Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2012

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  x    NO  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the Registrant was required to submit and post such files).    YES  x    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   x    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  x

As of November 1, 2012 there were 83,209,293 shares issued and 60,158,115 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 417,443 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC.

INDEX TO FORM 10-Q

 

Item Number

   Page Number  
   PART I—FINANCIAL INFORMATION   
1.   

Financial Statements:

  
  

Consolidated Statements of Financial Condition as of September  30, 2012 (unaudited) and December 31, 2011

     3   
  

Consolidated Statements of Income for the three and nine months ended September  30, 2012 and 2011 (unaudited)

     4   
  

Consolidated Statements of Comprehensive Income for the three and nine months ended September  30, 2012 and 2011 (unaudited)

     5   
  

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September  30, 2012 and 2011 (unaudited)

     6   
  

Consolidated Statements of Cash Flows for the nine months ended September  30, 2012 and 2011 (unaudited)

     8   
  

Notes to Consolidated Financial Statements (unaudited)

     9   
2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   
3.   

Quantitative and Qualitative Disclosures About Market Risk

     40   
4.   

Controls and Procedures

     42   
   PART II—OTHER INFORMATION   
1.   

Legal Proceedings

     43   
1A.   

Risk Factors

     43   
2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     43   
3.   

Defaults Upon Senior Securities

     43   
4.   

Mine Safety Disclosures

     43   
5.   

Other Information

     44   
6.   

Exhibits

     44   

Signatures

     46   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS.

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

September 30, 2012 (Unaudited) and December 31, 2011

(Dollars in Thousands)

 

      September 30, 2012     December 31, 2011  
ASSETS     

Cash and due from banks

   $ 105,601      $ 68,553   

Short-term investments

     1,952        1,079   
  

 

 

   

 

 

 

Total cash and cash equivalents

     107,553        69,632   
  

 

 

   

 

 

 

Securities available for sale, at fair value

     1,337,212        1,376,119   

Investment securities held to maturity (fair value of $370,353 at September 30, 2012 (unaudited) and $366,296 at December 31, 2011)

     352,307        348,318   

Federal Home Loan Bank Stock

     37,971        38,927   

Loans

     4,818,857        4,653,509   

Less allowance for loan losses

     70,280        74,351   
  

 

 

   

 

 

 

Net loans

     4,748,577        4,579,158   
  

 

 

   

 

 

 

Foreclosed assets, net

     13,900        12,802   

Banking premises and equipment, net

     67,315        66,260   

Accrued interest receivable

     22,590        24,653   

Intangible assets

     358,365        360,714   

Bank-owned life insurance

     145,905        142,010   

Other assets

     73,285        78,810   
  

 

 

   

 

 

 

Total assets

   $ 7,264,980      $ 7,097,403   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Demand deposits

   $ 3,468,321      $ 3,136,129   

Savings deposits

     897,854        891,742   

Certificates of deposit of $100,000 or more

     342,807        383,174   

Other time deposits

     664,695        745,552   
  

 

 

   

 

 

 

Total deposits

     5,373,677        5,156,597   

Mortgage escrow deposits

     21,340        20,955   

Borrowed funds

     834,421        920,180   

Other liabilities

     46,999        47,194   
  

 

 

   

 

 

 

Total liabilities

     6,276,437        6,144,926   
  

 

 

   

 

 

 

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 60,156,795 shares outstanding at September 30, 2012 and 59,968,195 outstanding at December 31, 2011

     832        832   

Additional paid-in capital

     1,020,778        1,019,253   

Retained earnings

     390,515        363,011   

Accumulated other comprehensive income

     13,038        9,571   

Treasury stock

     (383,256     (384,725

Unallocated common stock held by the Employee Stock Ownership Plan

     (53,364     (55,465

Common stock acquired by the Directors’ Deferred Fee Plan

     (7,321     (7,390

Deferred compensation – Directors’ Deferred Fee Plan

     7,321        7,390   
  

 

 

   

 

 

 

Total stockholders’ equity

     988,543        952,477   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,264,980      $ 7,097,403   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Three and nine months ended September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands, except per share data)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  

Interest income:

           

Real estate secured loans

   $ 38,544       $ 39,466       $ 116,175       $ 119,425   

Commercial loans

     10,242         11,010         30,817         31,867   

Consumer loans

     6,343         6,436         18,967         19,445   

Securities available for sale and Federal Home Loan Bank Stock

     6,599         9,174         22,743         28,468   

Investment securities

     2,987         3,045         8,896         9,169   

Deposits, Federal funds sold and other short-term investments

     42         26         58         81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     64,757         69,157         197,656         208,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     6,155         8,984         19,660         28,439   

Borrowed funds

     4,887         5,717         14,866         17,937   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     11,042         14,701         34,526         46,376   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     53,715         54,456         163,130         162,079   

Provision for loan losses

     3,500         7,500         12,000         22,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     50,215         46,956         151,130         139,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income:

           

Fees

     7,532         6,631         23,018         18,052   

Bank-owned life insurance

     1,273         1,274         3,895         3,998   

Other-than-temporary impairment losses on securities

     —           —           —           (1,661

Portion of loss recognized in other comprehensive income (before taxes)

     —           —           —           1,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impairment losses on securities recognized in earnings

     —           —           —           (302
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gain on securities transactions

     298         658         2,482         686   

Other income

     687         87         2,466         1,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     9,790         8,650         31,861         23,865   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense:

           

Compensation and employee benefits

     20,131         19,226         61,084         56,476   

Net occupancy expense

     5,142         5,286         15,330         15,811   

Data processing expense

     2,712         2,381         7,762         6,994   

FDIC insurance

     1,277         1,319         3,897         4,483   

Amortization of intangibles

     511         708         1,968         2,314   

Impairment of premises and equipment

     —           —           —           807   

Advertising and promotion expense

     1,036         823         2,849         2,605   

Other operating expenses

     6,087         5,210         18,553         16,747   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     36,896         34,953         111,443         106,237   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     23,109         20,653         71,548         56,807   

Income tax expense

     6,955         5,087         20,963         14,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 16,154       $ 15,566       $ 50,585       $ 42,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.28       $ 0.27       $ 0.89       $ 0.75   

Average basic shares outstanding

     57,194,046         56,926,131         57,133,164         56,847,975   

Diluted earnings per share

   $ 0.28       $ 0.27       $ 0.88       $ 0.75   

Average diluted shares outstanding

     57,238,819         56,941,715         57,169,844         56,860,371   

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Three and nine months ended September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Net income

   $ 16,154      $ 15,566      $ 50,585      $ 42,474   

Other comprehensive income (loss), net of tax:

        

Unrealized gains and losses on securities available for sale:

        

Net unrealized gains (losses) arising during the period

     3,352        2,698        4,899        6,246   

Reclassification adjustment for (gains) losses included in net income

     (176     (389     (1,468     (406
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     3,176        2,309        3,431        5,840   

Other-than-temporary impairment on debt securities available for sale:

        

Other-than-temporary impairment losses on securities

     —          —          —          (983

Reclassification adjustment for impairment losses included in net income

     —          —          —          179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     —          —          —          (804

Amortization related to post-retirement obligations

     212        67        36        (1,806
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     3,388        2,376        3,467        3,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 19,542      $ 17,942      $ 54,052      $ 45,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (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, 2010

  $ 832      $ 1,017,315      $ 332,472      $ 14,754      $ (385,094   $ (58,592   $ (7,482   $ 7,482      $ 921,687   

Net income

    —          —          42,474        —          —          —          —          —          42,474   

Other comprehensive income, net of tax

          3,230                3,230   

Cash dividends declared

    —          —          (21,159     —          —          —          —          —          (21,159

Distributions from DDFP

    —          —          —          —          —          —          69        (69     —     

Purchases of treasury stock

    —          —          —          —          (2,875     —          —          —          (2,875

Shares issued dividend reinvestment plan

    —          (533     —          —          1,797              1,264   

Allocation of ESOP shares

    —          (402     —          —          —          2,087        —          —          1,685   

Stock option exercises

      —              9              9   

Allocation of SAP shares

    —          2,510        —          —          —          —          —          —          2,510   

Allocation of stock options

    —          572        —          —          —          —          —          —          572   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

  $ 832      $ 1,019,462      $ 353,787      $ 17,984      $ (386,163   $ (56,505   $ (7,413   $ 7,413      $ 949,397   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (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, 2011

  $ 832      $ 1,019,253      $ 363,011      $ 9,571      $ (384,725   $ (55,465   $ (7,390   $ 7,390      $ 952,477   

Net income

    —          —          50,585        —          —          —          —          —          50,585   

Other comprehensive income, net of tax

          3,467                3,467   

Cash dividends paid

    —          —          (23,081     —          —          —          —          —          (23,081

Distributions from DDFP

    —          —          —          —          —          —          69        (69     —     

Purchases of treasury stock

    —          —          —          —          (5,620     —          —          —          (5,620

Shares issued dividend reinvestment plan

    —          (1,641     —          —          7,065              5,424   

Stock option exercises

      (6     —          —          24        —          —          —          18  

Allocation of ESOP shares

    —          (290     —          —          —          2,101        —          —          1,811   

Allocation of SAP shares

    —          3,246        —          —          —          —          —          —          3,246   

Allocation of stock options

    —          216        —          —          —          —          —          —          216   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ 832      $ 1,020,778      $ 390,515      $ 13,038      $ (383,256   $ (53,364   $ (7,321   $ 7,321      $ 988,543   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

7


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine months ended September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

 

     Nine months ended September 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 50,585      $ 42,474   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of intangibles

     7,094        7,303   

Impairment of premises and equipment

     —          807   

Provision for loan losses

     12,000        22,900   

Deferred tax benefit

     (4,921     (5,848

Increase in cash surrender value of Bank-owned life insurance

     (3,895     (3,998

Net amortization of premiums and discounts on securities

     12,115        8,505   

Accretion of net deferred loan fees

     (2,603     (1,660

Amortization of premiums on purchased loans, net

     1,272        1,332   

Net increase in loans originated for sale

     (32,826     (6,984

Proceeds from sales of loans originated for sale

     34,581        7,111   

Proceeds from sales of foreclosed assets

     13,465        5,761   

ESOP expense

     1,811        1,685   

Allocation of stock award shares

     3,246        2,510   

Allocation of stock options

     216        572   

Net gain on sale of loans

     (1,753     (127

Net gain on securities transactions

     (2,482     (686

Impairment charge on securities

     —          302   

Net gain on sale of premises and equipment

     (32     (43

Net loss (gain) on sale of foreclosed assets

     227        (27

Decrease in accrued interest receivable

     2,063        2,196   

Increase in other assets

     (6,343     (10,722

Decrease in other liabilities

     (195     (3,727
  

 

 

   

 

 

 

Net cash provided by operating activities

     83,625        69,636   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities, calls and paydowns of investment securities held to maturity

     61,882        44,392   

Purchases of investment securities held to maturity

     (66,579     (50,160

Proceeds from sales of securities available for sale

     51,090        23,504   

Proceeds from maturities and paydowns of securities available for sale

     353,493        298,422   

Purchases of securities available for sale

     (368,859     (247,883

Cash consideration paid to acquire Beacon Trust, net of cash and cash equivalents

     —          (7,254

Purchases of loans

     (115,428     (68,981

Net increase in loans

     (63,404     (98,761

Proceeds from sales of premises and equipment

     65        1,952   

Purchases of premises and equipment

     (6,410     (8,751
  

 

 

   

 

 

 

Net cash used in by investing activities

     (154,150     (113,520
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     217,080        196,558   

Increase in mortgage escrow deposits

     385        788   

Purchase of treasury stock

     (5,620     (2,875

Cash dividends paid to stockholders

     (23,081     (21,159

Shares issued dividend reinvestment plan

     5,424        (533

Stock options exercised

     18       9   

Proceeds from long-term borrowings

     —          236,300   

Payments on long-term borrowings

     (26,197     (252,328

Net decrease in short-term borrowings

     (59,563     (41,089
  

 

 

   

 

 

 

Net cash provided by financing activities

     108,446        115,671   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     37,921        71,787   

Cash and cash equivalents at beginning of period

     69,632        52,229   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 107,553      $ 124,016   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest on deposits and borrowings

   $ 34,854      $ 47,196   
  

 

 

   

 

 

 

Income taxes

   $ 20,318     $ 20,122   
  

 

 

   

 

 

 

Non cash investing activities:

    

Transfer of loans receivable to foreclosed assets

   $ 14,813      $ 9,664   
  

 

 

   

 

 

 

Fair value of assets acquired

   $ 672      $ 1,879   
  

 

 

   

 

 

 

Goodwill and customer relationship intangible

   $ (672   $ 9,547   
  

 

 

   

 

 

 

Liabilities assumed

   $ —        $ 926   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

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 is a material estimate that is particularly susceptible to near-term change. The current unstable economic environment has resulted in a heightened degree of uncertainty inherent in this material estimate.

The interim unaudited consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results of operations that may be expected for all of 2012.

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, 2011 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 September 30,     For the nine months ended September 30,  
    2012     2011     2012     2011  
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
 

Net income

  $ 16,154          $ 15,566          $ 50,585          $ 42,474       
 

 

 

       

 

 

       

 

 

       

 

 

     

Basic earnings per share:

                       

Income available to common stockholders

  $ 16,154        57,194,046      $ 0.28      $ 15,566        56,926,131      $ 0.27      $ 50,585        57,133,164      $ 0.89      $ 42,474        56,847,975      $ 0.75   
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Dilutive shares

      44,773            15,584            36,679            12,396     
   

 

 

       

 

 

       

 

 

       

 

 

   

Diluted earnings per share:

                       

Income available to common stockholders

  $ 16,154        57,238,819      $ 0.28      $ 15,566        56,941,715      $ 0.27      $ 50,585        57,169,844      $ 0.88      $ 42,474        56,860,371      $ 0.75   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Anti-dilutive stock options and awards totaling 4,017,273 shares at September 30, 2012, were excluded from the earnings per share calculations.

 

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Table of Contents

Note 2. Acquisition

On August 11, 2011, the Company’s wholly owned subsidiary, The Provident Bank, completed its acquisition of Beacon Trust Company, a New Jersey limited purpose trust company, and Beacon Global Asset Management, Inc., an SEC-registered investment advisor incorporated in Delaware (“Beacon”). Pursuant to the terms of the Stock Purchase Agreement announced on May 19, 2011, Beacon’s former parent company, Beacon Financial Corporation may be paid cash consideration in an amount up to $10.5 million, based upon the acquired companies’ financial performance in the three years following the closing of the transaction. Subsequent to the acquisition, Beacon Global Asset Management was merged with and into Beacon Trust Company.

The purpose of the Beacon acquisition was to significantly expand the Company’s wealth management business throughout the state of New Jersey. Beacon’s expertise in trust and wealth management services strategically positions the Company to increase market share and enhance the Company’s non-interest earnings growth.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price was allocated to the acquired assets and liabilities of Beacon based on their fair value as of August 11, 2011. The fair value estimates were considered preliminary and were subject to change for up to one year after the closing date of the transaction as additional information became available. During the quarter ended September 30, 2012, the recorded fair values were finalized. The final allocation of the purchase price is presented in the following table.

 

 

(in thousands)       

Assets:

  

Cash and cash equivalents

   $ 96   

Securities

     164   

Premises and equipment

     241   

Goodwill

     6,452   

Core relationship intangible

     2,423   

Other assets

     2,050   
  

 

 

 

Total assets

   $ 11,426   
  

 

 

 

Liabilities:

  

Other liabilities

     4,076   
  

 

 

 

Total liabilities

   $ 4,076   
  

 

 

 

In connection with the Beacon transaction, the Company recorded goodwill of $6.5 million, none of which was estimated to be deductible for income tax purposes. In addition, a core relationship intangible (“CRI”) of $2.4 million was recognized in connection with the Beacon acquisition and is being amortized on an accelerated basis over an estimated useful life of twelve years.

Note 3. Investment Securities

At September 30, 2012, the Company had $1.34 billion and $352.3 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, lack of reliable 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 on certain investment securities in future periods. Included in the Company’s investment portfolio are private label mortgage-backed securities. These investments may pose a higher risk of future impairment charges as a result of the uncertain economic environment and the potential negative effect on future performance of these private label mortgage-backed securities. The total number of all held to maturity and available for sale securities in an unrealized loss position as of September 30, 2012 totaled 35, compared with 24 at December 31, 2011. This included two private label mortgage-backed securities at September 30, 2012, with an amortized cost of $1.0 million and unrealized losses totaling $10,058. One of these private label mortgage-backed securities was below investment grade at September 30, 2012. All securities with unrealized losses at September 30, 2012 were analyzed for other-than-temporary impairment. Based upon this analysis, no other-than-temporary impairment existed at September 30, 2012.

 

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Table of Contents

Securities Available for Sale

The following table presents the amortized cost, gross unrealized gains, gross unrealized losses and the estimated fair value for securities available for sale at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 95,226         617         —          95,843   

Mortgage-backed securities

     1,192,748         35,041         (235     1,227,554   

State and municipal obligations

     10,019         456         (1     10,474   

Corporate obligations

     3,001         —           —          3,001   

Equity securities

     307         33         —          340   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,301,301         36,147         (236     1,337,212   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2011  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 105,130         442         (14     105,558   

Mortgage-backed securities

     1,221,988         31,206         (2,191     1,251,003   

State and municipal obligations

     11,066         553         (5     11,614   

Corporate obligations

     7,517         119         —          7,636   

Equity securities

     307         1         —          308   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,346,008         32,321         (2,210     1,376,119   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of securities available for sale at September 30, 2012, 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.

 

     September 30, 2012  
     Amortized
cost
     Fair
value
 

Due in one year or less

   $ 51,927         52,063   

Due after one year through five years

     55,481         56,343   

Due after five years through ten years

     838         912   

Mortgage-backed securities

     1,192,748         1,227,554   

Equity securities

     307         340   
  

 

 

    

 

 

 
   $ 1,301,301         1,337,212   
  

 

 

    

 

 

 

Proceeds from the sale of securities available for sale for the three months ended September 30, 2012, were $3,959,000 resulting in gains of $266,000 and no gross losses, while proceeds from the sale of securities available for sale for the nine months ended September 30, 2012 were $51,090,000, resulting in gross gains of $2,425,000 and no gross losses.

Proceeds from the sale of securities available for sale for the three and nine months ended September 30, 2011, were $23,504,000, resulting in gains of $644,000. Additionally, for the nine months ended September 30, 2011, the Company recognized gains of $14,000 related to calls on certain securities in the available for sale portfolio, with proceeds from calls totaling $514,000.

The following table presents a roll-forward of the credit loss component of other-than-temporary impairment (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as an addition in two components, based upon whether the current period is the first time a debt

 

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Table of Contents

security was credit-impaired (initial credit impairment), or whether the current period is not the first time a debt security was credit impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows (in thousands):

 

     Three months  ended
September 30,
     Nine months  ended
September 30,
 
     2012      2011      2012      2011  

Beginning credit loss amount

   $ 1,240         1,240       $ 1,240         938   

Add: Initial OTTI credit losses

     —           —           —           —     

Subsequent OTTI credit losses

     —           —           —           302   

Less: Realized losses for securities sold

     —           —           —           —     

Securities intended or required to be sold

     —           —           —           —     

Increases in expected cash flows on debt securities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending credit loss amount

   $ 1,240         1,240       $ 1,240         1,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company did not incur an OTTI charge on securities for the three months ended September 30, 2012 or 2011, respectively. For the nine months ended September 30, 2012, the Company did not incur an OTTI charge on securities, while a $302,000 net OTTI charge was recorded for the nine months ended September 30, 2011.

The following table represents the Company’s disclosure regarding securities available for sale with temporary impairment at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012 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
 

Mortgage-backed securities

   $ 51,081         (190     8,878         (45     59,959         (235

State and municipal obligations

     —           —          508         (1     508         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 51,081         (190       9,386            (46     60,467           (236
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2011 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
 

Mortgage-backed securities

   $ 64,838         (278     12,453         (1,913     77,291         (2,191

State and municipal obligations

     777         (5     —           —          777         (5

Agency notes

     5,032         (14     —           —          5,032         (14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 70,647         (297     12,453         (1,913     83,100         (2,210
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The temporary loss position associated with 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. In addition, there remains a lack of liquidity in certain sectors of the mortgage-backed securities market. Increases in delinquencies and foreclosures have resulted in limited trading activity and significant price declines, regardless of favorable movements in interest rates. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the market value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risk, 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 the anticipated recovery. For each private-label mortgage-backed security, the Company estimates loss projections 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 OTTI existed during the three and nine months ended September 30, 2012.

 

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Table of Contents

Based upon the review of the securities portfolio, the Company believes that as of September 30, 2012, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary, the Company does not have the intent to sell the securities and it is more likely than not that the Company will not be required to sell the securities before the anticipated recovery.

Investment Securities Held to Maturity

The following table presents the amortized cost, gross unrealized gains, gross unrealized losses and the estimated fair value for investment securities held to maturity at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 3,423         36         —          3,459   

Mortgage-backed securities

     13,440         582         —          14,022   

State and municipal obligations

     326,307         17,293         (145     343,455   

Corporate obligations

     9,137         280         —          9,417   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 352,307         18,191         (145     370,353   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2011  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 3,647         36         —          3,683   

Mortgage-backed securities

     22,321         859         —          23,180   

State and municipal obligations

     314,108         16,863         (69     330,902   

Corporate obligations

     8,242         296         (7     8,531   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 348,318         18,054         (76     366,296   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. For the three ended September 30, 2012, the Company recognized gross gains of $32,000 and no gross losses, related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $4,719,000. For the nine months ended September 30, 2012, the Company recognized gross gains of $57,000 and no gross losses, related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $7,071,000.

For the three and nine months ended September 30, 2011, the Company recognized gains of $14,000 and $28,000, respectively, related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $3,877,000 and $12,013,000, for the three and nine months ended September 30, 2011, respectively.

The amortized cost and fair value of investment securities at September 30, 2012 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.

 

     September 30, 2012  
     Amortized
cost
     Fair
value
 

Due in one year or less

   $ 41,254         41,495   

Due after one year through five years

     82,254         85,118   

Due after five years through ten years

     85,958         92,354   

Due after ten years

     129,401         137,364   

Mortgage-backed securities

     13,440         14,022   
  

 

 

    

 

 

 
   $ 352,307         370,353   
  

 

 

    

 

 

 

 

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Table of Contents

The following table represents the Company’s disclosure on investment securities held to maturity with temporary impairment at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012 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

   $ 15,751         (145     —           —          15,751         (145
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 15,751         (145     —           —          15,751         (145
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2011 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

   $ 3,868         (63     316         (6     4,184         (69

Corporate obligations

     394         (7     —           —          394         (7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 4,262         (70     316         (6     4,578         (76
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The temporary loss position associated with held to maturity securities portfolio is the result of changes in market interest rates relative to the coupon of the individual security and changes in credit spreads. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the market 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 the anticipated recovery.

Based upon the review of the held to maturity securities portfolio, the Company believes that as of September 30, 2012, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary, does not have the intent to sell the securities and it is more likely than not that the Company will not be required to sell the securities before the anticipated recovery.

 

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Table of Contents

Note 4. Loans Receivable and Allowance for Loan Losses

Loans receivable at September 30, 2012 and December 31, 2011 are summarized as follows (in thousands):

 

     September 30,
2012
    December 31,
2011
 

Mortgage loans:

    

Residential

   $ 1,289,316        1,308,635   

Commercial

     1,293,143        1,253,542   

Multi-family

     687,485        564,147   

Construction

     125,408        114,817   
  

 

 

   

 

 

 

Total mortgage loans

     3,395,352        3,241,141   

Commercial loans

     839,253        849,009   

Consumer loans

     583,554        560,970   
  

 

 

   

 

 

 

Total gross loans

     4,818,159        4,651,120   

Premiums on purchased loans

     5,327        5,823   

Unearned discounts

     (83     (100

Net deferred fees

     (4,546     (3,334
  

 

 

   

 

 

 
   $ 4,818,857        4,653,509   
  

 

 

   

 

 

 

The following table summarizes the aging of loans receivable by portfolio segment and class as follows (in thousands):

 

     At September 30, 2012  
     30-59
Days
     60-89
Days
     Non-accrual      Total Past
Due and
Non-accrual
     Current      Total Loans
Receivable
     Recorded
Investment >
90 days
accruing
 

Mortgage loans:

                    

Residential

   $ 14,849         8,426         31,655         54,930         1,234,386         1,289,316         —     

Commercial

     —           672         30,833         31,505         1,261,638         1,293,143         —     

Multi-family

     —           123         322         445         687,040         687,485         —     

Construction

     —           —           10,626         10,626         114,782         125,408         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     14,849         9,221         73,436         97,506         3,297,846         3,395,352         —     

Commercial loans

     915         261         26,618         27,794         811,459         839,253         —     

Consumer loans

     3,168         1,591         5,632         10,391         573,163         583,554         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 18,932         11,073         105,686         135,691         4,682,468         4,818,159         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2011  
     30-59
Days
     60-89
Days
     Non-accrual      Total Past
Due and
Non-accrual
     Current      Total Loans
Receivable
     Recorded
Investment >
90 days
accruing
 

Mortgage loans:

                    

Residential

   $ 16,034         7,936         40,386         64,356         1,244,279         1,308,635         —     

Commercial

     939         1,155         29,522         31,616         1,221,926         1,253,542         —     

Multi-family

     —           —           997         997         563,150         564,147         —     

Construction

     —           —           11,018         11,018         103,799         114,817         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     16,973         9,091         81,923         107,987         3,133,154         3,241,141         —     

Commercial loans

     2,472         526         32,093         35,091         813,918         849,009         —     

Consumer loans

     5,276         1,908         8,533         15,717         545,253         560,970         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 24,721         11,525         122,549         158,795         4,492,325         4,651,120         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Within the 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

 

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Table of Contents

were $105.7 million and $122.5 million at September 30, 2012 and December 31, 2011, respectively. Included in non-accrual loans were $34.9 million and $45.6 million of loans which were less than 90 days past due at September 30, 2012 and December 31, 2011, respectively. There were no loans ninety days or greater past due and still accruing interest at September 30, 2012, or December 31, 2011.

The Company defines an impaired loan as a non-homogenous 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; or (2) if a loan is collateral dependent, the fair value of collateral; or (3) the market price 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 fiscal 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 during the process described above.

At September 30, 2012, there were 107 impaired loans totaling $114.4 million, of which 91 loans totaling $84.4 million were TDRs. Included in the total TDRs were 77 loans to 66 borrowers totaling $57.2 million that were performing in accordance with their restructured terms and which continued to accrue interest at September 30, 2012. At December 31, 2011, there were 65 impaired loans totaling $103.2 million, of which 48 loans totaling $63.1 million were TDRs. Included in the total TDRs were 38 loans to 36 borrowers totaling $38.9 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2011.

 

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Table of Contents

Loans receivable summarized by portfolio segment and impairment method are as follows (in thousands):

 

     At September 30, 2012  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
 

Individually evaluated for impairment

   $ 81,149         31,722         1,501         114,372   

Collectively evaluated for impairment

     3,314,203         807,531         582,053         4,703,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,395,352         839,253         583,554         4,818,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
 

Individually evaluated for impairment

   $ 76,275         26,974         —           103,249   

Collectively evaluated for impairment

     3,164,866         822,035         560,970         4,547,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,241,141         849,009         560,970         4,651,120   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     At September 30, 2012  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
     Unallocated      Total  

Individually evaluated for impairment

   $ 6,180         2,119         134         8,433         —           8,433   

Collectively evaluated for impairment

     34,015         16,809         5,098         55,922         5,925         61,847   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,195         18,928         5,232         64,355         5,925         70,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
     Unallocated      Total  

Individually evaluated for impairment

   $ 5,360         3,966         —           9,326         —           9,326   

Collectively evaluated for impairment

     34,083         21,415         5,515         61,013         4,012         65,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,443         25,381         5,515         70,339         4,012         74,351   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 nine consecutive months of payments) and both principal and interest are deemed collectible.

 

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Table of Contents

The following tables present the number of loans modified as TDRs during the three and nine months ended September 30, 2012 and their balances immediately prior to the modification date and post-modification as of September 30, 2012.

 

     Three Months Ended September 30, 2012  
            Pre-Modification      Post-Modification  
Troubled Debt    Number of      Outstanding      Outstanding  

Restructurings

   Loans      Recorded Investment      Recorded Investment  
            ($ in thousands)         

Mortgage loans:

        

Residential

     13       $ 5,332         4,588   

Commercial

     1         276         276   
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     14         5,608         4,864   

Commercial loans

     3         301         273   

Consumer loans

     4         566         563   
  

 

 

    

 

 

    

 

 

 

Total restructured loans

     21       $   6,475           5,700   
  

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2012  
            Pre-Modification      Post-Modification  
Troubled Debt    Number of      Outstanding      Outstanding  

Restructurings

   Loans      Recorded Investment      Recorded Investment  
            ($ in thousands)         

Mortgage loans:

        

Residential

     28       $ 9,092         7,977   

Commercial

     1         276         276   
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     29         9,368         8,253   

Commercial loans

     11         14,487         13,938   

Consumer loans

     7         1,064         991   
  

 

 

    

 

 

    

 

 

 

Total restructured loans

     47       $ 24,919         23,182   
  

 

 

    

 

 

    

 

 

 

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 and nine months ended September 30, 2012 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 tables for the three and nine months ended September 30, 2012. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $7.2 million at September 30, 2012, and was included in the allowance for loan losses for loans individually evaluated for impairment.

The TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 4.28%, compared to a weighted average rate of 5.93% prior to modification for the three months ended September 30, 2012, and 4.91%, compared to a weighted average rate of 5.92% prior to modification for the nine months ended September 30, 2012.

 

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Table of Contents

The following table presents loans modified as TDRs within the previous 12 months from September 30, 2012, and for which there was a payment default (90 days or more past due) during the quarter ended September 30, 2012:

 

Troubled Debt    September 30, 2012  

Restructurings

Subsequently Defaulted

   Number of
Loans
     Outstanding
Recorded Investment
 
            ($ in thousands)  

Mortgage loans:

     

Residential

     —         $ —     

Commercial

     —           —     

Multi-family

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total mortgage loans

     —           —     

Commercial loans

     —           —     

Consumer loans

     1         53   
  

 

 

    

 

 

 

Total restructured loans

     1       $ 53   
  

 

 

    

 

 

 

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.

The activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):

 

Three Months Ended September 30,

   Mortgage
loans
    Commercial
loans
    Consumer
loans
    Total Portfolio
Segments
    Unallocated     Total  
2012             

Balance at beginning of period

   $ 37,435        21,571        5,596        64,602        7,750        72,352   

Provision charged to operations

     4,347        611        367        5,325        (1,825     3,500   

Recoveries of loans previously charged off

     1,374        82        168        1,624        —          1,624   

Loans charged off

     (2,961     (3,336     (899     (7,196     —          (7,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 40,195        18,928        5,232        64,355        5,925        70,280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
2011             

Balance at beginning of period

   $ 37,090        23,700        6,350        67,140        5,154        72,294   

Provision charged to operations

     5,978        916        2,080        8,974        (1,474     7,500   

Recoveries of loans previously charged off

     —          303        222        525        —          525   

Loans charged off

     (2,407     (1,681     (2,576     (6,664     —          (6,664
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 40,661        23,238        6,076        69,975        3,680        73,655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30,

   Mortgage
loans
    Commercial
loans
    Consumer
loans
    Total Portfolio
Segments
    Unallocated     Total  
2012             

Balance at beginning of period

   $ 39,443        25,381        5,515        70,339        4,012        74,351   

Provision charged to operations

     4,478        3,927        1,682        10,087        1,913        12,000   

Recoveries of loans previously charged off

     1,494        779        798        3,071        —          3,071   

Loans charged off

     (5,220     (11,159     (2,763     (19,142     —          (19,142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 40,195        18,928        5,232        64,355        5,925        70,280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
2011             

Balance at beginning of period

   $ 38,416        22,210        5,616        66,242        2,480        68,722   

Provision charged to operations

     7,849        7,457        6,394        21,700        1,200        22,900   

Recoveries of loans previously charged off

     200        541        424        1,165        —          1,165   

Loans charged off

     (5,804     (6,970     (6,358     (19,132     —          (19,132
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 40,661        23,238        6,076        69,975        3,680        73,655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired loans receivable by class are summarized as follows (in thousands):

 

    At September 30, 2012     At December 31, 2011  
    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

  $ 6,545        4,775        —          5,136        103        3,341        2,793        —          3,285        51   

Commercial

    10,284        10,241        —          10,257        81        8,432        7,521        —          7,915        146   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    11,410        10,626        —          10,804        —          11,410        11,018        —          11,254        258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    28,239        25,642        —          26,197        184        23,183        21,332        —          22,454        455   

Commercial loans

    6,335        5,455        —          6,355        18        4,982        4,651        —          6,222        259   

Consumer loans

    37        14        —          43        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    34,611        31,111        —          32,595        202        28,165        25,983        —          28,676        714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans with an allowance recorded

                   

Mortgage loans:

                   

Residential

  $ 13,208        12,211        1,511        12,805        276        7,681        7,442        1,056        7,644        187   

Commercial

    45,224        43,296        4,669        44,054        744        47,531        47,501        4,304        48,102        1,067   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    58,432        55,507        6,180        56,859        1,020        55,212        54,943        5,360        55,746        1,254   

Commercial loans

    27,095        26,267        2,119        27,473        554        26,504        22,323        3,966        23,637        37   

Consumer loans

    1,525        1,487        134        1,534        34        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 87,052        83,261        8,433        85,866        1,608        81,716        77,266        9,326        79,383        1,291   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

                   

Mortgage loans:

                   

Residential

  $ 19,753        16,986        1,511        17,941        379        11,022        10,235        1,056        10,929        238   

Commercial

    55,508        53,537        4,669        54,311        825        55,963        55,022        4,304        56,017        1,213   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    11,410        10,626        —          10,804        —          11,410        11,018        —          11,254        258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    86,671        81,149        6,180        83,056        1,204        78,395        76,275        5,360        78,200        1,709   

Commercial loans

    33,430        31,722        2,119        33,828        572        31,486        26,974        3,966        29,859        296   

Consumer loans

    1,562        1,501        134        1,577        34        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 121,663        114,372        8,433        118,461        1,810        109,881        103,249        9,326        108,059        2,005   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $8,433,000 and $9,326,000 at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, impaired loans for which there was no related allowance for loan losses totaled $31,111,000 and $25,983,000, respectively. The average balance of impaired loans during the nine months ended September 30, 2012 was $118,461,000.

The Company utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar characteristics. Loans deemed to be “acceptable quality” (pass) 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 Credit Administration. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party. Reports concerning periodic loan review examinations by the independent third party are presented directly to both the Audit and Risk Committees of the Board of Directors.

 

20


Table of Contents

Loans receivable by credit quality risk rating indicator are as follows (in thousands):

 

     At September 30, 2012  
     Residential      Commercial
mortgage
     Multi-family      Construction      Total
mortgages
     Commercial      Consumer      Total loans  

Special mention

   $ 8,426         13,702         8,300         6,625         37,053         21,118         1,591         59,762   

Substandard

     31,655         81,383         412         16,714         130,164         48,654         5,433         184,251   

Doubtful

     —           —           —           —           —           1,140         —           1,140   

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified and criticized

     40,081         95,085         8,712         23,339         167,217         70,912         7,024         245,153   

Pass/Watch

     1,249,235         1,198,058         678,773         102,069         3,228,135         768,341         576,530         4,573,006   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding loans

   $ 1,289,316         1,293,143         687,485         125,408         3,395,352         839,253         583,554         4,818,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2011  
     Residential      Commercial
mortgage
     Multi-family      Construction      Total
mortgages
     Commercial      Consumer      Total loans  

Special mention

   $ 7,980         27,773         12,193         10,699         58,645         14,498         1,908         75,051   

Substandard

     40,386         82,428         8,534         18,643         149,991         73,793         8,533         232,317   

Doubtful

     —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified and criticized

     48,366         110,201         20,727         29,342         208,636         88,291         10,441         307,368   

Pass/Watch

     1,260,269         1,143,341         543,420         85,475         3,032,505         760,718         550,529         4,343,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding loans

   $ 1,308,635         1,253,542         564,147         114,817         3,241,141         849,009         560,970         4,651,120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Deposits

Deposits at September 30, 2012 and December 31, 2011 are summarized as follows (in thousands):

 

     September 30,      December 31,  
     2012      2011  

Savings

   $ 897,854       $ 891,742   

Money market

     1,369,552         1,319,392   

NOW

     1,284,615         1,120,985   

Non-interest bearing

     814,154         695,752   

Certificates of deposit

     1,007,502         1,128,726   
  

 

 

    

 

 

 
   $ 5,373,677       $ 5,156,597   
  

 

 

    

 

 

 

Note 6. Components of Net Periodic Benefit Cost

The Bank has a noncontributory defined benefit pension plan (the “Plan”) covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003. The Plan was frozen on April 1, 2003. All participants in the Plan are 100% vested. The 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 became fully eligible to receive the benefits. Effective January 1, 2003, eligibility for retiree health care benefits was frozen 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 to new entrants and retiree life insurance benefits were eliminated for employees with less than ten years of service as of December 31, 2006.

 

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Net periodic benefit cost (increase) for the three and nine months ended September 30, 2012 and 2011 includes the following components (in thousands):

 

     Three months ended September 30,     Nine months ended September 30,  
     Pension
benefits
    Other post-
retirement
benefits
    Pension
benefits
    Other post-
retirement
benefits
 
     2012     2011     2012     2011     2012     2011     2012     2011  

Service cost

   $ —          —          63        46      $ —          —          189        132   

Interest cost

     322        313        261        256        966        939        783        765   

Expected return on plan assets

     (645     (561     —          —          (1,935     (1,683     —          —     

Amortization of prior service cost

     —          —          (1     (1     —          —          (3     (3

Amortization of the net loss (gain)

     357        180        3        (116     1,071        540        9        (338
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (increase)

   $ 34        (68     326        185      $ 102        (204     978        556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In its consolidated financial statements for the year ended December 31, 2011, the Company previously disclosed that it does not expect to contribute to the Plan in 2012. As of September 30, 2012, no contributions to the Plan have been made.

The net periodic benefit cost (increase) for pension benefits and other post-retirement benefits for the three and nine months ended September 30, 2012 were calculated using the actual January 1, 2012 pension valuation and the estimated results of the other post-retirement benefits January 1, 2012 valuations.

Note 7. Impact of Recent Accounting Pronouncements

Effective March 31, 2012, the Company adopted guidance regarding the presentation of comprehensive income. In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance providing an entity with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. As originally issued, ASU 2011-5 requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement was deferred by ASU 2011-12,—Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards. ASU No. 2011-05 is effective for all interim and annual periods beginning on or after December 15, 2011 with early adoption permitted, and must be applied retrospectively. The Company presented comprehensive income in a separate consolidated statement of comprehensive income for the three and nine months ended September 30, 2012 and 2011.

In May 2011, the FASB issued guidance which results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. This guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance effective March 31, 2012, and it did not have a material effect on the Company’s consolidated statement of condition or results of operations.

In April 2011, the FASB issued guidance to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to this guidance remove from the assessment of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by this new guidance. Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the

 

22


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transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met: (1) the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred; (2) the agreement is to repurchase or redeem them before maturity, at a fixed or determinable price; and (3) the agreement is entered into contemporaneously with, or in contemplation of, the transfer. This guidance became effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this guidance did not have a material effect on the Company’s consolidated statement of condition or results of operations.

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 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 September 30, 2012 and December 31, 2011.

 

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Table of Contents

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 to comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in 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.

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 September 30, 2012 and December 31, 2011.

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.

Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated costs to sell 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 costs to sell, 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 September 30, 2012 and December 31, 2011.

 

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Table of Contents

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of September 30, 2012 and December 31, 2011, by level within the fair value hierarchy.

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    September 30,
2012
     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:

           

Agency obligations

   $ 95,843         95,843         —           —     

Mortgage-backed securities

     1,227,554         —           1,227,554         —     

State and municipal obligations

     10,474         —           10,474         —     

Corporate obligations

     3,001         —           3,001         —     

Equity securities

     340         340         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,337,212         96,183         1,241,029         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

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

   $ 25,908         —           —           25,908   

Foreclosed assets

     13,900         —           —           13,900   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 39,808         —           —           39,808   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    December 31,
2011
     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:

           

Agency obligations

   $ 105,558         105,558         —           —     

Mortgage-backed securities

     1,251,003         —           1,251,003         —     

State and municipal obligations

     11,614         —           11,614         —     

Corporate obligations

     7,636         —           7,636         —     

Equity securities

     308         308         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,376,119         105,866         1,270,253         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

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

   $ 56,620         —           —           56,620   

Foreclosed assets

     12,802         —           —           12,802   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 69,422         —           —           69,422   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2012.

Other Fair Value Disclosures

The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities.

Cash and Cash Equivalents

For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value.

 

25


Table of Contents

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.

FHLB-NY Stock

The carrying value of FHLB-NY stock was its cost. The fair value of FHLB-NY stock is based on redemption at par value. The Company classifies the estimated fair value as Level 1 within the fair value hierarchy.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifies the estimated fair value of its loan portfolio as Level 3.

The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. The Company classifies the estimated fair value of its non-performing loan portfolio as Level 3.

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits and savings deposits, was equal to the amount payable on demand and classified as Level 1. The est