PROVIDENT FINANCIAL SERVICES, INC. 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 theU.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, the COVID-19 pandemic 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 COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated, and the extent to which the economy can remain open. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, we 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 theFederal 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 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. Acquisition SB One Bancorp Acquisition Effective as of the close of business onJuly 31, 2020 , the Company completed its previously announced acquisition of SB One Bancorp ("SB One"), which was merged with and into the Company. In connection with the acquisition,SB One Bank , a wholly owned subsidiary of SB One, was merged with and intoProvident Bank , a wholly owned subsidiary of the Company. AtJuly 31, 2020 , SB One had, on a consolidated basis, approximately$2.22 billion in total assets, which included$1.78 billion in total loans and$1.75 billion in total deposits, and operated 18 full-service banking offices inNew Jersey andNew York . Under the merger agreement, each share of SB One common stock will be exchanged for 1.357 shares, or approximately 12.8 million shares, of the Company's common stock plus cash in lieu of fractional shares. Consideration paid in the acquisition of SB One was approximately$180.8 million . Merger-related expenses, which are recorded in other operating expenses on the Consolidated Statements of Income, totaled$683,000 and$1.1 million for the three and six months endedJune 30, 2020 , respectively, and primarily consist of professional and legal expenses. 41 -------------------------------------------------------------------------------- Acquisition ofTirschwell & Loewy, Inc. OnApril 1, 2019 ,Beacon Trust Company ("Beacon") completed its acquisition of certain assets ofTirschwell & Loewy, Inc. ("T&L"), aNew York City -based independent registered investment adviser. Beacon is a wholly owned subsidiary ofProvident Bank . This acquisition expanded the Company's wealth management business by$822.4 million of assets under management at the time of acquisition. The acquisition was accounted for under the acquisition method of accounting. The Company recorded goodwill of$8.2 million , a customer relationship intangible of$12.6 million and$800,000 of other identifiable intangibles related to the acquisition. In addition, the Company recorded a contingent consideration liability at its fair value of$6.6 million . The contingent consideration arrangement requires the Company to pay additional cash consideration to T&L's former stakeholders over a three-year period after the closing date of the acquisition if certain financial and business retention targets are met. The acquisition agreement limits the total additional payment to a maximum of$11.0 million , to be determined based on actual future results. Total cost of the acquisition was$21.6 million , which included cash consideration of$15.0 million and contingent consideration with a fair value of$6.6 million . Tangible assets acquired in the transaction were nominal. No liabilities were assumed in the acquisition. The goodwill recorded in the transaction is deductible for tax purposes. In the fourth quarter of 2019, the Company recognized a$2.8 million increase in the estimated fair value of the contingent consideration liability. While performance of the acquired business has been adversely impacted for both the three and six months endedJune 30, 2020 due to worsening economic conditions and declining asset valuations attributable to the COVID-19 pandemic, asset valuations improved in the second quarter of 2020 and management has not identified a reduction in assets under management due to a declining customer base. As a result, the$9.4 million fair value of the contingent liability was unchanged atJune 30, 2020 , fromDecember 31, 2019 , with maximum potential future payments totaling$11.0 million . 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 OnJanuary 1, 2020 , the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which replaces the incurred loss methodology with an expected loss methodology that is referred to as 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 calculation of the allowance for credit losses is a critical accounting policy of the Company. CECL requires the use of projected macroeconomic factors. The Company's current forecast period is six quarters, with a four quarter reversion period to macroeconomic variables' means. The Company's economic forecast is approved by the Company's Asset-Liability Committee. 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 is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses. Management performs a quarterly evaluation of the adequacy of the allowance for credit losses. The analysis of the allowance for credit losses has two elements: loans collectively evaluated for impairment and loans individually evaluated for impairment. As part of its evaluation of the adequacy of the allowance for credit losses, each quarter Management prepares an analysis that segments the entire loan portfolio by loan type into groups of loans that share common attributes and risk characteristics. The allowance for credit losses collectively evaluated for impairment consists of a quantitative loss factor and a qualitative adjustment component. Management estimates the quantitative component by segmenting the loan portfolio and employing a discounted cash flow ("DCF") model framework to estimate the allowance for credit losses on the loan portfolio. The CECL estimate incorporates life-of-loan aspects through this DCF approach. For each segment, this approach compares each loan's 42 -------------------------------------------------------------------------------- amortized cost to the present value of its contractual cash flows adjusted for projected credit losses, prepayments and curtailments to determine the appropriate reserve for that loan. Quantitative loss factors will be evaluated at least annually. Management completed its initial development and evaluation of its quantitative loss factors atJanuary 1, 2020 . Qualitative adjustments give consideration to other qualitative factors such as trends in industry conditions, effects of changes in credit concentrations, changes in the Company's loan review process, changes in the Company's loan policies and procedures, economic forecast uncertainty and model imprecision. Qualitative adjustments reflect risks in the loan portfolio not captured by the quantitative loss factors. Qualitative adjustments are recalibrated at least annually and evaluated quarterly. The reserves resulting from the application of both of these sets of loss factors are combined to arrive at the allowance for credit losses on loans collectively evaluated for impairment. 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 review process. This process includes the review of delinquent and problem loans at the Company's Delinquency, Credit, Credit Risk Management and Allowance Committees. 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 troubled debt restructuring. 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. 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. Accordingly, the Company has provided for current expected credit losses at the current expected level to address the current risk in its loan portfolio. 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 the COVID-19 pandemic, 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 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 atJune 30, 2020 orDecember 31, 2019 . COMPARISON OF FINANCIAL CONDITION ATJUNE 30, 2020 ANDDECEMBER 31, 2019 Total assets atJune 30, 2020 were$10.51 billion , a$705.0 million increase fromDecember 31, 2019 . The increase in total assets was primarily due to a$433.5 million increase in total loans inclusive of commercial loans made under the Paycheck Protection Program ("PPP"), a$267.0 million increase in cash and cash equivalents and a$73.0 million increase in other assets, partially offset by a$42.1 million decrease in total investments. The Company's loan portfolio increased$433.5 million to$7.77 billion atJune 30, 2020 , from$7.33 billion atDecember 31, 2019 . For the six months endedJune 30, 2020 , loan originations, including advances on lines of credit, totaled$1.75 billion , compared with$1.35 billion for the same period in 2019. During the six months endedJune 30, 2020 , the loan portfolio had net increases of$421.5 million in commercial loans,$98.0 million in commercial mortgage loans,$50.0 million in multi-family mortgage loans and$47.7 million in residential mortgage loans, partially offset by net decreases of$144.8 million in construction loans and$29.7 million in consumer loans. AtJune 30, 2020 , the commercial loan portfolio included$400.3 43 -------------------------------------------------------------------------------- million of PPP loans. Commercial real estate, commercial and construction loans represented 80.9% of the loan portfolio atJune 30, 2020 , compared to 80.0% atDecember 31, 2019 . 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$218.7 million and$120.3 million , respectively, atJune 30, 2020 , compared to$213.2 million and$105.3 million , respectively, atDecember 31, 2019 . One SNC relationship consisting of three loans was 90 days or more delinquent atJune 30, 2020 . The Company had outstanding junior lien mortgages totaling$136.1 million atJune 30, 2020 . Of this total, 11 loans totaling$656,000 were 90 days or more delinquent. These loans were allocated a total loss reserve of$21,000 . The following table sets forth information regarding the Company's non-performing assets as ofJune 30, 2020 andDecember 31, 2019 (in thousands): June 30, 2020 December 31, 2019 Mortgage loans: Residential$ 6,806 8,543 Commercial 5,048 5,270 Total mortgage loans 11,854 13,813 Commercial loans 22,419 25,160 Consumer loans 1,194 1,221 Total non-performing loans 35,467 40,194 Foreclosed assets 3,272 2,715 Total non-performing assets$ 38,739 42,909
The following table sets forth information regarding the Company's 60-89 day
delinquent loans as of
June 30, 2020 December 31, 2019
Mortgage loans:
Residential $ 4,670 2,579
Total mortgage loans 4,670 2,579
Commercial loans 19 95
Consumer loans 590 337
Total 60-89 day delinquent loans $ 5,279 3,011
At June 30, 2020 , the allowance for loan losses totaled $86.3 million ,
representing 1.11% of total loans, or 1.17% of total loans excluding PPP,
compared to $55.5 million , or 0.76% of total loans, prior to the adoption of
CECL at December 31, 2019 . Total non-performing loans were $35.5 million , or
0.46% of total loans at June 30, 2020 , compared to $40.2 million , or 0.55% of
total loans at December 31, 2019 . The $4.7 million decrease in non-performing
loans consisted of a $2.7 million decrease in non-performing commercial loans, a
$1.7 million decrease in non-performing residential mortgage loans, a $222,000
decrease in non-performing commercial mortgage loans and a $27,000 decrease in
non-performing consumer loans. Non-performing loans do not include $750,000 of
purchased credit deteriorated ("PCD") loans acquired from Team Capital Bank in
2014.
At June 30, 2020 and December 31, 2019 , the Company held foreclosed assets of
$3.3 million and $2.7 million , respectively. During the six months ended June
30, 2020 , there were three additions to foreclosed assets with a carrying value
of $2.5 million and six properties sold with a carrying value of $1.4 million
and valuation charges of $548,000 . Foreclosed assets at June 30, 2020 consisted
of $1.7 million of commercial vehicles, $1.1 million of residential real estate
and $449,000 of commercial real estate.
Non-performing assets totaled $38.7 million , or 0.37% of total assets at
June 30, 2020 , compared to $42.9 million , or 0.44% of total assets at
December 31, 2019 .
Cash and cash equivalents were $453.8 million at June 30, 2020 , a $267.0 million
increase from December 31, 2019 primarily as a result of increases in cash
collateral pledged to counterparties to secure loan-level swaps and short-term
investments.
Total investments were $1.45 billion at June 30, 2020 , a $42.1 million decrease
from December 31, 2019 . This decrease was largely due to repayments of
mortgage-backed securities, maturities and calls of certain municipal and agency
bonds, partially
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offset by purchases of mortgage-backed and municipal securities and an increase
in unrealized gains on available for sale debt securities.
Total deposits increased $557.5 million during the six months ended June 30,
2020 to $7.66 billion . Total core deposits, consisting of savings and demand
deposit accounts, increased $680.0 million to $7.05 billion at June 30, 2020 ,
while total time deposits decreased $122.6 million to $611.5 million at June 30,
2020 . The increase in core deposits was largely attributable to a $388.1 million
increase in non-interest bearing demand deposits, which benefited from deposits
associated with PPP loans and stimulus funding, a $130.3 million increase in
interest bearing demand deposits, a $94.5 million increase in money market
deposits and a $67.1 million increase in savings deposits. The decrease in time
deposits was primarily the result of a $73.7 million decrease in retail time
deposits and a $48.9 million decrease in brokered deposits. Core deposits
represented 92.0% of total deposits at June 30, 2020 , compared to 89.7% at
December 31, 2019 .
Borrowed funds increased $50.1 million during the six months ended June 30,
2020 , to $1.18 billion . The increase in borrowings for the period was driven by
asset funding requirements. Borrowed funds represented 11.2% of total assets at
June 30, 2020 , a decrease from 11.5% at December 31, 2019 .
Stockholders' equity decreased $3.4 million during the six months ended June 30,
2020 , to $1.41 billion , primarily due to dividends paid to stockholders, the
adoption of CECL on January 1, 2020 and the related charge to equity of $8.3
million , net of tax, to establish initial allowances against credit losses and
off-balance sheet credit exposures under the new accounting standard and common
stock repurchases, partially offset by net income earned for the period and an
increase in unrealized gains on available for sale debt securities. For the six
months ended June 30, 2020 , common stock repurchases totaled 385,794 shares at
an average cost of $18.79 , of which 48,416 shares, at an average cost of $19.84 ,
were made in connection with withholding to cover income taxes on the vesting of
stock-based compensation. At June 30, 2020 , 1.2 million shares remained eligible
for repurchase under the current stock repurchase authorization.
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 generally
fairly predictable sources of funds. Changes in interest rates, local economic
conditions and the competitive marketplace can influence the repayment of loan
principal, loan prepayments, prepayments on mortgage-backed securities and
deposit flows.
In response to the COVID-19 pandemic, the Company has escalated the monitoring
of deposit behavior, utilization of credit lines, and borrowing capacity with
the FHLBNY and FRBNY, and is enhancing its collateral position with these
funding sources.
The Federal Deposit Insurance Corporation 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%, 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.
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At
June 30, 2020
Required with Capital
Required Conservation Buffer Actual
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Bank:(1)
Tier 1 leverage capital $ 387,427 4.00 % $ 387,427 4.00 % $ 888,239 9.17 %
Common equity Tier 1 risk-based
capital 376,693 4.50 585,967 7.00 888,239 10.61
Tier 1 risk-based capital 502,258 6.00 711,532 8.50 888,239 10.61
Total risk-based capital 669,677 8.00 878,951 10.50 993,592 11.87
Company:
Tier 1 leverage capital $ 387,470 4.00 % $ 387,470 4.00 % $ 970,600 10.02 %
Common equity Tier 1 risk-based
capital 378,821 4.50 589,277 7.00 970,600 11.53
Tier 1 risk-based capital 505,094 6.00 715,550 8.50 970,600 11.53
Total risk-based capital 673,459 8.00 883,915 10.50 1,045,661 12.42
(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, 2020
AND 2019
General. The Company reported net income of $14.3 million , or $0.22 per basic
and diluted share for the three months ended June 30, 2020 , compared to net
income of $24.4 million , or $0.38 per basic and diluted share for the three
months ended June 30, 2019 . For the six months ended June 30, 2020 , the Company
reported net income of $29.2 million , or $0.45 per basic and diluted share,
compared to net income of $55.3 million , or $0.85 per basic and diluted share,
for the same period last year.
The Company's earnings for the three and six months ended June 30, 2020 were
adversely impacted by elevated provisions for credit losses primarily related to
the current weak economic forecast attributable to the COVID-19 pandemic,
combined with the January 1, 2020 adoption of CECL, which requires the current
recognition of allowances for losses expected to be incurred over the life of
covered assets. For the three and six months ended June 30, 2020 , provisions for
credit losses and off-balance sheet credit exposures totaled $16.2 million and
$31.9 million , respectively. The Company's earnings were further impacted by
expenses related to the Company's acquisition of SB One Bancorp of $683,000 and
$1.1 million , for the three and six months ended June 30, 2020 , respectively,
and by COVID-19 related costs which totaled $1.0 million for both the three and
six months ended June 30, 2020 .
Net Interest Income. Total net interest income decreased $6.7 million to $69.8
million for the quarter ended June 30, 2020 , from $76.6 million for the quarter
ended June 30, 2019 . For the six months ended June 30, 2020 , total net interest
income decreased $9.7 million to $141.8 million , from $151.6 million for the
same period in 2019. Interest income for the quarter ended June 30, 2020
decreased $14.1 million to $81.5 million , from $95.6 million for the same period
in 2019. For the six months ended June 30, 2020 , interest income decreased $18.4
million to $169.7 million , from $188.1 million for the six months ended June 30,
2019 . Interest expense decreased $7.4 million to $11.7 million for the quarter
ended June 30, 2020 , from $19.1 million for the quarter ended June 30, 2019 . For
the six months ended June 30, 2020 , interest expense decreased $8.6 million to
$27.9 million , from $36.5 million for the six months ended June 30, 2019 . The
decline in net interest income for the three and six months ended June 30, 2020 ,
compared with the three and six months ended June 30, 2019 , was primarily due to
period-over-period compression in the net interest margin as the decrease in the
yield on interest-earning assets outpaced the decline in the Company's cost of
interest-bearing liabilities. This decline was tempered by growth in both
average loans outstanding and lower-costing average interest-bearing and
non-interest bearing core deposits. Net interest income included $1.9 million in
interest and fees on PPP loans at an average rate of 2.38% and 2.34% for the
three and six months ended June 30, 2020 , respectively. Excluding the impact of
PPP loans from both net interest income and average interest-earning assets
would result in an increase in the net interest margin of two basis points and
one basis point for the three and six months ended June 30, 2020 , respectively.
For the three and six months ended June 30, 2019 , the Company recognized the
acceleration of accretion of $2.2 million in interest income upon the prepayment
of loans which had been non-accruing. For the three and six months ended
46
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June 30, 2019 , the recognition of this interest income resulted in a 10 and 5
basis point increase in the net interest margin, respectively.
The net interest margin decreased 45 basis points to 2.97% for the quarter ended
June 30, 2020 , compared to 3.42% for the quarter ended June 30, 2019 . The
weighted average yield on interest-earning assets decreased 81 basis points to
3.47% for the quarter ended June 30, 2020 , compared with 4.28% for the quarter
ended June 30, 2019 , while the weighted average cost of interest bearing
liabilities decreased 44 basis points to 0.68% for the quarter ended June 30,
2020 , compared to the second quarter of 2019. The average cost of interest
bearing deposits for the quarter ended June 30, 2020 was 0.54%, compared with
0.86% for the same period last year. Average non-interest bearing demand
deposits totaled $1.85 billion for the quarter ended June 30, 2020 , compared to
$1.46 billion at June 30, 2019 . The average cost of all deposits, including
non-interest bearing deposits, was 41 basis points for the quarter ended
June 30, 2020 , compared with 68 basis points for the quarter ended June 30,
2019 . The average cost of borrowed funds for the quarter ended June 30, 2020 was
1.31%, compared to 2.18% for the same period last year.
For the six months ended June 30, 2020 , the net interest margin decreased 32
basis points to 3.09%, compared to 3.41% for the six months ended June 30, 2019 .
The weighted average yield on interest earning assets declined 54 basis points
to 3.70% for the six months ended June 30, 2020 , compared to 4.24% for the six
months ended June 30, 2019 , while the weighted average cost of interest bearing
liabilities decreased 27 basis points for the six months ended June 30, 2020 to
0.81%, compared to the six months ended June 30, 2019 . The average cost of
interest bearing deposits for the six months ended June 30, 2020 was 0.66%,
compared to 0.82% for the same period last year. Average non-interest bearing
demand deposits totaled $1.67 billion for the six months ended June 30, 2020 ,
compared with $1.45 billion for the six months ended June 30, 2019 . The average
cost of all deposits, including non-interest bearing deposits, was 51 basis
points for the six months ended June 30, 2020 , compared with 65 basis points for
the six months ended June 30, 2019 . The average cost of borrowings for the six
months ended June 30, 2020 was 1.55%, compared with 2.12% for the same period
last year.
Interest income on loans secured by real estate decreased $6.3 million to $49.3
million for the three months ended June 30, 2020 , from $55.6 million for the
three months ended June 30, 2019 . Commercial loan interest income decreased $4.2
million to $18.9 million for the three months ended June 30, 2020 , from $23.2
million for the three months ended June 30, 2019 . Consumer loan interest income
decreased $1.2 million to $3.5 million for the three months ended June 30, 2020 ,
from $4.8 million for the three months ended June 30, 2019 . For the three months
ended June 30, 2020 , the average balance of total loans increased $415.1 million
to $7.59 billion , compared to the same period in 2019. The average yield on
total loans for the three months ended June 30, 2020 decreased 87 basis points
to 3.76%, from 4.63% for the same period in 2019.
Interest income on loans secured by real estate decreased $6.9 million to $103.7
million for the six months ended June 30, 2020 , from $110.6 million for the six
months ended June 30, 2019 . Commercial loan interest income decreased $6.1
million to $37.6 million for the six months ended June 30, 2020 , from $43.7
million for the six months ended June 30, 2019 . Consumer loan interest income
decreased $1.8 million to $7.7 million for the six months ended June 30, 2020 ,
from $9.6 million for the six months ended June 30, 2019 . For the six months
ended June 30, 2020 , the average balance of total loans increased $269.6 million
to $7.42 billion , from $7.15 billion for the same period in 2019. The average
yield on total loans for the six months ended June 30, 2020 decreased 58 basis
points to 3.99%, from 4.57% for the same period in 2019.
Interest income on held to maturity debt securities decreased $286,000 to $2.9
million for the quarter ended June 30, 2020 , compared to the same period last
year. Average held to maturity debt securities decreased $29.9 million to $444.3
million for the quarter ended June 30, 2020 , from $474.2 million for the same
period last year. Interest income on held to maturity debt securities decreased
$508,000 to $5.8 million for the six months ended June 30, 2020 , compared to the
same period in 2019. Average held to maturity debt securities decreased $27.3
million to $446.7 million for the six months ended June 30, 2020 , from $474.0
million for the same period last year.
Interest income on available for sale debt securities and FHLBNY stock decreased
$2.0 million to $6.3 million for the quarter ended June 30, 2020 , from $8.3
million for the quarter ended June 30, 2019 . The average balance of available
for sale debt securities and FHLBNY stock decreased $131.1 million to $1.03
billion for the three months ended June 30, 2020 , compared to the same period in
2019. Interest income on available for sale debt securities and FHLBNY stock
decreased $3.3 million to $13.3 million for the six months ended June 30, 2020 ,
from $16.7 million for the same period last year. The average balance of
available for sale debt securities and FHLBNY stock decreased $106.2 million to
$1.05 billion for the six months ended June 30, 2020 .
The average yield on total securities decreased to 2.21% for the three months
ended June 30, 2020 , compared with 2.80% for the same period in 2019. For the
six months ended June 30, 2020 , the average yield on total securities decreased
to 2.42%, compared with 2.84% for the same period in 2019.
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Interest expense on deposit accounts decreased $4.1 million to $7.6 million for
the quarter ended June 30, 2020 , compared with $11.7 million for the quarter
ended June 30, 2019 . For the six months ended June 30, 2020 , interest expense on
deposit accounts decreased $3.6 million to $18.6 million , from $22.2 million for
the same period last year. The average cost of interest bearing deposits
decreased to 0.54% for the second quarter of 2020 and 0.66% for the six months
ended June 30, 2020 , from 0.86% and 0.82% for the three and six months ended
June 30, 2019 , respectively. The average balance of interest bearing core
deposits for the quarter ended June 30, 2020 increased $405.2 million to $5.07
billion . For the six months ended June 30, 2020 , average interest bearing core
deposits increased $323.6 million , to $4.98 billion , from $4.66 billion for the
same period in 2019. Average time deposit account balances decreased $196.2
million , to $605.8 million for the quarter ended June 30, 2020 , from $802.0
million for the quarter ended June 30, 2019 . For the six months ended June 30,
2020 , average time deposit account balances decreased $101.3 million , to $688.5
million , from $789.8 million for the same period in 2019.
Interest expense on borrowed funds decreased $3.3 million to $4.1 million for
the quarter ended June 30, 2020 , from $7.4 million for the quarter ended
June 30, 2019 . For the six months ended June 30, 2020 , interest expense on
borrowed funds decreased $5.0 million to $9.3 million , from $14.3 million for
the six months ended June 30, 2019 . The average cost of borrowings decreased to
1.31% for the three months ended June 30, 2020 , from 2.18% for the three months
ended June 30, 2019 . The average cost of borrowings decreased to 1.55% for the
six months ended June 30, 2020 , from 2.12% for the same period last year.
Average borrowings decreased $110.5 million to $1.25 billion for the quarter
ended June 30, 2020 , from $1.36 billion for the quarter ended June 30, 2019 . For
the six months ended June 30, 2020 , average borrowings decreased $152.8 million
to $1.20 billion , compared to $1.36 billion for the six months ended June 30,
2019 .
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 adequacy of the allowance.
The Company recorded provisions for credit losses of $10.9 million and $25.6
million for the three and six months ended June 30, 2020 , respectively, compared
with provisions of $9.5 million and $9.7 million for the three and six months
ended June 30, 2019 , respectively. For the three and six months ended June 30,
2020 , the Company had net recoveries of $216,000 and net charge-offs of $2.8
million , respectively, compared to net charge-offs of $2.0 million and $2.5
million , respectively, for the same periods in 2019. At June 30, 2020 , the
Company's allowance for credit losses was $86.3 million , representing 1.11% of
total loans, or 1.17% of total loans excluding PPP, compared with $55.5 million ,
or 0.76% of total loans, prior to the adoption of CECL at December 31, 2019 . The
three and six months ended June 30, 2020 reflects management's best estimate of
projected losses over the life of loans in our portfolio in accordance with the
CECL approach, given the economic outlook and forecasts related to the COVID-19
pandemic, as well as the impact of unprecedented fiscal, monetary and regulatory
interventions. In addition, a gross allowance for credit losses of $7.9 million
and a related deferred tax asset were recorded against equity upon the January
1, 2020 adoption of CECL. 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 pandemic and its impact on the
economy 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 and reserve
requirements.
Non-Interest Income. Non-interest income totaled $14.4 million for the quarter
ended June 30, 2020 , a decrease of $1.5 million , compared to the same period in
2019. Fee income decreased $2.0 million to $4.9 million for the three months
ended June 30, 2020 , compared to the same period in 2019, largely due to a $1.1
million decrease in deposit related fees, a $262,000 decrease in non-deposit
investment fees and a $208,000 decrease in debit card revenue, partially offset
by a $173,000 increase in commercial loan prepayment fees. Overall fee income
for the quarter was adversely impacted by lower transaction volumes and reduced
business opportunities related to the COVID-19 outbreak and related mitigation
efforts. Wealth management income decreased $266,000 to $6.0 million for the
three months ended June 30, 2020 . This decrease in income was largely a function
of market declines in the value of assets under management and a decrease in
managed mutual fund fees. Partially offsetting these decreases, income from
Bank-owned life insurance ("BOLI") increased $574,000 to $1.9 million for the
three months ended June 30, 2020 , compared to the same period in 2019, primarily
due to an increase in benefit claims and higher equity valuations. Also, other
income increased $180,000 to $1.6 million for the three months ended June 30,
2020 , compared to the quarter ended June 30, 2019 , primarily due to a $387,000
increase in net gains on the sale of foreclosed real estate, partially offset by
a $206,000 decrease in net fees on loan-level interest rate swap transactions.
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For the six months ended June 30, 2020 , non-interest income totaled $31.4
million , an increase of $3.3 million , compared to the same period in 2019. Other
income increased $3.3 million to $5.0 million for the six months ended June 30,
2020 , compared to $1.7 million for the same period in 2019, due to a $2.8
million increase in net fees on loan-level interest rate swap transactions and a
$351,000 increase in net gains on the sale of foreclosed real estate. Wealth
management income increased $1.9 million to $12.2 million for the six months
ended June 30, 2020 , compared to the same period in 2019, primarily due to fees
earned on assets under management acquired in the April 1, 2019 Tirschwell &
Loewy ("T&L") acquisition, partially offset by a decrease in managed mutual fund
fees. Partially offsetting these increases, fee income decreased $1.5 million ,
primarily due to a $1.2 million decrease in deposit related fees, a $115,000
decrease in non-deposit investment fees and a $67,000 decrease in debit card
income, all largely due to the effects of COVID-19 and related mitigation
efforts, while BOLI income decreased $335,000 to $2.6 million for the six months
ended June 30, 2020 , compared to the same period in 2019, primarily due to a
decrease in equity valuations.
Non-Interest Expense. For the three months ended June 30, 2020 , non-interest
expense totaled $55.3 million , an increase of $5.6 million , compared to the
three months ended June 30, 2019 . For the three months ended June 30, 2020 ,
credit loss expense for off-balance sheet credit exposures under the CECL
standard accounted for $5.3 million of the $5.6 million increase, due to an
increase in loss factors associated with the current economic forecast, an
increase in the pipeline of loans approved awaiting closing and an increase in
availability on committed lines of credit due to below average utilization. Data
processing expense increased $619,000 to $5.0 million for the three months ended
June 30, 2020 , compared with the same period in 2019, primarily due to increases
in software subscription service expense and on-line banking costs. In addition,
FDIC insurance increased $340,000 due to increases in both the insurance
assessment rate and total assets subject to assessment, partially offset by the
receipt of the small bank assessment credit for the first quarter of 2020.
Compensation and benefits expense increased $210,000 to $29.2 million for the
three months ended June 30, 2020 , compared to $29.0 million for the same period
in 2019, largely due to an increase in salary expense related to annual merit
increases and COVID-19 supplemental pay for branch employees, partially offset
by a decrease in stock-based compensation and the deferral of salary expense
related to PPP loan originations. Partially offsetting these increases, other
operating expenses decreased $113,000 to $7.5 million for the three months ended
June 30, 2020 , compared to the same period in 2019, largely due to decreases in
business development and debit card expenses, partially offset by increases in
legal and consulting expenses, which included $683,000 related to the pending
acquisition of SB One Bancorp.
Non-interest expense totaled $109.4 million for the six months ended June 30,
2020 , an increase of $11.3 million , compared to $98.1 million for the six months
ended June 30, 2019 . For the six months ended June 30, 2020 , credit loss expense
for off-balance sheet credit exposures was $6.3 million related to the January
1, 2020 adoption of CECL, and the subsequent increase in loss factors due to the
current economic forecast, increase in the pipeline of loans approved awaiting
closing and an increase in availability on committed lines of credit due to
below average utilization. Compensation and benefits expense increased $3.0
million to $60.4 million for the six months ended June 30, 2020 , compared to
$57.4 million for the six months ended June 30, 2019 , primarily due to
additional compensation expense associated with the acquisition of T&L, an
increase in executive severance costs and COVID 19 supplemental pay for branch
employees, partially offset by the deferral of salary expense related to PPP
loan originations. Other operating expenses increased $1.9 million to $16.7
million for the six months ended June 30, 2020 , compared to the same period in
2019, largely due to an increase in professional service expenses related to the
SB One transaction and a market valuation adjustment on foreclosed real estate.
Data processing expense increased $1.1 million to $9.4 million for the six
months ended June 30, 2020 , compared to $8.3 million for the same period in
2019, principally due to increases in software subscription service expense and
on-line banking costs. Partially offsetting these increases, net occupancy
expense decreased $847,000 to $12.4 million for the six months ended June 30,
2020 , compared to the same period in 2019, due to reductions in snow removal and
depreciation expenses.
Income Tax Expense. For the three months ended June 30, 2020 , the Company's
income tax expense was $3.7 million with an effective tax rate of 20.6%,
compared with income tax expense of $8.8 million with an effective tax rate of
26.5%, for the three months ended June 30, 2019 . The decreases in tax expense
and the effective tax rate for the current quarter compared with the same period
last year were largely the result of a decrease in income derived from taxable
sources. In addition, the 2019 quarter was impacted by the publication of a
technical bulletin by the New Jersey Division of Taxation that specifies the
treatment of real estate investment trusts in connection with combined reporting
for New Jersey corporate business purposes.
For the six months ended June 30, 2020 , the Company's income tax expense was
$9.0 million with an effective tax rate of 23.5%, compared with $16.5 million
with an effective tax rate of 23.0% for the six months ended June 30, 2019 . The
decrease in tax expense for the six months ended June 30, 2020 was largely the
result of a decrease in income derived from taxable sources. The increase in the
effective tax rate for the current year compared to the same period last year
was attributable to a discrete item in the first quarter 2020 related to the
vesting of stock awards at a market value below the fair value used for expense
recognition.
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