SEC Document



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

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from              to
Commission File Number: 001-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
42-1547151
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
239 Washington Street, Jersey City, New Jersey
 
07302
(Address of Principal Executive Offices)
 
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 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, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
As of May 2, 2016 there were 83,209,293 shares issued and 66,089,794 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 353,625 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
 
Item Number
Page Number
 
 
 
 
1.
 
 
 
 
 
Consolidated Statements of Financial Condition as of March 31, 2016 (unaudited) and December 31, 2015
 
 
 
 
Consolidated Statements of Income for the three months ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
Defaults Upon Senior Securities
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 

2



PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 2016 (Unaudited) and December 31, 2015
(Dollars in Thousands)
 
 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Cash and due from banks
 
$
107,252

 
$
100,899

Short-term investments
 
859

 
1,327

Total cash and cash equivalents
 
108,111

 
102,226

Securities available for sale, at fair value
 
984,206

 
964,534

Investment securities held to maturity (fair value of $491,349 at March 31, 2016 (unaudited)
and $488,331 at December 31, 2015)
 
472,934

 
473,684

Federal Home Loan Bank stock
 
72,135

 
78,181

Loans
 
6,638,127

 
6,537,674

Less allowance for loan losses
 
62,191

 
61,424

Net loans
 
6,575,936

 
6,476,250

Foreclosed assets, net
 
11,029

 
10,546

Banking premises and equipment, net
 
88,249

 
88,987

Accrued interest receivable
 
25,399

 
25,766

Intangible assets
 
425,260

 
426,277

Bank-owned life insurance
 
184,389

 
183,057

Other assets
 
78,526

 
82,149

Total assets
 
$
9,026,174

 
$
8,911,657

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 
$
4,353,814

 
$
4,198,788

Savings deposits
 
1,005,430

 
985,478

Certificates of deposit of $100,000 or more
 
389,985

 
324,215

Other time deposits
 
405,633

 
415,506

Total deposits
 
6,154,862

 
5,923,987

Mortgage escrow deposits
 
25,636

 
23,345

Borrowed funds
 
1,570,141

 
1,707,632

Other liabilities
 
61,413

 
60,628

Total liabilities
 
7,812,052

 
7,715,592

Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
 

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,293 shares issued and
65,732,579 shares outstanding at March 31, 2016 (unaudited) and 65,489,354 outstanding
at December 31, 2015
 
832

 
832

Additional paid-in capital
 
1,001,919

 
1,000,810

Retained earnings
 
517,365

 
507,713

Accumulated other comprehensive income (loss)
 
4,169

 
(2,546
)
Treasury stock
 
(269,105
)
 
(269,014
)
Unallocated common stock held by the Employee Stock Ownership Plan
 
(41,058
)
 
(41,730
)
Common stock acquired by the Directors’ Deferred Fee Plan
 
(6,350
)
 
(6,517
)
Deferred compensation – Directors’ Deferred Fee Plan
 
6,350

 
6,517

Total stockholders’ equity
 
1,214,122

 
1,196,065

Total liabilities and stockholders’ equity
 
$
9,026,174

 
$
8,911,657

See accompanying notes to unaudited consolidated financial statements.

3



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three months ended March 31, 2016 and 2015 (Unaudited)
(Dollars in Thousands, except per share data)
 
 
 
Three months ended March 31,
 
 
2016
 
2015
Interest income:
 
 
 
 
Real estate secured loans
 
$
44,233

 
$
43,289

Commercial loans
 
14,952

 
13,439

Consumer loans
 
5,636

 
5,794

Securities available for sale and Federal Home Loan Bank Stock
 
5,780

 
6,301

Investment securities held to maturity
 
3,331

 
3,396

Deposits, Federal funds sold and other short-term investments
 
42

 
12

Total interest income
 
73,974

 
72,231

Interest expense:
 
 
 
 
Deposits
 
3,821

 
3,588

Borrowed funds
 
7,084

 
6,715

Total interest expense
 
10,905

 
10,303

Net interest income
 
63,069

 
61,928

Provision for loan losses
 
1,500

 
600

Net interest income after provision for loan losses
 
61,569

 
61,328

Non-interest income:
 
 
 
 
Fees
 
6,461

 
6,054

Wealth management income
 
4,311

 
2,558

Bank-owned life insurance
 
1,332

 
1,348

Net gain on securities transactions
 
96

 
2

Other income
 
818

 
341

Total non-interest income
 
13,018

 
10,303

Non-interest expense:
 
 
 
 
Compensation and employee benefits
 
26,030

 
24,201

Net occupancy expense
 
6,434

 
7,172

Data processing expense
 
3,245

 
3,027

FDIC insurance
 
1,322

 
1,218

Amortization of intangibles
 
1,005

 
927

Advertising and promotion expense
 
879

 
761

Other operating expenses
 
5,963

 
6,131

Total non-interest expense
 
44,878

 
43,437

Income before income tax expense
 
29,709

 
28,194

Income tax expense
 
8,736

 
8,392

Net income
 
$
20,973

 
$
19,802

Basic earnings per share
 
$
0.33

 
$
0.32

Weighted average basic shares outstanding
 
63,351,093

 
62,673,887

Diluted earnings per share
 
$
0.33

 
$
0.32

Weighted average diluted shares outstanding
 
63,519,755

 
62,840,951


See accompanying notes to unaudited consolidated financial statements.

4



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2016 and 2015 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended March 31,
 
 
2016
 
2015
Net income
 
$
20,973

 
$
19,802

Other comprehensive income, net of tax:
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
Net unrealized gains arising during the period
 
7,094

 
3,711

Reclassification adjustment for gains included in net income
 
(57
)
 
(1
)
Total
 
7,037

 
3,710

Unrealized losses on derivatives
 
(421
)
 

Amortization (accretion) related to post-retirement obligations
 
99

 
(4
)
Total other comprehensive income
 
6,715

 
3,706

Total comprehensive income
 
$
27,688

 
$
23,508

See accompanying notes to unaudited consolidated financial statements.


5



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Three months ended March 31, 2016 and 2015 (Unaudited)
(Dollars in Thousands)
 
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
RETAINED
EARNINGS
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
TREASURY
STOCK
 
UNALLOCATED
ESOP
SHARES
 
COMMON
STOCK
ACQUIRED
BY DDFP
 
DEFERRED
COMPENSATION
DDFP
 
TOTAL
STOCKHOLDERS’
EQUITY
Balance at December 31, 2014
 
$
832

 
$
995,053

 
$
465,276

 
$
29

 
$
(271,779
)
 
$
(45,312
)
 
$
(7,113
)
 
$
7,113

 
$
1,144,099

Net income
 

 

 
19,802

 

 

 

 

 

 
19,802

Other comprehensive income, net of tax
 

 

 

 
3,706

 

 

 

 

 
3,706

Cash dividends declared
 

 

 
(10,798
)
 

 

 

 

 

 
(10,798
)
Distributions from DDFP
 

 

 

 

 

 

 
23

 
(23
)
 

Purchases of treasury stock
 

 

 

 

 
(1,882
)
 

 

 

 
(1,882
)
Shares issued dividend reinvestment plan
 

 
23

 

 

 
354

 

 

 

 
377

Stock option exercises
 

 
(17
)
 

 

 
412

 

 

 

 
395

Allocation of ESOP shares
 

 
38

 

 

 

 
649

 

 

 
687

Allocation of SAP shares
 

 
1,213

 

 

 

 

 

 

 
1,213

Allocation of stock options
 

 
72

 

 

 

 

 

 

 
72

Balance at March 31, 2015
 
$
832

 
$
996,382

 
$
474,280

 
$
3,735

 
$
(272,895
)
 
$
(44,663
)
 
$
(7,090
)
 
$
7,090

 
$
1,157,671

See accompanying notes to unaudited consolidated financial statements.

6





PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Three months ended March 31, 2016 and 2015 (Unaudited) (Continued)
(Dollars in Thousands)
 
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
RETAINED
EARNINGS
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
TREASURY
STOCK
 
UNALLOCATED
ESOP
SHARES
 
COMMON
STOCK
ACQUIRED
BY DDFP
 
DEFERRED
COMPENSATION
DDFP
 
TOTAL
STOCKHOLDERS’
EQUITY
Balance at December 31, 2015
 
$
832

 
$
1,000,810

 
$
507,713

 
$
(2,546
)
 
$
(269,014
)
 
$
(41,730
)
 
$
(6,517
)
 
$
6,517

 
$
1,196,065

Net income
 

 

 
20,973

 

 

 

 

 

 
20,973

Other comprehensive income, net of tax
 

 

 

 
6,715

 

 

 

 

 
6,715

Cash dividends declared
 

 

 
(11,321
)
 

 

 

 

 

 
(11,321
)
Distributions from DDFP
 

 
30

 

 

 

 

 
167

 
(167
)
 
30

Purchases of treasury stock
 

 

 

 

 
(2,697
)
 

 

 

 
(2,697
)
Shares issued dividend reinvestment plan
 

 
34

 

 

 
331

 

 

 

 
365

Stock option exercises
 

 
46

 

 

 
2,275

 

 

 

 
2,321

Allocation of ESOP shares
 

 
74

 

 

 

 
672

 

 

 
746

Allocation of SAP shares
 

 
879

 

 

 

 

 

 

 
879

Allocation of stock options
 

 
46

 

 

 

 

 

 

 
46

Balance at March 31, 2016
 
$
832

 
$
1,001,919

 
$
517,365

 
$
4,169

 
$
(269,105
)
 
$
(41,058
)
 
$
(6,350
)
 
$
6,350

 
$
1,214,122

See accompanying notes to unaudited consolidated financial statements.


7



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended March 31, 2016 and 2015 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended March 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
20,973

 
$
19,802

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
3,323

 
3,333

Provision for loan losses
 
1,500

 
600

Deferred tax expense
 
456

 
1,748

Increase in cash surrender value of Bank-owned life insurance
 
(1,332
)
 
(1,348
)
Net amortization of premiums and discounts on securities
 
2,401

 
2,655

Accretion of net deferred loan fees
 
(687
)
 
(946
)
Amortization of premiums on purchased loans, net
 
198

 
292

Net increase in loans originated for sale
 
(2,598
)
 
(3,869
)
Proceeds from sales of loans originated for sale
 
2,921

 
4,056

Proceeds from sales of foreclosed assets
 
1,063

 
288

ESOP expense
 
746

 
687

Allocation of stock award shares
 
723

 
852

Allocation of stock options
 
46

 
72

Net gain on sale of loans
 
(323
)
 
(187
)
Net gain on securities transactions
 
(96
)
 
(2
)
Net gain on sale of premises and equipment
 
(4
)
 
(5
)
Net (gain) loss on sale of foreclosed assets
 
(26
)
 
32

Decrease in accrued interest receivable
 
367

 
686

Increase in other assets
 
(2,659
)
 
(4,621
)
Increase (decrease) in other liabilities
 
785

 
(2,897
)
Net cash provided by operating activities
 
27,777

 
21,228

Cash flows from investing activities:
 
 
 
 
Proceeds from maturities, calls and paydowns of investment securities held to maturity
 
11,805

 
5,343

Purchases of investment securities held to maturity
 
(11,259
)
 
(10,220
)
Proceeds from sales of securities
 
2,106

 

Proceeds from maturities, calls and paydowns of securities available for sale
 
40,818

 
45,848

Purchases of securities available for sale
 
(52,513
)
 
(14,769
)
Net decrease in Federal Home Loan Bank stock
 
6,046

 
2,334

Purchases of loans
 
(28,590
)
 
(23,692
)
Net increase in loans
 
(72,894
)
 
(15,994
)
Proceeds from sales of premises and equipment
 
4

 
5

Purchases of premises and equipment
 
(1,758
)
 
(2,148
)
Net cash used in investing activities
 
(106,235
)
 
(13,293
)
Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
230,875

 
30,528

Increase in mortgage escrow deposits
 
2,291

 
2,004

Purchases of treasury stock
 
(2,697
)
 
(1,882
)
Cash dividends paid to stockholders
 
(11,321
)
 
(10,798
)
Shares issued through the dividend reinvestment plan
 
365

 
377

Stock options exercised
 
2,321

 
395


8



 
 
Three months ended March 31,
 
 
2016
 
2015
Proceeds from long-term borrowings
 
167,858

 
82,917

Payments on long-term borrowings
 
(206,068
)
 
(87,000
)
Net decrease in short-term borrowings
 
(99,281
)
 
(37,364
)
Net cash provided by (used in) financing activities
 
84,343

 
(20,823
)
Net increase (decrease) in cash and cash equivalents
 
5,885

 
(12,888
)
Cash and cash equivalents at beginning of period
 
102,226

 
103,762

Cash and cash equivalents at end of period
 
$
108,111

 
$
90,874

Cash paid during the period for:
 
 
 
 
Interest on deposits and borrowings
 
$
10,856

 
$
9,804

Income taxes
 
$
3,125

 
$
8,057

Non-cash investing activities:
 
 
 
 
Transfer of loans receivable to foreclosed assets
 
$
1,520

 
$
1,146

See accompanying notes to unaudited consolidated financial statements.

9



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly owned subsidiary, The 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 statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates. The allowance for loan losses, the valuation of securities available for sale and the valuation of deferred tax assets are material estimates that are particularly susceptible to near-term change.
The interim unaudited consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results of operations that may be expected for all of 2016.
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, 2015 Annual Report to Stockholders on Form 10-K.
B. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the three months ended March 31, 2016 and 2015 (dollars in thousands, except per share amounts):
 
 
Three months ended March 31,
 
 
 
2016
 
2015
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
20,973

 
 
 
 
 
$
19,802

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
20,973

 
63,351,093

 
$
0.33

 
$
19,802

 
62,673,887

 
$
0.32

 
Dilutive shares
 
 
 
168,662

 
 
 
 
 
167,064

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
20,973

 
63,519,755

 
$
0.33

 
$
19,802

 
62,840,951

 
$
0.32

 
Anti-dilutive stock options and awards at March 31, 2016 and 2015, totaling 633,989 shares and 818,059 shares, respectively, were excluded from the earnings per share calculations.
Note 2. Business Combinations
On April 1, 2015, Beacon Trust Company ("Beacon"), a wholly owned subsidiary of The Provident Bank, completed its acquisition of certain assets and liabilities of The MDE Group, Inc. and the equity interests of Acertus Capital Management, LLC (together "MDE"), both Morristown, New Jersey-based registered investment advisory firms that manage assets for affluent and high net-worth clients. MDE was acquired with both cash and contingent consideration.
The Company recognized goodwill of $18.3 million and a customer relationship intangible of $7.0 million related to the acquisition. The Company recognized a contingent consideration liability at its fair value of $338,000. The contingent consideration arrangement requires the Company to pay additional cash consideration to MDE’s former stakeholders four years after the closing

10



of the acquisition if certain revenue targets are met. The fair value of the contingent consideration was estimated using a discounted cash flow model. The acquisition agreement limits the total payment to a maximum of $12.5 million, to be determined based on actual future results.
Note 3. Investment Securities
At March 31, 2016, the Company had $984.2 million and $472.9 million in available for sale and held to maturity investment 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 which could result in other-than-temporary impairment ("OTTI") on certain investment securities in future periods. The total number of held to maturity and available for sale securities in an unrealized loss position as of March 31, 2016 totaled 53, compared with 163 at December 31, 2015. All securities with unrealized losses at March 31, 2016 were analyzed for other-than-temporary impairment. Based upon this analysis, the Company believes that as of March 31, 2016, such securities with unrealized losses do not represent impairments that are other-than-temporary.
Securities Available for Sale
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the fair value for securities available for sale at March 31, 2016 and December 31, 2015 (in thousands):
 

March 31, 2016
 

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,003

 
44

 

 
8,047

Agency obligations

79,307


296


(3
)
 
79,600

Mortgage-backed securities

868,946


17,856


(161
)
 
886,641

State and municipal obligations

4,183


139



 
4,322

Corporate obligations
 
5,016

 
72

 
(13
)
 
5,075

Equity securities

397


124



 
521

 

$
965,852


18,531


(177
)
 
984,206

 
 
December 31, 2015
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,006

 

 
(2
)
 
8,004

Agency Obligations
 
82,396

 
82

 
(148
)
 
82,330

Mortgage-backed securities
 
857,430

 
9,828

 
(3,397
)
 
863,861

State and municipal obligations
 
4,193

 
115

 

 
4,308

Corporate obligations
 
5,516

 
6

 
(10
)
 
5,512

Equity securities
 
397

 
122

 

 
519

 
 
$
957,938

 
10,153

 
(3,557
)
 
964,534

The amortized cost and fair value of securities available for sale at March 31, 2016, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
 
 
March 31, 2016
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
31,520

 
31,566

Due after one year through five years
 
59,038

 
59,328

Due after five years through ten years
 
3,680

 
3,778

Due after ten years
 
2,271

 
2,372

 
 
$
96,509

 
97,044

Mortgage-backed securities totaling $868.9 million at amortized cost and $886.6 million 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. Also excluded from the table above are equity securities of $397,000 at amortized cost and $521,000 at fair value.

11



For the three months ended March 31, 2016, proceeds from sales on securities available for sale totaled $2,106,000 resulting in gross gains of $95,000 and no gross losses. For the same period last year, there were no sales of securities from the available for sale portfolio. For the three months ended March 31, 2016, there were no calls of securities from the available for sale portfolio. For the three months ended March 31, 2015, proceeds from calls on securities available for sale totaled $465,000, resulting in gross gains of $2,000 and no gross losses.
The Company did not incur an OTTI charge on securities in the available for sale portfolio for the three months ended March 31, 2016 and 2015.
The following tables represent the Company’s disclosure regarding securities available for sale with temporary impairment at March 31, 2016 and December 31, 2015 (in thousands):
 

March 31, 2016 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

10,033

 
(3
)
 

 

 
10,033

 
(3
)
Mortgage-backed securities

31,086

 
(74
)
 
16,614

 
(87
)
 
47,700

 
(161
)
Corporate obligations
 
999

 

 
989

 
(13
)
 
1,988

 
(13
)


$
42,118

 
(77
)
 
17,603

 
(100
)
 
59,721

 
(177
)
 

December 31, 2015 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
U.S. Treasury obligations
 
$
8,004

 
(2
)
 

 

 
8,004

 
(2
)
Agency obligations
 
59,197

 
(148
)
 

 

 
59,197

 
(148
)
Mortgage-backed securities
 
327,263

 
(2,427
)
 
47,911

 
(970
)
 
375,174

 
(3,397
)
Corporate obligations
 
500

 

 
992

 
(10
)
 
1,492

 
(10
)


$
394,964

 
(2,577
)
 
48,903

 
(980
)
 
443,867

 
(3,557
)
The temporary loss position associated with certain securities available for sale was the result of changes in market interest rates relative to the coupon of the individual security and changes in credit spreads. The Company does not have the intent to sell securities in a temporary loss position at March 31, 2016, nor is it more likely than not that the Company will be required to sell the securities before their prices recover.
The number of available for sale securities in an unrealized loss position at March 31, 2016 totaled 15, compared with 64 at December 31, 2015. At March 31, 2016, there were three private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $690,000 and an unrealized loss of $5,000. These private label mortgage-backed securities were investment grade at March 31, 2016.
The Company estimates the loss projections for each security by stressing the individual loans collateralizing the security and applying a range of expected default rates, loss severities, and prepayment speeds in conjunction with the underlying credit enhancement for each security. Based on specific assumptions about collateral and vintage, a range of possible cash flows was identified to determine whether other-than-temporary impairment existed during the three months ended March 31, 2016. The Company believes that no other-than-temporary impairment of the securities available for sale portfolio existed for the three months ended March 31, 2016.

12



Investment Securities Held to Maturity
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the estimated fair value for investment securities held to maturity at March 31, 2016 and December 31, 2015 (in thousands):
 
 
March 31, 2016
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
4,197

 
8

 

 
4,205

Mortgage-backed securities

1,403

 
55

 

 
1,458

State and municipal obligations

457,427

 
18,557

 
(251
)
 
475,733

Corporate obligations

9,907

 
52

 
(6
)
 
9,953

 

$
472,934

 
18,672

 
(257
)
 
491,349

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations
 
$
4,096

 
9

 
(8
)
 
4,097

Mortgage-backed securities
 
1,597

 
61

 

 
1,658

State and municipal obligations
 
458,062

 
15,094

 
(495
)
 
472,661

Corporate obligations
 
9,929

 
11

 
(25
)
 
9,915

 
 
$
473,684

 
15,175

 
(528
)
 
488,331

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. There were no sales of securities from the held to maturity portfolio for the three months ended March 31, 2016 and 2015. For the three months ended March 31, 2016, the Company recognized gross gains of $1,000 and no gross losses related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $516,000. For the same period in 2015, proceeds from calls on securities held to maturity totaled $4.1 million, with no gross gains or losses recognized.
The amortized cost and fair value of investment securities in the held to maturity portfolio at March 31, 2016 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
 
 
March 31, 2016
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
11,538

 
11,589

Due after one year through five years

52,697

 
53,797

Due after five years through ten years

221,145

 
231,977

Due after ten years

186,151

 
192,528



$
471,531

 
489,891

Mortgage-backed securities totaling $1.4 million at amortized cost and $1.5 million 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.

13



The following tables represent the Company’s disclosure on investment securities held to maturity with temporary impairment at March 31, 2016 and December 31, 2015 (in thousands):
 
 
March 31, 2016 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
State and municipal obligations

10,388

 
(71
)
 
9,984

 
(180
)
 
20,372

 
(251
)
Corporate obligations

1,245

 
(6
)
 

 

 
1,245

 
(6
)
 

$
11,633

 
(77
)
 
9,984

 
(180
)
 
21,617

 
(257
)
 
 
December 31, 2015 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
 
$
1,244

 
(6
)
 
278

 
(2
)
 
1,522

 
(8
)
State and municipal obligations
 
24,266

 
(165
)
 
17,746

 
(330
)
 
42,012

 
(495
)
Corporate obligations
 
5,840

 
(18
)
 
744

 
(7
)
 
6,584

 
(25
)
 
 
$
31,350

 
(189
)
 
18,768

 
(339
)
 
50,118

 
(528
)
Based upon the review of the held to maturity securities portfolio, the Company believes that as of March 31, 2016, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the fair value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risks, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company would be required to sell the securities before their prices recover.
The number of held to maturity securities in an unrealized loss position at March 31, 2016 totaled 38, compared with 99 at December 31, 2015. The decrease in the number of securities in an unrealized loss position at March 31, 2016, was largely due to an increase in market interest rates from December 31, 2015. All temporarily impaired investment securities were investment grade at March 31, 2016.

14



Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable at March 31, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
 
March 31, 2016
 
December 31, 2015
Mortgage loans:
 
 
 
 
Residential
 
$
1,263,109

 
1,254,036

Commercial
 
1,709,054

 
1,714,923

Multi-family
 
1,318,143

 
1,233,792

Construction
 
309,656

 
331,649

Total mortgage loans
 
4,599,962

 
4,534,400

Commercial loans
 
1,479,145

 
1,433,447

Consumer loans
 
556,056

 
566,175

Total gross loans
 
6,635,163

 
6,534,022

Purchased credit-impaired ("PCI") loans
 
2,683

 
3,435

Premiums on purchased loans
 
6,011

 
5,740

Unearned discounts
 
(40
)
 
(41
)
Net deferred fees
 
(5,690
)
 
(5,482
)
Total loans
 
$
6,638,127

 
6,537,674

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
March 31, 2016
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Recorded
Investment
> 90 days
accruing
 
Total Past
Due
 
Current
 
Total Loans
Receivable
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
9,002

 
4,491

 
14,063

 

 
27,556

 
1,235,553

 
1,263,109

Commercial
 
1,115

 
3,351

 
1,306

 

 
5,772

 
1,703,282

 
1,709,054

Multi-family
 
47

 
751

 
1,240

 

 
2,038

 
1,316,105

 
1,318,143

Construction
 

 

 
2,517

 

 
2,517

 
307,139

 
309,656

Total mortgage loans
 
10,164

 
8,593

 
19,126

 

 
37,883

 
4,562,079

 
4,599,962

Commercial loans
 
1,108

 

 
28,527

 

 
29,635

 
1,449,510

 
1,479,145

Consumer loans
 
2,762

 
441

 
2,996

 

 
6,199

 
549,857

 
556,056

Total gross loans
 
$
14,034

 
9,034

 
50,649

 

 
73,717

 
6,561,446

 
6,635,163

 
 
December 31, 2015
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Recorded
Investment
> 90 days
accruing
 
Total Past
Due
 
Current
 
Total Loans
Receivable
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
8,983

 
5,434

 
12,031

 

 
26,448

 
1,227,588

 
1,254,036

Commercial
 
1,732

 
543

 
1,263

 

 
3,538

 
1,711,385

 
1,714,923

Multi-family
 
763

 
506

 
742

 

 
2,011

 
1,231,781

 
1,233,792

Construction
 

 

 
2,351

 

 
2,351

 
329,298

 
331,649

Total mortgage loans
 
11,478

 
6,483

 
16,387

 

 
34,348

 
4,500,052

 
4,534,400

Commercial loans
 
632

 
801

 
23,875

 
165

 
25,473

 
1,407,974

 
1,433,447

Consumer loans
 
3,603

 
1,194

 
4,109

 

 
8,906

 
557,269

 
566,175

Total gross loans
 
$
15,713

 
8,478

 
44,371

 
165

 
68,727

 
6,465,295

 
6,534,022



15



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 $50.6 million and $44.4 million at March 31, 2016 and December 31, 2015, respectively. Included in non-accrual loans were $13.1 million and $18.3 million of loans which were less than 90 days past due at March 31, 2016 and December 31, 2015, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2016. At December 31, 2015, there was one commercial loan for $165,000 which was ninety days or greater past due and still accruing interest. This loan was past due for maturity and well secured at December 31, 2015, and subsequent to the end of the year was renewed by the Company.
The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million for which it is probable, based on current information, all amounts due under the contractual terms of the loan agreement will not be collected. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a loan modification resulting in a concession is made in an effort to mitigate potential loss arising from a borrower’s financial difficulty. Smaller balance homogeneous loans, including residential mortgages and other consumer loans, are evaluated collectively for impairment and are excluded from the definition of impaired loans, unless modified as TDRs. The Company separately calculates the reserve for loan losses on impaired loans. The Company may recognize impairment of a loan based upon: (1) the present value of expected cash flows discounted at the effective interest rate; (2) if a loan is collateral dependent, the fair value of collateral; or (3) the fair value of the loan. Additionally, if impaired loans have risk characteristics in common, those loans may be aggregated and historical statistics may be used as a means of measuring those impaired loans.
The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analyses of collateral dependent impaired loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral dependent impaired loan and is updated annually or more frequently, if required.
A specific allocation of the allowance for loan losses is established for each collateral dependent impaired loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. Charge-offs are generally taken for the amount of the specific allocation when operations associated with the respective property cease and it is determined that collection of amounts due will be derived primarily from the disposition of the collateral. At each quarter end, if a loan is designated as a collateral dependent impaired loan and the third party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value. The Company believes there have been no significant time lapses as a result of this process.
At March 31, 2016, there were 151 impaired loans totaling $54.2 million. Included in this total were 119 TDRs related to 117 borrowers totaling $25.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2016. At December 31, 2015, there were 148 impaired loans totaling $50.9 million. Included in this total were 122 TDRs to 120 borrowers totaling $26.0 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2015.
The following table summarizes loans receivable by portfolio segment and impairment method, excluding PCI loans (in thousands):
 

March 31, 2016
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
26,688

 
25,186

 
2,319

 
54,193

Collectively evaluated for impairment

4,573,274

 
1,453,959

 
553,737

 
6,580,970

Total gross loans

$
4,599,962

 
1,479,145

 
556,056

 
6,635,163

 

December 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
26,743

 
21,756

 
2,368

 
50,867

Collectively evaluated for impairment

4,507,657

 
1,411,691

 
563,807

 
6,483,155

Total gross loans

$
4,534,400

 
1,433,447

 
566,175

 
6,534,022


16



The allowance for loan losses is summarized by portfolio segment and impairment classification as follows (in thousands):
 

March 31, 2016
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Total
Individually evaluated for impairment

$
2,167

 
2,796

 
90

 
5,053

 
5,053

Collectively evaluated for impairment

28,682

 
25,459

 
2,997

 
57,138

 
57,138

Total gross loans

$
30,849

 
28,255

 
3,087

 
62,191

 
62,191

 
 

December 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Total
Individually evaluated for impairment

$
2,086

 
91

 
94

 
2,271

 
2,271

Collectively evaluated for impairment

30,008

 
25,738

 
3,407

 
59,153

 
59,153

Total gross loans

$
32,094

 
25,829

 
3,501

 
61,424

 
61,424

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, the Company attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
The following tables present the number of loans modified as TDRs during the three months ended March 31, 2016 and 2015 along with their balances immediately prior to the modification date and post-modification as of March 31, 2016 and 2015. There were no loans modified as TDRs during the three months ended March 31, 2106.
 

For the three months ended
 

March 31, 2016

March 31, 2015
Troubled Debt Restructuring

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
 

($ in thousands)
Mortgage loans:












Residential


 
$

 
$

 
2

 
$
322

 
$
321

Construction
 

 

 

 
1

 
2,600

 
347

Total mortgage loans


 

 

 
3

 
2,922

 
668

Commercial loans


 

 

 
4

 
6,659

 
6,898

Consumer loans


 

 

 
1

 
44

 
42

Total restructured loans


 
$

 
$

 
8

 
$
9,625

 
$
7,608

All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. Estimated collateral values of collateral dependent impaired loans modified during the three months ended March 31, 2015 exceeded the carrying amounts of such loans. As a result, there were no charge-offs recorded on collateral dependent impaired loans presented in the preceding table for the three months ended March 31, 2015. The allowance for loan losses associated with the TDRs presented in the preceding table for the three months ended March 31, 2015 totaled $31,000 and was included in the allowance for loan losses for loans individually evaluated for impairment.
For the three months ended March 31, 2015, the TDRs had a weighted average modified interest rate of approximately 5.90%, compared to a rate of 5.83% prior to modification.

17



The following table presents loans modified as TDRs within the 12 month periods ending March 31, 2016 and 2015, and for which there was a payment default (90 days or more past due) within the respective one year period:
 
 
March 31, 2016
 
March 31, 2015
Troubled Debt Restructurings Subsequently Defaulted
 
Number of
Loans
 
Outstanding
Recorded  Investment
 
Number of
Loans
 
Outstanding
Recorded  Investment
 
 
($ in thousands)
Mortgage loans:
 
 
 
 
 
 
 
 
Construction
 
1

 
$
2,517

 

 
$

Total mortgage loans
 
1

 
2,517

 

 

Commercial loans
 
4

 
6,809

 

 
$

Total restructured loans
 
5

 
$
9,326

 

 
$

 
 
 
 
 
 
 
 
 
TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs.
PCI loans are loans acquired at a discount primarily due to deteriorated credit quality. As part of the May 30, 2014 acquisition of Team Capital, $5.2 million of the loans acquired were determined to be PCI loans. At the date of acquisition, PCI loans were accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.
The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired from Team Capital at May 30, 2014 (in thousands):
 
 
May 30, 2014
Contractually required principal and interest
 
$
12,505

Contractual cash flows not expected to be collected (non-accretable discount)
 
(6,475
)
Expected cash flows to be collected at acquisition
 
6,030

Interest component of expected cash flows (accretable yield)
 
(810
)
Fair value of acquired loans
 
$
5,220

PCI loans declined $750,000 to $2.7 million at March 31, 2016, from $3.4 million at December 31, 2015. The decrease from December 31, 2015, was largely due to the full repayment and greater than projected cash flows on certain PCI loans. This resulted in a $280,000 and a $76,000 increase in interest income for the three months ended March 31, 2016 and 2015, respectively, due to the acceleration of accretable and non-accretable discounts on these loans.
The following table summarizes the changes in the accretable yield for PCI loans during the three months ended March 31, 2016 and 2015 (in thousands):
 
Three months ended March 31,
 
2016
 
2015
Beginning balance
$
676

 
$
695

Acquisition

 

Accretion
(421
)
 
(198
)
Reclassification from non-accretable discount
248

 
184

Ending balance
$
503

 
$
681


18



The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015 was as follows (in thousands):
Three months ended March 31,

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Unallocated

Total
2016












Balance at beginning of period

$
32,094

 
25,829

 
3,501

 
61,424

 

 
61,424

Provision charged to operations

(1,193
)
 
2,958

 
(265
)
 
1,500

 

 
1,500

Recoveries of loans previously charged-off

172

 
91

 
316

 
579

 

 
579

Loans charged-off

(224
)
 
(623
)
 
(465
)
 
(1,312
)
 

 
(1,312
)
Balance at end of period

$
30,849

 
28,255

 
3,087

 
62,191

 

 
62,191

 
 
 
 
 
 
 
 
 
 
 
 
 
2015












Balance at beginning of period

$
31,977

 
24,381

 
4,881

 
61,239

 
495

 
61,734

Provision charged to operations

1,038

 
(477
)
 
284

 
845

 
(245
)
 
600

Recoveries of loans previously charged-off

65

 
215

 
211

 
491

 

 
491

Loans charged-off

(194
)
 
(422
)
 
(1,099
)
 
(1,715
)
 

 
(1,715
)
Balance at end of period

$
32,886

 
23,697

 
4,277

 
60,860

 
250

 
61,110


19



The following table presents loans individually evaluated for impairment by class and loan category, excluding PCI loans (in thousands):
 
 
March 31, 2016
 
December 31, 2015
 
 
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
 
$
11,046

 
8,121

 

 
8,148

 
106

 
12,144

 
8,799

 

 
9,079

 
451

Commercial
 

 

 

 

 

 

 

 

 

 

Multi-family
 

 

 

 

 

 

 

 

 

 

Construction
 
2,553

 
2,517

 

 
2,505

 

 
2,358

 
2,351

 

 
1,170

 
16

Total
 
13,599

 
10,638

 

 
10,653

 
106

 
14,502

 
11,150

 

 
10,249

 
467

Commercial loans
 
15,198

 
14,570

 

 
14,672

 

 
23,754

 
21,144

 

 
21,875

 
747

Consumer loans
 
1,543

 
1,046

 

 
1,066

 
24

 
1,560

 
1,082

 

 
1,121

 
48

Total impaired loans
 
$
30,340

 
26,254

 

 
26,391

 
130

 
39,816

 
33,376

 

 
33,245

 
1,262

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
15,889

 
14,826

 
1,989

 
14,865

 
147

 
14,997

 
14,353

 
1,901

 
14,500

 
505

Commercial
 
1,224

 
1,224

 
178

 
1,232

 
15

 
1,240

 
1,240

 
185

 
1,361

 
63

Multi-family
 

 

 

 

 

 

 

 

 

 

Construction
 

 

 

 

 

 

 

 

 

 

Total
 
17,113

 
16,050

 
2,167

 
16,097

 
162

 
16,237

 
15,593

 
2,086

 
15,861

 
568

Commercial loans
 
12,709

 
10,616

 
2,796

 
10,770

 
12

 
612

 
612

 
91

 
807

 
52

Consumer loans
 
1,284

 
1,273

 
90

 
1,279

 
16

 
1,297

 
1,286

 
94

 
1,312

 
67

Total impaired loans
 
$
31,106

 
27,939

 
5,053

 
28,146

 
190

 
18,146

 
17,491

 
2,271

 
17,980

 
687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total impaired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
26,935

 
22,947

 
1,989

 
23,013

 
253

 
27,141

 
23,152

 
1,901

 
23,579

 
956

Commercial
 
1,224

 
1,224

 
178

 
1,232

 
15

 
1,240

 
1,240

 
185

 
1,361

 
63

Multi-family
 

 

 

 

 

 

 

 

 

 

Construction
 
2,553

 
2,517

 

 
2,505

 

 
2,358

 
2,351

 

 
1,170

 
16

Total
 
30,712

 
26,688

 
2,167

 
26,750

 
268

 
30,739

 
26,743

 
2,086

 
26,110

 
1,035

Commercial loans
 
27,907

 
25,186

 
2,796

 
25,442

 
12

 
24,366

 
21,756

 
91

 
22,682

 
799

Consumer loans
 
2,827

 
2,319

 
90

 
2,345

 
40

 
2,857

 
2,368

 
94

 
2,433

 
115

Total impaired loans
 
$
61,446

 
54,193

 
5,053

 
54,537

 
320

 
57,962

 
50,867

 
2,271

 
51,225

 
1,949

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $5.1 million and $2.3 million at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016 and December 31, 2015, impaired loans for which there was no related allowance for loan losses totaled $26.3 million and $33.4 million , respectively. The average balance of impaired loans during the three months ended March 31, 2016 was $54.5 million.

20



The Company 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 Administration 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.
Loans receivable by credit quality risk rating indicator, excluding PCI loans, are as follows (in thousands):
 

At March 31, 2016
 

Residential

Commercial
mortgage

Multi-
family

Construction

Total
mortgages

Commercial

Consumer

Total loans
Special mention

$
4,491

 
27,574

 

 

 
32,065

 
56,931

 
441

 
89,437

Substandard

14,063

 
12,652

 
1,991

 
2,517

 
31,223

 
36,005

 
2,942

 
70,170

Doubtful


 

 

 

 

 
4,002

 

 
4,002

Loss


 

 

 

 

 

 

 

Total classified and criticized

18,554

 
40,226

 
1,991

 
2,517

 
63,288

 
96,938

 
3,383

 
163,609

Pass/Watch

1,244,555

 
1,668,828

 
1,316,152

 
307,139

 
4,536,674

 
1,382,207

 
552,673

 
6,471,554

Total

$
1,263,109

 
1,709,054

 
1,318,143

 
309,656

 
4,599,962

 
1,479,145

 
556,056

 
6,635,163

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At December 31, 2015
 

Residential

Commercial
mortgage

Multi-
family

Construction

Total
mortgages

Commercial

Consumer

Total loans
Special mention

$
5,434

 
29,363

 
1,080

 

 
35,877

 
76,464

 
1,194

 
113,535

Substandard

12,031

 
19,451

 
1,248

 
2,351

 
35,081

 
38,654

 
4,054

 
77,789

Doubtful


 

 

 

 

 
8

 

 
8

Loss


 

 

 

 

 

 

 

Total classified and criticized

17,465

 
48,814

 
2,328

 
2,351

 
70,958

 
115,126

 
5,248

 
191,332

Pass/Watch

1,236,571

 
1,666,109

 
1,231,464

 
329,298

 
4,463,442

 
1,318,321

 
560,927

 
6,342,690

Total

$
1,254,036

 
1,714,923

 
1,233,792

 
331,649

 
4,534,400

 
1,433,447

 
566,175

 
6,534,022

Note 5. Deposits
Deposits at March 31, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
 
March 31, 2016
 
December 31, 2015
Savings
 
$
1,005,430

 
985,478

Money market
 
1,546,619

 
1,468,352

NOW
 
1,621,395

 
1,540,894

Non-interest bearing
 
1,185,800

 
1,189,542

Certificates of deposit
 
795,618

 
739,721

Total deposits
 
$
6,154,862

 
5,923,987

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%

21



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 months ended March 31, 2016 and 2015 includes the following components (in thousands):
 

Three months ended March 31,
 

Pension
benefits

Other post-
retirement
benefits
 

2016

2015

2016

2015
Service cost

$

 

 
38

 
42

Interest cost

312

 
284

 
284

 
281

Expected return on plan assets

(612
)
 
(633
)
 

 

Amortization of prior service cost


 

 

 

Amortization of the net loss

236

 
194

 

 

Net periodic benefit (increase) cost

$
(64
)
 
(155
)
 
322

 
323

In its consolidated financial statements for the year ended December 31, 2015, the Company previously disclosed that it does not expect to contribute to the pension plan in 2016. As of March 31, 2016, no contributions have been made to the pension plan.
The net periodic benefit (increase) cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2016 were calculated using the actual January 1, 2016 pension and other post-retirement benefits valuations.
Note 7. Impact of Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU”) No. 2016-09, "Compensation - Stock Compensation (Topic 718)."  The objective of this ASU is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Under this ASU, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.  An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.  An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur.  Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements.
In February 2016, the FASB issued (ASU No. 2016-02, "Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact that the guidance will have on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial

22



instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact that the guidance will have on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations, Simplifying the Accounting for Measurement - Period Adjustments."  The amendments in this update apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized.  In these cases, the acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  The amendments in this update are effective for fiscal years beginning after December 15, 2015 including interim periods within those fiscal years.  The Company’s adoption of this ASU did not have a material impact on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period," which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
Also in June 2014, the FASB issued ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" which aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. This update is effective for the first interim or annual period beginning after December 15, 2014. In addition the disclosure of certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption was prohibited. The Company's adoption of this ASU did not have an impact on its consolidated financial statements.

23


Note 8. Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, the Company utilizes various valuation techniques to estimate fair value.
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the financial instrument.
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:
Level 1:
  
Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
 
Level 2:
  
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and
 
 
Level 3:
  
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The valuation techniques described below were used to measure fair value of financial instruments in the table below on a recurring basis as of March 31, 2016 and December 31, 2015.
Securities Available for Sale
For securities available for sale, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also may hold equity securities and debt instruments issued by the U.S. government and U.S. government-sponsored agencies 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 balance sheet 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. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships. The existing interest rate derivatives result from a service provided to certain qualifying borrowers in a loan related transaction and, therefore, are not used

24


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 Federal Home Loan Bank borrowings. The effective portion of changes in the fair value of these derivatives are recorded in accumulated other comprehensive income, and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of these derivatives are recognized directly in earnings.
The fair value of the Company's derivatives are determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 inputs.
Assets Measured at Fair Value on a Non-Recurring Basis
The valuation techniques described below were used to estimate fair value of financial instruments measured on a non-recurring basis as of March 31, 2016 and December 31, 2015.
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 of up to 6%. The Company classifies these loans as Level 3 within the fair value hierarchy.
Foreclosed Assets
Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated selling costs of up to 6%. 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 loan losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.
There were no changes to the valuation techniques for fair value measurements as of March 31, 2016 and December 31, 2015.

25


The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of March 31, 2016 and December 31, 2015, by level within the fair value hierarchy:
 

Fair Value Measurements at Reporting Date Using:
(In thousands)

March 31, 2016

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:








Securities available for sale:

 
 
 
 
 
 
 
US Treasury obligations
 
$
8,047

 
8,047

 

 

Agency obligations

79,600

 
79,600

 

 

Mortgage-backed securities

886,641

 

 
886,641

 

State and municipal obligations

4,322

 

 
4,322

 

Corporate obligations
 
5,075

 

 
5,075

 

Equity securities

521

 
521

 

 

Total securities available for sale

984,206

 
88,168

 
896,038

 

 Derivative assets
 
14,407

 

 
14,407

 

 
 
$
998,613

 
88,168

 
910,445

 

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
15,565

 

 
15,565

 

 
 
 
 
 
 
 
 
 
Measured on a non-recurring basis:

 
 
 
 
 
 
 
Loans measured for impairment based on the fair value of the underlying collateral

$
10,136

 

 

 
10,136

Foreclosed assets

11,029

 

 

 
11,029



$
21,165

 

 

 
21,165

 

Fair Value Measurements at Reporting Date Using:
(In thousands)

December 31, 2015

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:








Securities available for sale:








US Treasury obligations
 
$
8,004

 
8,004

 

 

Agency obligations

82,330

 
82,330

 

 

Mortgage-backed securities

863,861

 

 
863,861

 

State and municipal obligations

4,308

 

 
4,308

 

Corporate obligations
 
5,512

 

 
5,512

 

Equity securities

519

 
519

 

 



$
964,534

 
90,853

 
873,681

 

Derivative assets
 
6,854

 

 
6,854

 

 
 
$
971,388

 
90,853

 
880,535

 

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
6,745

 

 
6,745

 

 
 
 
 
 
 
 
 
 
Measured on a non-recurring basis:

 
 
 
 
 
 
 
Loans measured for impairment based on the fair value of the underlying collateral

$
9,481

 

 

 
9,481

Foreclosed assets

10,546

 

 

 
10,546



$
20,027

 

 

 
20,027

There were no transfers between Level 1, Level 2 and Level 3 during the three months ended March 31, 2016.

26


Other Fair Value Disclosures
The Company is required to disclose the 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.
Investment Securities Held to Maturity
For investment securities held to maturity, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy.

Federal Home Loan Bank of New York ("FHLBNY") Stock
The carrying value of FHLBNY stock was its cost. The fair value of FHLBNY stock is based on redemption at par value. The Company classifies the estimated fair value as Level 1 within the fair value hierarchy.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifies the estimated fair value of its loan portfolio as Level 3.
The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows and estimated selling costs. 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. The fair value estimates of commitments to extend credit and letters of credit are deemed immaterial.

27


Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following tables present the Company’s financial instruments at their carrying and fair values as of March 31, 2016 and December 31, 2015. Fair values are presented by level within the fair value hierarchy.
 
 
 
 
Fair Value Measurements at March 31, 2016 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
 
$
108,111

 
108,111

 
108,111

 

 

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
US Treasury obligations
 
8,047

 
8,047

 
8,047

 

 

Agency obligations
 
79,600

 
79,600

 
79,600

 

 

Mortgage-backed securities
 
886,641

 
886,641

 

 
886,641

 

State and municipal obligations
 
4,322

 
4,322

 

 
4,322

 

Corporate obligations
 
5,075

 
5,075

 

 
5,075

 

Equity securities
 
521

 
521

 
521

 

 

Total securities available for sale
 
$
984,206

 
984,206

 
88,168

 
896,038

 

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
Agency obligations
 
4,197

 
4,205

 
4,205

 

 

Mortgage-backed securities
 
1,403

 
1,458

 

 
1,458

 

State and municipal obligations
 
457,427

 
475,733

 

 
475,733

 

Corporate obligations
 
9,907

 
9,953

 

 
9,953

 

Total securities held to maturity
 
$
472,934

 
491,349

 
4,205

 
487,144

 

FHLBNY stock
 
72,135

 
72,135

 
72,135

 

 

Loans, net of allowance for loan losses
 
6,575,936

 
6,557,405

 

 

 
6,557,405

Derivative assets
 
14,407

 
14,407

 

 
14,407

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits other than certificates of deposits
 
$
5,359,244

 
5,359,244

 
5,359,244

 

 

Certificates of deposit
 
795,618

 
797,686

 

 
797,686

 

Total deposits
 
$
6,154,862

 
6,156,930

 
5,359,244

 
797,686

 

Borrowings
 
1,570,141

 
1,587,301

 

 
1,587,301

 

Derivative liabilities
 
15,565

 
15,565

 

 
15,565

 


28


 
 
 
 
Fair Value Measurements at December 31, 2015 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
 
$
102,226

 
102,226

 
102,226

 

 

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
US Treasury obligations
 
8,004

 
8,004

 
8,004

 

 

Agency obligations
 
82,330

 
82,330

 
82,330

 

 

Mortgage-backed securities
 
863,861

 
863,861

 

 
863,861

 

State and municipal obligations
 
4,308

 
4,308

 

 
4,308

 

Corporate obligations
 
5,512

 
5,512

 

 
5,512

 

Equity securities
 
519

 
519

 
519

 

 

Total securities available for sale
 
$
964,534

 
964,534

 
90,853

 
873,681

 

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
Agency obligations
 
$
4,096

 
4,097

 
4,097

 

 

Mortgage-backed securities
 
1,597

 
1,658

 

 
1,658

 

State and municipal obligations
 
458,062

 
472,661

 

 
472,661

 

Corporate obligations
 
9,929

 
9,915

 

 
9,915

 

Total securities held to maturity
 
$
473,684

 
488,331

 
4,097

 
484,234

 

FHLBNY stock
 
78,181

 
78,181

 
78,181

 

 

Loans, net of allowance for loan losses
 
6,476,250

 
6,509,502

 

 

 
6,509,502

Derivative assets
 
6,854

 
6,854

 

 
6,854

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits other than certificates of deposits
 
$
5,184,266

 
5,184,266

 
5,184,266

 

 

Certificates of deposit
 
739,721

 
742,020

 

 
742,020

 

Total deposits
 
$
5,923,987

 
5,926,286

 
5,184,266

 
742,020

 

Borrowings
 
1,707,632

 
1,726,726

 

 
1,726,726

 

Derivative liabilities
 
6,745

 
6,745

 

 
6,745

 


29



Note 9. Other Comprehensive Income
The following table presents the components of other comprehensive income (loss) both gross and net of tax, for the three months ended March 31, 2016 and 2015 (in thousands):
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
Before
Tax
 
Tax
Effect
 
After
Tax
 
Before
Tax
 
Tax
Effect
 
After
Tax
Components of Other Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Net gains arising during the period
 
$
11,856

 
(4,762
)
 
7,094

 
6,202

 
(2,491
)
 
3,711

Reclassification adjustment for gains included in net income
 
(96
)
 
39

 
(57
)
 
(2
)
 
1

 
(1
)
Total
 
11,760

 
(4,723
)
 
7,037

 
6,200

 
(2,490
)
 
3,710

Unrealized losses on derivatives (cash flow hedges)
 
(704
)
 
283

 
(421
)
 

 

 

Amortization related to post-retirement obligations
 
165

 
(66
)
 
99

 
(7
)
 
3

 
(4
)
Total other comprehensive income
 
$
11,221

 
(4,506
)
 
6,715

 
6,193

 
(2,487
)
 
3,706

The following tables present the changes in the components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2016 and 2015 (in thousands):
 
 
Changes in Accumulated Other Comprehensive Income by Component, net of tax
For the three months ended March 31,
 
 
2016
 
2015
 
 
Unrealized
Gains on Securities
Available for 
Sale
 
Post  Retirement
Obligations
 
Unrealized (losses) on Derivatives (cash flow hedges)
 
Accumulated
Other
Comprehensive
Income
 
Unrealized
Gains on Securities
Available for 
Sale
 
Post  Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income
Balance at December 31,
 
$
3,951

 
(6,424
)
 
(73
)
 
(2,546
)
 
7,743

 
(7,714
)
 
29

Current - period other comprehensive income
 
7,037

 
99

 
(421
)
 
6,715

 
3,710

 
(4
)
 
3,706

Balance at March 31,
 
$
10,988

 
(6,325
)
 
(494
)
 
4,169

 
11,453

 
(7,718
)
 
3,735


30



The following tables summarize the reclassifications out of accumulated other comprehensive income to the consolidated statements of income for the three months ended March 31, 2016 and 2015 (in thousands):
 
 
Reclassifications Out of Accumulated Other Comprehensive
Income ("AOCI")
 
 
Amount reclassified from AOCI for the three months ended March 31,
 
Affected line item in the Consolidated
Statement of Income
 
 
2016
 
2015
 
Details of AOCI:
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
Realized net gains on the sale of securities available for sale
 
$
96

 
2

 
Net gain on securities transactions
 
 
(39
)
 
(1
)
 
Income tax expense
 
 
57

 
1

 
Net of tax
 
 
 
 
 
 
 
Post-retirement obligations:
 
 
 
 
 
 
Amortization of actuarial losses
 
236

 
194

 
Compensation and employee benefits (1)
 
 
(95
)
 
(79
)
 
Income tax expense
 
 
141

 
115

 
Net of tax
Total reclassifications
 
$
198

 
116

 
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.

31




Note 10. Derivative and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.
Non-designated Hedges. Derivatives not designated in qualifying hedging relationships are not speculative and result from a service the Company provides to certain qualifying commercial borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company executes interest rate swaps with 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 banking borrower is collateralized by the borrower's property financed by the Company. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At March 31, 2016 and December 31, 2015, the Company had 26 interest rate swaps with an aggregate notional amount of $414.2 million and 23 interest rate swaps with an aggregate notional amount of $391.4 million, respectively, related to this program.
Cash Flow Hedges of Interest Rate Risk. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2016, such derivatives were used to hedge the variable cash outflows associated with Federal Home Loan Bank borrowings. The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings. The Company implemented this program during the quarter ended September 30, 2015. During the three months ended March 31, 2016, the Company did not record any hedge ineffectiveness.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $336,000 will be reclassified as an increase to interest expense. As of March 31, 2016, the Company had one outstanding interest rate derivative with a notional amount of $40.0 million that was designated as a cash flow hedge of interest rate risk.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at March 31, 2016 and December 31, 2015 (in thousands):
 
 
At March 31, 2016
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Consolidated Statements of Financial Condition
 
Fair
Value
 
Consolidated Statements of Financial Condition
 
Fair
Value
Derivatives not designated as a hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
Other assets
 
$
14,399

 
Other liabilities
 
$
14,714

Credit contracts
 
Other assets
 
8

 
 
 
26

Total derivatives not designated as hedging instruments
 
 
 
$
14,407

 
 
 
$
14,740

 
 
 
 
 
 
 
 
 
Derivatives designated as a a hedging instrument:
 
 
 
 
 
 
 

Interest rate products
 
Other assets
 
$

 
Other liabilities
 
$
825

Total derivatives designated as a hedging instrument
 
 
 
$

 
 
 
$
825


32



 
 
At December 31, 2015
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Consolidated Statements of Financial Condition
 
Fair
Value
 
Consolidated Statements of Financial Condition
 
Fair
Value
Derivatives not designated as a hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
Other assets
 
$
6,849

 
Other liabilities
 
$
6,623

Credit contracts
 
Other assets
 
5

 
 
 

Total derivatives not designated as hedging instruments
 
 
 
$
6,854

 
 
 
$
6,623

 
 
 
 
 
 
 
 
 
Derivatives designated as a a hedging instrument:
 
 
 
 
 
 
 
 
Interest rate products
 
Other assets
 
$

 
Other liabilities
 
$
122

Total derivatives designated as a hedging instrument
 
 
 
$

 
 
 
$
122

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three months ended March 31, 2016 (in thousands).
 
 
 
 
Gain (loss) recognized in income on derivatives for the three months ended
 
 
Consolidated Statements of Income
 
 March 31, 2016
 
 March 31, 2015
Derivatives not designated as a hedging instruments:
 
 
 
 
 
 
Interest rate products
 
Other income
 
$
(540
)
 
$
(65
)
Credit contracts
 
Other income
 
104

 
1

Total
 
 
 
$
(436
)
 
$
(64
)
 
 
 
 
 
 
 
Derivatives designated as a hedging instruments:
 
 
 
 
 
 
Interest Rate Products
 
Other income
 
$
(145
)
 
$

Total
 
 
 
$
(145
)
 
$

The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision that if the Company fails to maintain its status as a well / adequate capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of March 31, 2016, the termination value of derivatives in a net liability position, which includes accrued interest, was $15.7 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $14.3 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2016, it could have been required to settle its obligations under the agreements at the termination value.
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,” “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 or supplemented by its quarterly reports on Form 10-Q and, those related to the economic environment,

33



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 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.
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 also 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 any subsequent events or circumstances after the date of this statement.
Acquisitions
On April 1, 2015, Beacon Trust Company ("Beacon"), a wholly owned subsidiary of The Provident Bank, completed its acquisition of certain assets and liabilities of The MDE Group, Inc. and the equity interests of Acertus Capital Management, LLC (together "MDE"), both Morristown, New Jersey-based registered investment advisory firms that manage assets for affluent and high net-worth clients. MDE was acquired with both cash and contingent consideration.
The Company recognized goodwill of $18.3 million and a customer relationship intangible of $7.0 million related to the acquisition. The Company recognized a contingent consideration liability at its fair value of $338,000. The contingent consideration arrangement requires the Company to pay additional cash consideration to MDE’s former stakeholders four years after the closing of the acquisition if certain revenue targets are met. The fair value of the contingent consideration was estimated using a discounted cash flow model. The acquisition agreement limits the total payment to a maximum of $12.5 million, to be determined based on actual future results.
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 loan losses
Goodwill valuation and analysis for impairment
Valuation of securities available for sale and impairment analysis
Valuation of deferred tax assets
The calculation of the allowance for loan losses is a critical accounting policy of the Company. The allowance for loan losses is a valuation account that reflects management’s evaluation of the probable losses in the loan portfolio. The Company maintains the allowance for loan losses through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses.
The Company’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on which the collectability of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.
As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating.
When assigning a risk rating to a loan, management utilizes a nine point internal risk rating system. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans 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 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 the Credit Administration Department. The risk ratings are also confirmed through periodic loan review

34



examinations, which are currently performed by an independent third party, and periodically by the Credit Committee in the credit renewal or approval. In addition, the Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk rating.
Management estimates the amount of loan losses for groups of loans by applying quantitative loss factors to loan segments at the risk rating level, and applying qualitative adjustments to each loan segment at the portfolio level. Quantitative loss factors give consideration to historical loss experience by loan type based upon an appropriate look back period and adjusted for a loss emergence period. Quantitative loss factors are evaluated at least annually. Qualitative adjustments give consideration to other qualitative or environmental factors such as trends and levels of delinquencies, impaired loans, charge-offs, recoveries and loan volumes, as well as national and local economic trends and conditions. Qualitative adjustments reflect risks in the loan portfolio not captured by the quantitative loss factors and, as such, are evaluated from a risk level perspective relative to the risk levels present over the look back period. Qualitative adjustments are evaluated at least quarterly. The reserves resulting from the application of both of these sets of loss factors are combined to arrive at the allowance for loan 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. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio.
Although management believes that the Company has established and maintained the allowance for loan losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy generally have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan 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 loan losses remains an estimate that is subject to significant judgment and short-term change.
Additional critical accounting policies relate to judgments about other asset impairments, including goodwill, investment securities and deferred tax assets. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates.
Management qualitatively determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing Step 1 of the goodwill impairment test. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to perform Step 1 of the assessment and then, if needed, Step 2 to determine whether goodwill is impaired. However, if it is more likely than not that the fair value of the reporting unit is more than its carrying amount, the entity does not need to apply the two-step impairment test. For this analysis, the Reporting Unit is defined as the Bank, which includes all core and retail banking operations of the Company but excludes the assets, liabilities, equity, earnings and operations held exclusively at the Company level. The guidance provides certain factors an entity should consider in its qualitative assessment in determining whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The factors include:
Macroeconomic conditions, such as deterioration in economic condition and limited access to capital.
Industry and market considerations, such as increased competition, regulatory developments and decline in market-dependent multiples.
Cost factors, such as increased labor costs, cost of materials and other operating costs.
Overall financial performance, such as declining cash flows and decline in revenue or earnings.
Other relevant entity-specific events, such as changes in management, strategy or customers, litigation and contemplation of bankruptcy.

35



Reporting unit events, such as selling or disposing a portion of a reporting unit and a change in composition of assets.
The Company may, based upon its qualitative assessment, or at its option, perform the two-step process to evaluate the potential impairment of goodwill. If, based upon Step 1, the fair value of the Reporting Unit exceeds its carrying amount, goodwill of the Reporting Unit is considered not impaired. However, if the carrying amount of the Reporting Unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the Reporting Unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.
The Company completed its annual goodwill impairment test as of September 30, 2015. Based upon its qualitative assessment of goodwill, the Company concluded it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, goodwill was not impaired and no further quantitative analysis (Step 1) was warranted.
The Company’s available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in Stockholders’ Equity. Estimated fair values are based on market quotations or matrix pricing as discussed in Note 8 to the consolidated financial statements. Securities which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Management conducts a periodic review and evaluation of the securities portfolio to determine if any declines in the fair values of securities are other-than-temporary. In this evaluation, if such a decline were deemed other-than-temporary, Management would measure the total credit-related component of the unrealized loss, and recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed-rate securities decreases and as interest rates fall, the fair value of fixed-rate securities increases. The Company determines if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. If either exists, the decline in value is considered other-than-temporary. In its evaluations, the Company did not recognize an other-than-temporary impairment charge on securities for the three months ended March 31, 2016 and 2015.
The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities, utilization against carryback years and estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company did not require a valuation allowance at March 31, 2016.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2016 AND DECEMBER 31, 2015
Total assets increased $114.5 million to $9.03 billion at March 31, 2016, from $8.91 billion at December 31, 2015, primarily due to a $100.5 million increase in total loans and a $12.9 million increase in total investments.
Total loans increased $100.5 million, or 1.5%, to $6.64 billion at March 31, 2016, from $6.54 billion at December 31, 2015. Loan originations totaled $646.8 million and loan purchases totaled $28.6 million for the three months ended March 31, 2016. The loan portfolio had net increases of $84.2 million in multi-family mortgage loans, $45.7 million in commercial loans and $8.5 million in residential mortgage loans, partially offset by net decreases of $22.0 million in construction loans, $10.1 million in consumer loans and $5.9 million in commercial mortgage loans. Commercial real estate, commercial and construction loans represented 72.6% of the loan portfolio at March 31, 2016, compared to 72.1% at December 31, 2015.
The Company does not originate or purchase sub-prime or option ARM loans. Prior to September 30, 2008, the Company originated “Alt-A” mortgages in the form of stated income loans with a maximum loan-to-value ratio of 50% on a limited basis. The balance of these “Alt-A” loans at March 31, 2016 was $6.1 million. Of this total, 3 loans totaling $1.0 million were 90 days or more delinquent. These loans were allocated total loss reserves of $70,000.
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 $232.9 million and $180.9 million, respectively, at March 31, 2016. No SNCs were 90 days or more delinquent at March 31, 2016.
The Company had outstanding junior lien mortgages totaling $241.1 million at March 31, 2016. Of this total, 24 loans totaling $1.9 million were 90 days or more delinquent. These loans were allocated total loss reserves of $474,000.

36



At March 31, 2016, the Company had outstanding indirect marine loans totaling $16.8 million. No marine loans were 90 days or more delinquent at March 31, 2016. Marine loans are currently made only on a direct, limited accommodation basis to existing customers.
The following table sets forth information regarding the Company’s non-performing assets as of March 31, 2016 and December 31, 2015 (in thousands):


March 31, 2016

December 31, 2015
Mortgage loans:




Residential

$
14,063

 
12,031

Commercial

1,306

 
1,263

Multi-family

1,240

 
742

Construction

2,517

 
2,351

Total mortgage loans

19,126

 
16,387

Commercial loans

28,527

 
23,875

Consumer loans

2,996

 
4,109

Total non-performing/non-accrual loans

50,649

 
44,371

Total non-performing/accruing loans - 90 days or more delinquent
 

 
165

Total non-performing loans
 
50,649

 
44,536

Foreclosed assets

11,029

 
10,546

Total non-performing assets

$
61,678

 
55,082

The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of March 31, 2016 and December 31, 2015 (in thousands):
 
 
March 31, 2016
 
December 31, 2015
Mortgage loans:
 
 
 
 
Residential
 
$
4,491

 
5,434

Commercial
 
3,351

 
543

Multi-family
 
751

 
506

Total mortgage loans
 
8,593

 
6,483

Commercial loans
 

 
801

Consumer loans
 
441

 
1,194

Total 60-89 day delinquent loans
 
$
9,034

 
8,478

At March 31, 2016, the allowance for loan losses totaled $62.2 million, or 0.94% of total loans, compared with $61.4 million, or 0.94% of total loans at December 31, 2015. Total non-performing loans were $50.6 million, or 0.76% of total loans at March 31, 2016, compared to $44.5 million, or 0.68% of total loans at December 31, 2015. The $6.1 million increase in non-performing loans consisted of a $4.5 million increase in non-performing commercial loans, a $2.0 million increase in non-performing residential mortgage loans, a $498,000 increase in non-performing multi-family loans and a $166,000 increase in non-performing construction loans, partially offset by a $1.1 million decrease in non-performing consumer loans. Non-performing loans do not include $2.7 million of purchased credit impaired ("PCI") loans acquired from Team Capital.
At March 31, 2016, the Company held $11.0 million of foreclosed assets, compared with $10.5 million at December 31, 2015. During the quarter ended March 31, 2016, there were eight additions to foreclosed assets with a carrying value of $1.5 million and seven properties sold with a carrying value of $875,000. Foreclosed assets at March 31, 2016, consisted primarily of $5.8 million of residential real estate, $5.1 million of commercial real estate and $156,000 of marine vessels.
Non-performing assets totaled $61.7 million, or 0.68% of total assets at March 31, 2016, compared to $55.1 million, or 0.62% of total assets at December 31, 2015.
Total investments increased $12.9 million, or 0.85%, to $1.53 billion at March 31, 2016, from $1.52 billion at December 31, 2015, largely due to purchases of mortgage-backed and municipal securities and an increase in unrealized gains on securities available for sale, partially offset by principal repayments on mortgage-backed securities, maturities of municipal and agency bonds and sales of certain mortgage-backed securities.

37



Total deposits increased $230.9 million, or 3.9%, during the three months ended March 31, 2016, to $6.15 billion. Total core deposits, which consist of savings and demand deposit accounts, increased $175.0 million to $5.36 billion at March 31, 2016, while time deposits increased $55.9 million to $795.6 million at March 31, 2016. The increase in core deposits was largely attributable to an $80.5 million increase in interest bearing demand deposits, a $78.3 million increase in money market deposits and a $20.0 million increase in savings deposits. The increase in time deposits was primarily due to a $54.5 million increase in brokered certificates of deposits. At March 31, 2016, total brokered deposits were $153.2 million. Core deposits represented 87.1% of total deposits at March 31, 2016, compared to 87.5% at December 31, 2015.
Borrowed funds decreased $137.5 million, or 8.1%, during the three months ended March 31, 2016, to $1.57 billion, as shorter-term wholesale fundings were replaced by net inflows of deposits for the period. Borrowed funds represented 17.4% of total assets at March 31, 2016, a decrease from 19.2% at December 31, 2015.
Stockholders’ equity increased $18.1 million, or 1.5%, during the three months ended March 31, 2016, to $1.21 billion, due to net income earned for the period and an increase in unrealized gains on securities available for sale, partially offset by dividends paid to stockholders. For the three months ended March 31, 2016, 146,245 shares of common stock were repurchased at an average cost of $18.45 per share, a portion of which were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At March 31, 2016, 3.2 million shares remained eligible for repurchase under the current authorization. Book value per share and tangible book value per share at March 31, 2016 were $18.47 and $12.00, respectively, compared with $18.26 and $11.75, respectively, at December 31, 2015.
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 and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows.
In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule became effective January 1, 2015. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopts a uniform minimum leverage capital ratio at 4%, increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also requires 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 is exercised. The Company has 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” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer was effective on January 1, 2016, with a 0.625% requirement, and will continue to be phased in through January 1, 2019, when the full capital requirement will be effective.

38



As of March 31, 2016, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:
 

March 31, 2016
 

Required

Required with Capital Conservation Buffer
 
Actual
 

Amount

Ratio

Amount
 
Ratio
 
Amount

Ratio
 

(Dollars in thousands)
Bank:





 
 
 
 



Tier 1 leverage capital
 
$
341,549

 
4.000
%
 
$
341,549

 
4.000
%
 
$
719,094

 
8.422
%
Common equity Tier 1 risk-based capital

306,487

 
4.500
%
 
349,055

 
5.125
%
 
719,094

 
10.558
%
Tier 1 risk-based capital

408,650

 
6.000
%
 
451,217

 
6.625
%
 
719,094

 
10.558
%
Total risk-based capital

544,866

 
8.000
%
 
587,434

 
8.625
%
 
781,439

 
11.473
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Company:

 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital
 
$
341,560

 
4.000
%
 
$
341,560

 
4.000
%
 
$
788,340

 
9.232
%
Common equity Tier 1 risk-based capital

306,496

 
4.500
%
 
349,065

 
5.125
%
 
788,340

 
11.574
%
Tier 1 risk-based capital

408,661

 
6.000
%
 
451,230

 
6.625
%
 
788,340

 
11.574
%
Total risk-based capital

544,881

 
8.000
%
 
587,450

 
8.625
%
 
850,531

 
12.488
%
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
General. The Company reported net income of $21.0 million, or $0.33 per basic and diluted share for the three months ended March 31, 2016, compared to net income of $19.8 million, or $0.32 per basic and diluted share for the three months ended March 31, 2015.
Results of operations for the three months ended March 31, 2016 were favorably impacted by growth in both average loans outstanding and average non-interest bearing deposits, along with growth in wealth management income. These factors helped mitigate the impact of compression in the net interest margin.
Net Interest Income. Total net interest income increased $1.1 million to $63.1 million for the quarter ended March 31, 2016, from $61.9 million for the quarter ended March 31, 2015. For the three months ended March 31, 2016, interest income increased $1.7 million to $74.0 million, from $72.2 million for the three months ended March 31, 2015. Interest expense increased $602,000, or 5.8%, to $10.9 million for the quarter ended March 31, 2016, from $10.3 million for the quarter ended March 31, 2015. The increase in net interest income for the quarter ended March 31, 2016 was primarily due to organic growth in average loans outstanding and an increase in average non-interest bearing demand deposits, partially offset by period-over-period compression in the net interest margin.
The Company’s net interest margin decreased 13 basis points to 3.11% for the quarter ended March 31, 2016, from 3.24% for the quarter ended March 31, 2015. The weighted average yield on interest-earning assets decreased 12 basis points to 3.66% for the quarter ended March 31, 2016, compared with 3.78% for the quarter ended March 31, 2015, while the weighted average cost of interest-bearing liabilities increased one basis point to 0.68% for the quarter ended March 31, 2016, compared with 0.67% for the first quarter of 2015. The average cost of interest bearing deposits for the quarter ended March 31, 2016 was 0.32%, a one basis point increase from the quarter ended March 31, 2015. Average non-interest bearing demand deposits increased $133.6 million to $1.19 billion for the quarter ended March 31, 2016, compared with $1.05 billion for the quarter ended March 31, 2015. The average cost of borrowed funds for the quarter ended March 31, 2016 was 1.71%, compared with 1.82% for the same period last year.
Interest income on loans secured by real estate increased $944,000 to $44.2 million for the three months ended March 31, 2016, from $43.3 million for the three months ended March 31, 2015. Commercial loan interest income increased $1.5 million to $15.0 million for the three months ended March 31, 2016, from $13.4 million for the three months ended March 31, 2015. Consumer loan interest income decreased $158,000 to $5.6 million for the three months ended March 31, 2016, from $5.8 million for the three months ended March 31, 2015. For the three months ended March 31, 2016, the average balance of total loans increased $475.0 million to $6.50 billion, from $6.03 billion for the same period in 2015. The average loan yield for the three months ended March 31, 2016 decreased 19 basis points to 3.97%, from 4.16% for the same period in 2015.
The average yield on total securities decreased to 2.36% for the three months ended March 31, 2016, compared with 2.38% for the same period in 2015.

39



Interest income on investment securities held to maturity decreased $65,000, or 1.9%, to $3.3 million for the quarter ended March 31, 2016, compared to the same period last year. Average investment securities held to maturity increased $756,000 to $474.1 million for the quarter ended March 31, 2016, from $473.4 million for the same period last year.
Interest income on securities available for sale and FHLBNY stock decreased $521,000, or 8.3%, to $5.8 million for the quarter ended March 31, 2016, from $6.3 million for the quarter ended March 31, 2015. The average balance of securities available for sale and FHLBNY stock decreased $98.9 million to $1.04 billion for the three months ended March 31, 2016, from $1.14 billion for the same period in 2015.
Interest expense on deposit accounts increased $233,000, or 6.5%, to $3.8 million for the quarter ended March 31, 2016, from $3.6 million for the quarter ended March 31, 2015. The average cost of interest bearing deposits increased one basis point to 0.32% for the three months ended March 31, 2016, compared to same period last year. For the three months ended March 31, 2016, average interest bearing core deposits increased $115.1 million to $4.04 billion, from $3.93 billion for the same period in 2015. Average time deposit account balances decreased $35.0 million, to $774.2 million for the quarter ended March 31, 2016, from $809.3 million for the quarter ended March 31, 2015.
Interest expense on borrowed funds increased $369,000, or 5.5%, to $7.1 million for the quarter ended March 31, 2016, from $6.7 million for the quarter ended March 31, 2015. The average cost of borrowings decreased to 1.71% for the three months ended March 31, 2016, from 1.82% for the three months ended March 31, 2015. Average borrowings increased $176.2 million, or 11.8%, to $1.67 billion for the quarter ended March 31, 2016, from $1.49 billion for the quarter ended March 31, 2015.
Provision for Loan Losses. Provisions for loan losses are charged to operations in order to maintain the allowance for loan losses at a level management considers necessary to absorb probable credit losses inherent in the loan portfolio. In determining the level of the allowance for loan losses, management considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay the loan and the levels of non-performing and other classified loans. 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 loan losses on a quarterly basis and makes provisions for loan losses, if necessary, in order to maintain the adequacy of the allowance.
The Company recorded a $1.5 million provision for loan losses for the three months ended March 31, 2016, compared with a $600,000 provision for loan losses recorded for the same period in 2015. For the three months ended March 31, 2016, the Company had net charge-offs of $734,000, compared with net charge-offs of $1.2 million for the three months ended March 31, 2015. At March 31, 2016, the Company’s allowance for loan losses was $62.2 million, or 0.94% of total loans, compared with $61.4 million, or 0.94% of total loans at December 31, 2015.
Non-Interest Income. For the three months ended March 31, 2016, non-interest income totaled $13.0 million, an increase of $2.7 million, or 26.4%, compared to $10.3 million for the same period in 2015. Wealth management income increased $1.8 million, to $4.3 million for the three months ended March 31, 2016, compared to $2.6 million for the same period in 2015. The increase in wealth management income was primarily attributable to fees earned from assets under management acquired in the MDE transaction, which closed on April 1, 2015. Other income increased $477,000 for the three months ended March 31, 2016, compared to the same period in 2015, primarily due to a $204,000 gain recognized on the sale of deposits resulting from a strategic branch divestiture and an increase in net gains on loan sales, partially offset by a decrease in net fees on loan-level interest rate swap transactions. Also contributing to the increase in non-interest income, fee income for the three months ended March 31, 2016, increased $407,000 to $6.5 million, compared to $6.1 million for the same period in 2015. This increase was largely due to a $481,000 increase in ATM and debit card revenue and a $343,000 increase in deposit related fees, partially offset by a $548,000 decrease in prepayment fees on commercial loans. Net gains on securities transactions increased $94,000 for the three months ended March 31, 2016, compared to the same period in 2015.
Non-Interest Expense. For the three months ended March 31, 2016, non-interest expense increased $1.4 million to $44.9 million, compared to the three months ended March 31, 2015. Compensation and benefits expense increased $1.8 million to $26.0 million for the three months ended March 31, 2016, compared to $24.2 million for the same period in 2015. This increase was principally due to an increase in salary expense associated with new employees added as a result of the MDE acquisition, additional salary expense related to annual merit increases and an increase in employee medical and retirement benefit costs, partially offset by lower stock-based compensation expense. Data processing expenses increased $218,000 to $3.2 million for the three months ended March 31, 2016, compared to the same period in 2015, largely due to an increase in software maintenance expense and electronic banking costs. Partially offsetting these increases in non-interest expense, net occupancy costs decreased $738,000 to $6.4 million for the three months ended March 31, 2016, compared to $7.2 million for the three months ended March 31, 2015, primarily due to a decrease in seasonal expenses resulting from a milder winter, combined with decreases in facilities and equipment maintenance expenses. Also, other operating expenses decreased $168,000 to $6.0 million for the three months ended March 31,

40



2016, compared to the same period in 2015, principally due to a decrease in attorney fees, a portion of which were related to the Company's asset recovery activities, partially offset by increases in business development and personnel recruitment expenses.
Income Tax Expense. For the three months ended March 31, 2016, the Company’s income tax expense was $8.7 million, compared to $8.4 million, for the three months ended March 31, 2015. The increase in income tax expense was a function of growth in pre-tax income for the three months ended March 31, 2016. The Company’s effective tax rates were 29.4% and 29.8% for the three months ended March 31, 2016 and 2015, respectively.
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 mortgage loans at origination. 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; and
Higher-balance demand deposit tiers and promotional demand accounts move at 50% to 75% of the rate ramp in either direction

41



The following table sets forth the results of a twelve-month net interest income projection model as of March 31, 2016 (dollars in thousands):
Change in Interest Rates in
Basis Points (Rate Ramp)
 
Net Interest Income
Dollar
Amount
 
Dollar
Change
 
Percent
Change
-100
 
$
245,878

 
$
(5,940
)
 
(2.4
)%
Static
 
251,818

 

 

+100
 
250,354

 
(1,464
)
 
(0.6
)
+200
 
248,377

 
(3,441
)
 
(1.4
)
+300
 
247,228

 
(4,590
)
 
(1.8
)
The preceding table indicates that, as of March 31, 2016, 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 decrease 1.8%, or $4.6 million. In the event of a 100 basis point decrease in interest rates, net interest income would decrease 2.4%, or $5.9 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 March 31, 2016 (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
 
$
1,305,986

 
$
612

 
0.05
 %
 
14.2
%
 
(0.5
)%
Flat
 
1,305,374

 

 

 
14.3

 

+100
 
1,278,505

 
(26,869
)
 
(2.1
)
 
14.1

 
(1.3
)
+200
 
1,235,952

 
(69,422
)
 
(5.3
)
 
13.7

 
(3.7
)
+300
 
1,181,117

 
(124,257
)
 
(9.5
)
 
13.3

 
(7.1
)
The preceding table indicates that as of March 31, 2016, in the event of an immediate and sustained 300 basis point increase in interest rates, the present value of equity is projected to decrease 9.5%, or $124.3 million. If rates were to decrease 100 basis points, the model forecasts a 0.05%, or $612,000 increase in the present value of equity.
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.
 
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. There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

42



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

Item 1A.
Risk Factors
There have been no material changes to the risk factors that were previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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)(2)
January 1, 2016 through January 31, 2016
 
68,100

 
$
17.98

 
68,100

 
3,273,204

February 1, 2016 through February 29, 2016
 
41,183

 
18.37

 
41,183

 
3,232,021

March 1, 2016 through March 31, 2016
 
36,962

 
19.38

 
36,962

 
3,195,059

Total
 
146,245

 
18.45

 
146,245

 
 
(1)
On October 24, 2007, the Company’s Board of Directors approved the purchase of up to 3,107,077 shares of its common stock under a seventh general repurchase program which commenced upon completion of the previous repurchase program. The repurchase program has no expiration date.
(2)
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 will commence upon completion of the previous repurchase program. The repurchase program has no expiration date.

43



Item 3.
Defaults Upon Senior Securities.
Not Applicable
 
Item 4.
Mine Safety Disclosures
Not Applicable
 
Item 5.
Other Information.
None
 
Item 6.
Exhibits.
The following exhibits are filed herewith:
3.1
Certificate of Incorporation of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.)
 
 
3.2
Amended and Restated Bylaws of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
 
 
4.1
Form of Common Stock Certificate of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.)
 
 
10.1
Employment Agreement by and between Provident Financial Services, Inc and Christopher Martin dated September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2009/ File No. 001-31566.)
 
 
10.2
Change in Control Agreement by and between Provident Financial Services, Inc. and Christopher Martin dated as of December 16, 2015. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.3
Form of Three-Year Change in Control Agreement between Provident Financial Services, Inc. and each of Messrs. Blum, Kuntz, Lyons and Nesci dated as of December 16, 2015. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.4
Form of Two-Year Change in Control Agreement between Provident Financial Services, Inc. and certain senior officers. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.5
Form of One-Year Change in Control Agreement between Provident Financial Services, Inc. and certain senior officers. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.6
Supplemental Executive Retirement Plan of The Provident Bank. (Filed as Exhibit 10.5 to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
10.7
Retirement Plan for the Board of Managers of The Provident Bank. (Filed as Exhibit 10.7 to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009 /File No. 001-31566.)
 
 
10.8
Provident Financial Services, Inc. Board of Directors Voluntary Fee Deferral Plan. (Filed as Exhibit 10.9 to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
10.9
First Savings Bank Directors’ Deferred Fee Plan, as amended. (Filed as Exhibit 10.10 to the Company’s September 30, 2004 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission /File No. 001-31566.)
 
 

44



10.10
The Provident Bank Non-Qualified Supplemental Defined Contribution Plan. (Filed as an exhibit to the Company’s May 27, 2010 Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2010/File No. 001-31566.)
 
 
10.11
Provident Financial Services, Inc. Amended and Restated the Long-Term Equity Incentive Plan. (Filed as an appendix to the Company’s Proxy Statement for the 2014 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 14, 2014/File No. 001-31566.)
 
 
10.12
Omnibus Incentive Compensation Plan. (Filed as Exhibit 10.19 to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
 
 
10.13
Provident Financial Services, Inc. Executive Annual Incentive Plan (filed as an appendix to the Company’s Proxy Statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 13, 2015/File No. 001-31566.)
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following materials from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
101.INS 
XBRL Instance Document
 
 
101.SCH 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
101.PRE 
XBRL Taxonomy Extension Presentation Linkbase Document





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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
PROVIDENT FINANCIAL SERVICES, INC.
 
 
 
 
 
Date:
 
May 10, 2016
 
By:
 
/s/ Christopher Martin
 
 
 
 
 
 
Christopher Martin
 
 
 
 
 
 
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
Date:
 
May 10, 2016
 
By:
 
/s/ Thomas M. Lyons
 
 
 
 
 
 
Thomas M. Lyons
 
 
 
 
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
Date:
 
May 10, 2016
 
By:
 
/s/ Frank S. Muzio
 
 
 
 
 
 
Frank S. Muzio
 
 
 
 
 
 
Senior Vice President and Chief Accounting Officer


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Exhibit Index
3.1
Certificate of Incorporation of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.)
 
 
3.2
Amended and Restated Bylaws of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
 
 
4.1
Form of Common Stock Certificate of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.)
 
 
10.1
Employment Agreement by and between Provident Financial Services, Inc and Christopher Martin dated September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2009/ File No. 001-31566.)
 
 
10.2
Change in Control Agreement by and between Provident Financial Services, Inc. and Christopher Martin dated as of December 16, 2015. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.3
Form of Three-Year Change in Control Agreement between Provident Financial Services, Inc. and each of Messrs. Blum, Kuntz, Lyons and Nesci dated as of December 16, 2015. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.4
Form of Two-Year Change in Control Agreement between Provident Financial Services, Inc. and certain senior officers. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.5
Form of One-Year Change in Control Agreement between Provident Financial Services, Inc. and certain senior officers. (Filed as an exhibit to the Company's December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
 
 
10.6
Supplemental Executive Retirement Plan of The Provident Bank. (Filed as Exhibit 10.5 to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
10.7
Retirement Plan for the Board of Managers of The Provident Bank. (Filed as Exhibit 10.7 to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009 /File No. 001-31566.)
 
 
10.8
Provident Financial Services, Inc. Board of Directors Voluntary Fee Deferral Plan. (Filed as Exhibit 10.9 to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
10.9
First Savings Bank Directors’ Deferred Fee Plan, as amended. (Filed as Exhibit 10.10 to the Company’s September 30, 2004 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission /File No. 001-31566.)
 
 
10.10
The Provident Bank Non-Qualified Supplemental Defined Contribution Plan. (Filed as an exhibit to the Company’s May 27, 2010 Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2010/File No. 001-31566.)
 
 
10.11
Provident Financial Services, Inc. Amended and Restated the Long-Term Equity Incentive Plan. (Filed as an appendix to the Company’s Proxy Statement for the 2014 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 14, 2014/File No. 001-31566.)
 
 
10.12
Omnibus Incentive Compensation Plan. (Filed as Exhibit 10.19 to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
 
 
10.13
Provident Financial Services, Inc. Executive Annual Incentive Plan (filed as an appendix to the Company’s Proxy Statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 13, 2015/File No. 001-31566.)
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 

47



32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following materials from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
101.INS 
XBRL Instance Document
 
 
101.SCH 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
101.PRE 
XBRL Taxonomy Extension Presentation Linkbase Document


48