PROVIDENT FINANCIAL SERVICES : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

Forward-Looking Statements
Certain statements contained herein are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "project," "intend," "anticipate," "continue," or similar terms or
variations on those terms, or the negative of those terms. Forward-looking
statements are subject to numerous risks and uncertainties, including, but not
limited to, those set forth in Item 1A of the Company's Annual Report on Form
10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related
to the economic environment, particularly in the market areas in which the
Company operates, competitive products and pricing, fiscal and monetary policies
of the U.S. Government, changes in accounting policies and practices that may be
adopted by the regulatory agencies and the accounting standards setters, changes
in government regulations affecting financial institutions, including regulatory
fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset-liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
In addition, COVID-19 continues to have an adverse impact on the Company, its
customers and the communities it serves. Given its ongoing and dynamic nature,
it is difficult to predict the full impact of the pandemic on the Company's
business, financial condition or results of operations. The extent of such
impact will depend on future developments, which are highly uncertain, including
when the pandemic will be controlled and abated, and the extent to which the
economy can remain open. As the result of the pandemic and the related adverse
local and national economic consequences, the Company could be subject to any of
the following risks, any of which could have a material, adverse effect on our
business, financial condition, liquidity, and results of operations: the demand
for our products and services may decline, making it difficult to grow assets
and income; if the economy is unable to remain substantially open, and high
levels of unemployment continue for an extended period of time, loan
delinquencies, problem assets, and foreclosures may increase, resulting in
increased charges and reduced income; collateral for loans, especially real
estate, may decline in value, which could cause loan losses to increase; our
allowance for credit losses may increase if borrowers experience financial
difficulties, which will adversely affect our net income; the net worth and
liquidity of loan guarantors may decline, impairing their ability to honor
commitments to us; as the result of the decline in the Federal Reserve Board's
target federal funds rate to near 0%, the yield on our assets may decline to a
greater extent than the decline in our cost of interest-bearing liabilities,
reducing our net interest margin and spread and reducing net income; our wealth
management revenues may decline with continuing market turmoil; we may face the
risk of a goodwill write-down due to stock price decline; and our cyber security
risks are increased as the result of an increase in the number of employees
working remotely.
The Company cautions readers not to place undue reliance on any such
forward-looking statements which speak only as of the date made. The Company
advises readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements. The Company does not have
any obligation to update any forward-looking statements to reflect events or
circumstances after the date of this statement.
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Acquisition

SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB
One"), which added $2.20 billion to total assets, $1.77 billion to total loans
and $1.76 billion to total deposits, and added 18 full-service banking offices
in New Jersey and New York. As part of the acquisition, the addition of SB One
Insurance Agency allows the Company to expand its products offerings to its
customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outstanding SB One common stock was
exchanged for 1.357 shares of the Company's common stock. The Company issued
12.8 million shares of common stock from treasury stock, plus cash in lieu of
fractional shares in the acquisition of SB One. The total consideration paid for
the acquisition of SB One was $180.8 million. In connection with the
acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with
and into Provident Bank, a wholly owned subsidiary of the Company.
Critical Accounting Policies
The Company considers certain accounting policies to be critically important to
the fair presentation of its financial condition and results of operations.
These policies require management to make complex judgments on matters which by
their nature have elements of uncertainty. The sensitivity of the Company's
consolidated financial statements to these critical accounting policies, and the
assumptions and estimates applied, could have a significant impact on its
financial condition and results of operations. These assumptions, estimates and
judgments made by management can be influenced by a number of factors, including
the general economic environment. The Company has identified the following as
critical accounting policies:
•Adequacy of the allowance for credit losses; and
•Valuation of deferred tax assets
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit
Losses on Financial Instruments," which replaces the incurred loss methodology
with the current expected credit loss ("CECL") methodology. It also applies to
off-balance sheet credit exposures, including loan commitments and lines of
credit. The adoption of the new standard resulted in the Company recording a
$7.9 million increase to the allowance for credit losses and a $3.2 million
liability for off-balance sheet credit exposures. The adoption of the standard
did not result in a change to the Company's results of operations upon adoption
as it was recorded as an $8.3 million cumulative effect adjustment, net of
income taxes, to retained earnings.
The allowance for credit losses is a valuation account that reflects
management's evaluation of the current expected credit losses in the loan
portfolio. The Company maintains the allowance for credit losses through
provisions for credit losses that are charged to income. Charge-offs against the
allowance for credit losses are taken on loans where management determines that
the collection of loan principal and interest is unlikely. Recoveries made on
loans that have been charged-off are credited to the allowance for credit
losses.
The calculation of the allowance for credit losses is a critical accounting
policy of the Company. Management estimates the allowance balance using relevant
available information, from internal and external sources, related to past
events, current conditions, and a reasonable and supportable forecast.
Historical credit loss experience for both the Company and peers provides the
basis for the estimation of expected credit losses, where observed credit losses
are converted to probability of default rate ("PDR") curves through the use of
segment-specific loss given default ("LGD") risk factors that convert default
rates to loss severity based on industry-level, observed relationships between
the two variables for each segment, primarily due to the nature of the
underlying collateral. These risk factors were assessed for reasonableness
against the Company's own loss experience and adjusted in certain cases when the
relationship between the Company's historical default and loss severity deviate
from that of the wider industry. The historical PDR curves, together with
corresponding economic conditions, establish a quantitative relationship between
economic conditions and loan performance through an economic cycle.
Using the historical relationship between economic conditions and loan
performance, management's expectation of future loan performance is incorporated
using an externally developed economic forecast. This forecast is applied over a
period that management has determined to be reasonable and supportable. Beyond
the period over which management can develop or source a reasonable and
supportable forecast, the model will revert to long-term average economic
conditions using a straight-line, time-based methodology. The Company's current
forecast period is six quarters, with a four quarter reversion period to
historical average macroeconomic factors. The Company's economic forecast is
approved by the Company's Asset-Liability Committee.
The allowance for credit losses is measured on a collective (pool) basis, with
both a quantitative and qualitative analysis that is applied on a quarterly
basis, when similar risk characteristics exist. The respective quantitative
allowance for each segment is measured using an econometric, discounted PD/LGD
modeling methodology in which distinct, segment-specific multi-variate
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regression models are applied to an external economic forecast. Under the
discounted cash flows methodology, expected credit losses are estimated over the
effective life of the loans by measuring the difference between the net present
value of modeled cash flows and amortized cost basis. Contractual cash flows
over the contractual life of the loans are the basis for modeled cash flows,
adjusted for modeled defaults and expected prepayments and discounted at the
loan-level effective interest rate. The contractual term excludes expected
extensions, renewals, and modifications unless either of the following applies:
management has a reasonable expectation at the reporting date that a troubled
debt restructuring ("TDR") will be executed with an individual borrower or the
extension or renewal options are included in the original or modified contract
at the reporting date and are not unconditionally cancellable by the Company.
After quantitative considerations, management applies additional qualitative
adjustments so that the allowance for credit loss is reflective of the estimate
of lifetime losses that exist in the loan portfolio at the balance sheet date.
Qualitative considerations include limitations inherent in the quantitative
model; portfolio concentrations that may affect loss experience across one or
more components of the portfolio; changes in industry conditions; changes in the
Company's loan review process; changes in the Company's loan policies and
procedures, economic forecast uncertainty and model imprecision.
Portfolio segment is defined as the level at which an entity develops and
documents a systematic methodology to determine its allowance for credit losses.
Management developed segments for estimating loss based on type of borrower and
collateral which is generally based upon federal call report segmentation. The
segments have been combined or sub-segmented as needed to ensure loans of
similar risk profiles are appropriately pooled. As of June 30, 2021, the
portfolio and class segments for the Company's loan portfolio were:
•Mortgage Loans - Residential, Commercial Real Estate, Multi-Family and
Construction
•Commercial Loans - Commercial Owner Occupied and Commercial Non-Owner Occupied
•Consumer Loans - First Lien Home Equity and Other Consumer
The allowance for credit losses on loans individually evaluated for impairment
is based upon loans that have been identified through the Company's normal loan
monitoring process. This process includes the review of delinquent and problem
loans at the Company's Delinquency, Credit, Credit Risk Management and Allowance
Committees; or which may be identified through the Company's loan review
process. Generally, the Company only evaluates loans individually for impairment
if the loan is non-accrual, non-homogeneous and the balance is at least $1.0
million, or if the loan was modified in a TDR.
For all classes of loans deemed collateral-dependent, the Company estimates
expected credit losses based on the fair value of the collateral less any
selling costs. If the loan is not collateral dependent, the allowance for credit
losses related to individually assessed loans is based on discounted expected
cash flows using the loan's initial effective interest rate.
A loan for which the terms have been modified resulting in a concession by the
Company, and for which the borrower is experiencing financial difficulties is
considered to be a TDR. The allowance for credit losses on a TDR is measured
using the same method as all other impaired loans, except that the original
interest rate is used to discount the expected cash flows, not the rate
specified within the restructuring.
As previously noted, in accordance with the CARES Act, the Company elected to
not apply troubled debt restructuring classification to any COVID-19 related
loan modifications that occurred after March 1, 2020 to borrowers who were
current as of December 31, 2019. Accordingly, these modifications were not
classified as TDRs. In addition, for loans modified in response to COVID-19 that
did not meet the above criteria (e.g., current payment status at December 31,
2019), the Company applied the guidance included in an interagency statement
issued by the bank regulatory agencies. This guidance states that loan
modifications performed in light of COVID-19, including loan payment deferrals
that are up to six months in duration, that were granted to borrowers who were
current as of the implementation date of a loan modification program or
modifications granted under government mandated modification programs, are not
TDRs.
Loans granted short-term COVID-19 related deferrals decreased from a peak level
of $1.31 billion, or 16.8% of loans, to $7.3 million of loans as of July 16,
2021, all of which are performing loans. The $7.3 million of loans in deferral
consists of $300,000 in a second 90-day deferral period and $7.0 million in a
third deferral period. Included in the $7.3 million of total loans in deferral,
$3.9 million are secured by hotel properties, $2.1 million are secured by
restaurants, $463,000 is secured by a special-purpose property, $431,000 are
secured by retail properties, and $359,000 are secured by residential mortgages.
Of the $6.9 million of commercial loans in deferral, all are under principal
only deferral and are paying interest.
For loans acquired that have experienced more-than-insignificant deterioration
in credit quality since origination are considered PCD loans. The Company
evaluates acquired loans for deterioration in credit quality based on any of,
but not limited to, the following: (1) non-accrual status; (2) troubled debt
restructured designation; (3) risk ratings of special mention, substandard or
doubtful; (4) watchlist credits; and (5) delinquency status, including loans
that are current on acquisition date, but had been
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previously delinquent. At the acquisition date, an estimate of expected credit
losses is made for groups of PCD loans with similar risk characteristics and
individual PCD loans without similar risk characteristics. Subsequent to the
acquisition date, the initial allowance for credit losses on PCD loans will
increase or decrease based on future evaluations, with changes recognized in the
provision for credit losses.
Management believes the primary risks inherent in the portfolio are a general
decline in the economy, a decline in real estate market values, rising
unemployment or a protracted period of elevated unemployment, increasing vacancy
rates in commercial investment properties and possible increases in interest
rates in the absence of economic improvement. As the impact of COVID-19
continues to unfold, the effectiveness of medical advances, government programs,
and the resulting impact on consumer behavior and employment conditions will
have a material bearing on future credit conditions. Any one or a combination of
these events may adversely affect borrowers' ability to repay the loans,
resulting in increased delinquencies, credit losses and higher levels of
provisions. Management considers it important to maintain the ratio of the
allowance for credit losses to total loans at an acceptable level given current
and forecasted economic conditions, interest rates and the composition of the
portfolio.
Although management believes that the Company has established and maintained the
allowance for credit losses at appropriate levels, additions may be necessary if
future economic and other conditions differ substantially from the current
operating environment and economic forecast. Management evaluates its estimates
and assumptions on an ongoing basis giving consideration to forecasted economic
factors, historical loss experience and other factors. Such estimates and
assumptions are adjusted when facts and circumstances dictate. In addition to
the ongoing impact of COVID-19, illiquid credit markets, volatile securities
markets, and declines in the housing and commercial real estate markets and the
economy in general may increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with
precision, actual results could differ significantly from these estimates.
Changes in estimates resulting from continuing changes in the economic
environment will be reflected in the financial statements in future periods. In
addition, various regulatory agencies periodically review the adequacy of the
Company's allowance for credit losses as an integral part of their examination
process. Such agencies may require the Company to recognize additions to the
allowance or additional write-downs based on their judgments about information
available to them at the time of their examination. Although management uses the
best information available, the level of the allowance for credit losses remains
an estimate that is subject to significant judgment and short-term change.
The CECL approach to calculate the allowance for credit losses on loans is
significantly influenced by the composition, characteristics and quality of the
Company's loan portfolio, as well as the prevailing economic conditions and
forecast utilized. Material changes to these and other relevant factors creates
greater volatility to the allowance for credit losses, and therefore, greater
volatility to the Company's reported earnings. For the three and six months
ended June 30, 2021, the changing economic forecasts attributable to COVID-19
and projected economic recovery led to the Company recording negative provisions
for credit losses. See Note 4 to the Consolidated Financial Statements and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") for more information on the allowance for credit losses on
loans.
The determination of whether deferred tax assets will be realizable is
predicated on the reversal of existing deferred tax liabilities and estimates of
future taxable income. Such estimates are subject to management's judgment. A
valuation allowance is established when management is unable to conclude that it
is more likely than not that it will realize deferred tax assets based on the
nature and timing of these items. The Company did not require a valuation
allowance at June 30, 2021 or December 31, 2020.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2021 AND DECEMBER 31, 2020
Total assets at June 30, 2021 were $13.22 billion, a $297.2 million increase
from December 31, 2020. The increase in total assets was primarily due to a
$415.9 million increase in total investments and a $177.8 million increase in
cash and cash equivalents, partially offset by a $283.0 million decrease in
total loans.
The Company's loan portfolio decreased $283.0 million to $9.54 billion at
June 30, 2021, from $9.82 billion at December 31, 2020, despite strong
originations, as prepayments and Paycheck Protection Program ("PPP") loan
forgiveness, were elevated. For the six months ended June 30, 2021, loan
funding, including advances on lines of credit, totaled $1.67 billion, compared
with $2.04 billion for the same period in 2020. Originations under PPP programs
totaled $208.7 million and $397.8 million for the six month periods ended
June 30, 2021 and 2020, respectively. Total PPP loans outstanding decreased
$163.8 million to $309.4 million at June 30, 2021, from $473.2 million at
December 31, 2020. In addition to the net decrease in PPP loans, during the six
months ended June 30, 2021, the Company experienced net decreases in consumer
loans, multi-family loans, commercial loans, and residential mortgage loans of
$144.1 million, $123.4 million, $49.5 million and $40.9 million, respectively,
partially offset by net increases in construction loans and commercial mortgage
loans of $123.9 million and
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$112.8 million, respectively. Commercial real estate, commercial and
construction loans represented 83.2% of the loan portfolio at June 30, 2021,
compared to 81.8% at December 31, 2020.
The Company participates in loans originated by other banks, including
participations designated as Shared National Credits ("SNCs"). The Company's
gross commitments and outstanding balances as a participant in SNCs were $210.4
million and $84.7 million, respectively, at June 30, 2021, compared to $225.4
million and $110.6 million, respectively, at December 31, 2020. No SNC
relationship were 90 days or more delinquent at June 30, 2021.
The Company had outstanding junior lien mortgages totaling $147.0 million at
June 30, 2021. Of this total, 18 loans totaling $610,000 were 90 days or more
delinquent with an allowance for credit losses of $14,000.
The following table sets forth information regarding the Company's
non-performing assets as of June 30, 2021 and December 31, 2020 (in thousands):
                                  June 30, 2021       December 31, 2020
Mortgage loans:
Residential                      $        6,875             9,315
Commercial                               36,312            31,982

Construction                              2,967             1,392
Total mortgage loans                     46,154            42,689
Commercial loans                         32,023            42,118
Consumer loans                            1,883             2,283

Total non-performing loans               80,060            87,090
Foreclosed assets                         2,350             4,475
Total non-performing assets      $       82,410            91,565

The following table sets forth information regarding the Company’s 60-89 day
delinquent loans as of June 30, 2021 and December 31, 2020 (in thousands):

                                        June 30, 2021       December 31, 2020
Mortgage loans:
Residential                            $        4,455             8,852
Commercial                                          -               113
Multi-family                                        -               585
Construction                                        -                 -
Total mortgage loans                            4,455             9,550
Commercial loans                                  175             1,179
Consumer loans                                  1,272             4,519
Total 60-89 day delinquent loans       $        5,902            15,248


At June 30, 2021, the Company's allowance for credit losses related to the loan
portfolio was 0.85% of total loans, compared to 0.87% and 1.03% at March 31,
2021 and December 31, 2020, respectively. The Company recorded negative
provisions for credit losses of $10.7 million and $25.7 million for the three
and six months ended June 30, 2021, respectively, compared with provisions of
$10.9 million and $25.6 million for the three and six months ended June 30,
2020, respectively. For the three and six months ended June 30, 2021, the
Company had net recoveries of $6.1 million and $5.2 million, respectively,
compared to net recoveries of $216,000 and net charge-offs of $2.8 million,
respectively, for the same periods in 2020. The allowance for loan losses
decreased $20.5 million to $81.0 million at June 30, 2021 from $101.5 million at
December 31, 2020. The negative provision for credit losses for the three and
six months ended June 30, 2021 was primarily the result of an improved economic
forecast and the resultant favorable impact on expected credit losses, compared
with a provision for credit losses for the prior year, which was based upon a
weak economic forecast and a more uncertain outlook attributable to the COVID-19
pandemic. In addition, the significant recoveries realized in the second quarter
of 2021 related to a previously charged-off loan further contributed to the
negative provision for credit losses in the current period.
Total non-performing loans were $80.1 million, or 0.84% of total loans at
June 30, 2021, compared to $87.1 million, or 0.89% of total loans at
December 31, 2020. The $7.0 million decrease in non-performing loans consisted
of a $10.1 million decrease in non-performing commercial loans, a $2.4 million
decrease in non-performing residential mortgage loans and a $400,000
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decrease in non-performing consumer loans, partially offset by a $4.3 million
increase in non-performing commercial mortgage loans and a $1.6 million increase
in non-performing construction loans.
At June 30, 2021 and December 31, 2020, the Company held foreclosed assets of
$2.4 million and $4.5 million, respectively. During the six months ended June
30, 2021, there were two additions to foreclosed assets with an aggregate
carrying value of $434,000, six properties sold with a carrying value of $1.4
million and valuation charges of $1.1 million. Foreclosed assets at June 30,
2021 consisted primarily of commercial real estate. Non-performing assets
totaled $82.4 million, or 0.62% of total assets at June 30, 2021, compared to
$91.6 million, or 0.71% of total assets at December 31, 2020.
Cash and cash equivalents were $710.2 million at June 30, 2021, a $177.8 million
increase from December 31, 2020, largely due to net deposit inflows and loan
repayments, primarily attributable to proceeds from the forgiveness of PPP loans
and government stimulus programs.
Total investments were $2.03 billion at June 30, 2021, a $415.9 million increase
from December 31, 2020. This increase was primarily due to purchases of
mortgage-backed and municipal securities, partially offset by repayments of
mortgage-backed securities, maturities and calls of certain municipal and agency
bonds, and a decrease in unrealized gains on available for sale debt securities.
Total deposits increased $752.2 million during the six months ended June 30,
2021, to $10.59 billion. Total core deposits, consisting of savings and demand
deposit accounts, increased $1.00 billion to $9.75 billion at June 30, 2021,
while total time deposits decreased $252.1 million to $842.1 million at June 30,
2021. The increase in core deposits was largely attributable to a $577.4 million
increase in interest bearing demand deposits, as the Company shifted $450.0
million from Federal Home Loan Bank of New York ("FHLBNY") borrowings into
lower-costing brokered demand deposits, a $189.0 million increase in
non-interest bearing demand deposits, which partially benefited from deposits
retained from activity associated with PPP loans and stimulus funding, a $167.6
million increase in money market deposits and a $70.2 million increase in
savings deposits. The decrease in time deposits was primarily due to the outflow
of brokered time deposits, combined with additional maturities of longer-term
retail time deposits. Core deposits represented 92.0% of total deposits at
June 30, 2021, compared to 88.9% at December 31, 2020.
Borrowed funds decreased $482.6 million during the six months ended June 30,
2021, to $693.3 million. The decrease in borrowings for the period was largely
due to the maturity and replacement of FHLBNY borrowings with lower-costing
brokered deposits. Borrowed funds represented 5.2% of total assets at June 30,
2021, a decrease from 9.1% at December 31, 2020.
Stockholders' equity increased $57.8 million during the six months ended June
30, 2021, to $1.68 billion, primarily due to net income earned for the period,
partially offset by dividends paid to stockholders, a decrease in unrealized
gains on available for sale debt securities and common stock repurchases. For
the six months ended June 30, 2021, common stock repurchases totaled 46,791
shares at an average cost of $21.56 per share, of which 44,078 shares, at an
average cost of $21.81 per share, were made in connection with withholding to
cover income taxes on the vesting of stock-based compensation. At June 30, 2021,
approximately 4.1 million shares remained eligible for repurchase under the
current stock repurchase authorization. Book value per share and tangible book
value per share (1) at June 30, 2021 were $21.55 and $15.58, respectively,
compared with $20.87 and $14.86, respectively, at December 31, 2020.
Liquidity and Capital Resources. Liquidity refers to the Company's ability to
generate adequate amounts of cash to meet financial obligations to its
depositors, to fund loans and securities purchases, deposit outflows and
operating expenses. Sources of funds include scheduled amortization of loans,
loan prepayments, scheduled maturities of investments, cash flows from
mortgage-backed securities and the ability to borrow funds from the FHLBNY and
approved broker-dealers.
Cash flows from loan payments and maturing investment securities are fairly
predictable sources of funds. Changes in interest rates, local economic
conditions, COVID-19 and related government response and the competitive
marketplace can influence loan prepayments, prepayments on mortgage-backed
securities and deposit flows.
In response to COVID-19, the Company has escalated the monitoring of deposit
behavior, utilization of credit lines, and borrowing capacity with the FHLBNY
and Federal Reserve Bank of New York ("FRBNY"), and is enhancing its collateral
position with these funding sources.
The Federal Deposit Insurance Corporation ("FDIC") and the other federal bank
regulatory agencies issued a final rule that revised the leverage and risk-based
capital requirements and the method for calculating risk-weighted assets to make
them consistent with agreements that were reached by the Basel Committee on
Banking Supervision and certain provisions of the Dodd-Frank Act, that were
effective January 1, 2015. Among other things, the rule established a new common
equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets),
adopted a uniform minimum leverage capital ratio at 4%,
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increased the minimum Tier 1 capital to risk-based assets requirement (from 4%
to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to
exposures that are more than 90 days past due or are on non-accrual status and
to certain commercial real estate facilities that finance the acquisition,
development or construction of real property. The rule also required unrealized
gains and losses on certain "available-for-sale" securities holdings to be
included for purposes of calculating regulatory capital unless a one-time
opt-out was exercised. The Company exercised the option to exclude unrealized
gains and losses from the calculation of regulatory capital. Additional
constraints were also imposed on the inclusion in regulatory capital of
mortgage-servicing assets, deferred tax assets and minority interests. The rule
limits a banking organization's capital distributions and certain discretionary
bonus payments if the banking organization does not hold a "capital conservation
buffer," of 2.5% in addition to the amount necessary to meet its minimum
risk-based capital requirements.
In the first quarter of 2020, U.S. federal regulatory authorities issued an
interim final rule providing banking institutions that adopt CECL during the
2020 calendar year with the option to delay for two years the estimated impact
of CECL on regulatory capital, followed by a three-year transition period to
phase out the aggregate amount of the capital benefit provided during the
initial two-year delay (i.e., a five year transition in total). In connection
with its adoption of CECL on January 1, 2020, the Company elected to utilize the
five-year CECL transition.
At June 30, 2021, the Bank and the Company exceeded all current minimum
regulatory capital requirements as follows:
                                                                                              June 30, 2021
                                                                                  Required with Capital Conservation
                                                     Required                                   Buffer                                     Actual
                                             Amount             Ratio                 Amount                 Ratio               Amount               Ratio
                                                                                          (Dollars in thousands)

Bank:(1)

Tier 1 leverage capital                   $ 510,866               4.00  %       $       510,866                4.00  %       $ 1,156,061                 9.05  %
Common equity Tier 1 risk-based
capital                                     473,413               4.50                  736,420                7.00            1,156,061                10.99
Tier 1 risk-based capital                   631,217               6.00                  894,225                8.50            1,156,061                10.99
Total risk-based capital                    841,623               8.00                1,104,630               10.50            1,227,102                11.66

Company:
Tier 1 leverage capital                   $ 511,091               4.00  %       $       511,091                4.00  %       $ 1,225,848                 9.59  %
Common equity Tier 1 risk-based
capital                                     473,666               4.50                  736,814                7.00            1,212,961                11.52
Tier 1 risk-based capital                   631,555               6.00                  894,703                8.50            1,225,848                11.65
Total risk-based capital                    842,074               8.00                1,105,221               10.50            1,296,889                12.32


(1) Under the FDIC's prompt corrective action provisions, the Bank is considered
well capitalized if it has: a leverage (Tier 1) capital ratio of at least 5.00%;
a common equity Tier 1 risk-based capital ratio of 6.50%; a Tier 1 risk-based
capital ratio of at least 8.00%; and a total risk-based capital ratio of at
least 10.00%.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021
AND 2020
General. The Company reported net income of $44.8 million, or $0.58 per basic
and diluted share for the three months ended June 30, 2021, compared to net
income of $14.3 million, or $0.22 per basic and diluted share for the three
months ended June 30, 2020. For the six months ended June 30, 2021, the Company
reported net income of $93.3 million, or $1.22 per basic and diluted share,
compared to net income of $29.2 million, or $0.45 per basic and diluted share,
for the same period last year.
Earnings for the three and six months ended June 30, 2021 were aided by improved
economic conditions and resulting lower credit loss allowance requirements, and
the additional earnings attributable to the acquisition of earning assets
acquired in the July 31, 2020 merger with SB One Bancorp ("SB One"). For the
three and six months ended June 30, 2021, the Company recorded negative
provisions for credit losses on loans of $10.7 million and $25.7 million,
respectively, compared with provisions of $10.9 million and $25.6 million for
the respective 2020 periods.
Net Interest Income. Total net interest income increased $21.1 million to $90.9
million for the quarter ended June 30, 2021, from $69.8 million for the quarter
ended June 30, 2020. For the six months ended June 30, 2021, total net interest
income increased $39.1 million to $180.9 million, from $141.8 million for the
same period in 2020. Interest income for the quarter ended June 30, 2021
increased $19.0 million to $100.5 million, from $81.5 million for the same
period in 2020. For the six months ended June 30, 2021, interest income
increased $31.4 million to $201.1 million, from $169.7 million for the six
months ended June 30, 2020. Interest expense decreased $2.1 million to $9.6
million for the quarter ended June 30, 2021, from $11.7
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million for the quarter ended June 30, 2020. For the six months ended June 30,
2021, interest expense decreased $7.7 million to $20.2 million, from $27.9
million for the six months ended June 30, 2020. The increase in net interest
income for both comparative periods was largely attributable to growth in
average earning assets resulting from the net assets acquired from SB One and
PPP loan originations. Both periods were also aided by favorable liability
repricing and the inflow of lower-costing core deposits, as well as an increase
in the accelerated recognition of fees related to the forgiveness of PPP loans
in 2021. For the three and six months ended June 30, 2021, the accelerated
accretion of fees related to the forgiveness of PPP loans totaled $2.9 million
and $6.9 million recognized in interest income, compared to $1.1 million for the
three and six months ended June 30, 2020, respectively.
The net interest margin increased five basis points to 2.99% for the quarter
ended June 30, 2021, compared to 2.94% for the quarter ended June 30, 2020. The
weighted average yield on interest-earning assets decreased 13 basis points to
3.31% for the quarter ended June 30, 2021, compared to 3.44% for the quarter
ended June 30, 2020, while the weighted average cost of interest bearing
liabilities decreased 24 basis points for the quarter ended June 30, 2021 to
0.44%, compared to the second quarter of 2020. The average cost of interest
bearing deposits for the quarter ended June 30, 2021 was 0.34%, compared to
0.54% for the same period last year. Average non-interest bearing demand
deposits totaled $2.48 billion for the quarter ended June 30, 2021, compared to
$1.85 billion for the quarter ended June 30, 2020. The average cost of all
deposits, including non-interest bearing deposits, was 0.26% for the quarter
ended June 30, 2021, compared with 0.41% for the quarter ended June 30, 2020.
The average cost of borrowed funds for the quarter ended June 30, 2021 was
1.18%, compared to 1.31% for the same period last year.
For the six months ended June 30, 2021, the net interest margin decreased four
basis points to 3.02%, compared to 3.06% for the six months ended June 30, 2020.
The weighted average yield on interest earning assets declined 31 basis points
to 3.36% for the six months ended June 30, 2021, compared to 3.67% for the six
months ended June 30, 2020, while the weighted average cost of interest bearing
liabilities decreased 35 basis points to 0.46% for the six months ended June 30,
2021, compared to 0.81% for the same period last year. The average cost of
interest bearing deposits decreased 30 basis points to 0.36% for the six months
ended June 30, 2021, compared to 0.66% for the same period last year. Average
non-interest bearing demand deposits totaled $2.43 billion for the six months
ended June 30, 2021, compared with $1.67 billion for the six months ended June
30, 2020. The average cost of all deposits, including non-interest bearing
deposits, was 0.28% for the six months ended June 30, 2021, compared with 0.51%
for the six months ended June 30, 2020. The average cost of borrowings for the
six months ended June 30, 2021 was 1.15%, compared to 1.55% for the same period
last year.
Interest income on loans secured by real estate increased $13.6 million to $62.9
million for the three months ended June 30, 2021, from $49.3 million for the
three months ended June 30, 2020. Commercial loan interest income increased $6.2
million to $25.2 million for the three months ended June 30, 2021, from $18.9
million for the three months ended June 30, 2020. Consumer loan interest income
decreased $135,000 to $3.4 million for the three months ended June 30, 2021,
from $3.5 million for the three months ended June 30, 2020. For the three months
ended June 30, 2021, the average balance of total loans increased $2.00 billion
to $9.59 billion, compared to the same period in 2020, largely due to total
loans acquired from SB One. The average yield on total loans for the three
months ended June 30, 2021, increased three basis points to 3.79%, from 3.76%
for the same period in 2020.
Interest income on loans secured by real estate increased $21.2 million to
$124.9 million for the six months ended June 30, 2021, from $103.7 million for
the six months ended June 30, 2020. Commercial loan interest income increased
$13.7 million to $51.3 million for the six months ended June 30, 2021, from
$37.6 million for the six months ended June 30, 2020. Consumer loan interest
income decreased $815,000 to $6.9 million for the six months ended June 30,
2021, from $7.7 million for the six months ended June 30, 2020. For the six
months ended June 30, 2021, the average balance of total loans increased $2.23
billion to $9.66 billion, from $7.42 billion for the same period in 2020,
primarily due to total loans acquired from SB One, and organic growth, including
PPP loans. The average yield on total loans for the six months ended June 30,
2021, decreased 20 basis points to 3.79%, from 3.99% for the same period in
2020.
Interest income on held to maturity debt securities decreased $185,000 to $2.7
million for the quarter ended June 30, 2021, compared to the same period last
year. Average held to maturity debt securities decreased $6.2 million to $438.1
million for the quarter ended June 30, 2021, from $444.3 million for the same
period last year. Interest income on held to maturity debt securities decreased
$341,000 to $5.5 million for the six months ended June 30, 2021, compared to the
same period in 2020. Average held to maturity debt securities decreased $2.5
million to $444.2 million for the six months ended June 30, 2021, from $446.7
million for the same period last year.
Interest income on available for sale debt securities and FHLBNY stock decreased
$557,000 to $5.7 million for the quarter ended June 30, 2021, from $6.3 million
for the quarter ended June 30, 2020. The average balance of available for sale
debt securities and FHLBNY stock increased $415.1 million to $1.45 billion for
the three months ended June 30, 2021, compared to the same period in 2020.
Interest income on available for sale debt securities and FHLBNY stock decreased
$2.0 million to
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$11.3 million for the six months ended June 30, 2021, from $13.3 million for the
same period last year. The average balance of available for sale debt securities
and FHLBNY stock increased $271.0 million to $1.32 billion for the six months
ended June 30, 2021.
The average yield on total securities decreased to 1.46% for the three months
ended June 30, 2021, compared with 2.21% for the same period in 2020. For the
six months ended June 30, 2021, the average yield on total securities decreased
to 1.57%, compared with 2.42% for the same period in 2020.
Interest expense on deposit accounts decreased $859,000 to $6.8 million for the
quarter ended June 30, 2021, compared with $7.6 million for the quarter ended
June 30, 2020. For the six months ended June 30, 2021, interest expense on
deposit accounts decreased $4.4 million to $14.2 million, from $18.6 million for
the same period last year. The average cost of interest bearing deposits
decreased to 0.34% for the second quarter of 2021 and 0.36% for the six months
ended June 30, 2021, from 0.54% and 0.66% for the three and six months ended
June 30, 2020, respectively. The average balance of interest bearing core
deposits for the quarter ended June 30, 2021 increased $2.00 billion to $7.08
billion. For the six months ended June 30, 2021, average interest bearing core
deposits increased $1.90 billion, to $6.88 billion, from $4.98 billion for the
same period in 2020. The increase in average core deposits for both the three
and six months ended June 30, 2021 was largely due to deposits acquired from SB
One, combined with organic growth, activity associated with PPP loans and
government stimulus. Average time deposit account balances increased $291.8
million, to $897.6 million for the quarter ended June 30, 2021, from $605.8
million for the quarter ended June 30, 2020. For the six months ended June 30,
2021, average time deposit account balances increased $281.4 million, to $969.9
million, from $688.5 million for the same period in 2020.
Interest expense on borrowed funds decreased $1.5 million to $2.6 million for
the quarter ended June 30, 2021, from $4.1 million for the quarter ended
June 30, 2020. For the six months ended June 30, 2021, interest expense on
borrowed funds decreased $3.9 million to $5.4 million, from $9.3 million for the
six months ended June 30, 2020. The average cost of borrowings decreased to
1.18% for the three months ended June 30, 2021, from 1.31% for the three months
ended June 30, 2020. The average cost of borrowings decreased to 1.15% for the
six months ended June 30, 2021, from 1.55% for the same period last year.
Average borrowings decreased $380.7 million to $869.0 million for the quarter
ended June 30, 2021, from $1.25 billion for the quarter ended June 30, 2020. For
the six months ended June 30, 2021, average borrowings decreased $262.0 million
to $941.7 million, compared to $1.20 billion for the six months ended June 30,
2020.
Provision for Credit Losses. Provisions for credit losses are charged to
operations in order to maintain the allowance for credit losses at a level
management considers necessary to absorb projected credit losses that may arise
over the expected term of each loan in the portfolio. In determining the level
of the allowance for credit losses, management estimates the allowance balance
using relevant available information from internal and external sources relating
to past events, current conditions and reasonable and supportable forecasts. The
amount of the allowance is based on estimates, and the ultimate losses may vary
from such estimates as more information becomes available or later events
change. Management assesses the adequacy of the allowance for credit losses on a
quarterly basis and makes provisions for credit losses, if necessary, in order
to maintain the valuation of the allowance.
The Company recorded negative provisions for credit losses of $10.7 million and
$25.7 million for the three and six months ended June 30, 2021, respectively,
compared with provisions of $10.9 million and $25.6 million for the three and
six months ended June 30, 2020, respectively. The negative provision for credit
losses for the three and six months ended June 30, 2021 was primarily the result
of an improved economic forecast and the resultant favorable impact on expected
credit losses, compared with a provision for credit losses for the prior year,
which was based upon a weak economic forecast and a more uncertain outlook
attributable to COVID-19. In addition, the significant recoveries realized in
the second quarter of 2021 related to a previously charged-off loan further
contributed to the negative provision for credit losses in the current period.
Future credit loss provisions are subject to significant uncertainty given the
undetermined nature of prospective changes in economic conditions, as the impact
of COVID-19 and recovery continues to unfold.
Non-Interest Income. Non-interest income totaled $21.2 million for the quarter
ended June 30, 2021, an increase of $6.8 million, compared to the same period in
2020. Fee income increased $3.6 million to $8.5 million for the three months
ended June 30, 2021, compared to the same period in 2020, largely due to a $1.4
million increase in commercial loan prepayment fees, a $418,000 increase in
deposit related fees, an $832,000 increase in debit card revenue and a $450,000
increase in non-deposit investment fee income. The increases in fee income are
partially attributable to the addition of the SB One customer base, as well as a
recovering economy compared to the initial severely negative impact COVID-19 had
on consumer and business activity in the prior year. Insurance agency income, a
new revenue opportunity for the Company resulting from the SB One acquisition,
totaled $2.8 million for the three months ended June 30, 2021. Wealth management
income increased $1.9 million to $7.9 million for the three months ended June
30, 2021, compared to the same period in 2020, primarily due to solid new
business generation and increased market value of assets under management as a
result of strong equity market performance, and an increase in the level of
managed mutual funds. Partially offsetting these increases in non-interest
income, other income
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decreased $1.1 million to $424,000 for the three months ended June 30, 2021,
compared to the quarter ended June 30, 2020, primarily due to a $989,000
decrease in net fees on loan-level interest rate swap transactions.
Additionally, income from Bank-owned life insurance ("BOLI") decreased $336,000
to $1.5 million for the three months ended June 30, 2021, compared to the same
period in 2020, primarily due to a decrease in benefit claims and lower equity
valuations, partially offset by additional income related to the BOLI assets
acquired from SB One.
For the six months ended June 30, 2021, non-interest income totaled $42.8
million, an increase of $11.4 million, compared to the same period in 2020.
Insurance agency income for the six months ended June 30, 2021, totaled $5.6
million. Fee income increased $4.2 million, primarily due to a $1.6 million
increase in commercial loan prepayment fees, a $1.3 million increase in deposit
fees and debit card revenue, a $629,000 increase in late charges and other loan
related fee income and a $346,000 increase in non-deposit investment fee income
The increases in fee income are partially attributable to the addition of the SB
One customer base, as well as a recovering economy compared to the initial
severely negative effects that COVID-19 had on consumer and business activities
in the prior year. Wealth management income increased $2.8 million to $15.0
million for the six months ended June 30, 2021, compared to the same period in
2020, primarily due to an increase in the market value of assets under
management as a result of strong equity market performance and solid new
business results, and an increase in the level of managed mutual funds. Also,
BOLI income increased $1.4 million to $4.1 million for the six months ended June
30, 2021, compared to the same period in 2020, primarily due to an increase in
benefit claims, additional income related to the BOLI assets acquired from SB
One and higher equity valuations. Partially offsetting these increases, other
income decreased $2.7 million to $2.2 million for the six months ended June 30,
2021, compared to $5.0 million for the same period in 2020, mainly due to a $2.9
million decrease in net fees on loan-level interest rate swap transactions.
Non-Interest Expense. For the three months ended June 30, 2021, non-interest
expense totaled $62.7 million, an increase of $7.4 million, compared to the
three months ended June 30, 2020. Compensation and benefits expense increased
$5.7 million to $34.9 million for the three months ended June 30, 2021, compared
to $29.2 million for the same period in 2020. The increase was principally due
to increases in salary expense, the accrual for incentive compensation and
employee medical benefits each associated with the addition of former SB One
employees, as well as increases in mortgage commission expense and stock-based
compensation. Net occupancy expenses increased $1.7 million to $7.9 million for
the three months ended June 30, 2021, compared to the same period in 2020,
primarily due to increases in rent, depreciation, utilities and maintenance
expenses, which were principally related to the facilities acquired from SB One.
Other operating expenses increased $1.5 million to $9.0 million for the three
months ended June 30, 2021, compared to the same period in 2020, primarily due
to a market valuation adjustment on foreclosed real estate, combined with
increases in business development and debit card maintenance expenses, partially
offset by non-recurring merger related expenses incurred in the prior year
quarter. FDIC insurance increased $802,000 due to an increase in the insurance
assessment rate and an increase in total assets subject to assessment, including
assets acquired from SB One. Data processing expense increased $426,000 to $5.4
million for the three months ended June 30, 2021, compared with the same period
in 2020, primarily due to increases in software subscription service expense and
software maintenance expense. Also, the amortization of intangibles increased
$207,000 for the three months ended June 30, 2021, compared with the same period
in 2020, was mainly due to increases in the amortization of the customer
relationship and core-deposit intangibles associated with the acquisition of SB
One. Partially offsetting these increases, credit loss expense for off-balance
sheet credit exposures decreased $3.2 million to $2.1 million for the three
months ended June 30, 2020, compared to same period in 2020. The decrease was
primarily a function of an improved economic forecast resulting in a decline in
projected loss factors, partially offset by an increase in the pipeline of loans
that have been approved and awaiting closing.
Non-interest expense totaled $124.6 million for the six months ended June 30,
2021, an increase of $15.2 million, compared to $109.4 million for the six
months ended June 30, 2020. Compensation and benefits expense increased $9.8
million to $70.2 million for the six months ended June 30, 2021, compared to
$60.4 million for the six months ended June 30, 2020, primarily due to increases
in salary expense, the accrual for incentive compensation and employee medical
benefits each associated with the addition of former SB One employees, as well
as company-wide annual merit increases, partially offset by a decrease in
severance expense, as well as increases in mortgage commissions and stock-based
compensation. Net occupancy expense increased $4.8 million to $17.2 million for
the six months ended June 30, 2021, compared to the same period in 2020,
primarily due to increases in rent, depreciation, utilities and maintenance
expenses related to the facilities acquired from SB One, along with an increase
in snow removal costs incurred earlier in the year. FDIC insurance increased
$2.6 million for the six months ended June 30, 2021, primarily due to an
increase in the insurance assessment rate and an increase in total assets
subject to assessment, including assets acquired from SB One, along with the
receipt of the small bank assessment credit in the prior year that was not
available in 2021. Other operating expenses increased $2.5 million to $19.1
million for the six months ended June 30, 2021, compared to the same period in
2020. The increase in other operating expense was largely due to a valuation
adjustment on foreclosed assets and increases in debit card maintenance expense
and insurance expense, as a result of the addition of SB One, partially offset
by non-recurring merger related expenses incurred in the prior year. Partially
offsetting these increases, credit loss expense for off-balance sheet credit
exposures decreased $5.1 million to $1.2 million for the six
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months ended June 30, 2021. The decrease was primarily a function of an improved
economic forecast resulting in a decline in projected loss factors, partially
offset by an increase in the pipeline of loans that have been approved and are
awaiting closing.
Income Tax Expense. For the three months ended June 30, 2021, the Company's
income tax expense was $15.3 million with an effective tax rate of 25.4%,
compared with income tax expense of $3.7 million with an effective tax rate of
20.6% for the three months ended June 30, 2020. The increases in tax expense and
the effective tax rate for the three months ended June 30, 2021, compared with
the same period last year were largely the result of an increase in the
proportion of income derived from taxable sources.
For the six months ended June 30, 2021, the Company's income tax expense was
$31.5 million with an effective tax rate of 25.2%, compared with $9.0 million
with an effective tax rate of 23.5% for the six months ended June 30, 2020. The
increases in tax expense and the effective tax rate for the six months ended
June 30, 2021, compared with the same period last year were largely the result
of an increase in the proportion of income derived from taxable sources.

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