | | — | | | — | |
Equity Securities | | 971 | | | 971 | | | 971 | | | — | | | — | |
Loans, net of allowance for credit losses | | 9,721,424 | | | 9,969,330 | | | — | | | — | | | 9,969,330 | |
Derivative assets | | 101,079 | | | 101,079 | | | — | | | 101,079 | | | — | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits other than certificates of deposits | | $ | 8,743,655 | | | 8,743,655 | | | 8,743,655 | | | — | | | — | |
Certificates of deposit | | 1,094,174 | | | 1,097,993 | | | — | | | 1,097,993 | | | — | |
Total deposits | | $ | 9,837,829 | | | 9,841,648 | | | 8,743,655 | | | 1,097,993 | | | — | |
Borrowings | | 1,175,972 | | | 1,193,024 | | | — | | | 1,193,024 | | | — | |
Subordinated Debt | | 25,135 | | | 24,375 | | | — | | | 24,375 | | | — | |
Derivative liabilities | | 109,148 | | | 109,148 | | | — | | | 109,148 | | | — | |
Note 10. Other Comprehensive Income
The following table presents the components of other comprehensive income, both gross and net of tax, for the three and six months ended June 30, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, |
| | 2021 | | 2020 |
| | Before Tax | | Tax Effect | | After Tax | | Before Tax | | Tax Effect | | After Tax |
Components of Other Comprehensive Income: | | | | | | | | | | | | |
Unrealized gains and losses on available for sale debt securities: | | | | | | | | | | | | |
Net unrealized (losses) gains arising during the period | | $ | 3,288 | | | (848) | | | 2,440 | | | (1,252) | | | 322 | | | (930) | |
Reclassification adjustment for gains included in net income | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 3,288 | | | (848) | | | 2,440 | | | (1,252) | | | 322 | | | (930) | |
Unrealized losses on derivatives (cash flow hedges) | | (1,649) | | | 425 | | | (1,224) | | | (1,730) | | | 446 | | | (1,284) | |
Amortization related to post-retirement obligations | | (150) | | | 39 | | | (111) | | | 95 | | | (25) | | | 70 | |
Total other comprehensive income (loss) | | $ | 1,489 | | | (384) | | | 1,105 | | | (2,887) | | | 743 | | | (2,144) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2021 | | 2020 |
| | Before Tax | | Tax Effect | | After Tax | | Before Tax | | Tax Effect | | After Tax |
Components of Other Comprehensive Income: | | | | | | | | | | | | |
Unrealized gains and losses on available for sale debt securities: | | | | | | | | | | | | |
Net unrealized (losses) gains arising during the period | | $ | (8,865) | | | 2,286 | | | (6,579) | | | 21,310 | | | (5,494) | | | 15,816 | |
Reclassification adjustment for gains included in net income | | (230) | | | 59 | | | (171) | | | — | | | — | | | — | |
Total | | (9,095) | | | 2,345 | | | (6,750) | | | 21,310 | | | (5,494) | | | 15,816 | |
Unrealized gains ( losses) on derivatives (cash flow hedges) | | 4,577 | | | (1,180) | | | 3,397 | | | (9,427) | | | 2,430 | | | (6,997) | |
Amortization related to post-retirement obligations | | (300) | | | 80 | | | (220) | | | 207 | | | (53) | | | 154 | |
Total other comprehensive (loss) income | | $ | (4,818) | | | 1,245 | | | (3,573) | | | 12,090 | | | (3,117) | | | 8,973 | |
The following tables present the changes in the components of accumulated other comprehensive income, net of tax, for the three and six months ended June 30, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Changes in Accumulated Other Comprehensive Income (Loss) by Component, net of tax for the three months ended June 30, |
| | 2021 | | 2020 |
| | Unrealized Gains (Losses) on Available for Sale Debt Securities | | Post- Retirement Obligations | | Unrealized (Losses) Gains on Derivatives (cash flow hedges) | | Accumulated Other Comprehensive Income | | Unrealized Gains on Available for Sale Debt Securities | | Post- Retirement Obligations | | Unrealized Gains (Losses) on Derivatives (cash flow hedges) | | Accumulated Other Comprehensive(Loss) Income |
Balance at March 31, | | $ | 14,500 | | | (1,190) | | | (333) | | | 12,977 | | | 25,492 | | | (5,156) | | | (5,398) | | | 14,938 | |
Current - period other comprehensive income (loss) | | 2,440 | | | (111) | | | (1,224) | | | 1,105 | | | (930) | | | 70 | | | (1,284) | | | (2,144) | |
Balance at June 30, | | $ | 16,940 | | | (1,301) | | | (1,557) | | | 14,082 | | | 24,562 | | | (5,086) | | | (6,682) | | | 12,794 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Changes in Accumulated Other Comprehensive Income (Loss) by Component, net of tax for the six months ended June 30, |
| | 2021 | | 2020 |
| | Unrealized Gains on Available for Sale Debt Securities | | Post- Retirement Obligations | | Unrealized (Losses) Gains on Derivatives (cash flow hedges) | | Accumulated Other Comprehensive Income (Loss) | | Unrealized Gains (Losses) on Available for Sale Debt Securities | | Post- Retirement Obligations | | Unrealized Gains (Losses) on Derivatives (cash flow hedges) | | Accumulated Other Comprehensive(Loss) Income |
Balance at December 31, | | $ | 23,690 | | | (1,081) | | | (4,954) | | | 17,655 | | | 8,746 | | | (5,240) | | | 315 | | | 3,821 | |
Current - period other comprehensive (loss) income | | (6,750) | | | (220) | | | 3,397 | | | (3,573) | | | 15,816 | | | 154 | | | (6,997) | | | 8,973 | |
| | | | | | | | | | | | | | | | |
Balance at June 30, | | $ | 16,940 | | | (1,301) | | | (1,557) | | | 14,082 | | | 24,562 | | | (5,086) | | | (6,682) | | | 12,794 | |
The following tables summarize the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of income for the three and six months ended June 30, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reclassifications From Accumulated Other Comprehensive Income ("AOCI") |
| | Amount reclassified from AOCI for the three months ended June 30, | | Affected line item in the Consolidated Statement of Income |
| | 2021 | | 2020 | |
Details of AOCI: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Post-retirement obligations: | | | | | | |
Amortization of actuarial (losses) gains | | $ | (150) | | | 112 | | | Compensation and employee benefits (1) |
| | 39 | | | (29) | | | Income tax expense |
Total reclassification | | $ | (111) | | | 83 | | | Net of tax |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reclassifications From Accumulated Other Comprehensive Income ("AOCI") |
| | Amount reclassified from AOCI for the six months ended June 30, | | Affected line item in the Consolidated Statement of Income |
| | 2021 | | 2020 | |
Details of AOCI: | | | | | | |
Available for sale debt securities: | | | | | | |
Realized net gains on the sale of securities available for sale | | $ | (230) | | | — | | | Net gain on securities transactions |
| | 59 | | | — | | | Income tax expense |
| | (171) | | | — | | | Net of tax |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Post-retirement obligations: | | | | | | |
Amortization of actuarial (losses) gains | | $ | (300) | | | 224 | | | Compensation and employee benefits (1) |
| | 80 | | | (58) | | | Income tax expense |
Total reclassification | | $ | (220) | | | 166 | | | 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 the 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 which, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company may execute 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. 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 June 30, 2021 and December 31, 2020, the Company had 170 and 172 loan related interest rate swaps, respectively, with aggregate notional amounts of $2.55 billion and $2.63 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 RPAs are entered into to manage the credit exposure on interest rate contracts associated with these loan participation agreements. Under the RPAs, the Company will either receive or make a payment in the event the borrower defaults on the related interest rate contract. The
Company has minimum collateral posting thresholds with certain of its risk participation counterparties, and has posted collateral of $650,000 against the potential risk of default by the borrower under these agreements. At June 30, 2021 and December 31, 2020, the Company had 13 credit derivatives, with aggregate notional amounts of $136.4 million and $121.7 million, respectively, from participations in interest rate swaps as part of these loan participation arrangements. At June 30, 2021 and December 31, 2020, the fair value of these credit derivatives were $131,000 and $97,000, 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 payment 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 and six months ended June 30, 2021 and 2020, such derivatives were used to hedge the variable cash outflows associated with borrowings and brokered demand deposits.
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 or demand deposits. During the next twelve months, the Company estimates that $3.5 million will be reclassified as an increase to interest expense. As of June 30, 2021, the Company had 14 outstanding interest rate derivatives with an aggregate notional amount of $600.0 million that were each 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 June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At June 30, 2021 |
| | Asset Derivatives | | Liability Derivatives |
| | Consolidated Statements of Financial Condition | | Fair value | | Consolidated Statements of Financial Condition | | Fair value |
Derivatives not designated as a hedging instrument: | | | | | | | | |
Interest rate products | | Other assets | | $ | 76,310 | | | Other liabilities | | 77,716 | |
Credit contracts | | Other assets | | 131 | | | Other liabilities | | — | |
Total derivatives not designated as a hedging instrument | | | | $ | 76,441 | | | | | 77,716 | |
| | | | | | | | |
Derivatives designated as a hedging instrument: | | | | | | | | |
Interest rate products | | Other assets | | $ | 5,018 | | | Other liabilities | | 7,111 | |
| | | | | | | | |
Total derivatives designated as a hedging instrument | | | | $ | 5,018 | | | | | 7,111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| | Asset Derivatives | | Liability Derivatives |
| | Consolidated Statements of Financial Condition | | Fair value | | Consolidated Statements of Financial Condition | | Fair value |
Derivatives not designated as a hedging instrument: | | | | | | | | |
Interest rate products | | Other assets | | $ | 107,652 | | | Other liabilities | | 109,148 | |
Credit contracts | | Other assets | | 97 | | | Other liabilities | | — | |
Total derivatives not designated as a hedging instrument | | | | $ | 107,749 | | | | | 109,148 | |
| | | | | | | | |
Derivatives designated as a hedging instrument: | | | | | | | | |
Interest rate products | | Other assets | | $ | (6,671) | | | Other liabilities | | — | |
| | | | | | | | |
Total derivatives designated as a hedging instrument | | | | $ | (6,671) | | | | | — | |
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three and six months ended June 30, 2021 and 2020 (in thousands).
| | | | | | | | | | | | | | | | | | | | |
| | | | Gain (loss) recognized in income on derivatives for the three months ended |
| | Consolidated Statements of Income | | June 30, 2021 | | June 30, 2020 |
Derivatives not designated as a hedging instrument: | | | | | | |
Interest rate products | | Other income | | $ | (323) | | | (229) | |
Credit contracts | | Other income | | 24 | | | — | |
Total | | | | $ | (299) | | | (229) | |
| | | | | | |
Derivatives designated as a hedging instrument: | | | | | | |
Interest rate products | | Interest expense | | $ | 947 | | | 126 | |
Total | | | | $ | 947 | | | 126 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Gain (loss) recognized in income on derivatives for the six months ended |
| | Consolidated Statements of Income | | June 30, 2021 | | June 30, 2020 |
Derivatives not designated as a hedging instrument: | | | | | | |
Interest rate products | | Other income | | $ | 77 | | | (1,049) | |
Credit contracts | | Other income | | 47 | | | (1) | |
Total | | | | $ | 124 | | | (1,050) | |
| | | | | | |
Derivatives designated as a hedging instrument: | | | | | | |
Interest rate products | | Interest expense | | $ | 1,826 | | | 21 | |
Total | | | | $ | 1,826 | | | 21 | |
The Company has agreements with certain of its dealer counterparties which contain a provision that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be deemed in default on its derivative obligations.
In addition, the Company has agreements with certain of its dealer counterparties which 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 June 30, 2021, 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 $59.5 million at June 30, 2021. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $57.8 million against its obligations under these agreements. If the Company had breached any of these provisions at June 30, 2021, 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 and six months ended June 30, 2021, the out-of-scope revenue related to financial instruments was 82.6% and 82.5% of the Company's total revenue, respectively, compared to 85.0% and 84.4% for the three and six months ended June 30, 2020, respectively. Revenue-generating activities that are within the scope of Topic 606, are components of non-interest income. These revenue streams are generally classified into three categories: wealth management revenue, insurance agency income 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 and six months ended June 30, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Non-interest income | | | | | | | |
In-scope of Topic 606: | | | | | | | |
Wealth management fees | $ | 7,859 | | | 5,977 | | | 14,993 | | | 12,228 | |
Insurance agency income | 2,849 | | | — | | | 5,576 | | | — | |
Banking service charges and other fees: | | | | | | | |
Service charges on deposit accounts | 2,555 | | | 2,071 | | | 5,054 | | | 5,047 | |
Debit card and ATM fees | 2,098 | | | 1,265 | | | 3,876 | | | 2,475 | |
Total banking service charges and other fees | 4,653 | | | 3,336 | | | 8,930 | | | 7,522 | |
Total in-scope non-interest income | 15,361 | | | 9,313 | | | 29,499 | | | 19,750 | |
Total out-of-scope non-interest income | 5,795 | | | 5,052 | | | 13,294 | | | 11,606 | |
Total non-interest income | $ | 21,156 | | | 14,365 | | | 42,793 | | | 31,356 | |
| | | | | | | |
| | | | | | | |
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. 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 on a 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.
Insurance agency income, consisting of commissions and fees, is generally recognized as of the effective date of the insurance policy. Commission revenues related to installment billings are recognized on the invoice date. Subsequent commission adjustments are recognized upon the receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or when the Company receives formal notification of the amount of such payments.
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 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 the 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
The following table represents the consolidated statements of financial condition classification of the Company’s right-of use-assets and lease liabilities at June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Classification | | June 30, 2021 | | December 31, 2020 |
Lease Right-of-Use Assets: | | | | | | |
Operating lease right-of-use assets | | Other assets | | $ | 40,372 | | | $ | 41,142 | |
Lease Liabilities: | | | | | | |
Operating lease liabilities | | Other liabilities | | $ | 41,523 | | | $ | 42,042 | |
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.
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.
At June 30, 2021, the weighted-average remaining lease term and the weighted-average discount rate for the Company's operating leases were 8.8 years and 3.09%, respectively.
The following tables represent 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):
| | | | | | | | | | | | | | |
| | Three months ended June 30, 2021 | | Three months ended June 30, 2020 |
Lease Costs | | | |
Operating lease cost | | $ | 2,330 | | | $ | 2,132 | |
| | | | |
Variable lease cost | | 717 | | | 724 | |
| | | | |
Total lease cost | | $ | 3,047 | | | $ | 2,856 | |
| | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 | | Six months ended June 30, 2020 |
Lease Costs | | | |
Operating lease cost | | $ | 5,142 | | | $ | 4,262 | |
| | | | |
Variable lease cost | | 1,519 | | | 1,330 | |
| | | | |
Total lease cost | | $ | 6,661 | | | $ | 5,592 | |
| | | | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | Six months ended June 30, 2021 | | Six months ended June 30, 2020 |
| | | | |
Operating cash flows from operating leases | | $ | 4,575 | | | $ | 4,247 | |
| | | | |
| | | | |
| | | | |
| | | | |
Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2021, were as follows (in thousands): | | | | | | | | |
| | Operating leases |
Twelve months ended: | |
Remainder of 2021 | | $ | 4,347 | |
2022 | | 6,613 | |
2023 | | 6,102 | |
2024 | | 5,700 | |
2025 | | 5,114 | |
Thereafter | | 20,120 | |
Total future minimum lease payments | 47,996 | |
Amounts representing interest | | 6,473 | |
Present value of net future minimum lease payments | $ | 41,523 | |
| | | | | |
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, COVID-19 continues to have 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 pandemic on the Company's business, financial condition or results of operations. The extent of such impact will depend on future developments, which are highly uncertain, including when the pandemic will be controlled and abated, and the extent to which the economy can remain open. As the result of the 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 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 remain substantially open, 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 loan 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 stock price decline; 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 July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans and $1.76 billion to total deposits, and added 18 full-service banking offices in New Jersey and New York. As part of the acquisition, the addition of SB One Insurance Agency allows the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outstanding SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid for the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.
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 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 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 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 and interest is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses.
The calculation of the allowance for credit losses is a critical accounting policy of the Company. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience for both the Company and peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PDR”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each segment, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.
Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using an externally developed economic forecast. This forecast is applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The Company's current forecast period is six quarters, with a four quarter reversion period to historical average macroeconomic factors. The Company's economic forecast is approved by the Company's Asset-Liability Committee.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate
regression models are applied to an external economic forecast. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (“TDR”) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; portfolio concentrations that may affect loss experience across one or more components of the portfolio; changes in industry conditions; changes in the Company’s loan review process; changes in the Company's loan policies and procedures, economic forecast uncertainty and model imprecision.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation. The segments have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled. As of June 30, 2021, the portfolio and class segments for the Company’s loan portfolio were:
•Mortgage Loans – Residential, Commercial Real Estate, Multi-Family and Construction
•Commercial Loans – Commercial Owner Occupied and Commercial Non-Owner Occupied
•Consumer Loans – First Lien Home Equity and Other Consumer
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 monitoring process. This process includes the review of delinquent and problem loans at the Company’s Delinquency, Credit, Credit Risk Management and Allowance Committees; or which may be identified through the Company’s loan review process. 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 TDR.
For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate.
A loan for which the terms have been modified resulting in a concession by the Company, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other impaired loans, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.
As previously noted, in accordance with the CARES Act, the Company elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that occurred after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications were not classified as TDRs. In addition, for loans modified in response to COVID-19 that did not meet the above criteria (e.g., current payment status at December 31, 2019), the Company applied the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of COVID-19, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were current as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are not TDRs.
Loans granted short-term COVID-19 related deferrals decreased from a peak level of $1.31 billion, or 16.8% of loans, to $7.3 million of loans as of July 16, 2021, all of which are performing loans. The $7.3 million of loans in deferral consists of $300,000 in a second 90-day deferral period and $7.0 million in a third deferral period. Included in the $7.3 million of total loans in deferral, $3.9 million are secured by hotel properties, $2.1 million are secured by restaurants, $463,000 is secured by a special-purpose property, $431,000 are secured by retail properties, and $359,000 are secured by residential mortgages. Of the $6.9 million of commercial loans in deferral, all are under principal only deferral and are paying interest.
For loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been
previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.
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. As the impact of COVID-19 continues to unfold, 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. 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. 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 adjusted when facts and circumstances dictate. In addition to the ongoing impact of COVID-19, illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy in general may 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 CECL approach to calculate the allowance for credit losses on loans is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors creates greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company’s reported earnings. For the three and six months ended June 30, 2021, the changing economic forecasts attributable to COVID-19 and projected economic recovery led to the Company recording negative provisions for credit losses. See Note 4 to the Consolidated Financial Statements and the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for more information on the allowance for credit losses on loans.
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 June 30, 2021 or December 31, 2020.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2021 AND DECEMBER 31, 2020
Total assets at June 30, 2021 were $13.22 billion, a $297.2 million increase from December 31, 2020. The increase in total assets was primarily due to a $415.9 million increase in total investments and a $177.8 million increase in cash and cash equivalents, partially offset by a $283.0 million decrease in total loans.
The Company’s loan portfolio decreased $283.0 million to $9.54 billion at June 30, 2021, from $9.82 billion at December 31, 2020, despite strong originations, as prepayments and Paycheck Protection Program ("PPP") loan forgiveness, were elevated. For the six months ended June 30, 2021, loan funding, including advances on lines of credit, totaled $1.67 billion, compared with $2.04 billion for the same period in 2020. Originations under PPP programs totaled $208.7 million and $397.8 million for the six month periods ended June 30, 2021 and 2020, respectively. Total PPP loans outstanding decreased $163.8 million to $309.4 million at June 30, 2021, from $473.2 million at December 31, 2020. In addition to the net decrease in PPP loans, during the six months ended June 30, 2021, the Company experienced net decreases in consumer loans, multi-family loans, commercial loans, and residential mortgage loans of $144.1 million, $123.4 million, $49.5 million and $40.9 million, respectively, partially offset by net increases in construction loans and commercial mortgage loans of $123.9 million and
$112.8 million, respectively. Commercial real estate, commercial and construction loans represented 83.2% of the loan portfolio at June 30, 2021, compared to 81.8% at December 31, 2020.
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 $210.4 million and $84.7 million, respectively, at June 30, 2021, compared to $225.4 million and $110.6 million, respectively, at December 31, 2020. No SNC relationship were 90 days or more delinquent at June 30, 2021.
The Company had outstanding junior lien mortgages totaling $147.0 million at June 30, 2021. Of this total, 18 loans totaling $610,000 were 90 days or more delinquent with an allowance for credit losses of $14,000.
The following table sets forth information regarding the Company’s non-performing assets as of June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Mortgage loans: | | | | |
Residential | | $ | 6,875 | | | 9,315 | |
Commercial | | 36,312 | | | 31,982 | |
| | | | |
Construction | | 2,967 | | | 1,392 | |
Total mortgage loans | | 46,154 | | | 42,689 | |
Commercial loans | | 32,023 | | | 42,118 | |
Consumer loans | | 1,883 | | | 2,283 | |
| | | | |
| | | | |
Total non-performing loans | | 80,060 | | | 87,090 | |
Foreclosed assets | | 2,350 | | | 4,475 | |
Total non-performing assets | | $ | 82,410 | | | 91,565 | |
The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of June 30, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Mortgage loans: | | | | |
Residential | | $ | 4,455 | | | 8,852 | |
Commercial | | — | | | 113 | |
Multi-family | | — | | | 585 | |
Construction | | — | | | — | |
Total mortgage loans | | 4,455 | | | 9,550 | |
Commercial loans | | 175 | | | 1,179 | |
Consumer loans | | 1,272 | | | 4,519 | |
Total 60-89 day delinquent loans | | $ | 5,902 | | | 15,248 | |
At June 30, 2021, the Company’s allowance for credit losses related to the loan portfolio was 0.85% of total loans, compared to 0.87% and 1.03% at March 31, 2021 and December 31, 2020, respectively. The Company recorded negative provisions for credit losses of $10.7 million and $25.7 million for the three and six months ended June 30, 2021, respectively, compared with provisions of $10.9 million and $25.6 million for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2021, the Company had net recoveries of $6.1 million and $5.2 million, respectively, compared to net recoveries of $216,000 and net charge-offs of $2.8 million, respectively, for the same periods in 2020. The allowance for loan losses decreased $20.5 million to $81.0 million at June 30, 2021 from $101.5 million at December 31, 2020. The negative provision for credit losses for the three and six months ended June 30, 2021 was primarily the result of an improved economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak economic forecast and a more uncertain outlook attributable to the COVID-19 pandemic. In addition, the significant recoveries realized in the second quarter of 2021 related to a previously charged-off loan further contributed to the negative provision for credit losses in the current period.
Total non-performing loans were $80.1 million, or 0.84% of total loans at June 30, 2021, compared to $87.1 million, or 0.89% of total loans at December 31, 2020. The $7.0 million decrease in non-performing loans consisted of a $10.1 million decrease in non-performing commercial loans, a $2.4 million decrease in non-performing residential mortgage loans and a $400,000
decrease in non-performing consumer loans, partially offset by a $4.3 million increase in non-performing commercial mortgage loans and a $1.6 million increase in non-performing construction loans.
At June 30, 2021 and December 31, 2020, the Company held foreclosed assets of $2.4 million and $4.5 million, respectively. During the six months ended June 30, 2021, there were two additions to foreclosed assets with an aggregate carrying value of $434,000, six properties sold with a carrying value of $1.4 million and valuation charges of $1.1 million. Foreclosed assets at June 30, 2021 consisted primarily of commercial real estate. Non-performing assets totaled $82.4 million, or 0.62% of total assets at June 30, 2021, compared to $91.6 million, or 0.71% of total assets at December 31, 2020.
Cash and cash equivalents were $710.2 million at June 30, 2021, a $177.8 million increase from December 31, 2020, largely due to net deposit inflows and loan repayments, primarily attributable to proceeds from the forgiveness of PPP loans and government stimulus programs.
Total investments were $2.03 billion at June 30, 2021, a $415.9 million increase from December 31, 2020. This increase was primarily due to purchases of mortgage-backed and municipal securities, partially offset by repayments of mortgage-backed securities, maturities and calls of certain municipal and agency bonds, and a decrease in unrealized gains on available for sale debt securities.
Total deposits increased $752.2 million during the six months ended June 30, 2021, to $10.59 billion. Total core deposits, consisting of savings and demand deposit accounts, increased $1.00 billion to $9.75 billion at June 30, 2021, while total time deposits decreased $252.1 million to $842.1 million at June 30, 2021. The increase in core deposits was largely attributable to a $577.4 million increase in interest bearing demand deposits, as the Company shifted $450.0 million from Federal Home Loan Bank of New York ("FHLBNY") borrowings into lower-costing brokered demand deposits, a $189.0 million increase in non-interest bearing demand deposits, which partially benefited from deposits retained from activity associated with PPP loans and stimulus funding, a $167.6 million increase in money market deposits and a $70.2 million increase in savings deposits. The decrease in time deposits was primarily due to the outflow of brokered time deposits, combined with additional maturities of longer-term retail time deposits. Core deposits represented 92.0% of total deposits at June 30, 2021, compared to 88.9% at December 31, 2020.
Borrowed funds decreased $482.6 million during the six months ended June 30, 2021, to $693.3 million. The decrease in borrowings for the period was largely due to the maturity and replacement of FHLBNY borrowings with lower-costing brokered deposits. Borrowed funds represented 5.2% of total assets at June 30, 2021, a decrease from 9.1% at December 31, 2020.
Stockholders’ equity increased $57.8 million during the six months ended June 30, 2021, to $1.68 billion, primarily due to net income earned for the period, partially offset by dividends paid to stockholders, a decrease in unrealized gains on available for sale debt securities and common stock repurchases. For the six months ended June 30, 2021, common stock repurchases totaled 46,791 shares at an average cost of $21.56 per share, of which 44,078 shares, at an average cost of $21.81 per share, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At June 30, 2021, approximately 4.1 million shares remained eligible for repurchase under the current stock repurchase authorization. Book value per share and tangible book value per share (1) at June 30, 2021 were $21.55 and $15.58, respectively, compared with $20.87 and $14.86, respectively, at December 31, 2020.
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 fairly predictable sources of funds. Changes in interest rates, local economic conditions, COVID-19 and related government response and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows.
In response to COVID-19, the Company has escalated the monitoring of deposit behavior, utilization of credit lines, and borrowing capacity with the FHLBNY and Federal Reserve Bank of New York ("FRBNY"), and is enhancing its collateral position with these funding sources.
The Federal Deposit Insurance Corporation ("FDIC") 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 providing banking institutions that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, 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 elected to utilize the five-year CECL transition.
At June 30, 2021, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Required | | Required with Capital Conservation Buffer | | Actual |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in thousands) |
Bank:(1) | | | | | | | | | | | | |
Tier 1 leverage capital | | $ | 510,866 | | | 4.00 | % | | $ | 510,866 | | | 4.00 | % | | $ | 1,156,061 | | | 9.05 | % |
Common equity Tier 1 risk-based capital | | 473,413 | | | 4.50 | | | 736,420 | | | 7.00 | | | 1,156,061 | | | 10.99 | |
Tier 1 risk-based capital | | 631,217 | | | 6.00 | | | 894,225 | | | 8.50 | | | 1,156,061 | | | 10.99 | |
Total risk-based capital | | 841,623 | | | 8.00 | | | 1,104,630 | | | 10.50 | | | 1,227,102 | | | 11.66 | |
| | | | | | | | | | | | |
Company: | | | | | | | | | | | | |
Tier 1 leverage capital | | $ | 511,091 | | | 4.00 | % | | $ | 511,091 | | | 4.00 | % | | $ | 1,225,848 | | | 9.59 | % |
Common equity Tier 1 risk-based capital | | 473,666 | | | 4.50 | | | 736,814 | | | 7.00 | | | 1,212,961 | | | 11.52 | |
Tier 1 risk-based capital | | 631,555 | | | 6.00 | | | 894,703 | | | 8.50 | | | 1,225,848 | | | 11.65 | |
Total risk-based capital | | 842,074 | | | 8.00 | | | 1,105,221 | | | 10.50 | | | 1,296,889 | | | 12.32 | |
(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 AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
General. The Company reported net income of $44.8 million, or $0.58 per basic and diluted share for the three months ended June 30, 2021, compared to net income of $14.3 million, or $0.22 per basic and diluted share for the three months ended June 30, 2020. For the six months ended June 30, 2021, the Company reported net income of $93.3 million, or $1.22 per basic and diluted share, compared to net income of $29.2 million, or $0.45 per basic and diluted share, for the same period last year.
Earnings for the three and six months ended June 30, 2021 were aided by improved economic conditions and resulting lower credit loss allowance requirements, and the additional earnings attributable to the acquisition of earning assets acquired in the July 31, 2020 merger with SB One Bancorp ("SB One"). For the three and six months ended June 30, 2021, the Company recorded negative provisions for credit losses on loans of $10.7 million and $25.7 million, respectively, compared with provisions of $10.9 million and $25.6 million for the respective 2020 periods.
Net Interest Income. Total net interest income increased $21.1 million to $90.9 million for the quarter ended June 30, 2021, from $69.8 million for the quarter ended June 30, 2020. For the six months ended June 30, 2021, total net interest income increased $39.1 million to $180.9 million, from $141.8 million for the same period in 2020. Interest income for the quarter ended June 30, 2021 increased $19.0 million to $100.5 million, from $81.5 million for the same period in 2020. For the six months ended June 30, 2021, interest income increased $31.4 million to $201.1 million, from $169.7 million for the six months ended June 30, 2020. Interest expense decreased $2.1 million to $9.6 million for the quarter ended June 30, 2021, from $11.7
million for the quarter ended June 30, 2020. For the six months ended June 30, 2021, interest expense decreased $7.7 million to $20.2 million, from $27.9 million for the six months ended June 30, 2020. The increase in net interest income for both comparative periods was largely attributable to growth in average earning assets resulting from the net assets acquired from SB One and PPP loan originations. Both periods were also aided by favorable liability repricing and the inflow of lower-costing core deposits, as well as an increase in the accelerated recognition of fees related to the forgiveness of PPP loans in 2021. For the three and six months ended June 30, 2021, the accelerated accretion of fees related to the forgiveness of PPP loans totaled $2.9 million and $6.9 million recognized in interest income, compared to $1.1 million for the three and six months ended June 30, 2020, respectively.
The net interest margin increased five basis points to 2.99% for the quarter ended June 30, 2021, compared to 2.94% for the quarter ended June 30, 2020. The weighted average yield on interest-earning assets decreased 13 basis points to 3.31% for the quarter ended June 30, 2021, compared to 3.44% for the quarter ended June 30, 2020, while the weighted average cost of interest bearing liabilities decreased 24 basis points for the quarter ended June 30, 2021 to 0.44%, compared to the second quarter of 2020. The average cost of interest bearing deposits for the quarter ended June 30, 2021 was 0.34%, compared to 0.54% for the same period last year. Average non-interest bearing demand deposits totaled $2.48 billion for the quarter ended June 30, 2021, compared to $1.85 billion for the quarter ended June 30, 2020. The average cost of all deposits, including non-interest bearing deposits, was 0.26% for the quarter ended June 30, 2021, compared with 0.41% for the quarter ended June 30, 2020. The average cost of borrowed funds for the quarter ended June 30, 2021 was 1.18%, compared to 1.31% for the same period last year.
For the six months ended June 30, 2021, the net interest margin decreased four basis points to 3.02%, compared to 3.06% for the six months ended June 30, 2020. The weighted average yield on interest earning assets declined 31 basis points to 3.36% for the six months ended June 30, 2021, compared to 3.67% for the six months ended June 30, 2020, while the weighted average cost of interest bearing liabilities decreased 35 basis points to 0.46% for the six months ended June 30, 2021, compared to 0.81% for the same period last year. The average cost of interest bearing deposits decreased 30 basis points to 0.36% for the six months ended June 30, 2021, compared to 0.66% for the same period last year. Average non-interest bearing demand deposits totaled $2.43 billion for the six months ended June 30, 2021, compared with $1.67 billion for the six months ended June 30, 2020. The average cost of all deposits, including non-interest bearing deposits, was 0.28% for the six months ended June 30, 2021, compared with 0.51% for the six months ended June 30, 2020. The average cost of borrowings for the six months ended June 30, 2021 was 1.15%, compared to 1.55% for the same period last year.
Interest income on loans secured by real estate increased $13.6 million to $62.9 million for the three months ended June 30, 2021, from $49.3 million for the three months ended June 30, 2020. Commercial loan interest income increased $6.2 million to $25.2 million for the three months ended June 30, 2021, from $18.9 million for the three months ended June 30, 2020. Consumer loan interest income decreased $135,000 to $3.4 million for the three months ended June 30, 2021, from $3.5 million for the three months ended June 30, 2020. For the three months ended June 30, 2021, the average balance of total loans increased $2.00 billion to $9.59 billion, compared to the same period in 2020, largely due to total loans acquired from SB One. The average yield on total loans for the three months ended June 30, 2021, increased three basis points to 3.79%, from 3.76% for the same period in 2020.
Interest income on loans secured by real estate increased $21.2 million to $124.9 million for the six months ended June 30, 2021, from $103.7 million for the six months ended June 30, 2020. Commercial loan interest income increased $13.7 million to $51.3 million for the six months ended June 30, 2021, from $37.6 million for the six months ended June 30, 2020. Consumer loan interest income decreased $815,000 to $6.9 million for the six months ended June 30, 2021, from $7.7 million for the six months ended June 30, 2020. For the six months ended June 30, 2021, the average balance of total loans increased $2.23 billion to $9.66 billion, from $7.42 billion for the same period in 2020, primarily due to total loans acquired from SB One, and organic growth, including PPP loans. The average yield on total loans for the six months ended June 30, 2021, decreased 20 basis points to 3.79%, from 3.99% for the same period in 2020.
Interest income on held to maturity debt securities decreased $185,000 to $2.7 million for the quarter ended June 30, 2021, compared to the same period last year. Average held to maturity debt securities decreased $6.2 million to $438.1 million for the quarter ended June 30, 2021, from $444.3 million for the same period last year. Interest income on held to maturity debt securities decreased $341,000 to $5.5 million for the six months ended June 30, 2021, compared to the same period in 2020. Average held to maturity debt securities decreased $2.5 million to $444.2 million for the six months ended June 30, 2021, from $446.7 million for the same period last year.
Interest income on available for sale debt securities and FHLBNY stock decreased $557,000 to $5.7 million for the quarter ended June 30, 2021, from $6.3 million for the quarter ended June 30, 2020. The average balance of available for sale debt securities and FHLBNY stock increased $415.1 million to $1.45 billion for the three months ended June 30, 2021, compared to the same period in 2020. Interest income on available for sale debt securities and FHLBNY stock decreased $2.0 million to
$11.3 million for the six months ended June 30, 2021, from $13.3 million for the same period last year. The average balance of available for sale debt securities and FHLBNY stock increased $271.0 million to $1.32 billion for the six months ended June 30, 2021.
The average yield on total securities decreased to 1.46% for the three months ended June 30, 2021, compared with 2.21% for the same period in 2020. For the six months ended June 30, 2021, the average yield on total securities decreased to 1.57%, compared with 2.42% for the same period in 2020.
Interest expense on deposit accounts decreased $859,000 to $6.8 million for the quarter ended June 30, 2021, compared with $7.6 million for the quarter ended June 30, 2020. For the six months ended June 30, 2021, interest expense on deposit accounts decreased $4.4 million to $14.2 million, from $18.6 million for the same period last year. The average cost of interest bearing deposits decreased to 0.34% for the second quarter of 2021 and 0.36% for the six months ended June 30, 2021, from 0.54% and 0.66% for the three and six months ended June 30, 2020, respectively. The average balance of interest bearing core deposits for the quarter ended June 30, 2021 increased $2.00 billion to $7.08 billion. For the six months ended June 30, 2021, average interest bearing core deposits increased $1.90 billion, to $6.88 billion, from $4.98 billion for the same period in 2020. The increase in average core deposits for both the three and six months ended June 30, 2021 was largely due to deposits acquired from SB One, combined with organic growth, activity associated with PPP loans and government stimulus. Average time deposit account balances increased $291.8 million, to $897.6 million for the quarter ended June 30, 2021, from $605.8 million for the quarter ended June 30, 2020. For the six months ended June 30, 2021, average time deposit account balances increased $281.4 million, to $969.9 million, from $688.5 million for the same period in 2020.
Interest expense on borrowed funds decreased $1.5 million to $2.6 million for the quarter ended June 30, 2021, from $4.1 million for the quarter ended June 30, 2020. For the six months ended June 30, 2021, interest expense on borrowed funds decreased $3.9 million to $5.4 million, from $9.3 million for the six months ended June 30, 2020. The average cost of borrowings decreased to 1.18% for the three months ended June 30, 2021, from 1.31% for the three months ended June 30, 2020. The average cost of borrowings decreased to 1.15% for the six months ended June 30, 2021, from 1.55% for the same period last year. Average borrowings decreased $380.7 million to $869.0 million for the quarter ended June 30, 2021, from $1.25 billion for the quarter ended June 30, 2020. For the six months ended June 30, 2021, average borrowings decreased $262.0 million to $941.7 million, compared to $1.20 billion for the six months ended June 30, 2020.
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 valuation of the allowance.
The Company recorded negative provisions for credit losses of $10.7 million and $25.7 million for the three and six months ended June 30, 2021, respectively, compared with provisions of $10.9 million and $25.6 million for the three and six months ended June 30, 2020, respectively. The negative provision for credit losses for the three and six months ended June 30, 2021 was primarily the result of an improved economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak economic forecast and a more uncertain outlook attributable to COVID-19. In addition, the significant recoveries realized in the second quarter of 2021 related to a previously charged-off loan further contributed to the negative provision for credit losses in the current period. 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 and recovery continues to unfold.
Non-Interest Income. Non-interest income totaled $21.2 million for the quarter ended June 30, 2021, an increase of $6.8 million, compared to the same period in 2020. Fee income increased $3.6 million to $8.5 million for the three months ended June 30, 2021, compared to the same period in 2020, largely due to a $1.4 million increase in commercial loan prepayment fees, a $418,000 increase in deposit related fees, an $832,000 increase in debit card revenue and a $450,000 increase in non-deposit investment fee income. The increases in fee income are partially attributable to the addition of the SB One customer base, as well as a recovering economy compared to the initial severely negative impact COVID-19 had on consumer and business activity in the prior year. Insurance agency income, a new revenue opportunity for the Company resulting from the SB One acquisition, totaled $2.8 million for the three months ended June 30, 2021. Wealth management income increased $1.9 million to $7.9 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to solid new business generation and increased market value of assets under management as a result of strong equity market performance, and an increase in the level of managed mutual funds. Partially offsetting these increases in non-interest income, other income
decreased $1.1 million to $424,000 for the three months ended June 30, 2021, compared to the quarter ended June 30, 2020, primarily due to a $989,000 decrease in net fees on loan-level interest rate swap transactions. Additionally, income from Bank-owned life insurance ("BOLI") decreased $336,000 to $1.5 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to a decrease in benefit claims and lower equity valuations, partially offset by additional income related to the BOLI assets acquired from SB One.
For the six months ended June 30, 2021, non-interest income totaled $42.8 million, an increase of $11.4 million, compared to the same period in 2020. Insurance agency income for the six months ended June 30, 2021, totaled $5.6 million. Fee income increased $4.2 million, primarily due to a $1.6 million increase in commercial loan prepayment fees, a $1.3 million increase in deposit fees and debit card revenue, a $629,000 increase in late charges and other loan related fee income and a $346,000 increase in non-deposit investment fee income The increases in fee income are partially attributable to the addition of the SB One customer base, as well as a recovering economy compared to the initial severely negative effects that COVID-19 had on consumer and business activities in the prior year. Wealth management income increased $2.8 million to $15.0 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to an increase in the market value of assets under management as a result of strong equity market performance and solid new business results, and an increase in the level of managed mutual funds. Also, BOLI income increased $1.4 million to $4.1 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to an increase in benefit claims, additional income related to the BOLI assets acquired from SB One and higher equity valuations. Partially offsetting these increases, other income decreased $2.7 million to $2.2 million for the six months ended June 30, 2021, compared to $5.0 million for the same period in 2020, mainly due to a $2.9 million decrease in net fees on loan-level interest rate swap transactions.
Non-Interest Expense. For the three months ended June 30, 2021, non-interest expense totaled $62.7 million, an increase of $7.4 million, compared to the three months ended June 30, 2020. Compensation and benefits expense increased $5.7 million to $34.9 million for the three months ended June 30, 2021, compared to $29.2 million for the same period in 2020. The increase was principally due to increases in salary expense, the accrual for incentive compensation and employee medical benefits each associated with the addition of former SB One employees, as well as increases in mortgage commission expense and stock-based compensation. Net occupancy expenses increased $1.7 million to $7.9 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to increases in rent, depreciation, utilities and maintenance expenses, which were principally related to the facilities acquired from SB One. Other operating expenses increased $1.5 million to $9.0 million for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to a market valuation adjustment on foreclosed real estate, combined with increases in business development and debit card maintenance expenses, partially offset by non-recurring merger related expenses incurred in the prior year quarter. FDIC insurance increased $802,000 due to an increase in the insurance assessment rate and an increase in total assets subject to assessment, including assets acquired from SB One. Data processing expense increased $426,000 to $5.4 million for the three months ended June 30, 2021, compared with the same period in 2020, primarily due to increases in software subscription service expense and software maintenance expense. Also, the amortization of intangibles increased $207,000 for the three months ended June 30, 2021, compared with the same period in 2020, was mainly due to increases in the amortization of the customer relationship and core-deposit intangibles associated with the acquisition of SB One. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures decreased $3.2 million to $2.1 million for the three months ended June 30, 2020, compared to same period in 2020. The decrease was primarily a function of an improved economic forecast resulting in a decline in projected loss factors, partially offset by an increase in the pipeline of loans that have been approved and awaiting closing.
Non-interest expense totaled $124.6 million for the six months ended June 30, 2021, an increase of $15.2 million, compared to $109.4 million for the six months ended June 30, 2020. Compensation and benefits expense increased $9.8 million to $70.2 million for the six months ended June 30, 2021, compared to $60.4 million for the six months ended June 30, 2020, primarily due to increases in salary expense, the accrual for incentive compensation and employee medical benefits each associated with the addition of former SB One employees, as well as company-wide annual merit increases, partially offset by a decrease in severance expense, as well as increases in mortgage commissions and stock-based compensation. Net occupancy expense increased $4.8 million to $17.2 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to increases in rent, depreciation, utilities and maintenance expenses related to the facilities acquired from SB One, along with an increase in snow removal costs incurred earlier in the year. FDIC insurance increased $2.6 million for the six months ended June 30, 2021, primarily due to an increase in the insurance assessment rate and an increase in total assets subject to assessment, including assets acquired from SB One, along with the receipt of the small bank assessment credit in the prior year that was not available in 2021. Other operating expenses increased $2.5 million to $19.1 million for the six months ended June 30, 2021, compared to the same period in 2020. The increase in other operating expense was largely due to a valuation adjustment on foreclosed assets and increases in debit card maintenance expense and insurance expense, as a result of the addition of SB One, partially offset by non-recurring merger related expenses incurred in the prior year. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures decreased $5.1 million to $1.2 million for the six
months ended June 30, 2021. The decrease was primarily a function of an improved economic forecast resulting in a decline in projected loss factors, partially offset by an increase in the pipeline of loans that have been approved and are awaiting closing.
Income Tax Expense. For the three months ended June 30, 2021, the Company’s income tax expense was $15.3 million with an effective tax rate of 25.4%, compared with income tax expense of $3.7 million with an effective tax rate of 20.6% for the three months ended June 30, 2020. The increases in tax expense and the effective tax rate for the three months ended June 30, 2021, compared with the same period last year were largely the result of an increase in the proportion of income derived from taxable sources.
For the six months ended June 30, 2021, the Company's income tax expense was $31.5 million with an effective tax rate of 25.2%, compared with $9.0 million with an effective tax rate of 23.5% for the six months ended June 30, 2020. The increases in tax expense and the effective tax rate for the six months ended June 30, 2021, compared with the same period last year were largely the result of an increase in the proportion of income derived from taxable sources.
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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.
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 June 30, 2021 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | |
Change in interest rates (basis points) - Rate Ramp | | Net Interest Income |
Dollar Amount | | Dollar Change | | Percent Change |
-100 | | $ | 335,030 | | | $ | (12,850) | | | (3.7) | % |
Static | | 347,880 | | | — | | | — | |
+100 | | 349,724 | | | 1,844 | | | 0.5 | |
+200 | | 352,046 | | | 4,166 | | | 1.2 | |
+300 | | 354,359 | | | 6,479 | | | 1.9 | |
The preceding table indicates that, as of June 30, 2021, 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 1.9%, or $6.5 million. In the event of a 100 basis point decrease in interest rates, net interest income would decrease 3.7%, or $12.9 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 June 30, 2021 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Present Value of Equity | | Present Value of Equity as Percent of Present Value of Assets |
Change in interest rates (basis points) | | Dollar Amount | | Dollar Change | | Percent Change | | Present Value Ratio | | Percent Change |
-100 | | $ | 1,422,066 | | | $ | (230,438) | | | (13.9) | % | | 10.4 | % | | (15.9) | % |
Flat | | 1,652,504 | | | — | | | — | | | 12.4 | | | — | |
+100 | | 1,699,077 | | | 46,573 | | | 2.8 | | | 13.0 | | | 5.1 | |
+200 | | 1,728,297 | | | 75,793 | | | 4.6 | | | 13.5 | | | 9.4 | |
+300 | | 1,751,038 | | | 98,534 | | | 6.0 | | | 14.0 | | | 13.3 | |
The preceding table indicates that as of June 30, 2021, in the event of an immediate and sustained 300 basis point increase in interest rates, the present value of equity is projected to increase 6.0%, or $98.5 million. If rates were to decrease 100 basis points, the present value of equity would decrease 13.9%, or $230.4 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.
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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 and controls related to SB One.
PART II—OTHER INFORMATION
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.
There were no changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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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) |
April 1, 2021 through April 30, 2021 | | — | | | $ | — | | | — | | | 4,071,549 | |
May 1, 2021 through May 31, 2021 | | 1,568 | | | 25.28 | | | 1,568 | | | 4,069,981 | |
June 1, 2021 through June 30, 2021 | | 286 | | | 23.78 | | | 286 | | | 4,069,695 | |
Total | | 1,854 | | | 25.05 | | | 1,854 | | | |
(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 seventh repurchase program. The repurchase program has no expiration date. On December 28, 2020, the Company’s Board of Directors approved the purchase of up to 3,900,000 shares of its common stock under a ninth general repurchase program to commence upon completion of the eighth repurchase program. The repurchase program has no expiration date.
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Item 3. | Defaults Upon Senior Securities. |
Not Applicable
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Item 4. | Mine Safety Disclosures |
Not Applicable
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Item 5. | Other Information. |
None
The following exhibits are filed herewith: | | | | | |
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32 | |
101 | The following financial statements from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended June 30, 2021, formatted in iXBRL (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. |
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101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
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101.SCH | XBRL Taxonomy Extension Schema Document | |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
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101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, has been formatted in iXBRL. | |
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.
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| | | | PROVIDENT FINANCIAL SERVICES, INC. |
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Date: | | August 9, 2021 | | By: | | /s/ Christopher Martin |
| | | | | | Christopher Martin |
| | | | | | Chairman and Chief Executive Officer (Principal Executive Officer) |
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Date: | | August 9, 2021 | | By: | | /s/ Thomas M. Lyons |
| | | | | | Thomas M. Lyons |
| | | | | | Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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Date: | | August 9, 2021 | | By: | | /s/ Frank S. Muzio |
| | | | | | Frank S. Muzio |
| | | | | | Executive Vice President and Chief Accounting Officer |