PFS-12.31.2013-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 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 No. 1-31566
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 Number)
 
 
 
239 Washington Street, Jersey City, New Jersey
 
07302
(Address of Principal Executive Offices)
 
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
 
New York Stock Exchange
(Title of Class)
 
(Name of Exchange on Which Registered)
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ý    NO  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  ý
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ý
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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer  ý    Accelerated  Filer  ¨    Non-Accelerated Filer  ¨    Smaller Reporting Company  ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
As of February 1, 2014, there were 83,209,293 issued and 60,329,589 shares of the Registrant’s Common Stock outstanding, including 410,843 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under accounting principles generally accepted in the United States of America. The aggregate value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the Common Stock as of June 28, 2013, as quoted by the NYSE, was approximately $844.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
(1)
Proxy Statement for the 2014 Annual Meeting of Stockholders of the Registrant (Part III).




PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-K
 
Item Number
 
Page Number
PART I
1.
1A.
1B.
2.
3.
4.
 
PART II
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
PART III
10.
11.
12.
13.
14.
 
PART IV
15.
 




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 Provident Financial Services, Inc. (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.


PART I
 
Item 1.
Business
Provident Financial Services, Inc.
The Company is a Delaware corporation which became the holding company for The Provident Bank (the “Bank”) on January 15, 2003, following the completion of the conversion of the Bank to a stock chartered savings bank. On January 15, 2003, the Company issued an aggregate of 59,618,300 shares of its common stock, par value $0.01 per share in a subscription offering, and contributed $4.8 million in cash and 1,920,000 shares of its common stock to The Provident Bank Foundation, a charitable foundation established by the Bank. As a result of the conversion and related stock offering, the Company raised $567.2 million in net proceeds, of which $293.2 million was utilized to acquire all of the outstanding common stock of the Bank. The Company owns all of the outstanding common stock of the Bank, and as such, is a bank holding company subject to regulation by the Federal Reserve Board.
At December 31, 2013, the Company had total assets of $7.49 billion, loans of $5.19 billion, total deposits of $5.20 billion, and total stockholders’ equity of $1.01 billion. The Company’s mailing address is 239 Washington Street, Jersey City, New Jersey 07302, and the Company’s telephone number is (732) 590-9200.
Capital Management. The Company paid cash dividends totaling $32.3 million and repurchased 398,339 shares of its common stock at a cost of $5.9 million in 2013. At December 31, 2013, 3.7 million shares were eligible for repurchase under the board approved stock repurchase program(s). The Company and the Bank were “well capitalized” at December 31, 2013 under current regulatory standards.
Available Information. The Company is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission (“SEC”). These respective reports are on file and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov). All filed SEC reports and interim filings can also be obtained from the Bank’s website, www.providentnj.com, on the “Investor Relations” page, without charge from the Company.
The Provident Bank
Established in 1839, the Bank is a New Jersey-chartered capital stock savings bank currently operating 77 full-service branch offices in the New Jersey counties of Hudson, Bergen, Essex, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset and Union, which the Bank considers its primary market area. As a community- and customer-oriented institution, the Bank emphasizes personal service and customer convenience in serving the financial needs of the individuals, families and businesses residing in its primary markets areas. The Bank attracts deposits from the general public and businesses primarily in the areas surrounding its banking offices and uses those funds, together with funds generated from operations and borrowings, to originate

1



commercial real estate loans, residential mortgage loans, commercial business loans and consumer loans. The Bank also invests in mortgage-backed securities and other permissible investments.
The following are highlights of The Provident Bank’s operations:
Diversified Loan Portfolio. To improve asset yields and reduce its exposure to interest rate risk, the Bank has diversified its loan portfolio and has emphasized the origination of commercial real estate loans, multi-family loans and commercial business loans. These loans generally have adjustable rates or shorter fixed terms and interest rates that are higher than the rates applicable to one- to four-family residential mortgage loans. However, these loans generally have a higher risk of loss than one- to four- family residential mortgage loans.
Asset Quality. As of December 31, 2013, non-performing assets were $82.2 million or 1.10% of total assets, compared to $111.5 million or 1.53% of total assets at December 31, 2012. While the Bank’s non-performing asset levels have been adversely impacted by the troubled real estate market and the challenging economic environment, the Bank continues to focus on conservative underwriting criteria and on active and timely collection efforts.
Emphasis on Relationship Banking and Core Deposits. The Bank emphasizes the acquisition and retention of core deposit accounts, consisting of savings and all demand deposit accounts, and expanding customer relationships. Core deposit accounts totaled $4.40 billion at December 31, 2013, representing 84.5% of total deposits, compared with $4.47 billion, or 82.4% of total deposits at December 31, 2012. The Bank also focuses on increasing the number of households and businesses served and the number of banking products per customer.
Non-Interest Income. The Bank’s focus on transaction accounts and expanded products and services has enabled the Bank to generate non-interest income. Fees derived from core deposit accounts are a primary source of non-interest income. The Bank also offers investment, wealth and asset management services through its subsidiaries to generate non-interest income. Total non-interest income was $44.2 million for the year ended December 31, 2013, compared with $43.6 million for the year ended December 31, 2012, and fee income was $34.0 million for the year ended December 31, 2013, compared with $30.3 million for the year ended December 31, 2012.
Managing Interest Rate Risk. The Bank manages its exposure to interest rate risk through the origination and retention of adjustable rate and shorter-term loans. In addition, the Bank uses its investments in securities to manage interest rate risk. At December 31, 2013, 47.7% of the Bank’s loan portfolio had a term to maturity of one year or less, or had adjustable interest rates. Moreover, at December 31, 2013, the Bank’s securities portfolio totaled $1.57 billion and had an expected average life of 4.55 years.
MARKET AREA
The Company and the Bank are headquartered in Jersey City, which is located in Hudson County, New Jersey. At December 31, 2013, the Bank operated a network of 77 full-service banking offices throughout eleven counties in northern and central New Jersey, comprised of 14 offices in Hudson County, 3 in Bergen, 7 in Essex, 1 in Mercer, 22 in Middlesex, 8 in Monmouth, 10 in Morris, 4 in Ocean, 1 in Passaic, 4 in Somerset and 3 in Union Counties. The Bank also maintains its administrative offices in Iselin, New Jersey and satellite loan production offices in Convent Station, East Rutherford and Princeton, New Jersey. The Bank’s lending activities, though concentrated in the communities surrounding its offices, extend predominantly throughout the State of New Jersey and, to a lesser extent, Eastern Pennsylvania.
The Bank’s primary market area includes a mix of urban and suburban communities, and has a diversified mix of industries including pharmaceutical and other manufacturing companies, network communications, insurance and financial services, healthcare, and retail. According to the U.S. Census Bureau’s most recent population data for 2013, the Bank’s market area has a population of 6.6 million, which was 74.6% of the state’s total population. Because of the diversity of industries in the Bank’s market area and, to a lesser extent, its proximity to the New York City financial markets, the area’s economy can be significantly affected by changes in national and international economies. According to the U.S. Bureau of Labor Statistics, the unemployment rate in New Jersey remained elevated at 7.3% at December 31, 2013, and decreased from 9.6% at December 31, 2012.
Within its primary market area, the Bank had an approximate 2.26% share of bank deposits as of June 30, 2013, the latest date for which statistics are available, and an approximate 1.91% deposit share of the New Jersey market statewide.
COMPETITION
The Bank faces intense competition in originating loans, retaining loans and attracting deposits. The northern and central New Jersey market area has a high concentration of financial institutions, including large money center and regional banks, community banks, credit unions, investment brokerage firms and insurance companies. The Bank faces direct competition for

2



loans from each of these institutions as well as from mortgage companies and other loan origination firms operating in its market area. The Bank’s most direct competition for deposits has come from several commercial banks and savings banks in its market area. Certain of these banks have substantially greater financial resources than the Bank. In addition, the Bank faces significant competition for deposits from the mutual fund industry and from investors’ direct purchases of short-term money market securities and other corporate and government securities.
The Bank competes in this environment by maintaining a diversified product line, including mutual funds, annuities and other investment services made available through its investment subsidiaries. Relationships with customers are built and maintained through the Bank’s branch network, its deployment of branch and off-site ATMs, and its mobile, telephone and web-based banking services.
LENDING ACTIVITIES
The Bank originates commercial real estate loans, commercial business loans, fixed-rate and adjustable-rate mortgage loans collateralized by one- to four-family residential real estate and other consumer loans, for borrowers generally located within its primary market area.
Residential mortgage loans are primarily underwritten to standards that allow the sale of the loans to the secondary markets, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”). To manage interest rate risk, the Bank generally sells fixed-rate residential mortgages that it originates with terms greater than 15 years. The Bank commonly retains biweekly payment fixed-rate residential mortgage loans with a term of 25 years or less and a majority of the originated adjustable rate mortgages for its portfolio.
The Bank originates commercial real estate loans that are secured by income-producing properties such as multi-family apartment buildings, office buildings, and retail and industrial properties. Generally, these loans have terms of either 5 or 10 years.

The Bank historically provided construction loans for both single family and condominium projects intended for sale and commercial projects, including residential for rent projects, that will be retained as investments by the borrower. The Bank underwrites most construction loans for a term of three years or less. The majority of these loans are underwritten on a floating rate basis. The Bank recognizes that there is higher risk in construction lending than permanent lending. As such, the Bank takes certain precautions to mitigate this risk, including the retention of an outside engineering firm to perform plan and cost reviews and to review all construction advances made against work in place and a limitation on how and when loan proceeds are advanced. In most cases, for the single family/condominium projects, the Bank limits its exposure against houses or units that are not under contract. Similarly, commercial construction loans usually have commitments for significant pre-leasing, or funds are held back until the leases are finalized. Funding requirements and loan structure for residential for rent projects vary depending on whether such projects are vertical or horizontal construction.
The Bank originates consumer loans that are secured, in most cases, by a borrower’s assets. Home equity loans and home equity lines of credit that are secured by a first or second mortgage lien on the borrower’s residence comprise the largest category of the Bank’s consumer loan portfolio. The Bank’s consumer loan portfolio also includes marine loans made on an indirect basis that are secured by a first lien on recreational boats. The marine loans were generated via boat dealers located on the East Coast of the United States. The Bank discontinued indirect marine lending in 2010. Marine loans are currently made on a direct, limited accommodation basis to existing customers.
Commercial loans are made to businesses of varying size and type within the Bank’s market. The Bank lends to established businesses, and the loans are generally secured by business assets such as equipment, receivables, inventory, real estate or marketable securities. On a limited basis, the Bank makes unsecured commercial loans. Most commercial lines of credit are made on a floating interest rate basis and most term loans are made on a fixed interest rate basis, usually with terms of five years or less.

3



Loan Portfolio Composition. Set forth below is selected information concerning the composition of the loan portfolio in dollar amounts and in percentages (after deductions for deferred fees and costs, unearned discounts and premiums and allowances for losses) as of the dates indicated.
 
At December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Residential mortgage loans
$
1,174,043

 
22.89
 %
 
$
1,265,015

 
26.17
 %
 
$
1,308,635

 
28.58
 %
 
$
1,386,326

 
31.93
 %
 
$
1,491,358

 
34.49
 %
Commercial mortgage loans
1,400,624

 
27.30

 
1,349,950

 
27.92

 
1,253,542

 
27.37

 
1,180,147

 
27.19

 
1,089,937

 
25.21

Multi-family mortgage loans
928,906

 
18.11

 
723,958

 
14.98

 
564,147

 
12.32

 
387,189

 
8.92

 
227,663

 
5.27

Construction loans
183,289

 
3.57

 
120,133

 
2.48

 
114,817

 
2.51

 
125,192

 
2.88

 
195,889

 
4.53

Total mortgage loans
3,686,862

 
71.87

 
3,459,056

 
71.55

 
3,241,141

 
70.78

 
3,078,854

 
70.92

 
3,004,847

 
69.50

Commercial loans
932,199

 
18.17

 
866,395

 
17.92

 
849,009

 
18.54

 
755,487

 
17.40

 
785,818

 
18.18

Consumer loans
577,602

 
11.26

 
579,166

 
11.98

 
560,970

 
12.25

 
569,597

 
13.12

 
586,459

 
13.56

Total gross loans
5,196,663

 
101.30

 
4,904,617

 
101.45

 
4,651,120

 
101.57

 
4,403,938

 
101.45

 
4,377,124

 
101.24

Premiums on purchased loans
4,202

 
0.08

 
4,964

 
0.10

 
5,823

 
0.13

 
6,771

 
0.16

 
8,012

 
0.19

Unearned discounts
(62
)
 

 
(78
)
 

 
(100
)
 

 
(104
)
 

 
(266
)
 
(0.01
)
Net deferred costs (fees)
(5,990
)
 
(0.12
)
 
(4,804
)
 
(0.10
)
 
(3,334
)
 
(0.07
)
 
(792
)
 
(0.02
)
 
(676
)
 
(0.02
)
Total loans
5,194,813

 
101.26

 
4,904,699

 
101.45

 
4,653,509

 
101.63

 
4,409,813

 
101.58

 
4,384,194

 
101.40

Allowance for loan losses
(64,664
)
 
(1.26
)
 
(70,348
)
 
(1.45
)
 
(74,351
)
 
(1.62
)
 
(68,722
)
 
(1.58
)
 
(60,744
)
 
(1.40
)
Total loans, net
$
5,130,149

 
100.00
 %
 
$
4,834,351

 
100.00
 %
 
$
4,579,158

 
100.00
 %
 
$
4,341,091

 
100.00
 %
 
$
4,323,450

 
100.00
 %

Loan Maturity Schedule. The following table sets forth certain information as of December 31, 2013, regarding the maturities of loans in the loan portfolio. Demand loans having no stated schedule of repayment and no stated maturity, and overdrafts are reported as due within one year.
 
Within
One Year
 
One
Through
Three
Years
 
Three
Through
Five Years
 
Five
Through
Ten Years
 
Ten
Through
Twenty
Years
 
Beyond
Twenty
Years
 
Total
 
(Dollars in thousands)
Residential mortgage loans
$
1,801

 
$
4,616

 
$
39,156

 
$
84,149

 
$
418,909

 
$
625,412

 
$
1,174,043

Commercial mortgage loans
79,235

 
132,317

 
271,195

 
790,771

 
127,012

 
94

 
1,400,624

Multi-family mortgage loans
11,515

 
73,471

 
41,603

 
600,108

 
202,116

 
93

 
928,906

Construction loans
72,470

 
101,819

 

 
9,000

 

 

 
183,289

Total mortgage loans
165,021

 
312,223

 
351,954

 
1,484,028

 
748,037

 
625,599

 
3,686,862

Commercial loans
213,753

 
147,722

 
108,518

 
367,005

 
77,931

 
17,270

 
932,199

Consumer loans
23,503

 
8,391

 
23,405

 
90,344

 
331,647

 
100,312

 
577,602

Total loans
$
402,277

 
$
468,336

 
$
483,877

 
$
1,941,377

 
$
1,157,615

 
$
743,181

 
$
5,196,663



4



Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2013, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2014.
 
Due After December 31, 2014
 
Fixed
 
Adjustable
 
Total
 
(Dollars in thousands)
Residential mortgage loans
$
770,172

 
$
402,070

 
$
1,172,242

Commercial mortgage loans
719,515

 
601,874

 
1,321,389

Multi-family mortgage loans
541,196

 
376,195

 
917,391

Construction loans

 
110,819

 
110,819

Total mortgage loans
2,030,883

 
1,490,958

 
3,521,841

Commercial loans
318,905

 
399,541

 
718,446

Consumer loans
367,418

 
186,681

 
554,099

Total loans
$
2,717,206

 
$
2,077,180

 
$
4,794,386


Residential Mortgage Loans. The Bank originates residential mortgage loans secured by first mortgages on one- to four-family residences, generally located in the State of New Jersey. The Bank originates residential mortgages primarily through commissioned mortgage representatives and through the Internet. The Bank originates both fixed-rate and adjustable-rate mortgages. As of December 31, 2013, $1.17 billion or 22.9% of the total portfolio consisted of residential real estate loans. Of the one- to four-family loans at that date, 65.8% were fixed-rate and 34.2% were adjustable-rate loans.
The Bank originates fixed-rate fully amortizing residential mortgage loans with the principal and interest due each month, that typically have maturities ranging from 10 to 30 years. The Bank also originates fixed-rate residential mortgage loans with maturities of 15, 20 and 30 years that require the payment of principal and interest on a biweekly basis. Fixed-rate jumbo residential mortgage loans (loans over the maximum that one of the government-sponsored agencies will purchase) are originated with maturities of up to 30 years. The Bank has offered adjustable-rate mortgage loans with a fixed-rate period of 1, 3, 5, 7 or 10 years prior to the first annual interest rate adjustment. In October 2009, the Bank discontinued the origination of one- and three-year adjustable rate mortgage loans. The standard adjustment formula is the one-year constant maturity Treasury rate plus 2 3/4%, adjusting annually with a 2% maximum annual adjustment and a 6% maximum adjustment over the life of the loan.
The Bank does not originate or purchase sub-prime or option ARM loans. Prior to September 30, 2008, the Bank originated on a limited basis “Alt-A” mortgages in the form of stated income loans with a maximum loan-to-value ratio of 50%. The balance of these “Alt-A” loans at December 31, 2013 was $7.5 million.
Residential loans are primarily underwritten to Freddie Mac and Fannie Mae standards. The Bank’s standard maximum loan to value ratio is 80%. However, working through mortgage insurance companies, the Bank underwrites loans for sale to Freddie Mac or Fannie Mae programs that will finance up to 95% of the value of the residence. Generally all fixed-rate loans with terms of 20 years or more are sold into the secondary market with servicing rights retained. Fixed-rate residential mortgage loans retained in the Bank’s portfolio generally include loans with a term of 15 years or less and biweekly payment residential mortgage loans with a term of 25 years or less. The Bank retains the majority of the originated adjustable-rate mortgages for its portfolio.
Loans are sold without recourse, generally with servicing rights retained by the Bank. The percentage of loans sold into the secondary market will vary depending upon interest rates and the Bank’s strategies for reducing exposure to interest rate risk. In 2013, $31.0 million, or 25.3% of residential real estate loans originated were sold into the secondary market. All of the loans sold in 2013 were long-term, fixed-rate mortgages.
The retention of adjustable-rate mortgages, as opposed to longer-term, fixed-rate residential mortgage loans, helps reduce the Bank’s exposure to interest rate risk. However, adjustable-rate mortgages generally pose credit risks different from the credit risks inherent in fixed-rate loans primarily because as interest rates rise, the underlying debt service payments of the borrowers rise, thereby increasing the potential for default. The Bank believes that these credit risks, which have not had a material adverse effect on the Bank to date, generally are less onerous than the interest rate risk associated with holding 20- and 30-year fixed-rate loans in its loan portfolio.
For many years, the Bank has offered discounted rates on residential mortgage loans to low- to moderate-income individuals. Loans originated in this category over the last five years have totaled $43.0 million. The Bank also offers a special rate program for first-time homebuyers under which originations have totaled over $2.7 million for the past five years.

5



Commercial Real Estate Loans. The Bank originates loans secured by mortgages on various commercial income producing properties, including multi-family apartment buildings, office buildings and retail and industrial properties. Commercial real estate loans were 27.3% of the loan portfolio at December 31, 2013. A substantial majority of the Bank’s commercial real estate loans are secured by properties located in the State of New Jersey.
The Bank originates commercial real estate loans with adjustable rates and with fixed interest rates for a period that is generally five to ten years or less, which may adjust after the initial period. Typically these loans are written for maturities of ten years or less and generally have an amortization schedule of 20 or 25 years. As a result, the typical amortization schedule will result in a substantial principal payment upon maturity. The Bank generally underwrites commercial real estate loans to a maximum 75% advance against either the appraised value of the property, or its purchase price (for loans to fund the acquisition of real estate), whichever is less. The Bank generally requires minimum debt service coverage of 1.20 times. There is a potential risk that the borrower may be unable to pay off or refinance the outstanding balance at the loan maturity date. The Bank typically lends to experienced owners or developers who have knowledge and contacts in the commercial real estate market.
Among the reasons for the Bank’s continued emphasis on commercial real estate lending is the desire to invest in assets bearing interest rates that are generally higher than interest rates on residential mortgage loans and more sensitive to changes in market interest rates. Commercial real estate loans, however, entail significant additional credit risk as compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on commercial real estate loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be more significantly impacted by adverse conditions in the real estate market or in the economy generally.
The Bank performs more extensive diligence in underwriting commercial real estate loans than loans secured by owner-occupied one- to four-family residential properties due to the larger loan amounts and the riskier nature of such loans. The Bank assesses and mitigates the risk in several ways, including inspection of all such properties and the review of the overall financial condition of the borrower and guarantors, which may include, for example, the review of the rent rolls and the verification of income. If applicable, a tenant analysis and market analysis are part of the underwriting. Generally, for commercial real estate secured loans in excess of $750,000 and for all other commercial real estate loans where it is deemed appropriate, the Bank requires environmental experts to inspect the property and ascertain any potential environmental risks.
The Bank requires a full independent appraisal for commercial real estate in accordance with regulatory guidelines. The appraiser must be selected from the Bank’s approved list, or otherwise approved by the Chief Credit Officer in instances such as out-of-state or special use property. The Bank also employs an independent review appraiser to ensure that the appraisal meets the Bank’s standards. In addition, financial statements are required annually for review. The Bank’s policy also requires that a property inspection of commercial mortgages over $2.5 million be completed at least every 18 months, or more frequently when warranted.
The Bank’s largest commercial mortgage loan as of December 31, 2013 was a $28.4 million loan secured by a first mortgage lien on a 378 room, full service hotel and a 422 car parking garage located in Elizabeth, New Jersey. The loan has a risk rating of “4” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2013.
Multi-family Loans. The Bank underwrites loans secured by apartment buildings that have five or more units. The Bank considers multi-family lending a component of the commercial real estate lending portfolio. The underwriting standards and procedures that are used to underwrite commercial real estate loans are used to underwrite multi-family loans, except the loan-to-value ratio shall not exceed 80% of the appraised value of the property, the debt-service coverage should be a minimum of 1.15 times and an amortization period of up to 30 years.
The Bank’s largest multi-family loan as of December 31, 2013 was a $35.4 million loan on a newly constructed 220-unit luxury multi-family apartment project located in Howell, New Jersey. The loan has a risk rating of “4” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2013.
Construction Loans. The Bank originates commercial construction loans. Commercial construction lending includes both new construction of residential and commercial real estate projects and the reconstruction of existing structures.
The Bank’s commercial construction financing takes two forms: projects that are constructed for investment purposes (rental property) and projects for sale (single family/condominiums). To mitigate the speculative nature of construction loans, the Bank generally requires significant pre-leasing on rental properties; requires that a percentage of the for sale single-family residences

6



or condominiums be under contract to support construction loan advances; requires other covenants on residential for rent projects depending on whether the project is vertical or horizontal construction.
The Bank underwrites construction loans for a term of three years or less. The majority of the Bank’s construction loans are floating-rate loans with a maximum 75% loan-to-value ratio for the completed project. The Bank employs professional engineering firms to assist in the review of construction cost estimates and make site inspections to determine if the work has been completed prior to the advance of funds for the project.
Construction lending generally involves a greater degree of risk than one- to four-family mortgage lending. Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject project and the successful marketing of the sale or lease of the project. Construction delays, slower than anticipated absorption or the financial impairment of the builder may negatively affect the borrower’s ability to repay the loan.
For all construction loans, the Bank requires an independent appraisal, which includes information on market rents and/or comparable sales for competing projects. The Bank also obtains personal guarantees and conducts environmental due diligence as appropriate.
The Bank also employs other means to mitigate the risk of the construction lending process. On commercial construction projects that the developer maintains for rental, the Bank typically holds back funds for tenant improvements until a lease is executed. For single family/condominium financing, the Bank generally requires payment for the release of a unit that exceeds the amount of the loan advance attributable to such unit.
The Bank’s largest construction loan as of December 31, 2013 was a $28.0 million loan secured by a first lien on a new 250 unit luxury multi-family apartment project located in Woolwich Township, Gloucester County, New Jersey. The loan had an outstanding balance of $25.6 million at December 31, 2013. The project is approximately 90% complete with 149 units leased and occupied. The loan has a risk rating of “4” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2013.
Commercial Loans. The Bank underwrites commercial loans to corporations, partnerships and other businesses. Commercial loans represented 18.2% of the loan portfolio at December 31, 2013. The majority of the Bank’s commercial loan customers are local businesses with revenues of less than $50.0 million. The Bank primarily offers commercial loans for equipment purchases, lines of credit for working capital purposes, letters of credit and real estate loans where the borrower is the primary occupant of the property. Most commercial loans are originated on a floating-rate basis and the majority of fixed-rate commercial term loans are fully amortized over a five-year period. Owner-occupied commercial real estate loans are generally underwritten to terms consistent with those utilized for commercial real estate; however, the maximum loan-to-value ratio for owner-occupied commercial real estate loans is 80%.
The Bank also underwrites Small Business Administration (“SBA”) guaranteed loans and guaranteed or assisted loans through various state, county and municipal programs. These governmental guarantees are typically used in cases where the borrower requires additional credit support. The Bank has “Preferred Lender” status with the SBA, allowing a more streamlined application and approval process.
The underwriting of a commercial loan is based upon a review of the financial statements of the prospective borrower and guarantors. In most cases the Bank obtains a general lien on accounts receivable and inventory, along with the specific collateral such as real estate or equipment, as appropriate.
Commercial loans generally bear higher interest rates than mortgage loans, but they also involve a higher risk of default since their repayment is generally dependent on the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself and the general economic environment. The Bank’s largest commercial loan as of December 31, 2013 was a $38.0 million line of credit to a general contracting company specializing in bridge and highway construction with a risk rating of "3" (loans rated 1-4 are deemed “acceptable quality”-see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section). The line is used primarily for bid bonding and working capital purposes. The Bank sold a participation interest of $10.0 million in the line of credit to another financial institution, which reduced the Bank’s exposure to $28.0 million. As of December 31, 2013, the line of credit did not have an outstanding balance.
Consumer Loans. The Bank offers a variety of consumer loans to individuals. Consumer loans represented 11.3% of the loan portfolio at December 31, 2013. Home equity loans and home equity lines of credit constituted 90.4% of the consumer loan portfolio and indirect marine loans constituted 5.8% of the consumer loan portfolio as of December 31, 2013. The remainder of the consumer loan portfolio includes personal loans and unsecured lines of credit, direct auto loans and recreational vehicle loans,

7



which represented 3.8% of the consumer loan portfolio. The Bank no longer purchases indirect auto, marine or recreational vehicle loans.
Interest rates on home equity loans are fixed for a term not to exceed 20 years and the maximum loan amount is $500,000. A portion of the home equity loan portfolio includes “first lien product loans,” under which the Bank has offered special rates to borrowers who refinance first mortgage loans on the home equity (first lien) basis. As of December 31, 2013, there was $295.9 million of first-lien home equity loans outstanding. The Bank’s home equity lines are made at floating interest rates and the Bank provides lines of credit of up to $350,000. The approved home equity lines and utilization amounts as of December 31, 2013 were $445.1 million and $180.7 million, respectively, representing utilization of 40.6%.
The Bank previously purchased marine loans from established dealers and brokers located on the East Coast of the United States, which were underwritten to the Bank’s pre-established underwriting standards. The maximum marine loan is $500,000. All marine loans are collateralized by a first lien on the vessel. Originations of marine loans have declined significantly as the Bank discontinued indirect marine lending in 2010. Marine loans are currently made only on a direct, limited accommodation basis to existing customers. At December 31, 2013, marine loans totaled $33.4 million.
Consumer loans generally entail greater credit risk than residential mortgage loans, particularly in the case of home equity loans and lines of credit secured by second lien positions, consumer loans that are unsecured or that are secured by assets that tend to depreciate, such as automobiles, boats and recreational vehicles. Collateral repossessed by the Bank from a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance, and the remaining deficiency may warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent upon the borrower’s continued financial stability, and which is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount the Bank can recover on such loans.
Loan Originations, Purchases, and Repayments. The following table sets forth the Bank’s loan origination, purchase and repayment activities for the periods indicated.
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(Dollars in thousands)
Originations:
 
 
 
 
 
Residential mortgage
$
122,492

 
$
184,327

 
$
146,742

Commercial mortgage
254,087

 
270,190

 
240,930

Multi-family mortgage
294,288

 
219,068

 
150,625

Construction
182,895

 
92,291

 
119,245

Commercial
711,248

 
658,228

 
664,199

Consumer
205,282

 
228,401

 
184,955

Subtotal of loans originated
1,770,292

 
1,652,505

 
1,506,696

Loans purchased
34,766

 
73,740

 
79,521

Total loans originated
1,805,058

 
1,726,245

 
1,586,217

Loans sold or securitized
30,977

 
36,723

 
21,394

 
 
 
 
 
 
Repayments:
 
 
 
 
 
Residential mortgage
228,195

 
270,251

 
285,848

Commercial mortgage
216,068

 
179,937

 
159,742

Multi-family mortgage
137,576

 
59,599

 
21,065

Construction
47,835

 
73,116

 
86,447

Commercial
635,764

 
622,851

 
555,535

Consumer
203,256

 
206,654

 
187,040

Total repayments
1,468,694

 
1,412,408

 
1,295,677

Total reductions
1,499,671

 
1,449,131

 
1,317,071

Other items, net(1)
(15,273
)
 
(25,924
)
 
(25,450
)
Net increase
$
290,114

 
$
251,190

 
$
243,696


(1)
Other items include charge-offs, deferred fees and expenses, discounts and premiums.

8



Loan Approval Procedures and Authority. The Bank’s Board of Directors approves the Lending Policy on an annual basis as well as on an interim basis as modifications are warranted. The Lending Policy sets the Bank’s lending authority for each type of loan. The Bank’s lending officers are assigned dollar authority limits based upon their experience and expertise. All loan approvals require joint lending authority.
The largest individual lending authority is $10.0 million, which is only available to the Chief Executive Officer and the Chief Lending Officer for permanent commercial real estate loans. The Chief Executive Officer and the Chief Lending Officer have individual lending authority up to $7.5 million for all other loan facilities. Loans in excess of these limits, or which when combined with existing credits of the borrower or related borrowers exceed these limits, are presented to the management Credit Committee for approval. The Credit Committee currently consists of seven senior officers including the Chief Executive Officer, the Chief Lending Officer, the Chief Financial Officer and the Chief Credit Officer, and requires a majority vote for credit approval.
While the Bank discourages loan policy exceptions, from time to time, based upon reasonable business considerations exceptions to the policy may be warranted. The business reason and mitigants for the exception must be noted on the loan approval document. The policy exception requires the approval of the Chief Lending Officer or the Department Manager of the lending department responsible for the underlying loan, if it is within his or her approval authority limit. All other policy exceptions must be approved by the Credit Committee. The Credit Administration Department reports the type and frequency of loan policy exceptions to the Credit Committee and the Risk Committee of the Board of Directors on a quarterly basis, or more frequently if necessary.
The Bank has adopted a risk rating system as part of the credit risk assessment of its loan portfolio. The Bank’s commercial real estate and commercial lending officers are required to assign a risk rating to each loan in their portfolio at origination. When the lender learns of important financial developments, the risk rating is reviewed accordingly. Similarly, the Credit Committee can adjust a risk rating. Quarterly, management’s Credit Risk Management Committee meets to review all loans rated a “watch” ("5") or worse. In addition, a loan review examination is performed by an independent third party which validates the risk ratings. In addition, the Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk ratings. The risk ratings play an important role in the establishment of the loan loss provision and to confirm the adequacy of the allowance for loan losses.
Loans to One Borrower. The regulatory limit on total loans to any borrower or attributed to any one borrower is 15% of the Bank’s unimpaired capital and surplus. As of December 31, 2013, the regulatory lending limit was $95.0 million. The Bank’s current internal policy limit on total loans to a borrower or related borrowers that constitute a group exposure is up to $80.0 million for loans with a risk rating of 2 or better, $70.0 million for loans with a risk rating of "3" and $50.0 million for loans with a risk rating of "4". The Bank reviews these group exposures on a quarterly basis. The Bank also sets additional limits on size of loans by loan type.
At December 31, 2013, the Bank’s largest group exposure with an individual borrower and its related entities was $72.1 million, consisting of two construction/permanent first mortgages on a 454-unit multi-family apartment project being constructed in New Jersey (one has a risk rating of "3" and the other has a risk rating of "4"), a permanent mortgage secured by a first lien on a 150 unit apartment project in New Jersey with a risk rating of "2", and a line of credit secured by a 108 unit apartment project in Allentown, Pennsylvania with a risk rating of 2. The borrower, headquartered in New Jersey, is an experienced real estate owner and developer in New Jersey and Eastern Pennsylvania. Management has determined that this exception to the internal group exposure policy limit is manageable and is mitigated by the borrower’s diverse revenue mix, as well as its reputation and proven successful track record. This lending relationship was approved as an exception to the internal policy limits by the management Credit Committee and reported to the Risk Committee of the Board of Directors, and conformed to the regulatory limit applicable to the Bank at the time of loan origination. As of December 31, 2013, all of the loans in this lending relationship were performing in accordance with their respective terms and conditions.
As of December 31, 2013, the Bank had $1.7 billion in loans outstanding to its 50 largest borrowers and their related entities.
ASSET QUALITY
General. One of the Bank’s key objectives has been and continues to be to maintain a high level of asset quality. In addition to maintaining sound credit standards for new loan originations, the Bank employs proactive collection and workout processes in dealing with delinquent or problem loans. The Bank actively markets properties that it acquires through foreclosure or otherwise in the loan collection process.
Collection Procedures. In the case of residential mortgage and consumer loans, the collections personnel in the Bank’s Asset Recovery Department are responsible for collection activities from the sixteenth day of delinquency. Collection efforts include automated notices of delinquency, telephone calls, letters and other notices to delinquent borrowers. Foreclosure proceedings and other appropriate collection activities such as repossession of collateral are commenced within at least 90 to 120 days after a loan

9



is delinquent. Periodic inspections of real estate and other collateral are conducted throughout the collection process. The Bank’s collection procedures for Federal Housing Association (“FHA”) and Veteran’s Administration (“VA”) one- to four-family mortgage loans follow the collection guidelines outlined by those agencies.
Real estate and other assets acquired through foreclosure or in connection with a loan workout are held as foreclosed assets. The Bank carries other real estate owned and other foreclosed assets at the lower of their cost or their fair value less estimated selling costs. The Bank attempts to sell the property at foreclosure sale or as soon as practical after the foreclosure sale through a proactive marketing effort.
The collection procedures for commercial real estate and commercial loans include sending periodic late notices and letters to a borrower once a loan is past due. The Bank attempts to make direct contact with a borrower once a loan is 16 days past due, usually by telephone. The Chief Lending Officer and Chief Credit Officer review all commercial real estate and commercial loan delinquencies on a weekly basis. Generally, delinquent commercial real estate and commercial loans are transferred to the Asset Recovery Department for further action if the delinquency is not cured within a reasonable period of time, typically 60 to 90 days. The Chief Lending Officer and Chief Credit Officer have the authority to transfer performing commercial real estate or commercial loans to the Asset Recovery Department if, in their opinion, a credit problem exists or is likely to occur.
Loans deemed uncollectible are proposed for charge-off on a monthly basis. Any charge-off recommendation of $250,000 or greater is submitted to Executive Management for approval.
Delinquent Loans and Non-performing Loans and Assets. The Bank’s policies require that the Chief Credit Officer continuously monitor the status of the loan portfolios and report to the Board of Directors on a monthly basis. These reports include information on impaired loans, delinquent loans, criticized and classified assets, and foreclosed assets. An impaired loan is defined as a non-homogenous loan greater than $1.0 million for which it is probable, based on current information, that the Bank will not collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a modification resulting in a concession is made by the Bank 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, except for TDRs. Impaired loans are individually identified and reviewed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. As of December 31, 2013, there were 152 impaired loans totaling $106.4 million, of which 142 loans totaling $89.4 million were TDRs. Included in this total were 115 TDRs to 110 borrowers totaling $58.2 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2013.
Interest income stops accruing on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectability of such interest or principal is doubtful. When the accrual of interest on a loan is stopped, the loan is designated as a non-accrual loan and the outstanding unpaid interest previously credited is reversed. A non-accrual loan is returned to accrual status when factors indicating doubtful collection no longer exist, the loan has been brought current and the borrower demonstrates some period (generally six months) of timely contractual payments.
Federal and state regulations as well as the Bank’s policy require the Bank to utilize an internal risk rating system as a means of reporting problem and potential problem assets. Under this system, the Bank classifies problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses, are designated “special mention.”
General valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When the Bank classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” the Bank may establish a specific allowance for loan losses in an amount deemed prudent by management. When the Bank classifies one or more assets, or portions thereof, as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount.
The Bank’s determination as to the classification of assets and the amount of the valuation allowances is subject to review by the FDIC and the New Jersey Department of Banking and Insurance, each of which can require the establishment of additional

10



general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, issued an interagency policy statement on the allowance for loan and lease losses. The policy statement provides updated guidance for financial institutions on both the responsibilities of the board of directors and management for the maintenance of adequate allowances, and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement reaffirms that institutions should have effective loan review systems and controls to identify, monitor and address asset quality problems; that loans deemed uncollectible are promptly charged off; and that the institution’s process for determining an adequate level for its valuation allowance is based on a comprehensive, adequately documented, and consistently applied analysis of the institution’s loan and lease portfolio. While management believes that on the basis of information currently available to it, the allowance for loans losses is adequate as of December 31, 2013, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary.
Loans are classified in accordance with the risk rating system described previously. At December 31, 2013, $137.4 million of loans were classified as “substandard,” which consisted of $55.0 million in commercial and multi-family mortgage loans, $46.7 million in commercial loans, $23.0 million in residential loans, $8.4 million in construction loans and $4.2 million in consumer loans. At that same date, loans classified as “doubtful” totaled $649,000, consisting solely of commercial loans. There were no loans classified as “loss” at December 31, 2013. As of December 31, 2013, $51.0 million of loans were designated “special mention.”
The following table sets forth delinquencies in the loan portfolio as of the dates indicated.
 
At December 31, 2013
 
At December 31, 2012
 
At December 31, 2011
 
60-89 Days
 
90 Days or More
 
60-89 Days
 
90 Days or More
 
60-89 Days
 
90 Days or More
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
(Dollars in thousands)
Residential mortgage loans
23

 
$
5,062

 
116

 
$
23,011

 
43

 
$
11,986

 
146

 
$
29,293

 
35

 
$
7,936

 
184

 
$
40,386

Commercial mortgage loans
1

 
318

 
12

 
6,189

 
5

 
12,194

 
11

 
14,932

 
2

 
1,155

 
9

 
11,928

Multi-family mortgage loans

 

 
2

 
403

 

 

 
2

 
412

 

 

 
1

 
997

Construction loans

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans
24

 
5,380

 
130

 
29,603

 
48

 
24,180

 
159

 
44,637

 
37

 
9,091

 
194

 
53,311

Commercial loans
3

 
77

 
23

 
9,722

 
2

 
70

 
46

 
15,682

 
11

 
526

 
40

 
15,059

Consumer loans
23

 
2,194

 
49

 
3,819

 
33

 
1,808

 
65

 
5,666

 
29

 
1,908

 
78

 
8,533

Total loans
50

 
$
7,651

 
202

 
$
43,144

 
83

 
$
26,058

 
270

 
$
65,985

 
77

 
$
11,525

 
312

 
$
76,903


Non-Accrual Loans and Non-Performing Assets. The following table sets forth information regarding non-accrual loans and other non-performing assets. At December 31, 2013, there were 27 TDRs totaling $31.2 million that were classified as non-accrual, compared to 14 non-accrual TDRs which totaled $25.6 million at December 31, 2012; no TDRs were non-accrual at the end of the prior period. Loans are generally placed on non-accrual status when they become 90 days or more past due or if they have been identified as presenting uncertainty with respect to the collectability of interest or principal.
 

11



 
At December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(Dollars in thousands)
Non-accruing loans:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
23,011

 
$
29,293

 
$
40,386

 
$
41,247

 
$
28,622

Commercial mortgage loans
18,662

 
29,072

 
29,522

 
16,091

 
23,356

Multi-family mortgage loans
403

 
412

 
997

 
201

 

Construction loans
8,448

 
8,896

 
11,018

 
9,412

 
13,186

Commercial loans
22,228

 
25,467

 
32,093

 
23,505

 
12,548

Consumer loans
3,928

 
5,850

 
8,533

 
6,808

 
6,765

Total non-accruing loans
76,680

 
98,990

 
122,549

 
97,264

 
84,477

Accruing loans delinquent 90 days or more

 

 

 

 

Total non-performing loans
76,680

 
98,990

 
122,549

 
97,264

 
84,477

Foreclosed assets
5,486

 
12,473

 
12,802

 
2,858

 
6,384

Total non-performing assets
$
82,166

 
$
111,463

 
$
135,351

 
$
100,122

 
$
90,861

Total non-performing assets as a percentage of total assets
1.10
%
 
1.53
%
 
1.91
%
 
1.47
%
 
1.33
%
Total non-performing loans to total loans
1.48
%
 
2.02
%
 
2.63
%
 
2.21
%
 
1.93
%

Non-performing commercial mortgage loans decreased $10.4 million, to $18.7 million at December 31, 2013, from $29.1 million at December 31, 2012. At December 31, 2013, the Company held 15 non-performing commercial mortgage loans. The largest non-performing commercial mortgage loan was a $12.5 million loan secured by a first mortgage on a 200,000 square foot office/industrial building located in Eatontown, New Jersey, which has been negatively impacted by the loss of a major tenant that relied upon contracts with the Federal Government. The loan has been restructured and payments are current at December 31, 2013. The borrower continues to make efforts to lease the property. There is no contractual commitment to advance additional funds to this borrower.
Non-performing residential mortgage loans decreased $6.3 million to $23.0 million at December 31, 2013, from $29.3 million at December 31, 2012. Gross charge-offs of residential loans were $3.9 million for the year ended December 31, 2013.
Non-performing commercial loans decreased $3.2 million, to $22.2 million at December 31, 2013, from $25.5 million at December 31, 2012. Non-performing commercial loans at December 31, 2013 consisted of 38 loans. The largest non-performing commercial loan relationship consisted of five loans to a power systems manufacturer with total outstanding balances of $8.0 million at December 31, 2013. All contractual payments on these loans, based upon modified terms, were current at December 31, 2013.
Non-performing consumer loans decreased $1.9 million, to $3.9 million at December 31, 2013, from $5.9 million at December 31, 2012. Gross consumer loan charge-offs were $3.7 million for the year ended December 31, 2013.
Non-performing construction loans decreased $448,000, to $8.4 million at December 31, 2013, from $8.9 million at December 31, 2012. At December 31, 2013, non-performing construction loans consisted of one loan secured by a first mortgage on a 77,000 square foot newly constructed Class A office building, and a parcel of land with approvals for an 110,000 square foot office building located in Parsippany, New Jersey. The office building is completed, except for tenant improvements, but not leased due to weakness in the market. The property is being marketed and the principals are supporting the project. All contractual payments on this loan, based upon modified terms, were current at December 31, 2013. The Company has an unfunded commitment of $3.6 million on this loan at December 31, 2013.
Non-performing multi-family loans declined $9,000 to $403,000 at December 31, 2013, from $412,000 at December 31, 2012.
At December 31, 2013, the Company held $5.5 million of foreclosed assets, compared with $12.5 million at December 31, 2012. Foreclosed assets at December 31, 2013 are carried at fair value based on recent appraisals and valuation estimates, less estimated selling costs. Foreclosed assets consisted of $3.0 million of commercial real estate, $2.4 million of residential properties, and $59,000 of marine vessels at December 31, 2013.

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Non-performing assets totaled $82.2 million, or 1.10% of total assets at December 31, 2013, compared to $111.5 million, or 1.53% of total assets at December 31, 2012. If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $1.9 million during the year ended December 31, 2013.
Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects an evaluation of the probable losses in the loan portfolio. The allowance for loan losses is maintained through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where it is determined the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses.
Management’s evaluation of the adequacy of the allowance for loan losses includes the review of all loans on which the collectability of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.
As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating. The factors considered in assessing the adequacy of the allowance for loan losses include the following:
results of the routine loan quality reviews performed by an independent third party;
general economic and business conditions affecting key lending areas;
credit quality trends (including trends in non-performing loans and anticipated trends based on market conditions);
collateral values;
loan volumes and concentrations;
seasoning of the loan portfolio;
specific industry conditions within portfolio segments;
recent loss experience in particular segments of the loan portfolio; and
duration of the current business cycle.
When assigning a risk rating to a loan, management utilizes the Bank’s internal nine-point 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 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 his or her portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Administration Department. The risk ratings for loans requiring Credit Committee approval are periodically reviewed by the Credit Committee in the credit approval or renewal process. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party. Reports by the independent third party are presented directly to the Audit and Risk Committees of the Board of Directors.
Each quarter, the lending groups prepare individual Credit Risk Management Reports for the Credit Administration Department. These reports review all commercial loans and commercial mortgage loans that have been determined to involve above-average risk (risk rating of 5 or worse). The Credit Risk Management Reports contain the reason for the risk rating assigned to each loan, status of the loan and any current developments. These reports are submitted to a committee chaired by the Chief Credit Officer. Each loan officer reviews the loan and the corresponding Credit Risk Management Report with the committee and the risk rating is evaluated for appropriateness.
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, as well as qualitative and environmental factors such as:
levels of and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries;
trends in volume and terms of loans;
effects of any changes in risk selection and underwriting standards, changes in lending policies, procedures and practices;

13



changes in the quality of the Bank’s loan review system;
experience, ability, and depth of lending management and other relevant staff;
national and local economic trends and conditions;
industry conditions; and
effects of changes in credit concentration.
The appropriateness of these percentages is evaluated by management at least annually and monitored on a quarterly basis, with changes made when they are required. In the second quarter of 2013, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, GVA percentages applied to residential mortgage, first-lien home equity loans and commercial mortgage loans were reduced to reflect the decrease in the historical loss experience. In addition, multi-family loans were segregated from other commercial mortgage loans as a result of differing risk characteristics and were assigned GVA percentages accordingly. Multi-family GVAs were established at levels lower than when previously included with other commercial mortgage loans as a result of lower historical loss experience resulting from the diverse cash flow sources supporting these loans.
The reserve factors applied to each loan risk rating are inherently subjective in nature. Reserve factors are assigned to each of the risk rating categories. This methodology permits adjustments to the allowance for loan losses in the event that, in management’s judgment, significant conditions impacting the credit quality and collectability of the loan portfolio as of the evaluation date are not otherwise adequately reflected in the analysis.
The provision for loan losses is established after considering the allowance for loan loss analysis, the amount of the allowance for loan losses in relation to the total loan balance, loan portfolio growth, loan portfolio composition, loan delinquency trends and peer group analysis. As a result of this process, management has established an unallocated portion of the allowance for loan losses. The unallocated portion of the allowance for loan losses is warranted based on factors such as the geographic concentration of the loan portfolio, current economic conditions and imprecision related to collateral valuations.
Management believes the primary risks inherent in the portfolio are a decline in the economy, generally, a 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. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. The allowance for loan losses is maintained at a level that represents management’s best estimate of probable losses related to specifically identified loans as well as probable losses inherent in the remaining loan portfolio. There can be no assurance that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future or that additional provisions for loan losses will not be required.

14



Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(Dollars in thousands)
Balance at beginning of period
$
70,348

 
$
74,351

 
$
68,722

 
$
60,744

 
$
47,712

Charge offs:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
3,900

 
4,622

 
5,229

 
1,996

 
2,712

Commercial mortgage loans
2,882

 
3,253

 
3,408

 
10,452

 
619

Multi-family mortgage loans

 
19

 

 

 

Construction loans
234

 
238

 
123

 
1,384

 
1,089

Commercial loans
3,686

 
12,259

 
8,634

 
11,196

 
7,576

Consumer loans
3,704

 
3,516

 
7,659

 
4,439

 
7,624

Total
14,406

 
23,907

 
25,053

 
29,467

 
19,620

Recoveries:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
160

 
105

 
197

 
359

 
19

Commercial mortgage loans
104

 
56

 
15

 
30

 
6

Multi-family mortgage loans

 
1

 

 

 

Construction loans
869

 

 
4

 
47

 

Commercial loans
1,075

 
2,771

 
1,018

 
727

 
1,367

Consumer loans
1,014

 
971

 
548

 
782

 
1,010

Total
3,222

 
3,904

 
1,782

 
1,945

 
2,402

Net charge-offs
11,184

 
20,003

 
23,271

 
27,522

 
17,218

Provision for loan losses
5,500

 
16,000

 
28,900

 
35,500

 
30,250

Balance at end of period
$
64,664

 
$
70,348

 
$
74,351

 
$
68,722

 
$
60,744

Ratio of net charge-offs to average loans outstanding during the period
0.22
%
 
0.43
%
 
0.52
%
 
0.64
%
 
0.39
%
Allowance for loan losses to total loans
1.24
%
 
1.43
%
 
1.60
%
 
1.56
%
 
1.39
%
Allowance for loan losses to non-performing loans
84.33
%
 
71.07
%
 
60.67
%
 
70.66
%
 
71.91
%

Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may be taken, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.
 

15



 
At December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans  in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
(Dollars in thousands)
Residential mortgage loans
$
5,500

 
22.60
%
 
$
6,053

 
25.79
%
 
$
5,873

 
28.14
%
 
$
6,628

 
31.48
%
 
$
5,324

 
34.07
%
Commercial mortgage loans
16,404

 
26.96

 
21,639

 
27.52

 
22,308

 
26.95

 
20,441

 
26.80

 
23,578

 
24.90

Multi-family mortgage loans
5,933

 
17.87

 
7,163

 
14.76

 
6,933

 
12.13

 
4,065

 
8.79

 
2,309

 
5.20

Construction loans
6,307

 
3.52

 
3,107

 
2.45

 
4,329

 
2.47

 
7,282

 
2.84

 
4,134

 
4.48

Commercial loans
24,107

 
17.93

 
20,315

 
17.67

 
25,381

 
18.25

 
22,210

 
17.15

 
16,572

 
17.95

Consumer loans
4,929

 
11.12

 
5,224

 
11.81

 
5,515

 
12.06

 
5,616

 
12.94

 
5,964

 
13.40

Unallocated
1,484

 

 
6,847

 

 
4,012

 

 
2,480

 

 
2,863

 

Total
$
64,664

 
100.00
%
 
$
70,348

 
100.00
%
 
$
74,351

 
100.00
%
 
$
68,722

 
100.00
%
 
$
60,744

 
100.00
%

INVESTMENT ACTIVITIES
General. The Board of Directors annually approves the Investment Policy for the Bank and the Company. The Chief Financial Officer and the Treasurer are authorized by the Board to implement the Investment Policy and establish investment strategies. The Chief Executive Officer, Chief Financial Officer, Treasurer and Assistant Treasurer are authorized to make investment decisions consistent with the Investment Policy. Investment transactions for the Bank are reported to the Board of Directors of the Bank on a monthly basis.
The Investment Policy is designed to generate a favorable rate of return, consistent with established guidelines for liquidity, safety, duration and diversification, and to complement the lending activities of the Bank. Investment decisions are made in accordance with the policy and are based on credit quality, interest rate risk, balance sheet composition, market expectations, liquidity, income and collateral needs.
The Investment Policy does not currently permit the purchase of any securities that are below investment grade.
The investment strategy is to maximize the return on the investment portfolio consistent with the Investment Policy. The investment strategy considers the Bank’s and the Company’s interest rate risk position as well as liquidity, loan demand and other factors. Acceptable investment securities include U.S. Treasury and Agency obligations, collateralized mortgage obligations (“CMOs”), corporate debt obligations, municipal bonds, mortgage-backed securities, commercial paper, mutual funds, bankers’ acceptances and Federal funds. Securities purchased for the investment portfolio require a minimum credit rating of “A” by Moody’s or Standard & Poor’s at the time of purchase.
Securities in the investment portfolio are classified as held to maturity, available for sale or held for trading. Securities that are classified as held to maturity are securities that the Bank or the Company has the intent and ability to hold until their contractual maturity date and are reported at cost. Securities that are classified as available for sale are reported at fair value. Available for sale securities include U.S. Treasury and Agency obligations, U.S. Agency and privately-issued CMOs, corporate debt obligations and equities. Sales of securities may occur from time to time in response to changes in market rates and liquidity needs and to facilitate balance sheet reallocation to effectively manage interest rate risk. At the present time, there are no securities that are classified as held for trading.
Management conducts a periodic review and evaluation of the securities portfolio to determine if any securities with a market value below book value were other-than-temporarily impaired. If such an impairment were deemed other-than-temporary, management would measure the total credit-related component of the unrealized loss, and the Company would recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed-rate securities decreases and as interest rates fall, the fair value of fixed-rate securities increases. The market for non-investment grade, privately issued mortgage-backed securities remains illiquid and prices have not appreciated despite favorable movements in interest rates. The Company evaluates if it has the intent to sell these securities and if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery.
CMOs are a type of debt security issued by a special-purpose entity that aggregates pools of mortgages and mortgage-related securities and creates different classes of CMO securities with varying maturities and amortization schedules as well as a residual

16



interest with each class possessing different risk characteristics. In contrast to pass-through mortgage-backed securities from which cash flow is received (and prepayment risk is shared) pro rata by all securities holders, the cash flow from the mortgages or mortgage-related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage-related securities resulting from unexpected prepayment activity. In declining interest rate environments, the Bank attempts to purchase CMOs with principal lock-out periods, reducing prepayment risk in the investment portfolio. During rising interest rate periods, the Bank’s strategy is to purchase CMOs that are receiving principal payments that can be reinvested at higher current yields. Investments in CMOs involve a risk that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Additionally, the fair value of such securities may be adversely affected by changes in the market interest rates. Management believes these securities may represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available.
At December 31, 2013, the Bank held $27.5 million in privately-issued CMOs in the investment portfolio. The Bank and the Company do not invest in collateralized debt obligations, mortgage-related securities secured by sub-prime loans, or any preferred equity securities.
Amortized Cost and Fair Value of Securities. The following table sets forth certain information regarding the amortized cost and fair values of the Company’s securities as of the dates indicated.
 
At December 31,
 
2013
 
2012
 
2011
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(Dollars in thousands)
Held to Maturity:
 
Mortgage-backed securities
$
5,273

 
$
5,520

 
$
11,123

 
$
11,583

 
$
22,321

 
$
23,180

FHLB obligations
895

 
893

 
500

 
500

 
500

 
504

FHLMC obligations
1,900

 
1,876

 
1,300

 
1,305

 
499

 
503

FNMA obligations
3,909

 
3,883

 
2,905

 
2,934

 
2,648

 
2,676

FFCB obligations
819

 
818

 

 

 

 

State and municipal obligations
334,750

 
332,987

 
336,078

 
350,825

 
314,108

 
330,902

Corporate obligations
9,954

 
9,936

 
7,558

 
7,769

 
8,242

 
8,531

Total held-to-maturity
$
357,500

 
$
355,913

 
$
359,464

 
$
374,916

 
$
348,318

 
$
366,296

Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
8,739

 
8,758

 
9,933

 
10,316

 
11,066

 
11,614

Mortgage-backed securities
1,060,013

 
1,054,974

 
1,134,647

 
1,162,325

 
1,221,988

 
1,251,003

FHLMC obligations
47,713

 
47,709

 
38,812

 
39,026

 
24,077

 
24,155

FHLB obligations
12,163

 
12,178

 
13,196

 
13,234

 
43,546

 
43,669

FNMA obligations
33,347

 
33,529

 
38,435

 
38,757

 
33,506

 
33,725

FFCB obligations

 

 

 

 
4,001

 
4,009

Corporate obligations

 

 

 

 
7,517

 
7,636

Equity securities
357

 
446

 
307

 
344

 
307

 
308

Total available for sale
$
1,162,332

 
$
1,157,594

 
$
1,235,330

 
$
1,264,002

 
$
1,346,008

 
$
1,376,119

Average expected life of
securities(1)
4.55 years

 
 
 
3.75 years

 
 
 
3.00 years

 
 
 
(1)
Average expected life is based on prepayment assumptions utilizing prevailing interest rates as of the reporting dates and does not include equity securities.

17



The aggregate carrying values and fair values of securities by issuer, where the aggregate book value of such securities exceeds ten percent of stockholders’ equity are as follows (in thousands):
 
Amortized
Cost
 
Fair
Value
At December 31, 2013:
 
 
 
FNMA
$
511,670

 
$
506,701

FHLMC
522,622

 
521,977

The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company’s debt securities portfolio as of December 31, 2013. No tax equivalent adjustments were made to the weighted average yields. Amounts are shown at amortized cost for held to maturity securities and at fair value for available for sale securities.
  
At December 31, 2013
  
One Year or Less
 
More Than One
Year to Five Years
 
More Than Five
Years to Ten Years
 
After Ten Years
 
Total
  
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield(1)
 
(Dollars in thousands)
Held to Maturity:
 
Mortgage-backed securities
$

 
%
 
$
3,802

 
4.15
%
 
$
1,471

 
5.15
%
 
$

 
%
 
$
5,273

 
4.43
%
Agency obligations

 

 
7,523

 
1.25

 

 

 

 

 
7,523

 
1.25

Corporate obligations
2,214

 
4.45

 
7,740

 
2.15

 

 

 

 

 
9,954

 
2.66

State and municipal obligations
22,987

 
2.46

 
33,224

 
3.64

 
119,121

 
3.29

 
159,418

 
2.82

 
334,750

 
3.05

Total held to maturity
$
25,201

 
2.64
%
 
$
52,289

 
3.11
%
 
$
120,592

 
3.31
%
 
$
159,418

 
2.82
%
 
$
357,500

 
3.02
%
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
$
1,044

 
3.34
%
 
$
4,847

 
4.11
%
 
%
 
%
 
$
2,867

 
2.78
%
 
$
8,758

 
3.58
%
Mortgage-backed securities
4

 
5.37

 
18,260

 
4.22

 
102,376

 
3.07

 
934,334

 
2.62

 
1,054,974

 
2.69

Agency obligations
20,144

 
0.72

 
73,272

 
0.89

 

 

 

 

 
93,416

 
0.85

Total available for sale(2)
$
21,192

 
0.85
%
 
$
96,379

 
1.68
%
 
$
102,376

 
3.07
%
 
$
937,201

 
2.62
%
 
$
1,157,148

 
2.55
%
 
(1)
Yields are not tax equivalent
(2)
Totals excludes $446,000 of available for sale equity securities
SOURCES OF FUNDS
General. Primary sources of funds consist of principal and interest cash flows received from loans and mortgage-backed securities, contractual maturities on investments, deposits, Federal Home Loan Bank of New York (“FHLB”) advances and proceeds from sales of loans and investments. These sources of funds are used for lending, investing and general corporate purposes, including acquisitions and common stock repurchases.
Deposits. The Bank offers a variety of deposits for retail and business accounts. Deposit products include savings accounts, checking accounts, interest-bearing checking accounts, money market deposit accounts and certificate of deposit accounts at varying interest rates and terms. The Bank also offers IRA and KEOGH accounts. Business customers are offered several checking account and savings plans, cash management services, remote deposit capture services, payroll origination services, escrow account management and business credit cards. The Bank focuses on relationship banking for retail and business customers to enhance the customer experience. Deposit activity is influenced by state and local economic conditions, changes in interest rates, internal pricing decisions and competition. Deposits are primarily obtained from the areas surrounding the Bank’s branch locations. To attract and retain deposits, the Bank offers competitive rates, quality customer service and a wide variety of products and services that meet customers’ needs, including online banking. The Bank has no brokered deposits.
Deposit pricing strategy is monitored monthly by the management Asset/Liability Committee and Pricing Committee. Deposit pricing is set weekly by the Bank’s Treasury Department. When setting deposit pricing, the Bank considers competitive market rates, FHLB advance rates and rates on other sources of funds. Core deposits, defined as savings accounts, interest and non-interest bearing checking accounts and money market deposit accounts represented 84.5% of total deposits at December 31, 2013

18



and 82.4% of total deposits at December 31, 2012. As of December 31, 2013 and December 31, 2012, time deposits maturing in less than one year amounted to $530 million and $624 million, respectively.
The following table indicates the amount of certificates of deposit by time remaining until maturity as of December 31, 2013.
 
Maturity
 
Total
 
3 Months
or Less
 
Over 3 to
6 Months
 
Over 6 to
12 Months
 
Over 12
Months
 
 
(Dollars in thousands)
Certificates of deposit of $100,000 or more
$
74,091

 
$
40,257

 
$
50,320

 
$
105,963

 
$
270,631

Certificates of deposit less than $100,000
58,694

 
119,371

 
187,163

 
170,895

 
536,123

Total certificates of deposit
$
132,785

 
$
159,628

 
$
237,483

 
$
276,858

 
$
806,754


Certificates of Deposit Maturities. The following table sets forth certain information regarding certificates of deposit.
 
Period to Maturity from December 31, 2013
 
At December 31,
 
Less Than
One Year
 
One to
Two
Years
 
Two to
Three
Years
 
Three to
Four Years
 
Four to
Five Years
 
Five Years
or More
 
2013
 
2012
 
2011
 
(Dollars in thousands)
Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to 0.99%
$
439,905

 
$
73,180

 
$
11,226

 
$

 
$

 
$

 
$
524,311

 
$
588,809

 
$
609,021

1.00 to 2.00%
12,439

 
2,752

 
22,315

 
38,889

 
43,301

 
1,054

 
120,750

 
124,088

 
205,321

2.01 to 3.00%
28,629

 
69,054

 
14,215

 

 

 

 
111,898

 
129,352

 
168,354

3.01 to 4.00%
45,821

 
21

 

 

 

 
3

 
45,845

 
68,660

 
71,441

4.01 to 5.00%
3,037

 
256

 
431

 
125

 

 

 
3,849

 
46,178

 
64,806

5.01 to 6.00%
24

 

 
7

 

 

 

 
31

 
321

 
9,506

6.01 to 7.00%

 

 

 

 

 

 

 

 
188

Over 7.01%
41

 

 

 
29

 

 

 
70

 
65

 
89

Total
$
529,896

 
$
145,263

 
$
48,194

 
$
39,043

 
$
43,301

 
$
1,057

 
$
806,754

 
$
957,473

 
$
1,128,726


Borrowed Funds. At December 31, 2013, the Bank had $1.20 billion of borrowed funds. Borrowed funds consist primarily of FHLB advances and repurchase agreements. Repurchase agreements are contracts for the sale of securities owned or borrowed by the Bank, with an agreement to repurchase those securities at an agreed-upon price and date. The Bank uses wholesale repurchase agreements, as well as retail repurchase agreements as an investment vehicle for its commercial sweep checking product. Bank policies limit the use of repurchase agreements to collateral consisting of U.S. Treasury obligations, U.S. government agency obligations or mortgage-related securities.
As a member of the FHLB, the Bank is eligible to obtain advances upon the security of the FHLB common stock owned and certain residential mortgage loans, provided certain standards related to credit-worthiness have been met. FHLB advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities.

19



The following table sets forth the maximum month-end balance and average monthly balance of FHLB advances and securities sold under agreements to repurchase for the periods indicated.
 
Year Ended December 31,
 
2013

2012

2011
 
(Dollars in thousands)
Maximum Balance:





FHLB advances
$
774,557

 
$
518,215

 
$
585,234

FHLB line of credit
183,000

 
178,000

 
64,000

Securities sold under agreements to repurchase
294,035

 
357,164

 
366,460

Average Balance:
 
 
 
 
 
FHLB advances
599,991

 
516,440

 
560,420

FHLB line of credit
48,784

 
29,004

 
9,918

Securities sold under agreements to repurchase
260,004

 
319,031

 
338,839

Weighted Average Interest Rate:
 
 
 
 
 
FHLB advances
2.34
%
 
2.51
%
 
2.81
%
FHLB line of credit
0.38

 
0.39

 
0.47

Securities sold under agreements to repurchase
1.74

 
2.04

 
2.18


The following table sets forth certain information as to borrowings at the dates indicated.
 
At December 31,

2013

2012

2011
 
(Dollars in thousands)
Federal Funds Purchased
$

 
$

 
$
10,000

FHLB advances
774,557

 
507,648

 
518,347

FHLB line of credit
183,000

 

 
30,000

Securities sold under repurchase agreements
246,322

 
295,616

 
361,833

Total borrowed funds
$
1,203,879

 
$
803,264

 
$
920,180

Weighted average interest rate of Federal Funds Purchased
%
 
%
 
0.50
%
Weighted average interest rate of FHLB advances
2.17
%
 
2.47
%
 
2.51
%
Weighted average interest rate of FHLB line of credit
0.40
%
 
%
 
0.35
%
Weighted average interest rate of securities sold under agreements to repurchase
1.69
%
 
1.91
%
 
1.99
%

WEALTH MANAGEMENT SERVICES
As part of the Company’s strategy to increase its wealth management business, on August 11, 2011, the Company’s wholly owned subsidiary, The Provident Bank, completed its acquisition of Beacon Trust Company, a New Jersey limited purpose trust company, and Beacon Global Asset Management, Inc., an SEC-registered investment advisor incorporated in Delaware (collectively “Beacon”). Subsequent to the acquisition, Beacon Global Asset Management was merged with and into Beacon Trust Company. Beacon’s expertise in trust and wealth management services strategically positions the Company to increase market share and enhance the Company’s non-interest earnings growth.
In addition to its trust and estate administrative services, Beacon is a provider of asset management services in New Jersey. The services are often introduced to existing clients through the Bank’s extensive branch network throughout the state. It offers a full range of asset management services to individuals, municipalities, non-profits, corporations and pension funds. These services include investment management, asset allocation, trust and fiduciary services, financial planning, family office services, estate settlement services and custody.
Beacon focuses on delivering personalized investment strategies based on the client’s risk profile. These strategies are focused on maximizing clients’ investment returns, while minimizing expenses. Most of the fee income generated by Beacon is based on assets under management.

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SUBSIDIARY ACTIVITIES
PFS Insurance Services, Inc., formerly Provident Investment Services, Inc., is a wholly owned subsidiary of the Bank, and a New Jersey licensed insurance producer that sells insurance and investment products, including annuities to customers through a third-party networking arrangement.
Dudley Investment Corporation is a wholly owned subsidiary of the Bank which operates as a New Jersey Investment Company. Dudley Investment Corporation owns all of the outstanding common stock of Gregory Investment Corporation.
Gregory Investment Corporation is a wholly owned subsidiary of Dudley Investment Corporation. Gregory Investment Corporation operates as a Delaware Investment Company. Gregory Investment Corporation owns all of the outstanding common stock of PSB Funding Corporation.
PSB Funding Corporation is a majority owned subsidiary of Gregory Investment Corporation. It was established as a New Jersey corporation to engage in the business of a real estate investment trust for the purpose of acquiring mortgage loans and other real estate related assets from the Bank.
TPB Realty, LLC, is a wholly owned subsidiary of the Bank formed to invest in real estate development joint ventures principally targeted at meeting the housing needs of low- and moderate-income communities in the Bank’s market. At December 31, 2013, TPB Realty, LLC had total assets of $2.9 million.
Bergen Avenue Realty, LLC, is a wholly owned subsidiary of the Bank formed to manage and sell real estate acquired through foreclosure. At December 31, 2013, Bergen Avenue Realty, LLC had total assets of $2.5 million.
Bergen Delaware Realty, LLC, is a wholly owned subsidiary of the Bank formed to manage and sell real estate acquired through foreclosure. At December 31, 2013, Bergen Delaware Realty, LLC had total assets of $500,000.
Beacon Trust Company, a New Jersey limited purpose trust company, is a wholly owned subsidiary of the Bank.
PERSONNEL
As of December 31, 2013, the Company had 830 full-time and 112 part-time employees. None of the Company’s employees are represented by a collective bargaining group. The Company believes its working relationship with its employees is good.
REGULATION and SUPERVISION
General
As a bank holding company controlling the Bank, the Company is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA. The Company is also subject to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”) and the regulations of the Commissioner of the New Jersey Department of Banking and Insurance (“Commissioner”) under the New Jersey Banking Act applicable to bank holding companies. The Company and the Bank are required to file reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board and the Commissioner. The Federal Reserve Board and the Commissioner conduct periodic examinations to assess the Company’s compliance with various regulatory requirements. The Company files certain reports with, and otherwise complies with, the rules and regulations of the SEC under the federal securities laws and the listing requirements of the New York Stock Exchange.
The Bank is a New Jersey chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to extensive regulation, examination and supervision by the Commissioner as the issuer of its charter, and by the FDIC as its deposit insurer. The Bank files reports with the Commissioner and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the FDIC conduct periodic examinations to assess the Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Any change in applicable laws and regulations, whether by the Commissioner, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on the Company and the Bank and their operations.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes in the regulation of depository institutions and their holding companies. Certain provisions of the Dodd-Frank Act are impacting the Company and the Bank. For example, the Dodd-Frank Act created the Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau has assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has the authority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their principal regulator, although the Consumer Financial Protection Bureau will have back-up authority to examine and enforce consumer protection laws against all institutions, including those with less than $10 billion in assets.
The material laws and regulations applicable to the Company and the Bank are summarized below and elsewhere in the Form 10-K.
New Jersey Banking Regulation
Activity Powers. The Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including the Bank, generally may, subject to certain limits, invest in:
(1)
real estate mortgages;
(2)
consumer and commercial loans;
(3)
specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;
(4)
certain types of corporate equity securities; and
(5)
certain other assets.
A savings bank may also invest pursuant to a “leeway” power that permits investments not otherwise permitted by the New Jersey Banking Act, subject to certain restrictions imposed by the FDIC. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon the approval of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Commissioner by regulation or by specific authorization is required. The exercise of these lending, investment and activity powers is limited by federal law and the related regulations. See “Federal Banking Regulation—Activity Restrictions on State-Chartered Bank” below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey chartered savings bank may not make loans or extend credit to a single borrower and to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A New Jersey chartered savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. The Bank currently complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by the bank.
Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey chartered depository institutions, including the Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. At December 31, 2013, the Bank was considered “well capitalized” under FDIC guidelines.
Examination and Enforcement. The New Jersey Department of Banking and Insurance may examine the Company and the Bank whenever it deems an examination advisable. The Department examines the Bank at least every two years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed.
Federal Banking Regulation

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Capital Requirements. FDIC regulations require banks to maintain minimum levels of capital. The FDIC regulations define two tiers, or classes, of capital.
Tier 1 capital is comprised of:
common stockholders’ equity, less net unrealized holding losses on available for sale equity securities with readily determinable fair values;
non-cumulative perpetual preferred stock, including any related surplus; and
minority interests in consolidated subsidiaries minus all intangible assets, other than qualifying servicing rights and any net unrealized loss on marketable equity securities.
Tier 2 capital is comprised of:
cumulative perpetual preferred stock;
certain perpetual preferred stock for which the dividend rate may be reset periodically;
hybrid capital instruments, including mandatorily convertible securities;
term subordinated debt;
intermediate term preferred stock;
allowance for loan losses; and
up to 45% of pre-tax net unrealized holding gains on available for sale equity securities with readily determinable fair values.
The allowance for loan losses may be includible in Tier 2 capital up to a maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be included in total capital cannot exceed 100% of Tier 1 capital. The FDIC regulations establish a minimum leverage capital requirement for banks in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC for banks) under the Uniform Financial Institutions Rating System that are not anticipating or experiencing significant growth, of not less than a ratio of 3.0% of Tier 1 capital to total assets. For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the bank.
The FDIC regulations also establish a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital, which is defined as the sum of Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of a bank’s risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of a bank’s exposure to declines in the economic value of a bank’s capital due to changes in interest rates when assessing such bank’s capital adequacy. Under such a risk assessment, examiners will evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. According to the agencies, applicable considerations include:
the quality of a bank’s interest rate risk management process;
the overall financial condition of the bank; and
the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to maintain additional capital.

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The following table shows the Bank’s leverage ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio, at December 31, 2013
 
As of December 31, 2013
 
Capital
 
Percent  of
Assets(1)
 
Capital
Requirements(1)
 
(Dollars in thousands)
Regulatory Tier 1 leverage capital
$
585,313

 
8.34
%
 
4.00
%
Tier 1 risk-based capital
585,313

 
11.42

 
4.00

Total risk-based capital
649,373

 
12.67

 
8.00

 
(1)
For purposes of calculating Regulatory Tier 1 leverage capital, assets are based on adjusted total leverage assets. In calculating Tier 1 risk-based capital and total risk-based capital, assets are based on total risk-weighted assets.
As of December 31, 2013, the Bank was considered “well capitalized” under FDIC guidelines.
In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule also implements the Dodd-Frank Act’s directive to apply to savings and loan holding companies consolidated capital requirements that are not less stringent than those applicable to their subsidiary institutions. The final rule is effective January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.
Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the FDIC.
Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC insurance fund. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.
Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 billion. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. The Bank currently meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries.
Federal Home Loan Bank System. The Bank is a member of the FHLB system which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of New York, is required to purchase and hold shares of capital stock in that FHLB in an amount as required by that FHLB’s capital plan and minimum capital requirements. The Bank is in compliance with these requirements. The Bank has received dividends on its FHLB stock, although no assurance can be given that these dividends will continue to be paid. For the year ended December 31, 2013, dividends paid by the FHLB to the Bank totaled $1.7 million.

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Deposit Insurance. As a member institution of the FDIC, deposit accounts at the Bank are generally insured up to a maximum of $250,000 for each separately insured depositor.
Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.
On May 22, 2009, the FDIC issued a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution did not exceed 10 basis points times the institution’s assessment base for the second quarter of 2009. The Bank paid this special assessment in the amount of $3.1 million on September 30, 2009.
On November 12, 2009, the FDIC issued a rule that required depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. These assessments were payable on December 30, 2009. The total prepaid assessment of $31.3 million was remitted to the FDIC on that date. Of that amount, $27.4 million was recorded as a prepaid asset as of December 31, 2009. Beginning in the first quarter of 2010, the Company recorded an expense for its regular assessment for each quarter, with an offsetting credit to the prepaid asset until it was fully expensed.
The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.
On February 7, 2011, the FDIC issued a final rule that establishes a target size for the Deposit Insurance Fund (“DIF”) at 2 percent of insured deposits as mandated by the Dodd-Frank Act. The rule also implements a lower assessment rate schedule when the DIF reaches 1.15 percent of total insured deposits. The FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of law and to unsafe or unsound practices.
Transactions with Affiliates. Transactions between an insured bank, such as the Bank, and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and its implementing regulations. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution, financial subsidiary or other entity defined by the regulation generally is not treated as an affiliate of the bank for purposes of Sections 23A and 23B.
Section 23A:
limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one