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 March 31, 2013

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 May 2, 2013 there were 83,209,293 shares issued and 59,679,433 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 416,123 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 March 31, 2013 (unaudited) and December 31, 2012

     3   
  

Consolidated Statements of Income for the three months ended March 31, 2013 and 2012 (unaudited)

     4   
  

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited)

     5   
  

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012 (unaudited)

     6   
  

Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)

     8   
  

Notes to Consolidated Financial Statements (unaudited)

     9   
2.   

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

     29   
3.   

Quantitative and Qualitative Disclosures About Market Risk

     37   
4.   

Controls and Procedures

     39   
   PART II—OTHER INFORMATION   
1.    Legal Proceedings      40   
1A.    Risk Factors      40   
2.    Unregistered Sales of Equity Securities and Use of Proceeds      40   
3.    Defaults Upon Senior Securities      41   
4.    Mine Safety Disclosures      41   
5.    Other Information      41   
6.    Exhibits      41   

Signatures

     44   

 

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS.

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

March 31, 2013 (Unaudited) and December 31, 2012

(Dollars in Thousands)

 

      March 31, 2013     December 31, 2012  
ASSETS     

Cash and due from banks

   $ 63,495      $ 101,850  

Short-term investments

     1,212        1,973  
  

 

 

   

 

 

 

Total cash and cash equivalents

     64,707        103,823  
  

 

 

   

 

 

 

Securities available for sale, at fair value

     1,215,540        1,264,002  

Investment securities held to maturity (fair value of $355,144 at March 31, 2013 (unaudited) and $374,916 at December 31, 2012)

     342,696        359,464   

Federal Home Loan Bank stock

     40,675        37,543   

Loans

     4,910,355        4,904,699  

Less allowance for loan losses

     70,034        70,348  
  

 

 

   

 

 

 

Net loans

     4,840,321        4,834,351  
  

 

 

   

 

 

 

Foreclosed assets, net

     12,192        12,473  

Banking premises and equipment, net

     67,103        66,120   

Accrued interest receivable

     22,099        24,002   

Intangible assets

     357,477        357,907  

Bank-owned life insurance

     148,496        147,286   

Other assets

     75,469        76,724   
  

 

 

   

 

 

 

Total assets

   $ 7,186,775      $ 7,283,695  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Demand deposits

   $ 3,435,629      $ 3,556,011  

Savings deposits

     925,274        914,787  

Certificates of deposit of $100,000 or more

     304,917        324,901  

Other time deposits

     610,761        632,572  
  

 

 

   

 

 

 

Total deposits

     5,276,581        5,428,271   

Mortgage escrow deposits

     22,541        21,238   

Borrowed funds

     854,007        803,264   

Other liabilities

     43,201        49,676   
  

 

 

   

 

 

 

Total liabilities

     6,196,330        6,302,449   
  

 

 

   

 

 

 

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 59,968,621 shares outstanding at March 31, 2013 and 59,937,955 outstanding at December 31, 2012

     832        832  

Additional paid-in capital

     1,022,386        1,021,507   

Retained earnings

     399,291        389,549   

Accumulated other comprehensive income

     6,053        7,716   

Treasury stock

     (386,737     (386,270

Unallocated common stock held by the Employee Stock Ownership Plan

     (51,380     (52,088

Common stock acquired by the Directors’ Deferred Fee Plan

     (7,275     (7,298

Deferred compensation – Directors’ Deferred Fee Plan

     7,275        7,298   
  

 

 

   

 

 

 

Total stockholders’ equity

     990,445        981,246   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,186,775      $ 7,283,695   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Three months ended March 31, 2013 and 2012 (Unaudited)

(Dollars in thousands, except per share data)

 

     Three months ended
March 31,
 
     2013      2012  

Interest income:

     

Real estate secured loans

   $ 38,335       $ 38,959   

Commercial loans

     9,971         10,370   

Consumer loans

     5,957         6,289   

Securities available for sale and Federal Home Loan Bank stock

     6,192         8,332   

Investment securities held to maturity

     2,839         2,918   

Deposits, Federal funds sold and other short-term investments

     10         12   
  

 

 

    

 

 

 

Total interest income

     63,304         66,880   
  

 

 

    

 

 

 

Interest expense:

     

Deposits

     4,956         7,002   

Borrowed funds

     4,453         5,041   
  

 

 

    

 

 

 

Total interest expense

     9,409         12,043   
  

 

 

    

 

 

 

Net interest income

     53,895         54,837   

Provision for loan losses

     1,500         5,000   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     52,395         49,837   
  

 

 

    

 

 

 

Non-interest income:

     

Fees

     7,960         8,075   

Bank-owned life insurance

     1,210         1,362   

Net gain on securities transactions

     511         2,183   

Other income

     264         1,108   
  

 

 

    

 

 

 

Total non-interest income

     9,945         12,728   
  

 

 

    

 

 

 

Non-interest expense:

     

Compensation and employee benefits

     20,991         20,508   

Net occupancy expense

     5,206         5,026   

Data processing expense

     2,622         2,588   

FDIC insurance

     1,250         1,390   

Amortization of intangibles

     511         739   

Advertising and promotion expense

     746         685   

Other operating expenses

     5,620         5,855   
  

 

 

    

 

 

 

Total non-interest expense

     36,946         36,791   
  

 

 

    

 

 

 

Income before income tax expense

     25,394         25,774   

Income tax expense

     7,566         7,346   
  

 

 

    

 

 

 

Net income

   $ 17,828       $ 18,428   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.31       $ 0.32   

Average basic shares outstanding

     57,167,198         57,051,827   

Diluted earnings per share

   $ 0.31       $ 0.32   

Average diluted shares outstanding

     57,337,215         57,082,631   

See accompanying notes to unaudited consolidated financial statements.

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Three months ended March 31, 2013 and 2012 (Unaudited)

(Dollars in thousands)

 

     Three months ended
March 31,
 
     2013     2012  

Net income

   $ 17,828      $ 18,428   

Other comprehensive income (loss), net of tax:

    

Unrealized gains and losses on securities available for sale:

    

Net unrealized (losses) gains arising during the period

     (1,620     1,424   

Reclassification adjustment for (gains) losses included in net income

     (302     (1,291
  

 

 

   

 

 

 

Total

     (1,922     133   

Amortization related to post-retirement obligations

     259        (388
  

 

 

   

 

 

 

Total other comprehensive loss

     (1,663     (255
  

 

 

   

 

 

 

Total comprehensive income

   $ 16,165      $ 18,173   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (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, 2011

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

Net income

    —         —         18,428        —         —         —         —         —         18,428   

Other comprehensive income, net of tax

          (255             (255

Cash dividends declared

    —         —         (7,330     —         —         —         —         —         (7,330

Distributions from DDFP

    —         —         —         —         —         —         23        (23     —    

Purchases of treasury stock

    —         —         —         —         (1,938     —         —         —         (1,938

Shares issued dividend reinvestment plan

    —         (746     —         —          3,221              2,475   

Allocation of ESOP shares

    —         (115     —         —         —         700        —         —         585   

Allocation of SAP shares

    —         944        —         —         —         —         —         —         944   

Allocation of stock options

    —         89        —         —         —         —         —         —         89   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

  $ 832      $ 1,019,425      $ 374,109      $ 9,316      $ (383,442   $ (54,765   $ (7,367   $ 7,367      $ 965,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (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, 2012

  $ 832      $ 1,021,507      $ 389,549      $ 7,716      $ (386,270   $ (52,088   $ (7,298   $ 7,298      $ 981,246   

Net income

    —         —         17,828        —         —          —          —          —          17,828   

Other comprehensive income, net of tax

          (1,663             (1,663

Cash dividends paid

    —          —          (8,086     —          —          —          —          —          (8,086

Distributions from DDFP

    —          —          —          —          —          —          23        (23     —     

Purchases of treasury stock

    —          —          —          —          (839     —          —          —          (839

Shares issued dividend reinvestment plan

    —          (44     —          —          345              301   

Stock option exercises

      (9     —          —          27        —          —          —          18   

Allocation of ESOP shares

    —          (81     —          —          —          708        —          —          627   

Allocation of SAP shares

    —          942        —          —          —          —          —          —          942   

Allocation of stock options

    —          71        —          —          —          —          —          —          71   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

  $ 832      $ 1,022,386      $ 399,291      $ 6,053      $ (386,737   $ (51,380   $ (7,275   $ 7,275      $ 990,445   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three months ended March 31, 2013 and 2012 (Unaudited)

(Dollars in thousands)

 

     Three months ended March 31,  
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 17,828      $ 18,428   

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

    

Depreciation and amortization of intangibles

     2,292        2,444   

Provision for loan losses

     1,500        5,000   

Deferred tax expense

     1,204        415   

Increase in cash surrender value of Bank-owned life insurance

     (1,210     (1,362

Net amortization of premiums and discounts on securities

     3,838        3,713   

Accretion of net deferred loan fees

     (1,291     (832

Amortization of premiums on purchased loans, net

     324        427   

Net increase in loans originated for sale

     (10,446     (9,355

Proceeds from sales of loans originated for sale

     10,824        9,800   

Proceeds from sales of foreclosed assets

     2,639        3,657   

ESOP expense

     627        585   

Allocation of stock award shares

     916        944   

Allocation of stock options

     71        89   

Net gain on sale of loans

     (378     (445

Net gain on securities transactions

     (511     (2,183

Net gain on sale of premises and equipment

     —          42   

Net loss (gain) on sale of foreclosed assets

     214        (25

Decrease in accrued interest receivable

     1,903        1,952   

(Increase) decrease in other assets

     (5,026     2,060   

Decrease in other liabilities

     (6,475     (2,917
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,843        32,437   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

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

     31,731        29,134   

Purchases of investment securities held to maturity

     (15,789     (32,662

Proceeds from sales of securities

     7,919        47,131   

Proceeds from maturities and paydowns of securities available for sale

     106,313        118,432   

Purchases of securities available for sale

     (71,352     (190,565

Purchases of loans

     (2,797     (19,088

Net (increase) decrease in loans

     (4,568     8,930   

Proceeds from sales of premises and equipment

     —          71   

Purchases of premises and equipment

     (1,165     (982
  

 

 

   

 

 

 

Net cash provided by (used in) by investing activities

     50,292        (39,599
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net (decrease) increase in deposits

     (151,690     38,277   

Increase in mortgage escrow deposits

     1,303        2,415   

Purchase of treasury stock

     (839     (1,938

Cash dividends paid to stockholders

     (8,086     (7,330

Shares issued dividend reinvestment plan

     301        2,475   

Stock options exercised

     18       —     

Proceeds from long-term borrowings

     20,000       —     

Payments on long-term borrowings

     (20,406     (397

Net increase (decrease) in short-term borrowings

     51,148        (26,717
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (108,251     6,785   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (39,116     (377

Cash and cash equivalents at beginning of period

     103,823        69,632   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 64,707      $ 69,255   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest on deposits and borrowings

   $ 9,508      $ 12,147   
  

 

 

   

 

 

 

Income taxes

   $ 5,002     $ —     
  

 

 

   

 

 

 

Non cash investing activities:

    

Transfer of loans receivable to foreclosed assets

   $ 2,676      $ 5,270   
  

 

 

   

 

 

 

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 months ended March 31, 2013 are not necessarily indicative of the results of operations that may be expected for all of 2013.

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, 2012 Annual Report to Stockholders on Form 10-K.

B. Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations:

 

     For the three months ended March 31,  
     2013      2012  
     Net
Income
     Weighted
Average
Common
Shares
Outstanding
     Per
Share
Amount
     Net
Income
     Weighted
Average
Common
Shares
Outstanding
     Per
Share
Amount
 

Net income

   $ 17,828             $ 18,428         
  

 

 

          

 

 

       

Basic earnings per share:

                 

Income available to common stockholders

   $ 17,828         57,167,198       $ 0.31       $ 18,428         57,051,827       $ 0.32   
  

 

 

       

 

 

    

 

 

       

 

 

 

Dilutive shares

        170,017               30,804      
     

 

 

          

 

 

    

Diluted earnings per share:

                 

Income available to common stockholders

   $ 17,828         57,337,215       $ 0.31       $ 18,428         57,082,631       $ 0.32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Anti-dilutive stock options and awards totaling 3,857,542 shares at March 31, 2013, were excluded from the earnings per share calculations.

Note 2. Investment Securities

At March 31, 2013, the Company had $1.22 billion and $342.7 million in available for sale and held to maturity investment securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, variations in pricing information, regulatory actions, changes in the business environment or any changes in the competitive marketplace could have an adverse effect on the Company’s investment portfolio which could result in other-than-temporary impairment 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 March 31, 2013 totaled 107, compared with 65 at December 31, 2012. This included 2 private label mortgage-backed securities at March 31, 2013, with an amortized cost of $639,000 and unrealized losses totaling $2,000. One of these private label mortgage-backed securities was below investment grade at March 31, 2013. All securities with unrealized losses at March 31, 2013 were analyzed for other-than-temporary impairment. Based upon this analysis, no other-than-temporary impairment existed at March 31, 2013.

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 March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 85,245         504         —          85,749   

Mortgage-backed securities

     1,095,139         25,373         (851     1,119,661   

State and municipal obligations

     9,428         342         —          9,770   

Equity securities

     307         53         —          360   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,190,119         26,272         (851     1,215,540   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2012  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 90,443         574           91,017   

Mortgage-backed securities

     1,134,647         27,934         (256     1,162,325   

State and municipal obligations

     9,933         384         (1     10,316   

Equity securities

     307         37         —          344   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,235,330         28,929         (257     1,264,002   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The amortized cost and fair value of securities available for sale at March 31, 2013, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.

 

     March 31, 2013  
     Amortized
Cost
     Fair
value
 

Due in one year or less

   $ 32,688         32,769   

Due after one year through five years

     61,570         62,305   

Due after five years through ten years

     415         445   

Mortgage-backed securities

     1,095,139         1,119,661   

Equity securities

     307         360   
  

 

 

    

 

 

 
   $ 1,190,119         1,215,540   
  

 

 

    

 

 

 

Proceeds from the sale of securities available for sale for the three months ended March 31, 2013, were $7,395,000 resulting in gross gains of $481,000 and no gross losses. For the three months ended March 31, 2012, proceeds from the sale of securities available for sale were $47,131,000, resulting in gross gains of $2,160,000 and no gross losses.

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 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
March 31,
 
     2013      2012  

Beginning credit loss amount

   $ 1,240         1,240   

Add: Initial OTTI credit losses

     —           —     

Subsequent OTTI credit losses

     —           —     

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   
  

 

 

    

 

 

 

 

The Company did not incur an OTTI charge on securities for the three months ended March 31, 2013 or 2012, respectively.

The following table represents the Company’s disclosure regarding securities available for sale with temporary impairment at March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013 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

   $ 195,722         (847     4,164         (4     199,886         (851
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 195,722         (847     4,164         (4     199,886         (851
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

11


Table of Contents
     December 31, 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

   $ 59,521         (205     11,012         (51     70,533         (256

State and municipal obligations

     —           —          503         (1     503         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 59,521         (205     11,515         (52     71,036         (257
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 Company does not have the intent to sell securities in a temporary loss position at March 31, 2013, nor is it more likely than not that the Company will be required to sell the securities before the anticipated recovery.

The number of securities in an unrealized loss position as of March 31, 2013 totaled 16, compared with 9 at December 31, 2012. There were 2 private label mortgage-backed securities in an unrealized loss position at March 31, 2013, with an amortized cost of $639,000 and unrealized losses totaling $2,000. One of these private label mortgage-backed securities was below investment grade at March 31, 2013.

The Company estimates the loss projections for each security by stressing the individual loans collateralizing the security and applying a range of expected default rates, loss severities, and prepayment speeds in conjunction with the underlying credit enhancement for each security. Based on specific assumptions about collateral and vintage, a range of possible cash flows was identified to determine whether other-than-temporary impairment existed during the three months ended March 31, 2013. The Company concluded that no other-than-temporary impairment of the securities available for sale portfolio existed at March 31, 2013.

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 March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 5,105         28         —          5,133   

Mortgage-backed securities

     9,230         414         —          9,644   

State and municipal obligations

     318,591         13,130         (1,280     330,441   

Corporate obligations

     9,770         161         (5     9,926   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 342,696         13,733         (1,285     355,144   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2012  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 

Agency obligations

   $ 4,705         34         —          4,739   

Mortgage-backed securities

     11,123         460         —          11,583   

State and municipal obligations

     336,078         15,332         (585     350,825   

Corporate obligations

     7,558         211         —          7,769   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 359,464         16,037         (585     374,916   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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 months ended March 31, 2013, the Company recognized gross gains of $13,000 and gross losses of 2,000, related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $9,209,000. In addition, the Company recognized gross gains of $19,000 and no gross losses related to sales on certain securities, with the proceeds totaling $524,000. The sales of these securities were in response to the credit deterioration of the issuers. For the three months ended March 31, 2012, the Company recognized gains of $23,000 related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $2,731,000. There were no sales of securities for the three months ended March 31, 2012.

The amortized cost and fair value of investment securities at March 31, 2013 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.

 

     March 31, 2013  
     Amortized
cost
     Fair
value
 

Due in one year or less

   $ 27,041         27,282   

Due after one year through five years

     74,978         76,840   

Due after five years through ten years

     94,116         100,235   

Due after ten years

     137,331         141,143   

Mortgage-backed securities

     9,230         9,644   
  

 

 

    

 

 

 
   $ 342,696         355,144   
  

 

 

    

 

 

 

The following table represents the Company’s disclosure on investment securities held to maturity with temporary impairment at March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013 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

   $ 49,808         (1,257     1,078         (23     50,886         (1,280

Corporate obligations

     1,942         (5     —           —          1,942         (5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 52,250         (1,262     1,078         (23     53,328         (1,285
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 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

   $ 30,992         (585     —           —           30,992         (585
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,992         (585     —           —           30,992         (585
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Based upon the review of the held to maturity securities portfolio, the Company believes that as of March 31, 2013, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the fair value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risks, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company would be required to sell the securities before the anticipated recovery.

The number of securities in an unrealized loss position as of March 31, 2013 totaled 91, compared with 56 at December 31, 2012. All temporarily impaired investment securities were investment grade at March 31, 2013.

 

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Table of Contents

Note 3. Loans Receivable and Allowance for Loan Losses

Loans receivable at March 31, 2013 and December 31, 2012 are summarized as follows (in thousands):

 

     March 31,
2013
    December 31,
2012
 

Mortgage loans:

    

Residential

   $ 1,234,173        1,265,015   

Commercial

     1,349,565        1,349,950   

Multi-family

     743,356        723,958   

Construction

     135,611        120,133   
  

 

 

   

 

 

 

Total mortgage loans

     3,462,705        3,459,056   

Commercial loans

     874,880        866,395   

Consumer loans

     573,784        579,166   
  

 

 

   

 

 

 

Total gross loans

     4,911,369        4,904,617   

Premiums on purchased loans

     4,683        4,964   

Unearned discounts

     (73     (78

Net deferred fees

     (5,624     (4,804
  

 

 

   

 

 

 
   $ 4,910,355        4,904,699   
  

 

 

   

 

 

 

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

 

     At March 31, 2013  
     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

   $ 14,404         6,043         31,634         52,081         1,182,092         1,234,173         —     

Commercial

     7,913         —             29,543         37,456         1,312,109         1,349,565         —     

Multi-family

     —             —             412         412         742,944         743,356         —     

Construction

     —             —             8,786         8,786         126,825         135,611         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     22,317         6,043         70,375         98,735         3,363,970         3,462,705         —     

Commercial loans

     4,256         113         23,586         27,955         846,925         874,880         —     

Consumer loans

     2,981         1,423         5,098         9,502         564,282         573,784         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 29,554         7,579         99,059         136,192         4,775,177         4,911,369         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 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

   $ 15,752         11,986         29,293         57,031         1,207,984         1,265,015         —     

Commercial

     535         12,194         29,072         41,801         1,308,149         1,349,950         —     

Multi-family

     —             —             412         412         723,546         723,958         —     

Construction

     —             —             8,896         8,896         111,237         120,133         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     16,287         24,180         67,673         108,140         3,350,916         3,459,056         —     

Commercial loans

     1,840         70         25,467         27,377         839,018         866,395         —     

Consumer loans

     4,144         1,808         5,850         11,802         567,364         579,166         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 22,271         26,058         98,990         147,319         4,757,298         4,904,617         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $99.1 million and $99.0 million at March 31, 2013 and December 31, 2012, respectively. Included in non-accrual loans were $30.8 million and $33.0 million of loans which were less than 90 days past due at March 31, 2013 and December 31, 2012, respectively. There were no loans ninety days or greater past due and still accruing interest at March 31, 2013, or December 31, 2012.

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 as a result of this the process.

At March 31, 2013, there were 126 impaired loans totaling $112.0 million. Included in this total were 96 TDRs related to 86 borrowers totaling $59.0 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2013. At December 31, 2012, there were 108 impaired loans totaling $109.6 million. Included in this total were 80 TDRs to 70 borrowers totaling $58.4 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2012.

 

15


Table of Contents

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

 

     At March 31, 2013  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
 

Individually evaluated for impairment

   $ 81,301         29,212         1,524         112,037   

Collectively evaluated for impairment

     3,381,404         845,668         572,260         4,799,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,462,705         874,880         573,784         4,911,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2012  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
 

Individually evaluated for impairment

   $ 78,525         29,807         1,298         109,630   

Collectively evaluated for impairment

     3,380,531         836,588         577,868         4,794,987   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,459,056         866,395         579,166         4,904,617   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     At March 31, 2013  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
     Unallocated      Total  

Individually evaluated for impairment

   $ 5,353         1,161         106         6,620         —           6,620   

Collectively evaluated for impairment

     31,040         22,340         4,715         58,095         5,319         63,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,393         23,501         4,821         64,715         5,319         70,034   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2012  
     Mortgage
loans
     Commercial
loans
     Consumer
loans
     Total Portfolio
Segments
     Unallocated      Total  

Individually evaluated for impairment

   $ 5,172         1,949         90         7,211         —           7,211   

Collectively evaluated for impairment

     32,790         18,366         5,134         56,290         6,847         63,137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 37,962         20,315         5,224         63,501         6,847         70,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, the Company attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following tables present the number of loans modified as TDRs during the three months ended March 31, 2013 and 2012 and their balances immediately prior to the modification date and post-modification as of March 31, 2013 and 2012.

 

16


Table of Contents
     Three Months Ended March 31, 2013  

Troubled Debt

Restructurings

   Number of
Loans
     Pre-Modification
Outstanding
Recorded Investment
     Post-Modification
Outstanding
Recorded Investment
 
            ($ in thousands)         

Mortgage loans:

        

Residential

     15       $ 2,802         2,882   

Commercial

     1         329         308   
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     16         3,131         3,190   

Consumer loans

     3         240         244   
  

 

 

    

 

 

    

 

 

 

Total restructured loans

     19       $ 3,371         3,434   
  

 

 

    

 

 

    

 

 

 
     Three Months Ended March 31, 2012  

Troubled Debt

Restructurings

   Number of
Loans
     Pre-Modification
Outstanding
Recorded Investment
     Post-Modification
Outstanding
Recorded Investment
 
            ($ in thousands)         

Mortgage loans:

        

Residential

     5       $ 1,173         1,008   
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     5         1,173         1,008   

Commercial loans

     3         10,261         10,261   

Consumer loans

     1         54         54   
  

 

 

    

 

 

    

 

 

 

Total restructured loans

     9       $ 11,488         11,323   
  

 

 

    

 

 

    

 

 

 

All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. Estimated collateral values of collateral dependent impaired loans modified during the three months ended March 31, 2013 and 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 months ended March 31, 2013 and 2012. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $380,000 and $746,000 at March 31, 2013 and 2012, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment.

The TDRs presented in the preceding tables had weighted average modified interest rates of 4.30%, and 5.45%, compared to weighted average rates of 5.90% and 6.45% prior to modification for the three months ended March 31, 2013 and 2012, respectively.

The following table presents loans modified as TDRs within the previous 12 months from March 31, 2013 and 2012, and for which there was a payment default (90 days or more past due) during the three months ended March 31, 2013 and 2012.

 

     For the three months ended  
     March 31, 2013      March 31, 2012  

Troubled Debt

Restructurings

Subsequently Defaulted

   Number of
Loans
     Outstanding
Recorded Investment
     Number of
Loans
     Outstanding
Recorded Investment
 
            ($ in thousands)             ($ in thousands)  

Mortgage loans:

           

Residential

     1       $ 1,785         4       $ 791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     1         1,785         4         791   

Consumer loans

     —           —           1         44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructured loans

     1       $ 1,785         5       $ 835   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012 are as follows (in thousands):

 

Three Months Ended March 31,

   Mortgage
loans
    Commercial
loans
    Consumer
loans
    Total Portfolio
Segments
    Unallocated     Total  
2013             

Balance at beginning of period

   $ 37,962        20,315        5,224        63,501        6,847        70,348   

Provision charged to operations

     (823     3,853        (2     3,028        (1,528     1,500   

Recoveries of loans previously charged off

     229        113        243        585        —          585   

Loans charged off

     (975     (780     (644     (2,399     —          (2,399
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 36,393        23,501        4,821        64,715        5,319        70,034   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
2012             

Balance at beginning of period

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

Provision charged to operations

     (618     (1,037     1,099        (556     5,556        5,000   

Recoveries of loans previously charged off

     41        197        245        483        —          483   

Loans charged off

     (1,183     (3,579     (1,076     (5,838     —          (5,838
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 37,683        20,962        5,783        64,428        9,568        73,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

    At March 31, 2013     At December 31, 2012  
    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

  $ 7,914        5,835        —          5,855        73        7,241        5,309        —          5,395        155   

Commercial

    17,652        14,091        —          14,330        —          17,656        14,104        —          16,579        82   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    9,811        8,786        —          8,830        —          9,810        8,896        —          9,738        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    35,377        28,712        —          29,015        73        34,707        28,309        —          31,712        237   

Commercial loans

    18,271        16,191        —          16,486        53        7,252        6,117        —          7,064        53   

Consumer loans

    276        185        —          276        —          84        58        —          71        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    53,924        45,088        —          45,777        126        42,043        34,484        —          38,847        292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans with an allowance recorded

                   

Mortgage loans:

                   

Residential

  $ 16,532        15,411        2,186        15,434        137        14,139        13,133        1,805        13,206        378   

Commercial

    37,936        37,178        3,167        37,271        245        37,739        37,083        3,367        37,490        990   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    54,468        52,589        5,353        52,705        382        51,878        50,216        5,172        50,696        1,368   

Commercial loans

    13,021        13,021        1,161        13,126        121        24,545        23,690        1,949        24,777        689   

Consumer loans

    1,377        1,339        106        1,382        16        1,277        1,240        90        1,291        46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 68,866        66,949        6,620        67,213        519        77,700        75,146        7,211        76,764        2,103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

                   

Mortgage loans:

                   

Residential

  $ 24,446        21,246        2,186        21,289        210        21,380        18,442        1,805        18,601        533   

Commercial

    55,588        51,269        3,167        51,601        245        55,395        51,187        3,367        54,069        1,072   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    9,811        8,786        —          8,830        —          9,810        8,896        —          9,738        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    89,845        81,301        5,353        81,720        455        86,585        78,525        5,172        82,408        1,605   

Commercial loans

    31,292        29,212        1,161        29,612        174        31,797        29,807        1,949        31,841        742   

Consumer loans

    1,653        1,524        106        1,658        16        1,361        1,298        90        1,362        48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 122,790        112,037        6,620        112,990        645        119,743        109,630        7,211        115,611        2,395   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $6,620,000 and $7,211,000 at March 31, 2013 and December 31, 2012, respectively. At March 31, 2013 and December 31, 2012, impaired loans for which there was no related allowance for loan losses totaled $45,088,000 and $34,484,000, respectively. The average balance of impaired loans during the three months ended March 31, 2013 was $112,990,000.

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.

 

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Table of Contents

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

 

     At March 31, 2013  
     Residential      Commercial
mortgage
     Multi-family      Construction      Total
mortgages
     Commercial      Consumer      Total loans  

Special mention

   $ 6,043         12,323         —           —           18,366         16,955         1,423         36,744   

Substandard

     31,634         66,457         412         8,786         107,289         62,710         4,795         174,794   

Doubtful

     —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified and criticized

     37,677         78,780         412         8,786         125,655         79,665         6,218         211,538   

Pass/Watch

     1,196,496         1,270,785         742,944         126,825         3,337,049         795,215         567,566         4,699,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding loans

   $ 1,234,173         1,349,565         743,356         135,611         3,462,705         874,880         573,784         4,911,369   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2012  
     Residential      Commercial
mortgage
     Multi-family      Construction      Total
mortgages
     Commercial      Consumer      Total loans  

Special mention

   $ 11,986         14,816         —           —           26,802         17,076         1,808         45,686   

Substandard

     29,293         79,235         412         13,642         122,582         54,200         5,666         182,448   

Doubtful

     —           —           —           —           —           464         —           464   

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified and criticized

     41,279         94,051         412         13,642         149,384         71,740         7,474         228,598   

Pass/Watch

     1,223,736         1,255,899         723,546         106,491         3,309,672         794,655         571,692         4,676,019   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding loans

   $ 1,265,015         1,349,950         723,958         120,133         3,459,056         866,395         579,166         4,904,617   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Deposits

Deposits at March 31, 2013 and December 31, 2012 are summarized as follows (in thousands):

 

     March 31,
2013
     December 31,
2012
 

Savings

   $ 925,274         914,787   

Money market

     1,338,437         1,357,046   

NOW

     1,304,215         1,334,813   

Non-interest bearing

     792,977         864,152   

Certificates of deposit

     915,678         957,473   
  

 

 

    

 

 

 
   $ 5,276,581         5,428,271   
  

 

 

    

 

 

 

Note 5. 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 as to new entrants, and retiree life insurance benefits were eliminated for employees with less than ten years of service as of December 31, 2006.

 

20


Table of Contents

Net periodic benefit cost (increase) for pension benefits and other post-retirement benefits for the three months ended March 31, 2013 and 2012 includes the following components (in thousands):

 

     Pension
benefits
    Other post-
retirement
benefits
 
     2013     2012     2013     2012  

Service cost

   $ —          —          60        63   

Interest cost

     318        322        245        261   

Expected return on plan assets

     (792     (645     —          —     

Amortization of prior service cost

     —          —          (1     (1

Amortization of the net gain (loss)

     338        357        4        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (increase)

   $ (136     34        308        326   
  

 

 

   

 

 

   

 

 

   

 

 

 

In its consolidated financial statements for the year ended December 31, 2012, the Company previously disclosed that it does not expect to contribute to the Plan in 2013. As of March 31, 2013, 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 months ended March 31, 2013 were calculated using the actual January 1, 2013 pension valuation and the estimated results of the other post-retirement benefits January 1, 2013 valuations.

Note 6. Impact of Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) in January 2013 issued Accounting Standards Update (“ASU”) No. 2013-01, “Scope of Disclosures about Offsetting Assets and Liabilities”, which clarifies the scope of the new offsetting disclosures required under ASU 2011-11. It is limited to (1) derivatives, (2) repurchase and reverse repurchase agreements, and (3) securities borrowing and lending transactions, that are either: offset in the statement of financial positions in accordance with ASC 210, “Balance Sheet Presentation”, or ASC 815, “Derivatives and Hedging “, or subject to an enforceable master netting arrangement or similar agreement regardless of whether they are presented net in the financial statements. This ASU is effective for annual and interim reporting periods beginning on or after January 1, 2013. This guidance did not have a significant impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, which requires disclosure of the effects of reclassifications out of accumulated other comprehensive income (“AOCI”) on net income line items only for those items that are reported in their entirety in net income in the period of reclassification. For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures. This guidance was effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company adopted this guidance, as required, for the quarter ended March 31, 2013.

 

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Table of Contents

Note 7. 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 March 31, 2013 and December 31, 2012.

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

 

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Table of Contents

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 March 31, 2013 and December 31, 2012.

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 March 31, 2013 and December 31, 2012.

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of March 31, 2013 and December 31, 2012, by level within the fair value hierarchy.

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    March 31,
2013
     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

   $ 85,749         85,749         —           —     

Mortgage-backed securities

     1,119,661         —           1,119,661         —     

State and municipal obligations

     9,770         —           9,770         —     

Equity securities

     360         360         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,215,540         86,109         1,129,431         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

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

   $ 46,450         —           —           46,450   

Foreclosed assets

     12,192         —           —           12,192   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 58,652         —           —           58,652   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

   $ 91,017         91,017         —           —     

Mortgage-backed securities

     1,162,325         —           1,162,325         —     

State and municipal obligations

     10,316         —           10,316         —     

Equity securities

     344         344         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,264,002         91,361         1,172,641         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

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

   $ 43,251         —           —           43,251   

Foreclosed assets

     12,473         —           —           12,473   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 55,724         —           —           55,724   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013.

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.

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.

 

24


Table of Contents

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 estimated fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifies the estimated fair value of its certificates of deposit portfolio as Level 2.

Borrowed Funds

The fair value of borrowed funds was estimated by discounting future cash flows using rates available for debt with similar terms and maturities and is classified by the Company as Level 2 within the fair value hierarchy.

Commitments to Extend Credit and Letters of Credit

The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value estimates of commitments to extend credit and letters of credit are deemed immaterial.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

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Table of Contents

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following tables present the Company’s financial instruments at their carrying and fair values as of March 31, 2013 and December 31, 2012. Fair values are presented by level within the fair value hierarchy.

 

            Fair Value Measurements at March 31, 2013 Using:  
(Dollars in thousands)    Carrying
value
     Fair
value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Financial assets:

              

Cash and cash equivalents

   $ 64,707         64,707         64,707         —           —     

Securities available for sale:

              

Agency obligations

     85,749         85,749         85,749         —           —     

Mortgage-backed securities

     1,119,661         1,119,661         —           1,119,661         —     

State and municipal obligations

     9,770         9,770         —           9,770         —     

Equity securities

     360         360         360         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,215,540         1,215,540         86,109         1,129,431         —     

Investment securities held to maturity:

              

Agency obligations

   $ 5,105         5,133         5,133         —           —     

Mortgage-backed securities

     9,230         9,644         —           9,644         —     

State and municipal obligations

     318,591         330,441         —           330,441         —     

Corporate obligations

     9,770         9,926         —           9,926         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 342,696         355,144         5,133         350,011         —     

FHLB-NY stock

     40,675         40,675         40,675         —           —     

Loans, net of allowance for loan losses

     4,840,321         5,028,118         —           —           5,028,118   

Financial liabilities:

              

Deposits other than certificates of deposits

   $ 4,360,903         4,360,903         4,360,903         —           —     

Certificates of deposit

     915,678         925,321         —           925,321         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5,276,581         5,286,224         4,360,903         925,321         —     

Borrowings

   $ 854,007         883,441         —           883,441         —     

 

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Table of Contents
            Fair Value Measurements at December 31, 2012 Using:  
(Dollars in thousands)    Carrying
value
     Fair
value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Financial assets:

              

Cash and cash equivalents

   $ 103,823         103,823         103,823         —           —     

Securities available for sale:

              

Agency obligations

     91,017         91,017         91,017         —           —     

Mortgage-backed securities

     1,162,325         1,162,325         —           1,162,325         —     

State and municipal obligations

     10,316         10,316         —           10,316         —     

Equity securities

     344         344         344         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,264,002         1,264,002         91,361         1,172,641         —     

Investment securities held to maturity:

              

Agency obligations

   $ 4,705         4,739         4,739         —           —     

Mortgage-backed securities

     11,123         11,583         —           11,583         —     

State and municipal obligations

     336,078         350,825         —           350,825         —     

Corporate obligations

     7,558         7,769         —           7,769         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 359,464         374,916         4,739         370,177         —     

FHLB-NY stock

     37,543         37,543         37,543         —           —     

Loans, net of allowance for loan losses

     4,834,351         5,025,700         —           —           5,025,700   

Financial liabilities:

              

Deposits other than certificates of deposits.

   $ 4,470,798         4,470,483         4,470,483         —           —     

Certificates of deposit

     957,473         968,668         —           968,668         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $ 5,428,271         5,439,151         4,470,483         968,668      

Borrowings

   $ 803,264         834,244         —           834,244         —     

Note 8. Other Comprehensive Income (Loss)

The following table presents the components of other comprehensive income (loss) both gross and net of tax, for the three months ended March 31, 2013 and 2012 (in thousands):

 

     Three months ended March 31,  
     2013     2012  
     Before
Tax
    Tax
Effect
    After
Tax
    Before
Tax
    Tax
Effect
    After
Tax
 

Components of Other Comprehensive Income (Loss):

            

Unrealized gains and losses on securities available for sale:

            

Net (losses) gains arising during the period

   $ (2,739     1,119        (1,620   $ 2,407        (983     1,424   

Reclassification adjustment for gains included in net income

     (511     209       (302     (2,183     892        (1,291
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (3,250     1,328        (1,922     224        (91     133   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization related to post retirement obligations

     438        (179     259        (656     268        (388
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   $ (2,812     1,149        (1,663   $ (432     177        (255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents the changes in the components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013 (in thousands):

 

     Changes in Accumulated Other Comprehensive Income by
Component, net of tax:
 
     Unrealized Gains
on Securities
Available for Sale
    Post Retirement
Obligations
    Accumulated
Other
Comprehensive
Income
 

Balance at December 31, 2012

   $ 16,961        (9,245     7,716   

Current - period other comprehensive (loss) income

     (1,922     259        (1,663
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ 15,039        (8,986     6,053   
  

 

 

   

 

 

   

 

 

 

The following table summarizes the reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2013 (in thousands):

 

     Reclassifications Out of Accumulated Other Comprehensive
Income for the Three Months Ended March 31, 2013

Details of Accumulated Other

Comprehensive Income (“AOCI”)

Components

   Amount
reclassified  from
AOCI
    Affected line item in the Consolidated
Statement of Income

Securities available for sale:

    

Realized net gains on the sale of securities available for sale

   $ 511      Net gain on securities transactions
     (209   Income tax expense
  

 

 

   
     302      Net of tax
  

 

 

   

Post retirement obligations:

    

Amortization of actuarial losses (gains)

     342      Compensation and employee benefits (1)
     (140   Income tax expense
  

 

 

   
     202      Net of tax
  

 

 

   

Total reclassifications

   $ 504      Net of tax
  

 

 

   

 

(1) This item is included in the computation of net periodic benefit cost. See Note 5. Components of Net Periodic Benefit Cost.

 

28


Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.

The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company also advises readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies:

 

   

Adequacy of the allowance for loan losses

 

   

Goodwill valuation and analysis for impairment

 

   

Valuation of securities available for sale and impairment analysis

 

   

Valuation of deferred tax assets

The calculation of the allowance for loan losses is a critical accounting policy of the Company. The allowance for loan losses is a valuation account that reflects management’s evaluation of the probable losses in the loan portfolio. The Company maintains the allowance for loan losses through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loan that have been charged-off are credited to the allowance for loan losses.

The Company’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on which the collectibility of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.

 

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Table of Contents

As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating.

When assigning a risk rating to a loan, management utilizes a nine point internal risk rating system. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial and construction loans are rated individually and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and the Credit Administration Department. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party and periodically, by the Credit Committee in the credit renewal or approval process.

Management assigns general valuation allowance (“GVA”) percentages to each risk rating category for use in allocating the allowance for loan losses, giving consideration to historical loss experience by loan type and other qualitative or environmental factors such as trends and levels of delinquencies, impaired loans, charge-offs, recoveries, loan volume, as well as, the national and local economic trends and conditions. The appropriateness of these percentages is evaluated by management at least once each calendar year and monitored on a quarterly basis, with changes made when they are required. In the first quarter of 2012, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, GVA percentages applied to the indirect marine loan portfolio were increased to reflect an increase in historical loss experience.

Management believes the primary risks inherent in the portfolio are a continued decline in the economy, generally, a continued decline in real estate market values, rising unemployment or a protracted period of unemployment at current elevated levels, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio.

Although management believes that the Company has established and maintained the allowance for loan losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy generally have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

Additional critical accounting policies relate to judgments about other asset impairments, including goodwill, investment securities and deferred tax assets. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates.

 

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Table of Contents

The Company qualitatively determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing Step 1 of the goodwill impairment test. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to perform Step 1 of the assessment and then, if needed, Step 2 to determine whether goodwill is impaired. However, if it is more likely than not that the fair value of the reporting unit is more than its carrying amount, the entity does not need to apply the two-step impairment test. For this analysis, the Reporting Unit is defined as the Bank, which includes all core and retail banking operations of the Company but excludes the assets, liabilities, equity, earnings and operations held exclusively at the Company level. The guidance provides certain factors an entity should consider in its qualitative assessment in determining whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The factors include:

 

   

Macroeconomic conditions, such as deterioration in economic condition and limited access to capital.

 

   

Industry and market considerations, such as increased competition, regulatory developments and decline in market-dependent multiples.

 

   

Cost factors, such as increased labor costs, cost of materials and other operating costs.

 

   

Overall financial performance, such as declining cash flows and decline in revenue or earnings.

 

   

Other relevant entity-specific events, such as changes in management, strategy or customers, litigation and contemplation of bankruptcy.

 

   

Reporting unit events, such as selling or disposing a portion of a reporting unit and a change in composition of assets.

The Company completed its annual goodwill impairment test as of September 30, 2012. Based upon its qualitative assessment of goodwill, the Company concluded it was more likely than not that the fair value of the reporting unit exceeded its carrying amount, goodwill was not impaired and no further quantitative analysis (Step 1) was warranted.

The Company may, based upon its qualitative assessment, or at its option, perform the two-step process to evaluate the potential impairment of goodwill. If, based upon Step 1, the fair value of the Reporting Unit exceeds its carrying amount, goodwill of the Reporting Unit is considered not impaired. However, if the carrying amount of the Reporting Unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the Reporting Unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

At March 31, 2013, the carrying value of goodwill was $352.7 million. Management has evaluated potential goodwill impairment triggers and based upon its qualitative assessment of goodwill, has determined that goodwill is not impaired and no further analysis is warranted.

The Company’s available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in Stockholders’ Equity. Estimated fair values are based on market quotations or matrix pricing as discussed in Note 7 to the consolidated financial statements. Securities which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. The Company conducts a periodic review and evaluation of the securities portfolio to determine if any declines in the fair values of securities are other-than-temporary. In this evaluation, if such a decline were deemed other-than-temporary, the Company would measure the total credit-related component of the unrealized loss, and recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed-rate securities decreases and as interest rates fall, the fair value of fixed-rate securities increases. Turmoil in the credit markets resulted in a lack of liquidity in certain sectors of the mortgage-

 

31


Table of Contents

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 Company determines if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. If either exists, the decline in value is considered other-than-temporary. In this evaluation, the Company did not recognize an other-than-temporary impairment charge on securities for the three months ended March 31, 2013 or 2012, respectively.

The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities, utilization against carryback years and estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. At March 31, 2013, the Company maintained a valuation allowance of $242,000, related to unused capital loss carryforwards.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2013 AND DECEMBER 31, 2012

Total assets decreased $96.9 million, or 1.3%, to $7.19 billion at March 31, 2013, from $7.28 billion at December 31, 2012, primarily due to decreases in total investments and cash and cash equivalents, partially offset by an increase in total loans.

Total investments decreased $62.1 million, or 3.7%, to $1.60 billion at March 31, 2013, from $1.66 billion at December 31, 2012, largely due to principal repayments on mortgage-backed securities, maturities of municipal and agency bonds, and the sale of certain mortgage-backed securities which had a heightened risk of prepayment, partially offset by purchases of mortgage-backed and municipal securities.

Cash and cash equivalents decreased $39.1 million to $64.7 million at March 31, 2013, from $103.8 million at December 31, 2012. The decline in cash was principally due to a decrease in total deposits and an increase in total loans, partially offset by a decrease in total investments.

Total loans increased $5.7 million during the three months ended March 31, 2013 to $4.91 billion. Loan growth was tempered by the repayment of $17.3 million on two shared national credits during the quarter. Loan originations totaled $348.3 million and loan purchases totaled $2.8 million for the three months ended March 31, 2013. The loan portfolio had net increases of $19.0 million in commercial and multi-family mortgage loans, $15.5 million in construction loans and $8.5 million in commercial loans, which were offset by decreases of $30.8 million in residential mortgage loans and $5.4 million in consumer loans. Commercial real estate, commercial and construction loans represented 63.2% of the loan portfolio at March 31, 2013, compared to 62.4% at December 31, 2012.

The Company does not originate or purchase sub-prime or option ARM loans. Prior to September 30, 2008, the Company originated “Alt-A” mortgages in the form of stated income loans with a maximum loan-to-value ratio of 50% on a limited basis. The balance of these “Alt-A” loans at March 31, 2013 was $9.0 million. Of this total, 6 loans totaling $715,000 were 90 days or more delinquent. General valuation reserves of 6.5%, or $46,000, were allocated to the loans which were 90 days or more delinquent at March 31, 2013.

The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNCs”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $35.4 million and $17.2 million, respectively, at March 31, 2013. At March 31, 2013, no SNC loans were past due.

The Company had outstanding junior lien mortgages totaling $242.8 million at March 31, 2013. Of this total, 40 loans totaling $2.9 million were 90 days or more delinquent. General valuation reserves of 10%, or $292,000, were allocated to the loans which were 90 days or more delinquent at March 31, 2013.

 

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At March 31, 2013, the Company had outstanding indirect marine loans totaling $39.3 million. Of this total, 1 loan for $12,000 was 90 days or more delinquent. General valuation reserves of 60%, or $7,000 were allocated to this loan at March 31, 2013. Marine loans are currently made only on a direct, limited accommodation basis to existing customers.

The following table sets forth information regarding the Company’s non-performing assets as of March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013      December 31, 2012  

Mortgage loans:

     

Residential

   $ 31,634         29,293   

Commercial

     29,543         29,072   

Multi-family

     412         412   

Construction

     8,786         8,896