XNYS:PFS Provident Financial Services Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended June 30, 2012

or

 

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

For the transition period from             to             

Commission File Number: 001-31566

PROVIDENT FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   42-1547151
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
239 Washington Street, Jersey City, New Jersey   07302
(Address of Principal Executive Offices)   (Zip Code)

(732) 590-9200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x     NO  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the Registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of August 1, 2012 there were 83,209,293 shares issued and 60,141,128 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 420,083 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC.

INDEX TO FORM 10-Q

 

Item Number

   Page Number  
   PART I—FINANCIAL INFORMATION   
1.   

Financial Statements:

  
  

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

     3   
  

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

     4   
  

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

     5   
  

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

     6   
  

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

     8   
  

Notes to Consolidated Financial Statements (unaudited)

     9   
2.   

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

     31   
3.   

Quantitative and Qualitative Disclosures About Market Risk

     41   
4.   

Controls and Procedures

     43   
   PART II—OTHER INFORMATION   
1.   

Legal Proceedings

     44   
1A.   

Risk Factors

     44   
2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     44   
3.   

Defaults Upon Senior Securities

     44   
4.   

Mine Safety Disclosures

     44   
5.   

Other Information

     44   
6.   

Exhibits

     45   

Signatures

     47   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS.

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

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

(Dollars in Thousands)

 

      June 30, 2012     December 31, 2011  
ASSETS     

Cash and due from banks

   $ 75,233      $ 68,553  

Short-term investments

     2,012        1,079  
  

 

 

   

 

 

 

Total cash and cash equivalents

     77,245        69,632  
  

 

 

   

 

 

 

Securities available for sale, at fair value

     1,309,262        1,376,119  

Investment securities held to maturity (fair value of $379,325 at June 30, 2012 (unaudited) and $366,296 at December 31, 2011)

     363,210        348,318   

Federal Home Loan Bank Stock

     40,689        38,927   

Loans

     4,735,130        4,653,509  

Less allowance for loan losses

     72,352        74,351  
  

 

 

   

 

 

 

Net loans

     4,662,778        4,579,158  
  

 

 

   

 

 

 

Foreclosed assets, net

     13,925        12,802  

Banking premises and equipment, net

     67,258        66,260   

Accrued interest receivable

     23,878        24,653   

Intangible assets

     359,405        360,714  

Bank-owned life insurance

     144,631        142,010   

Other assets

     72,570        78,810   
  

 

 

   

 

 

 

Total assets

   $ 7,134,851      $ 7,097,403  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Demand deposits

   $ 3,251,349      $ 3,136,129  

Savings deposits

     921,571        891,742  

Certificates of deposit of $100,000 or more

     349,056        383,174  

Other time deposits

     684,037        745,552  
  

 

 

   

 

 

 

Total deposits

     5,206,013        5,156,597   

Mortgage escrow deposits

     24,263        20,955   

Borrowed funds

     884,204        920,180   

Other liabilities

     45,825        47,194   
  

 

 

   

 

 

 

Total liabilities

     6,160,305        6,144,926   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,293 shares issued and 60,141,128 shares outstanding at June 30, 2012 and 59,968,195 outstanding at December 31, 2011

     832        832  

Additional paid-in capital

     1,019,493        1,019,253   

Retained earnings

     382,234        363,011   

Accumulated other comprehensive income

     9,650        9,571   

Treasury stock

     (383,599     (384,725

Unallocated common stock held by the Employee Stock Ownership Plan

     (54,064     (55,465

Common stock acquired by the Directors’ Deferred Fee Plan

     (7,344     (7,390

Deferred compensation – Directors’ Deferred Fee Plan

     7,344        7,390   
  

 

 

   

 

 

 

Total stockholders’ equity

     974,546        952,477   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,134,851      $ 7,097,403   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

3


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Three and six months ended June 30, 2012 and 2011 (Unaudited)

(Dollars in thousands, except per share data)

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2012     2011     2012     2011  

Interest income:

       

Real estate secured loans

  $ 38,672      $ 39,669      $ 77,631      $ 79,959   

Commercial loans

    10,205        10,775        20,575        20,857   

Consumer loans

    6,335        6,490        12,624        13,009   

Securities available for sale and Federal Home Loan Bank Stock

    7,812        9,800        16,144        19,294   

Investment securities

    2,991        3,031        5,909        6,124   

Deposits, Federal funds sold and other short-term investments

    4        46        16        55   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    66,019        69,811        132,899        139,298   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

       

Deposits

    6,503        9,625        13,505        19,455   

Borrowed funds

    4,938        6,010        9,979        12,220   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

    11,441        15,635        23,484        31,675   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    54,578        54,176        109,415        107,623   

Provision for loan losses

    3,500        7,500        8,500        15,400   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    51,078        46,676        100,915        92,223   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

       

Fees

    7,411        5,859        15,486        11,421   

Bank-owned life insurance

    1,260        1,316        2,622        2,724   

Other-than-temporary impairment losses on securities

    —          (1,661     —          (1,661

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

    —          1,359        —          1,359   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on securities recognized in earnings

    —          (302     —          (302
 

 

 

   

 

 

   

 

 

   

 

 

 

Net gain on securities transactions

    1        14        2,184        28   

Other income

    671        1,156        1,779        1,344   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

    9,343        8,043        22,071        15,215   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

       

Compensation and employee benefits

    20,445        18,767        40,953        37,250   

Net occupancy expense

    5,162        5,251        10,188        10,525   

Data processing expense

    2,462        2,349        5,050        4,613   

FDIC insurance

    1,230        1,284        2,620        3,164   

Amortization of intangibles

    718        766        1,457        1,606   

Impairment of premises and equipment

    —          —          —          807   

Advertising and promotion expense

    1,128        1,184        1,813        1,782   

Other operating expenses

    6,611        6,332        12,466        11,537   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

    37,756        35,933        74,547        71,284   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    22,665        18,786        48,439        36,154   

Income tax expense

    6,662        4,809        14,008        9,246   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 16,003      $ 13,977      $ 34,431      $ 26,908   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

  $ 0.28      $ 0.25      $ 0.60      $ 0.47   

Average basic shares outstanding

    57,152,952        56,846,186        57,102,389        56,808,747   

Diluted earnings per share

  $ 0.28      $ 0.25      $ 0.60      $ 0.47   

Average diluted shares outstanding

    57,187,413        56,867,788        57,135,022        56,819,547   

See accompanying notes to unaudited consolidated financial statements.

 

 

4


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Three and six months ended June 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

 

     Three months ended
June  30,
    Six months ended
June  30,
 
     2012     2011     2012     2011  

Net income

   $ 16,003      $ 13,977      $ 34,431      $ 26,908   

Other comprehensive income (loss), net of tax:

        

Unrealized gains and losses on securities available for sale:

        

Net unrealized gains (losses) arising during the period

     123        4,778        1,547        3,548   

Reclassification adjustment for (gains) losses included in net income

     (1     (17     (1,292     (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     122        4,761        255        3,531   

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

        

Other-than-temporary impairment losses on securities

     —          (983     —          (983

Reclassification adjustment for impairment losses included in net income

     —          179        —          179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     —          (804     —          (804

Amortization related to post-retirement obligations

     212        64        (176     (1,873
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     334        4,021        79        854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 16,337      $ 17,998      $ 34,510      $ 27,762   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

 

    COMMON
STOCK
    ADDITIONAL
PAID-IN
CAPITAL
    RETAINED
EARNINGS
    ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
    TREASURY
STOCK
    UNALLOCATED
ESOP
SHARES
    COMMON
STOCK
ACQUIRED
BY DDFP
    DEFERRED
COMPENSATION
DDFP
    TOTAL
STOCKHOLDERS’
EQUITY
 

Balance at December 31, 2010

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

Net income

    —          —          26,908        —          —          —          —          —          26,908   

Other comprehensive income, net of tax

          854                854   

Cash dividends declared

    —          —          (13,905     —          —          —          —          —          (13,905

Distributions from DDFP

    —          —          —          —          —          —          46        (46     —     

Purchases of treasury stock

    —          —          —          —          (309     —          —          —          (309

Allocation of ESOP shares

    —          (225     —          —          —          1,391        —          —          1,166   

Stock option exercises

      (2         9              7   

Allocation of SAP shares

    —          1,658        —          —          —          —          —          —          1,658   

Allocation of stock options

    —          389        —          —          —          —          —          —          389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 832      $ 1,019,135      $ 345,475      $ 15,608      $ (385,394   $ (57,201   $ (7,436   $ 7,436      $ 938,455   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (Unaudited) (Continued)

(Dollars in thousands)

 

    COMMON
STOCK
    ADDITIONAL
PAID-IN
CAPITAL
    RETAINED
EARNINGS
    ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
    TREASURY
STOCK
    UNALLOCATED
ESOP
SHARES
    COMMON
STOCK
ACQUIRED
BY DDFP
    DEFERRED
COMPENSATION
DDFP
    TOTAL
STOCKHOLDERS’
EQUITY
 

Balance at December 31, 2011

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

Net income

    —          —          34,431        —          —          —          —          —          34,431   

Other comprehensive income, net of tax

          79                79   

Cash dividends paid

    —          —          (15,208     —          —          —          —          —          (15,208

Distributions from DDFP

    —          —          —          —          —          —          46        (46     —     

Purchases of treasury stock

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

Shares issued dividend reinvestment plan

    —          (1,604     —          —          6,736              5,132   

Stock option exercises

      (6     —          —          10        —          —          —          4  

Allocation of ESOP shares

    —          (235     —          —          —          1,401        —          —          1,166   

Allocation of SAP shares

    —          1,930        —          —          —          —          —          —          1,930   

Allocation of stock options

    —          155        —          —          —          —          —          —          155   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

  $ 832      $ 1,019,493      $ 382,234      $ 9,650      $ (383,599   $ (54,064   $ (7,344   $ 7,344      $ 974,546   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

7


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six months ended June 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

 

     Six months ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 34,431      $ 26,908   

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

    

Depreciation and amortization of intangibles

     4,864        4,955   

Impairment of premises and equipment

     —          807   

Provision for loan losses

     8,500        15,400   

Deferred tax benefit

     (4,005     (3,484

Increase in cash surrender value of Bank-owned life insurance

     (2,621     (2,724

Net amortization of premiums and discounts on securities

     7,662        5,542   

Accretion of net deferred loan fees

     (1,701     (1,216

Amortization of premiums on purchased loans, net

     833        826   

Net increase in loans originated for sale

     (23,620     (5,169

Proceeds from sales of loans originated for sale

     24,954        5,249   

Proceeds from sales of foreclosed assets

     9,090        2,566   

ESOP expense

     1,166        1,166   

Allocation of stock award shares

     1,930        1,658   

Allocation of stock options

     155        389   

Net gain on sale of loans

     (1,334     (80

Net gain on securities transactions

     (2,184     (28

Impairment charge on securities

     —          302   

Net loss on sale of premises and equipment

     (97     (95

Net loss (gain) on sale of foreclosed assets

     270        (19

Decrease in accrued interest receivable

     775        1,249   

Decrease in other assets

     (2,287     (11,805

Decrease in other liabilities

     (1,369     (1,421
  

 

 

   

 

 

 

Net cash provided by operating activities

     55,412        40,976   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

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

     39,095        24,663   

Purchases of investment securities held to maturity

     (54,428     (27,664

Proceeds from sales of securities available for sale

     47,131        —     

Proceeds from maturities and paydowns of securities available for sale

     233,196        192,356   

Purchases of securities available for sale

     (218,099     (64,752

Purchases of loans

     (48,980     (58,952

Net (increase) decrease in loans

     (42,280     8,773   

Proceeds from sales of premises and equipment

     65        448   

Purchases of premises and equipment

     (4,555     (6,250
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (48,855     68,622   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     49,416        115,229   

Increase in mortgage escrow deposits

     3,308        2,996   

Purchase of treasury stock

     (5,620     (309

Cash dividends paid to stockholders

     (15,208     (13,905

Shares issued dividend reinvestment plan

     5,132        —     

Stock options exercised

     4       7   

Proceeds from long-term borrowings

     —          160,500   

Payments on long-term borrowings

     (25,796     (182,119

Net decrease in short-term borrowings

     (10,180     (56,937
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,056        25,462   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (7,613     135,060   

Cash and cash equivalents at beginning of period

     69,632        52,229   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 77,245      $ 187,289   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest on deposits and borrowings

   $ 23,793      $ 32,374   
  

 

 

   

 

 

 

Income taxes

   $ 10,071     $ 13,174   
  

 

 

   

 

 

 

Non cash investing activities:

    

Transfer of loans receivable to foreclosed assets

   $ 10,507      $ 6,490   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

A. Basis of Financial Statement Presentation

The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly owned subsidiary, The Provident Bank (the “Bank,” together with Provident Financial Services, Inc., the “Company”).

In preparing the interim unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates. The allowance for loan losses is a material estimate that is particularly susceptible to near-term change. The current unstable economic environment has resulted in a heightened degree of uncertainty inherent in this material estimate.

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

Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the December 31, 2011 Annual Report to Stockholders on Form 10-K.

B. Earnings Per Share

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

 

    For the three months ended June 30,     For the six months ended June 30,  
    2012     2011     2012     2011  
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
    Net
Income
    Weighted
Average
Common
Shares
Outstanding
    Per
Share
Amount
 

Net income

  $ 16,003          $ 13,977          $ 34,431          $ 26,908       
 

 

 

       

 

 

       

 

 

       

 

 

     

Basic earnings per share:

                       

Income available to common stockholders

  $ 16,003        57,152,952      $ 0.28      $ 13,977        56,846,186      $ 0.25      $ 34,431        57,102,389      $ 0.60      $ 26,908        56,808,747      $ 0.47   
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Dilutive shares

      34,461            21,602            32,632            10,800     
   

 

 

       

 

 

       

 

 

       

 

 

   

Diluted earnings per share:

                       

Income available to common stockholders

  $ 16,003        57,187,413      $ 0.28      $ 13,977        56,867,788      $ 0.25      $ 34,431        57,135,022      $ 0.60      $ 26,908        56,819,547      $ 0.47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Anti-dilutive stock options and awards totaling 3,962,816 shares at June 30, 2012, were excluded from the earnings per share calculations.

 

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Table of Contents

Note 2. Acquisition

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

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

The purchase price was allocated to the acquired assets and liabilities of Beacon based on their fair value as of August 11, 2011. The allocation of the purchase price is presented in the following table.

 

(in thousands)       

Assets:

  

Cash and cash equivalents

   $ 96   

Securities

     164   

Premises and equipment

     241   

Goodwill

     7,124   

Core relationship intangible

     2,423   

Other assets

     1,378   
  

 

 

 

Total assets

   $ 11,426   
  

 

 

 

Liabilities:

  

Other liabilities

     4,076   
  

 

 

 

Total liabilities

   $ 4,076   
  

 

 

 

In connection with the Beacon transaction, the Company recorded goodwill of $7.1 million, none of which was estimated to be deductible for income tax purposes. In addition, a core relationship intangible (“CRI”) of $2.4 million was recognized in connection with the Beacon acquisition and is being amortized on an accelerated basis over an estimated useful life of twelve years.

Note 3. Investment Securities

At June 30, 2012, the Company had $1.31 billion and $363.2 million in available for sale and held to maturity investment securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, lack of reliable pricing information, regulatory actions, changes in the business environment or any changes in the competitive marketplace could have an adverse effect on the Company’s investment portfolio which could result in other-than-temporary impairment on certain investment securities in future periods. Included in the Company’s investment portfolio are private label mortgage-backed securities. These investments may pose a higher risk of future impairment charges as a result of the uncertain economic environment and the potential negative effect on future performance of these private label mortgage-backed securities. The total number of all held to maturity and available for sale securities in an unrealized loss position as of June 30, 2012 totaled 50, compared with 24 at December 31, 2011. This included four private label mortgage-backed securities at June 30, 2012, with an amortized cost of $13.0 million and unrealized losses totaling $804,000. Three of these private label mortgage-backed securities

 

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were below investment grade at June 30, 2012. All securities with unrealized losses at June 30, 2012 were analyzed for other-than-temporary impairment. Based upon this analysis, no other-than-temporary impairment existed at June 30, 2012.

Securities Available for Sale

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

 

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

Agency obligations

   $ 99,414         512         —          99,926   

Mortgage-backed securities

     1,165,542         30,753         (1,246     1,195,049   

State and municipal obligations

     10,450         479         (1     10,928   

Corporate obligations

     3,006         29         —          3,035   

Equity securities

     307         17         —          324   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,278,719         31,790         (1,247     1,309,262   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Agency obligations

   $ 105,130         442         (14     105,558   

Mortgage-backed securities

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

State and municipal obligations

     11,066         553         (5     11,614   

Corporate obligations

     7,517         119         —          7,636   

Equity securities

     307         1         —          308   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of securities available for sale at June 30, 2012, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.

 

     June 30, 2012  
     Amortized
cost
     Fair
value
 

Due in one year or less

   $ 29,009         29,076   

Due after one year through five years

     83,022         83,905   

Due after five years through ten years

     839         908   

Mortgage-backed securities

     1,165,542         1,195,049   

Equity securities

     307         324   
  

 

 

    

 

 

 
   $ 1,278,719         1,309,262   
  

 

 

    

 

 

 

No securities were sold from the available for sale portfolio during the three months ended June 30, 2012, while proceeds from the sale of securities available for sale for the six months ended June 30, 2012 were $47,131,000, resulting in gross gains of $2,160,000 and no gross losses.

During the three and six months ended June 30, 2011, no securities were sold from the available for sale portfolio. However, for the three and six months ended June 30, 2011, the Company recognized gains of $14,000 and $0, respectively, related to calls on certain securities in the available for sale portfolio, with proceeds from the calls totaling $514,000 for the three and six months ended June 30, 2011.

The following table presents a roll-forward of the credit loss component of other-than-temporary impairment (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other

 

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comprehensive income. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows (in thousands):

 

     June 30,
2012
     June 30,
2011
 

Beginning credit loss amount

   $ 1,240         938   

Add: Initial OTTI credit losses

     —           —     

Subsequent OTTI credit losses

     —           302   

Less: Realized losses for securities sold

     —           —     

Securities intended or required to be sold

     —           —     

Increases in expected cash flows on debt securities

     —           —     
  

 

 

    

 

 

 

Ending credit loss amount

   $ 1,240         1,240   
  

 

 

    

 

 

 

The Company did not incur an other-than-temporary impairment charge on securities for the three and six months ended June 30, 2012. For the three and six months ended June 30, 2011, the Company recorded a net other-than-temporary impairment charge of $302,000.

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

 

     June 30, 2012 Unrealized Losses  
     Less than 12 months     12 months or longer     Total  
     Fair
Value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
 

Mortgage-backed securities

     81,996         (444     12,128         (802     94,124         (1,246

State and municipal obligations

     513         (1     —           —          513         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 82,509         (445     12,128         (802     94,637         (1,247
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2011 Unrealized Losses  
     Less than 12 months     12 months or longer     Total  
     Fair
Value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
 

Mortgage-backed securities

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

State and municipal obligations

     777         (5     —           —          777         (5

Agency notes

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The temporary loss position associated with debt securities is the result of changes in market interest rates relative to the coupon of the individual security and changes in credit spreads. In addition, there remains a lack of liquidity in certain sectors of the mortgage-backed securities market. Increases in delinquencies and foreclosures have resulted in limited trading activity and significant price declines, regardless of favorable movements in interest rates. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the market value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risk, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. For each private-label mortgage-backed security, the Company estimates loss projections by stressing the individual loans collateralizing the security and applying a range of expected default rates, loss severities, and prepayment speeds in conjunction with the underlying credit enhancement for each security. Based on specific assumptions about collateral and vintage, a range of possible cash flows was identified to determine whether other-than-temporary impairment existed during the three and six months ended June 30, 2012

 

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Table of Contents

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

Investment Securities Held to Maturity

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

 

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

Agency obligations

   $ 3,698         32         (1     3,729   

Mortgage-backed securities

     15,878         666         —          16,544   

State and municipal obligations

     335,143         15,554         (399     350,298   

Corporate obligations

     8,491         265         (2     8,754   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 363,210         16,517         (402     379,325   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Agency obligations

   $ 3,647         36         —          3,683   

Mortgage-backed securities

     22,321         859         —          23,180   

State and municipal obligations

     314,108         16,863         (69     330,902   

Corporate obligations

     8,242         296         (7     8,531   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. For the three and six months ended June 30, 2012, the Company recognized gains of $1,000 and $24,000, respectively, related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $1,249,000 and $3,956,000, respectively.

For the three and six months ended June 30, 2011, the Company recognized gains of $0 and $14,000, respectively, related to calls on certain securities in the held to maturity portfolio, with proceeds from the calls totaling $2,140,000 and $8,136,000 for the three and six months ended June 30, 2011, respectively.

The amortized cost and fair value of investment securities at June 30, 2012 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.

 

     June 30, 2012  
     Amortized
cost
     Fair
value
 

Due in one year or less

   $ 49,994         50,187   

Due after one year through five years

     83,794         86,763   

Due after five years through ten years

     88,075         94,277   

Due after ten years

     125,469         131,554   

Mortgage-backed securities

     15,878         16,544   
  

 

 

    

 

 

 
   $ 363,210         379,325   
  

 

 

    

 

 

 

 

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Table of Contents

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

 

     June 30, 2012 Unrealized Losses  
     Less than 12 months     12 months or longer      Total  
     Fair
Value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Agency obligations

   $ 499         (1     —           —           499         (1

State and municipal obligations

     27,309         (399     —           —           27,309         (399

Corporate obligations

     502         (2     —           —           502         (2
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,310         (402     —           —           28,310         (402
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011 Unrealized Losses  
     Less than 12 months     12 months or longer     Total  
     Fair
Value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
    Fair
value
     Gross
unrealized
losses
 

State and municipal obligations

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

Corporate obligations

     394         (7     —           —          394         (7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The temporary loss position associated with held to maturity securities portfolio is the result of changes in market interest rates relative to the coupon of the individual security and changes in credit spreads. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the market value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risks, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company would be required to sell the securities before the anticipated recovery.

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

 

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Table of Contents

Note 4. Loans Receivable and Allowance for Loan Losses

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

 

     June 30,
2012
    December 31,
2011
 

Mortgage loans:

    

Residential

   $ 1,307,578        1,308,635   

Commercial

     1,277,342        1,253,542   

Multi-family

     598,476        564,147   

Construction

     119,678        114,817   
  

 

 

   

 

 

 

Total mortgage loans

     3,303,074        3,241,141   

Commercial loans

     854,257        849,009   

Consumer loans

     576,291        560,970   
  

 

 

   

 

 

 

Total gross loans

     4,733,622        4,651,120   

Premiums on purchased loans

     5,571        5,823   

Unearned discounts

     (77     (100

Net deferred fees

     (3,986     (3,334
  

 

 

   

 

 

 
   $ 4,735,130        4,653,509   
  

 

 

   

 

 

 

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

 

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

Mortgage loans:

                    

Residential

   $ 14,885         4,504         34,207         53,596         1,253,982         1,307,578         —     

Commercial

     375         215         31,865         32,455         1,244,887         1,277,342         —     

Multi-family

     —           35         —           35         598,441         598,476         —     

Construction

     322         —           10,757         11,079         108,599         119,678         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     15,582         4,754         76,829         97,165         3,205,909         3,303,074         —     

Commercial loans

     1,037         1,428         31,489         33,954         820,303         854,257         —     

Consumer loans

     3,653         2,028         6,899         12,580         563,711         576,291         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 20,272         8,210         115,217         143,699         4,589,923         4,733,622         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

90 days
accruing
 

Mortgage loans:

                    

Residential

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

Commercial

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

Multi-family

     —           —           997         997         563,150         564,147         —     

Construction

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

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

Commercial loans

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

Consumer loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Within the loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $115.2 million and $122.5 million at June 30, 2012 and December 31, 2011, respectively. Included in non-accrual loans were $37.2 million and $45.6 million of loans which were less than 90 days past due at June 30, 2012 and December 31, 2011, respectively. There were no loans ninety days or greater past due and still accruing interest at June 30, 2012, or December 31, 2011.

The Company defines an impaired loan as a non-homogenous loan greater than $1.0 million for which it is probable, based on current information, all amounts due under the contractual terms of the loan agreement will not be collected. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a loan modification resulting in a concession is made in an effort to mitigate potential loss arising from a borrower’s financial difficulty. Smaller balance homogeneous loans, including residential mortgages and other consumer loans, are evaluated collectively for impairment and are excluded from the definition of impaired loans, unless modified as TDRs. The Company separately calculates the reserve for loan losses on impaired loans. The Company may recognize impairment of a loan based upon (1) the present value of expected cash flows discounted at the effective interest rate; or (2) if a loan is collateral dependent, the fair value of collateral; or (3) the market price of the loan. Additionally, if impaired loans have risk characteristics in common, those loans may be aggregated and historical statistics may be used as a means of measuring those impaired loans.

The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analyses of collateral dependent impaired loans. A third party appraisal is generally ordered as soon as a loan is designated as a collateral dependent impaired loan and is updated annually or more frequently, if required.

A specific allocation of the allowance for loan losses is established for each collateral dependent impaired loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. Charge-offs are generally taken for the amount of the specific allocation when operations associated with the respective property cease and it is determined that collection of amounts due will be derived primarily from the disposition of the collateral. At each fiscal quarter end, if a loan is designated as a collateral dependent impaired loan and the third party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value. The Company believes there have been no significant time lapses during the process described above.

At June 30, 2012, there were 92 impaired loans totaling $115.5 million, of which 71 loans totaling $80.0 million were TDRs. Included in this total were 65 TDRs to 56 borrowers totaling $77.3 million that were performing in accordance with their restructured terms and which continued to accrue interest at June 30, 2012. At December 31, 2011, there were 65 impaired loans totaling $103.2 million, of which 48 loans totaling $63.1 million were TDRs. Included in this total were 38 TDRs to 36 borrowers totaling $38.9 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2011.

 

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Table of Contents

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

 

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

Individually evaluated for impairment

   $ 77,720         36,843         954         115,517   

Collectively evaluated for impairment

     3,225,354         817,414         575,337         4,618,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,303,074         854,257         576,291         4,733,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Individually evaluated for impairment

   $ 76,275         26,974         —           103,249   

Collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents

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

 

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

Individually evaluated for impairment

   $ 4,237         4,292         49         8,578         —           8,578   

Collectively evaluated for impairment

     33,198         17,279         5,547         56,024         7,750         63,774   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Total

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

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

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

 

     Three Months Ended June 30, 2012  

Troubled Debt

Restructurings

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

Mortgage loans:

        

Residential

     8       $ 2,010         1,823   

Commercial

     —           —           —     

Multi-family

     —           —           —     

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     8         2,010         1,823   

Commercial loans

     3         3,846         3,846   

Consumer loans

     1         393         364   
  

 

 

    

 

 

    

 

 

 

Total restructured loans

     12       $ 6,249         6,033   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six Months Ended June 30, 2012  

Troubled Debt

Restructurings

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

Mortgage loans:

        

Residential

     15       $ 3,760         3,404   

Commercial

     —           —           —     

Multi-family

     —           —           —     

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     15         3,760         3,404   

Commercial loans

     6         14,107         13,940   

Consumer loans

     3         498         439   
  

 

 

    

 

 

    

 

 

 

Total restructured loans

     24       $ 18,365         17,783   
  

 

 

    

 

 

    

 

 

 

All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. Estimated collateral values of collateral dependent impaired loans modified during the three and six months ended June 30, 2012 exceeded the carrying amounts of such loans. As a result, there were no charge-offs recorded on collateral dependent impaired loans presented in the preceding tables for the three and six months ended June 30, 2012. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $1.4 million at June 30, 2012, and was included in the allowance for loan losses for loans individually evaluated for impairment.

The TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 4.52 percent, compared to a rate of 5.08 percent prior to modification for the three months ended June 30, 2012, and 5.11 percent, compared to a rate of 5.93 percent prior to modification for the six months ended June 30, 2012.

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

 

Troubled Debt    June 30, 2012  

Restructurings

Subsequently Defaulted

   Number of
Loans
     Outstanding
Recorded  Investment
 
            ($ in thousands)  

Mortgage loans:

     

Residential

     1       $ 903   

Commercial

     —           —     

Multi-family

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total mortgage loans

     1         903   

Commercial loans

     —           —     

Consumer loans

     —           —     
  

 

 

    

 

 

 

Total restructured loans

     1       $ 903   
  

 

 

    

 

 

 

TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs.

 

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Table of Contents

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

 

Three Months Ended June 30,

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

Balance at beginning of period

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

Provision charged to operations

     749        4,353        216        5,318        (1,818     3,500   

Recoveries of loans previously charged off

     78        499        385        962        —          962   

Loans charged off

     (1,075     (4,243     (788     (6,106     —          (6,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
2011             

Balance at beginning of period

   $ 37,798        24,843        6,557        69,198        3,490        72,688   

Provision charged to operations

     1,615        2,357        1,864        5,836        1,664        7,500   

Recoveries of loans previously charged off

     178        94        105        377        —          377   

Loans charged off

     (2,501     (3,594     (2,176     (8,271     —          (8,271
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30,

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

Balance at beginning of period

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

Provision charged to operations

     131        3,315        1,316        4,762        3,738        8,500   

Recoveries of loans previously charged off

     120        697        630        1,447        —          1,447   

Loans charged off

     (2,259     (7,822     (1,865     (11,946     —          (11,946
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
2011             

Balance at beginning of period

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

Provision charged to operations

     1,870        6,541        4,314        12,725        2,675        15,400   

Recoveries of loans previously charged off

     200        238        202        640        —          640   

Loans charged off

     (3,396     (5,289     (3,782     (12,467     (1     (12,468
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

    At June 30, 2012     At December 31, 2011  
    Unpaid
Principal
Balance
    Recorded
Investment
    Related
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized
    Unpaid
Principal
Balance
    Recorded
Investment
    Related
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized
 

Loans with no related allowance

                   

Mortgage loans:

                   

Residential

  $ 5,402        4,380        —          4,418        66        3,341        2,793        —          3,285        51   

Commercial

    17,660        16,715        —          16,725        82        8,432        7,521        —          7,915        146   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    11,410        10,757        —          10,870        —          11,410        11,018        —          11,254        258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    34,472        31,852        —          32,013        148        23,183        21,332        —          22,454        455   

Commercial loans

    10,257        6,812        —          7,595        —          4,982        4,651        —          6,222        259   

Consumer loans

    43        22        —          47        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    44,772        38,686        —          39,655        148        28,165        25,983        —          28,676        714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans with an allowance recorded

                   

Mortgage loans:

                   

Residential

  $ 9,335        8,639        1,207        8,382        152        7,681        7,442        1,056        7,644        187   

Commercial

    37,678        37,229        3,017        37,418        494        47,531        47,501        4,304        48,102        1,067   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    47,013        45,868        4,224        45,800        646        55,212        54,943        5,360        55,746        1,254   

Commercial loans

    31,042        30,031        4,305        30,712        362        26,504        22,323        3,966        23,637        37   

Consumer loans

    970        932        49        973        15        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 79,025        76,831        8,578        77,485        1,023        81,716        77,266        9,326        79,383        1,291   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

                   

Mortgage loans:

                   

Residential

  $ 14,737        13,019        1,207        12,800        218        11,022        10,235        1,056        10,929        238   

Commercial

    55,338        53,944        3,017        54,143        576        55,963        55,022        4,304        56,017        1,213   

Multi-family

    —          —          —          —          —          —          —          —          —          —     

Construction

    11,410        10,757        —          10,870        —          11,410        11,018        —          11,254        258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    81,485        77,720        4,224        77,813        794        78,395        76,275        5,360        78,200        1,709   

Commercial loans

    41,299        36,843        4,305        38,307        362        31,486        26,974        3,966        29,859        296   

Consumer loans

    1,013        954        49        1,020        15        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 123,797        115,517        8,578        117,140        1,171        109,881        103,249        9,326        108,059        2,005   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $8,578,000 and $9,326,000 at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012 and December 31, 2011, impaired loans for which there was no related allowance for loan losses totaled $38,686,000 and $25,983,000, respectively. The average balances of impaired loans during the six months ended June 30, 2012 was $117,140,000.

The Company utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar characteristics. Loans deemed to be “acceptable quality” (pass) are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by Credit Administration. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party. Reports concerning periodic loan review examinations by the independent third party are presented directly to both the Audit and Risk Committees of the Board of Directors.

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

 

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

Special mention

   $ 4,503         13,740         8,356         7,929         34,528         15,407         2,081         52,016   

Substandard

     34,207         86,335         9,068         17,388         146,998         58,509         6,909         212,416   

Doubtful

     —           —           —           —           —           694         —           694   

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified and criticized

     38,710         100,075         17,424         25,317         181,526         74,610         8,990         265,126   

Pass/Watch

     1,268,868         1,177,267         581,052         94,361         3,121,548         779,647         567,301         4,468,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding loans

   $ 1,307,578         1,277,342         598,476         119,678         3,303,074         854,257         576,291         4,733,622   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Special mention

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

Substandard

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

Doubtful

     —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified and criticized

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

Pass/Watch

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Deposits

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

 

     June 30,
2012
     December 31,
2011
 

Savings

   $ 921,571       $ 891,742   

Money market

     1,288,325         1,319,392   

NOW

     1,233,984         1,120,985   

Non-interest bearing

     729,040         695,752   

Certificates of deposit

     1,033,093         1,128,726   
  

 

 

    

 

 

 
   $ 5,206,013       $ 5,156,597   
  

 

 

    

 

 

 

 

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Note 6. Components of Net Periodic Benefit Cost

The Bank has a noncontributory defined benefit pension plan (the “Plan”) covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003. The Plan was frozen on April 1, 2003. All participants in the Plan are 100% vested. The Plan’s assets are invested in investment funds and group annuity contracts currently managed by the Principal Financial Group and Allmerica Financial.

In addition to pension benefits, certain health care and life insurance benefits are currently made available to certain of the Bank’s retired employees. The costs of such benefits are accrued based on actuarial assumptions from the date of hire to the date the employee became fully eligible to receive the benefits. Effective January 1, 2003, eligibility for retiree health care benefits was frozen to new entrants and benefits were eliminated for employees with less than ten years of service as of December 31, 2002. Effective January 1, 2007, eligibility for retiree life insurance benefits was frozen to new entrants and retiree life insurance benefits were eliminated for employees with less than ten years of service as of December 31, 2006.

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

 

     Three months ended June 30,     Six months ended June 30,  
     Pension
benefits
    Other post-
retirement

benefits
    Pension
benefits
    Other post-
retirement
benefits
 
     2012     2011     2012     2011     2012     2011     2012     2011  

Service cost

   $ —          —          63        46      $ —          —          126        86   

Interest cost

     322        313        261        256        644        626        522        509   

Expected return on plan assets

     (645     (561     —          —          (1,290     (1,122     —          —     

Amortization of prior service cost

     —          —          (1     (1     —          —          (2     (2

Amortization of the net loss (gain)

     357        180        3        (116     714        360        6        (222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (increase)

   $ 34        (68     326        185      $ 68        (136     652        371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Note 7. Impact of Recent Accounting Pronouncements

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

 

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Table of Contents

with early adoption permitted, and must be applied retrospectively. The Company presented comprehensive income in a separate consolidated statement of comprehensive income for the three and six months ended June 30, 2012 and 2011.

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

In April 2011, the FASB issued guidance to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to this guidance remove from the assessment of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by this new guidance. Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met: (1) the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred; (2) the agreement is to repurchase or redeem them before maturity, at a fixed or determinable price; and (3) the agreement is entered into contemporaneously with, or in contemplation of, the transfer. This guidance became effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption was not permitted. The adoption of this guidance did not have a material effect on the Company’s consolidated statement of condition or results of operations.

Note 8. Fair Value Measurements

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, the Company utilizes various valuation techniques to estimate fair value.

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the financial instrument.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:

 

Level 1:

   Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2:

   Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3:

   Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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Table of Contents

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.

Assets Measured at Fair Value on a Recurring Basis

The valuation techniques described below were used to measure fair value of financial instruments in the table below on a recurring basis as of June 30, 2012 and December 31, 2011.

Securities Available for Sale

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

Assets Measured at Fair Value on a Non-Recurring Basis

The valuation techniques described below were used to estimate fair value of financial instruments measured on a non-recurring basis as of June 30, 2012 and December 31, 2011.

For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell of up to 6%. The Company classifies these loans as Level 3 within the fair value hierarchy.

Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated costs to sell of up to 6%. Fair value is generally based on independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraisers’ market knowledge and experience, and are classified as Level 3. When an asset is acquired, the excess of the loan balance over fair value, less estimated costs to sell, is charged to the allowance for loan losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure.

 

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Table of Contents

Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.

There were no changes to the valuation techniques for fair value measurements as of June 30, 2012 and December 31, 2011.

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

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    June 30,
2012
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Measured on a recurring basis:

           

Securities available for sale:

           

Agency obligations

   $ 99,926         99,926         —           —     

Mortgage-backed securities

     1,195,049         —           1,195,049         —     

State and municipal obligations

     10,928         —           10,928         —     

Corporate obligations

     3,035         —           3,035         —     

Equity securities

     324         324         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,309,262         100,250         1,209,012         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

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

   $ 37,645         —           —           37,645   

Foreclosed assets

     13,925         —           —           13,925   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,570         —           —           51,570   
  

 

 

    

 

 

    

 

 

    

 

 

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