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Provident Financial Services
PFS
#4126
Rank
$2.78 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$21.30
Share price
0.09%
Change (1 day)
36.54%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Provident Financial Services
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q3

Provident Financial Services - 10-Q quarterly report FY2020 Q3


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 9/30/2020
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 StreetJersey CityNew Jersey07302
(Address of Principal Executive Offices)
(City)(State)
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Symbol(s)
Name of each exchange on which registered
Common
PFS
New York Stock Exchange

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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  ý    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ý
As of November 6, 2020 there were 83,209,293 shares issued and 78,572,138 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 180,897 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.
1


PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page Number
PART I—FINANCIAL INFORMATION
1
Consolidated Statements of Financial Condition as of September 30, 2020 (unaudited) and December 31, 2019
3
Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)
6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)
8
10
2
45
3
55
4
56
PART II—OTHER INFORMATION
1
57
1A.
57
2
57
3
Defaults Upon Senior Securities
57
4
57
5
57
6
Exhibits
58
59



2

PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2020 (Unaudited) and December 31, 2019
(Dollars in Thousands)
 
September 30, 2020December 31, 2019
ASSETS
Cash and due from banks$382,014 $131,555 
Short-term investments128,124 55,193 
Total cash and cash equivalents510,138 186,748 
Available for sale debt securities, at fair value1,100,391 976,919 
Held to maturity debt securities, net (fair value of $467,693 at September 30, 2020 (unaudited) and $467,966 at December 31, 2019)
446,591 453,629 
Equity securities, at fair value869 825 
Federal Home Loan Bank stock69,975 57,298 
Loans9,756,809 7,332,885 
Less allowance for credit losses106,314 55,525 
Net loans9,650,495 7,277,360 
Foreclosed assets, net4,720 2,715 
Banking premises and equipment, net72,909 55,210 
Accrued interest receivable43,967 29,031 
Intangible assets467,128 437,019 
Bank-owned life insurance234,410 195,533 
Other assets269,729 136,291 
Total assets$12,871,322 $9,808,578 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits$7,104,322 $5,384,868 
Savings deposits1,310,231 983,714 
Certificates of deposit of $100,000 or more627,041 438,551 
Other time deposits517,647 295,476 
Total deposits9,559,241 7,102,609 
Mortgage escrow deposits27,510 26,804 
Borrowed funds1,413,029 1,125,146 
Subordinated debentures25,099 — 
Other liabilities244,874 140,179 
Total liabilities11,269,753 8,394,738 
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 78,481,159 shares outstanding at September 30, 2020 and 65,787,900 outstanding at December 31, 2019
832 832 
Additional paid-in capital960,863 1,007,303 
Retained earnings694,240 695,273 
Accumulated other comprehensive income 13,331 3,821 
Treasury stock(45,118)(268,504)
Unallocated common stock held by the Employee Stock Ownership Plan(22,579)(24,885)
Common stock acquired by deferred compensation plans(4,666)(3,833)
Deferred compensation plans4,666 3,833 
Total stockholders’ equity1,601,569 1,413,840 
Total liabilities and stockholders’ equity$12,871,322 $9,808,578 
See accompanying notes to unaudited consolidated financial statements.
3

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three and nine months ended September 30, 2020 and 2019 (Unaudited)
(Dollars in Thousands, except per share data)
 
Three months ended September 30,Nine months ended September 30,
2020201920202019
Interest income:
Real estate secured loans$58,897 $56,402 $162,635 $167,051 
Commercial loans20,622 20,104 58,238 63,788 
Consumer loans4,305 4,648 12,024 14,216 
Available for sale debt securities, equity securities and Federal Home Loan Bank stock6,321 7,918 19,669 24,584 
Held to maturity debt securities2,836 3,075 8,661 9,408 
Deposits, Federal funds sold and other short-term investments472 879 1,932 2,038 
Total interest income93,453 93,026 263,159 281,085 
Interest expense:
Deposits7,400 11,730 26,000 33,940 
Borrowed funds3,862 7,768 13,120 22,055 
Subordinated debt206 — 206 — 
Total interest expense11,468 19,498 39,326 55,995 
Net interest income81,985 73,528 223,833 225,090 
Provision for credit losses6,400 500 32,017 10,200 
Net interest income after provision for credit losses75,585 73,028 191,816 214,890 
Non-interest income:
Fees5,736 7,634 17,179 20,617 
Wealth management income6,847 6,084 19,075 16,406 
Insurance agency income1,711 — 1,711 — 
Bank-owned life insurance1,644 1,272 4,290 4,253 
Net gains on securities transactions— — 55 29 
Other income4,688 3,057 9,672 4,764 
Total non-interest income20,626 18,047 51,982 46,069 
Non-interest expense:
Compensation and employee benefits35,700 29,376 96,095 86,735 
Net occupancy expense6,993 6,413 19,362 19,629 
Data processing expense5,026 4,114 14,439 12,447 
FDIC insurance1,185 — 1,953 1,167 
Amortization of intangibles918 827 2,373 2,161 
Advertising and promotion expense773 1,098 2,774 3,059 
Credit loss (benefit) expense for off-balance sheet credit exposures(575)— 5,714 — 
Other operating expenses9,763 7,910 26,447 22,650 
Total non-interest expense59,783 49,738 169,157 147,848 
Income before income tax expense36,428 41,337 74,641 113,111 
Income tax expense9,285 9,938 18,257 26,429 
Net income$27,143 $31,399 $56,384 $86,682 
Basic earnings per share$0.37 $0.49 $0.84 $1.34 
Weighted average basic shares outstanding72,519,123 64,511,956 67,093,442 64,720,642 
Diluted earnings per share$0.37 $0.49 $0.84 $1.34 
Weighted average diluted shares outstanding72,604,298 64,632,285 67,173,876 64,852,983 

See accompanying notes to unaudited consolidated financial statements.
4

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2020 and 2019 (Unaudited)
(Dollars in Thousands)
 
Three months ended September 30,Nine months ended September 30,
2020201920202019
Net income$27,143 $31,399 $56,384 $86,682 
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale debt securities:
Net unrealized (losses) gains arising during the period(428)2,614 15,388 19,854 
Reclassification adjustment for gains included in net income— — — — 
Total(428)2,614 15,388 19,854 
Unrealized gains (losses) on derivatives 880 137 (6,117)(813)
Amortization related to post-retirement obligations85 35 239 57 
Total other comprehensive income 537 2,786 9,510 19,098 
Total comprehensive income$27,680 $34,185 $65,894 $105,780 

See accompanying notes to unaudited consolidated financial statements.

5

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three and nine months ended September 30, 2019 (Unaudited)
(Dollars in Thousands)
For the three months ended September 30, 2019
COMMON STOCKADDITIONAL PAID-IN CAPITALRETAINED EARNINGSACCUMULATED OTHER COMPREHENSIVE INCOMETREASURYSTOCKUNALLOCATED ESOP SHARESCOMMON STOCK ACQUIRED BY DEFERRED COMP PLANSDEFERRED COMPENSATION PLANSTOTAL STOCKHOLDERS’ EQUITY
Balance at June 30, 2019$832 $1,025,855 $666,415 $3,976 $(277,364)$(28,268)$(4,169)$4,169 $1,391,446 
Net income— — 31,399 — — — — — 31,399 
Other comprehensive income, net of tax— — 2,786 — — — — 2,786 
Cash dividends paid— — (15,274)— — — — — (15,274)
Distributions from DDFP— 38 — — — — 168 (168)38 
Purchases of treasury stock— — — — (15,817)— — — (15,817)
Purchase of employee restricted shares to fund statutory tax withholding— — — (32)— — — (32)
Shares issued dividend reinvestment plan— 116 — — 345 — — — 461 
Stock option exercises— — — — — — — — — 
Allocation of ESOP shares— 298 — — — 704 — — 1,002 
Allocation of Stock Award Plan ("SAP") shares— 1,778 — — — — — — 1,778 
Allocation of stock options— 46 — — — — — — 46 
Balance at September 30, 2019$832 $1,028,131 $682,540 $6,762 $(292,868)$(27,564)$(4,001)$4,001 $1,397,833 


For the nine months ended September 30, 2019
COMMONSTOCKADDITIONAL
PAID-IN CAPITAL		RETAINEDEARNINGSACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOMETREASURYSTOCKUNALLOCATED
ESOP SHARES		COMMON STOCK ACQUIRED BY DEFERRED COMP PLANSDEFERRED COMPENSATION PLANSTOTAL
STOCKHOLDERS’ EQUITY
Balance at December 31, 2018$832 $1,021,533 $651,099 $(12,336)$(272,470)$(29,678)$(4,504)$4,504 $1,358,980 
Net income— — 86,682 — — — — — 86,682 
Other comprehensive income, net of tax— — — 19,098 — — — — 19,098 
Cash dividends paid— — (59,591)— — — — — (59,591)
Effect of adopting Accounting Standards Update ("ASU") No. 2016-02
— — 4,350 — — — — — 4,350 
Distributions from DDFP— 123 — — — — 503 (503)123 
Purchases of treasury stock— — — — (19,867)— — — (19,867)
Purchase of employee restricted shares to fund statutory tax withholding— — — — (1,985)— — — (1,985)
Shares issued dividend reinvestment plan— 545 — — 1,219 — — — 1,764 
Stock option exercises— (96)— — 235 — — — 139 
Allocation of ESOP shares— 1,007 — — — 2,114 — — 3,121 
Allocation of SAP shares— 4,884 — — — — — — 4,884 
Allocation of stock options— 135 — — — — — — 135 
Balance at September 30, 2019$832 $1,028,131 $682,540 $6,762 $(292,868)$(27,564)$(4,001)$4,001 $1,397,833 
See accompanying notes to unaudited consolidated financial statements.





6


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three and nine months ended September 30, 2020 (Unaudited)
(Dollars in Thousands)

For the three months ended September 30, 2020
COMMON STOCKADDITIONAL PAID-IN CAPITALRETAINED EARNINGSACCUMULATED OTHER COMPREHENSIVE INCOMETREASURY STOCKUNALLOCATED ESOP SHARESCOMMON STOCK ACQUIRED BY DEFERRED COMP PLANSDEFERRED COMPENSATION PLANSTOTAL STOCKHOLDERS’ EQUITY
Balance at June 30, 2020832 1,009,978 685,509 12,794 (275,359)(23,347)(3,498)3,498 1,410,407 
Net income— — 27,143 — — — — — 27,143 
Other comprehensive income, net of tax— — — 537 — — — — 537 
Cash dividends paid— — (18,412)— — — — — (18,412)
Effect of adopting ASU No. 2016-13 ("CECL")
— — — — — — — — — 
Acquisition of deferred compensation plan— — — — — — (1,336)1,336 — 
Distributions from DDFP— 16 — — — — 168 (168)16 
Purchases of treasury stock— — — — (961)— — — (961)
Purchase of employee restricted shares to fund statutory tax withholding— — — — (13)— — — (13)
Shares issued dividend reinvestment plan— — — — — — — — — 
Stock option exercises— — — — — — — — — 
Allocation of ESOP shares— (163)— — — 768 — — 605 
Allocation of SAP shares— 1,371 — — — — — — 1,371 
Treasury shares issued due to acquisition— (50,387)— — 231,215 — — — 180,828 
Allocation of stock options— 48 — — — — — — 48 
Balance at September 30, 2020$832 $960,863 $694,240 $13,331 $(45,118)$(22,579)$(4,666)$4,666 $1,601,569 

For the nine months ended September 30, 2020
COMMONSTOCKADDITIONAL
PAID-IN
CAPITAL		RETAINED EARNINGSACCUMULATED
OTHER
COMPREHENSIVE
INCOME 		TREASURY
STOCK		UNALLOCATED
ESOP
SHARES		COMMON STOCK ACQUIRED BY DEFERRED COMP PLANSDEFERRED COMPENSATION PLANSTOTAL STOCKHOLDERS’ EQUITY
Balance at December 31, 2019$832 $1,007,303 $695,273 $3,821 $(268,504)$(24,885)$(3,833)$3,833 $1,413,840 
Net income— — 56,384 — — — — — 56,384 
Other comprehensive income, net of tax— — — 9,510 — — — — 9,510 
Cash dividends paid— — (49,106)— — — — — (49,106)
Effect of adopting ASU No. 2016-13 ("CECL")
— — (8,311)— — — — — (8,311)
Acquisition of director retirement plan— — — — — — (1,336)1,336 — 
Distributions from DDFP— 68 — — — — 503 (503)68 
Purchases of treasury stock— — — — (7,256)— — — (7,256)
Purchase of employee restricted shares to fund statutory tax withholding— — — — (974)— — — (974)
Shares issued dividend reinvestment plan— 50 — — 401 — — — 451 
Stock option exercises— — — — — — — — — 
Allocation of ESOP shares— (179)— — — 2,306 — — 2,127 
Allocation of SAP shares— 3,866 — — — — — — 3,866 
Treasury shares issued due to acquisition— (50,387)— — 231,215 — — — 180,828 
Allocation of stock options— 142 — — — — — — 142 
Balance at September 30, 2020$832 $960,863 $694,240 $13,331 $(45,118)$(22,579)$(4,666)$4,666 $1,601,569 
See accompanying notes to unaudited consolidated financial statements.
7

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine months ended September 30, 2020 and 2019 (Unaudited)
(Dollars in Thousands)
 
Nine months ended September 30,
20202019
Cash flows from operating activities:
Net income$56,384 $86,682 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangibles7,799 7,962 
Provision for credit losses on loans and securities32,017 10,200 
Provision for credit loss for off-balance sheet credit exposure5,714 — 
Deferred tax benefit(7,531)(112)
Amortization of operating lease right-of-use assets6,565 6,303 
Income on Bank-owned life insurance(4,290)(4,253)
Net amortization of premiums and discounts on securities6,881 5,619 
Accretion of net deferred loan fees(6,079)(3,872)
Amortization of premiums on purchased loans, net779 584 
Net increase in loans originated for sale(13,559)(14,414)
Proceeds from sales of loans originated for sale14,347 15,235 
Proceeds from sales and paydowns of foreclosed assets3,491 1,063 
ESOP expense2,127 3,121 
Allocation of stock award shares3,866 4,884 
Allocation of stock options142 135 
Net gain on sale of loans (788)(821)
Net gain on securities transactions(55)(29)
Net gain on sale of premises and equipment(806)— 
Net gain on sale of foreclosed assets(859)(182)
Decrease in accrued interest receivable 5,989 2,384 
Increase in other assets(145,561)(50,146)
Increase in other liabilities 78,047 38,291 
Net cash provided by operating activities44,620 108,634 
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of held to maturity debt securities49,422 30,789 
Purchases of held to maturity debt securities(31,686)(15,976)
Proceeds from sales of securities13,905 — 
Proceeds from maturities and paydowns of available for sale debt securities247,660 151,632 
Purchases of available for sale debt securities(137,879)(116,972)
Proceeds from redemption of Federal Home Loan Bank stock88,909 125,894 
Purchases of Federal Home Loan Bank stock(90,370)(125,802)
Cash received, net of cash consideration paid for acquisition 78,089 (15,022)
BOLI claim benefits received6,527 1,891 
Net increase in loans(668,612)(13,967)
Proceeds from sales of premises and equipment806 — 
Purchases of premises and equipment(6,977)(2,796)
Net cash (used in) provided by investing activities(450,206)19,671 
Cash flows from financing activities:
Net increase in deposits698,854 131,249 
Increase in mortgage escrow deposits706 404 
Cash dividends paid to stockholders(49,106)(59,591)
8

Nine months ended September 30,
20202019
Shares issued dividend reinvestment plan451 1,764 
Purchase of treasury stock(7,256)(19,867)
Purchase of employee restricted shares to fund statutory tax withholding(974)(1,985)
Stock options exercised— 139 
Proceeds from long-term borrowings1,810,999 1,009,000 
Payments on long-term borrowings(1,649,915)(891,955)
Net decrease in short-term borrowings(74,783)(179,264)
Net cash provided by (used in) financing activities728,976 (10,106)
Net increase in cash and cash equivalents323,390 118,199 
Cash and cash equivalents at beginning of period186,748 142,661 
Cash and cash equivalents at end of period$510,138 $260,860 
Cash paid during the period for:
Interest on deposits and borrowings$37,506 $55,474 
Income taxes$22,534 $21,137 
Non-cash investing activities:
Initial recognition of operating lease right-of-use assets$— $44,946 
Initial recognition of operating lease liabilities$— $46,050 
Transfer of loans receivable to foreclosed assets$2,516 $850 
Acquisitions:
Non-cash assets acquired at fair value:
Investment securities$255,242 — 
Loans, net1,752,529 — 
Bank-owned life insurance37,237 — 
Goodwill and other intangible assets32,404 21,562 
Bank premises and equipment16,620 — 
Other assets19,786 71 
Total non-cash assets acquired at fair value$2,113,818 $21,633 
Liabilities assumed
Deposits$1,757,777 $— 
Borrowings and subordinated debt226,656 — 
Other Liabilities26,648 — 
Total liabilities assumed$2,011,081 $— 
Common stock issued for acquisitions$180,828 $— 
See accompanying notes to unaudited consolidated financial statements.
9

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, 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 consolidated statements of financial condition and the consolidated statements of income for the periods presented. Actual results could differ from these estimates. The allowance for credit losses and the valuation of deferred tax assets are material estimates that are particularly susceptible to near-term change.
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. These interim financial statements include the assets and liabilities acquired from SB One on July 31, 2020, and include two months of results of operations related to the acquisition of SB One for the three and nine months ended September 30, 2020. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for all of 2020.
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, 2019 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 and nine months ended September 30, 2020 and 2019 (dollars in thousands, except per share amounts):
Three months ended September 30,
20202019
Net
Income		Weighted
Average
Common
Shares
Outstanding		Per
Share
Amount 		Net
Income		Weighted
Average
Common
Shares
Outstanding 		Per
Share
Amount
Net income$27,143 $31,399 
Basic earnings per share:
Income available to common stockholders$27,143 72,519,123 $0.37 $31,399 64,511,956 $0.49 
Dilutive shares85,175 120,329 
Diluted earnings per share:
Income available to common stockholders$27,143 72,604,298 $0.37 $31,399 64,632,285 $0.49 

10

Nine months ended September 30,
20202019
Net
Income		Weighted
Average
Common
Shares
Outstanding		Per
Share
Amount		Net
Income		Weighted
Average
Common Shares Outstanding		Per
Share
Amount
Net income$56,384 $86,682 
Basic earnings per share:
Income available to common stockholders$56,384 67,093,442 $0.84 $86,682 64,720,642 $1.34 
Dilutive shares80,434 132,341 
Diluted earnings per share:
Income available to common stockholders$56,384 67,173,876 $0.84 $86,682 64,852,983 $1.34 
Anti-dilutive stock options and awards at September 30, 2020 and 2019, totaling 1.1 million shares and 678,583 shares, respectively, were excluded from the earnings per share calculations.
C. Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,” which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company used the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period amounts continue to be reported with previously applicable GAAP. Further information regarding the impact of CECL can be found in Note 3 “Investment Securities”, Note 4 “Loans Receivable and Allowance for Credit Losses”, and Note 8 “Allowance for Credit Losses on Off-Balance Sheet Credit Exposures”.
Note 2. Business Combinations
SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans and $1.76 billion to total deposits, and added 18 full-service banking offices in New Jersey and New York. The Company expects to close three of the acquired banking offices in the fourth quarter of 2020. As part of the acquisition, the addition of SB One Insurance Agency allows the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outanding SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid for the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired totaled $22.4 million and was recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition from SB One, net of cash consideration paid (in thousands):

11

At July 31, 2020
Assets acquired:
Cash and cash equivalents, net$78,089 
Available for sale debt securities231,645 
Held to maturity debt securities12,381 
Federal Home Loan Bank stock11,216 
Loans1,766,115 
Allowance for credit losses on PCD loans(13,586)
Loans, net1,752,529 
Bank-owned life insurance37,237 
Banking premises and equipment16,620 
Accrued interest receivable8,947 
Goodwill22,439 
Other intangibles assets9,965 
Foreclosed assets, net2,441 
Other assets12,199 
Total assets acquired$2,195,708 
Liabilities assumed:
Deposits1,757,777 
Borrowed funds201,582 
Subordinated debentures25,074 
Other liabilities30,447 
Total liabilities assumed$2,014,880 
Net assets acquired$180,828 
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.
Fair Value Measurement of Assets Assumed and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the SB One acquisition were as follows:
Securities Available for Sale
The estimated fair values of the available for sale debt securities, primarily comprised of U.S. Government agency mortgage-backed securities and U.S. government agencies and municipal bonds carried on SB One's balance sheet was confirmed using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities and a fair value adjustment was not recorded on the investments.
Held to Maturity Debt Securities
The estimated fair values of the held to maturity debt securities, primarily comprised of municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value premium of $133,000 was recorded on the investments.
Loans
Loans acquired in the SB One acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from SB One were estimated using the discounted cash flow method based on the remaining maturity and repricing terms. Cash flows were adjusted for expected losses and prepayments. Projected cash
12

flows were then discounted to present value based on: the relative risk of the cash flows, taking into account the loan type, liquidity risk, the maturity of the loans, servicing costs, and a required return on capital; and monthly principal and interest cash flows were discounted to present value and summed to arrive at the calculated value of the loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $1.77 billion.  
For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into pools based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The loans were valued at the sub-pool level and were pooled at the summary level based on loan type. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these market rates was used as the fair value interest rate that a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $10.6 million.
Loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics.
Additionally for PCD loans, an allowance for credit losses was calculated using management's best estimate of projected losses over the remaining life of the loans in accordance with ASC 326-20. This represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective PCD loan pool, given the outlook and forecasts inclusive of the impact of the COVID-19 pandemic and related fiscal and regulatory interventions. The expected lifetime losses were calculated using historical losses observed at the Bank, SB One and peer banks. A $13.6 million allowance for credit losses was recorded on PCD loans. The interest rate fair value adjustment related to PCD loans will be substantially recognized as interest income on a level yield amortization or straight line method over the expected life of the loans.
The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired (in thousands):
Gross amortized cost basis at July 31, 2020$1,784,945 
Interest rate fair value adjustment on all loans2,567 
Credit fair value adjustment on non-PCD loans(21,397)
Allowance for credit losses on PCD loans(13,586)
Fair value of acquired loans at July 31, 2020$1,752,529 
The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition as of the closing date (in thousands):
Gross amortized cost basis at July 31, 2020$315,784 
Interest component of expected cash flows (accretable difference)(7,988)
Allowance for credit losses on PCD loans(13,586)
Net PCD loans$294,210 
Banking Premises and Equipment
The Company acquired 18 branches from SB One, 8 of which were owned premises. The Company expects to close three of the acquired banking offices in the fourth quarter of 2020. The fair value of SB One’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located.
Core Deposit Intangible and Customer Relationship Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates.
13

The fair value of the customer relationship intangible was determined based on a discounted cash flow analysis using the excess of the future cash inflows (i.e., revenue from existing customer the relationships) over the related cash outflows (i.e., operating costs) generated over the useful life of the acquired customer base. These cash flows were discounted to present value using an asset-specific risk-adjusted discount rate. The projected cash flows were developed using projected customer revenue retention rates.
The core deposit intangible totaled $3.2 million and is being amortized over its estimated useful life of approximately 10 years based on dollar weighted deposit runoff on an annualized basis. The insurance agency customer relationship intangible totaled $6.8 million and is being amortized over its estimated useful life of approximately 13 years based on customer revenue attrition on an annualized basis. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
Bank Owned Life Insurance ("BOLI")
SB One's BOLI cash surrender value was $37.2 million with no fair value adjustment.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $4.3 million is being amortized into income on a level yield amortization method over the contractual life of the deposits.
Borrowings
The fair value of Federal Home Loan Bank of New York ("FHLBNY") advances was determined based on a discounted cash flow analysis using a discount rate commensurate with FHLBNY rates as of July 31, 2020. The cash flows of the advances were projected based on the scheduled payments of the fixed rate of each advance.
Subordinated Debentures
At the valuation date, SB One had one outstanding Trust Preferred and one subordinated debt issuance with an aggregate balance of $27.5 million. The fair value of Trust Preferred and subordinated debt issuances was determined based on a discounted cash flow analysis using a discount rate commensurate with yields and terms of comparable issuances. The cash flows were projected through the remaining contractual term of the Trust Preferred issuance and based on the call date for the subordinated debt issuance.
Merger-Related Expenses
Merger-related expenses, which are recorded in other operating expenses on the Consolidated Statements of Income, totaled $2.0 and $3.1 million for the three and nine months ended September 30, 2020, respectively, and primarily consist of consulting and legal expenses.
Acquisition of Tirschwell & Loewy, Inc.
On April 1, 2019, Beacon Trust Company ("Beacon") completed its acquisition of certain assets of Tirschwell & Loewy, Inc. ("T&L"), a New York City-based independent registered investment adviser. Beacon is a wholly owned subsidiary of Provident 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 nine months ended September 30, 2020 due to worsening economic conditions and declining asset valuations attributable to the
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COVID-19 pandemic, asset valuations improved in the third 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 at September 30, 2020, from December 31, 2019, with maximum potential future payments totaling $11.0 million.
Note 3. Investment Securities
At September 30, 2020, the Company had $1.10 billion and $446.6 million in available for sale debt securities and held to maturity debt securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, variations in pricing information, regulatory actions, changes in the business environment or any changes in the competitive marketplace could have an adverse effect on the Company’s investment portfolio. The total number of available for sale and held to maturity debt securities in an unrealized loss position at September 30, 2020 totaled 68, compared with 85 at December 31, 2019.
On January 1, 2020, the Company adopted CECL which replaces the incurred loss methodology with an expected loss methodology. The Company did not record an allowance for credit losses on available for sale debt securities as this portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed immaterial. The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods. The Company recorded a $70,000 increase to the allowance for credit losses on held to maturity debt securities with a corresponding cumulative effect adjustment to decrease retained earnings by $52,000, net of income taxes. (See Adoption of CECL table below for additional detail.)
Management measures expected credit losses on held to maturity debt securities on a collective basis by security type. Management classifies the held to maturity debt securities portfolio into the following security types:
•Agency obligations;
•Mortgage-backed securities;
•State and municipal obligations; and
•Corporate obligations.

All of the agency obligations held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The majority of the state and municipal, and corporate obligations carry no lower than A ratings from the rating agencies at September 30, 2020 and the Company had one security rated with a triple-B by Moody’s Investors Service.
The Company adopted CECL using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of CECL.
Available for Sale Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the fair value for available for sale debt securities at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
Agency obligations$1,081 4 (1)1,084 
Mortgage-backed securities903,628 31,407 (864)934,171 
Asset-backed securities53,018 877 (27)53,868 
State and municipal obligations69,931 918 (331)70,518 
Corporate obligations40,216 589 (55)40,750 
$1,067,874 33,795 (1,278)1,100,391 

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December 31, 2019
Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
Mortgage-backed securities$936,196 12,367 (1,133)947,430 
State and municipal obligations3,907 172 — 4,079 
Corporate obligations25,032 393 (15)25,410 
$965,135 12,932 (1,148)976,919 
The amortized cost and fair value of available for sale debt securities at September 30, 2020, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
September 30, 2020
Amortized
cost		Fair
value
Due in one year or less$— — 
Due after one year through five years5,679 5,792 
Due after five years through ten years38,089 38,737 
Due after ten years66,379 66,739 
$110,147 111,268 
Investments which pay principal on a periodic basis totaling $957.7 million at amortized cost and $989.1 million at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments.
For the three and nine months ended September 30, 2020 and 2019, proceeds from calls on securities in the available for sale debt securities portfolio totaled $13.9 million, with no gain or loss recognized.
The following tables present the fair values and gross unrealized losses for available for sale debt securities in an unrealized loss position at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Less than 12 months12 months or longerTotal
Fair
value		Gross
unrealized
losses 		Fair
value		Gross
unrealized
losses 		Fair
value		Gross
unrealized
losses
Agency obligations$478 (1)— — 478 (1)
Mortgage-backed securities84,276 (835)8,489 (29)92,765 (864)
Asset-backed securities7,624 (27)— — 7,624 (27)
State and municipal obligations34,033 (331)— — 34,033 (331)
Corporate obligations6,938 (11)1,981 (44)8,919 (55)
$133,349 (1,205)10,470 (73)143,819 (1,278)

December 31, 2019
Less than 12 months12 months or longerTotal
Fair
value
 Gross
unrealized
losses
Fair
value
Gross
unrealized
losses 		Fair
value		Gross
unrealized
losses
Mortgage-backed securities$136,270 (629)46,819 (504)183,089 (1,133)
Corporate obligations2,013 (15)— — 2,013 (15)
$138,283 (644)46,819 (504)185,102 (1,148)
The number of available for sale debt securities in an unrealized loss position at September 30, 2020 totaled 55, compared with 50 at December 31, 2019. The increase in the number of securities in an unrealized loss position at September 30, 2020 was due to available for sale debt securities that were brought over from the SB One acquisition. At September 30, 2020, there was one private label mortgage-backed security in an unrealized loss position, with an amortized cost of $17,000 and an unrealized loss of $2,000.
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Held to Maturity Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses and the estimated fair value for held to maturity debt securities at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Amortized
cost		Gross
unrealized
gains 		Gross
unrealized
losses 		Allowance for credit lossesFair
value
Agency obligations$9,100 4 (16)— 9,088 
Mortgage-backed securities75 2 — — 77 
State and municipal obligations428,532 21,018 (35)(67)449,448 
Corporate obligations8,960 133 (4)(9)9,080 
$446,667 21,157 (55)(76)467,693 
At September 30, 2020, total amortized cost, net of allowance for credit losses totaled $446.6 million.
December 31, 2019
Amortized
cost		Gross
unrealized
gains 		Gross
unrealized
losses 		Allowance for credit lossesFair
value
Agency obligations$6,599 11 (9)— 6,601 
Mortgage-backed securities118 4 — — 122 
State and municipal obligations437,074 14,394 (115)— 451,353 
Corporate obligations9,838 58 (6)— 9,890 
$453,629 14,467 (130)— 467,966 
The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair value may fluctuate during the investment period. There were no sales of securities from the held to maturity debt securities portfolio for the three and nine months ended September 30, 2020 and 2019. For the three and nine months ended September 30, 2020, proceeds from calls on securities in the held to maturity debt securities portfolio totaled $13.7 million and $39.5 million, respectively. As to these calls of securities, for the three months ended September 30, 2020, there were no gross gains and no gross losses. For the nine months ended September 30, 2020, there were gross gains of $55,000 and no gross losses. For the three and nine months ended September 30, 2019, proceeds from calls of securities in the held to maturity debt securities portfolio totaled $14.4 million and $26.6 million, respectively. As to these calls of securities, there were no of gross gains and no gross losses for the three and nine months ended September 30, 2019.
The amortized cost and fair value of investment securities in the held to maturity debt securities portfolio at September 30, 2020 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.
September 30, 2020
Amortized
cost		Fair
value
Due in one year or less$22,685 22,792 
Due after one year through five years130,032 134,202 
Due after five years through ten years221,305 234,041 
Due after ten years72,569 76,658 
$446,591 467,693 
Mortgage-backed securities totaling $75,000 at amortized cost and $77,000 at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments. Additionally, allowance for credit losses totaling $76,000 is excluded from the table above.
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The following table illustrates the impact of the January 1, 2020 adoption of CECL on held to maturity debt securities (in thousands):
January 1, 2020
As reported under CECLPrior to CECLImpact of CECL adoption
Held to Maturity Debt Securities
Allowance for credit losses on corporate securities$6 — 6 
Allowance for credit losses on municipal securities64 — 64 
Allowance for credit losses on held to maturity debt securities$70 — 70 
The following tables present the fair values and gross unrealized losses for held to maturity debt securities in an unrealized loss position at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020 Unrealized Losses
Less than 12 months12 months or longerTotal
Fair
value		Gross
unrealized
losses 		Fair
value		Gross
unrealized
losses 		Fair
value		Gross
unrealized
losses
Agency obligations$3,985 (16)— — 3,985 (16)
State and municipal obligations3,552 (18)406 (17)3,958 (35)
Corporate obligations1,577 (4)— — 1,577 (4)
$9,114 (38)406 (17)9,520 (55)

December 31, 2019 Unrealized Losses
Less than 12 months12 months or longerTotal
Fair
value		Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value		Gross
unrealized
losses
Agency obligations$3,601 (9)— — 3,601 (9)
State and municipal obligations7,675 (42)2,093 (73)9,768 (115)
Corporate obligations3,254 (6)— — 3,254 (6)
$14,530 (57)2,093 (73)16,623 (130)
The number of held to maturity debt securities in an unrealized loss position at September 30, 2020 totaled 13, compared with 35 at December 31, 2019. The decrease in the number of securities in an unrealized loss position at September 30, 2020, was due to lower current market interest rates compared to prevailing market rates at December 31, 2019.











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Credit Quality Indicators. The following table provides the amortized cost of held to maturity debt securities by credit rating as of September 30, 2020 (in thousands):
September 30, 2020
Total PortfolioAAAAAABBBNot RatedTotal
Agency obligations$9,100 — — — — 9,100 
Mortgage-backed securities75 — — — — 75 
State and municipal obligations50,128 313,053 54,217 1,115 10,019 428,532 
Corporate obligations— 2,719 5,816 400 25 8,960 
$59,303 315,772 60,033 1,515 10,044 446,667 
December 31, 2019
Total PortfolioAAAAAABBBNot RatedTotal
Agency obligations$6,599 — — — — 6,599 
Mortgage-backed securities118 — — — — 118 
State and municipal obligations49,316 330,322 56,317 1,119 — 437,074 
Corporate obligations— 3,128 6,335 350 25 9,838 
$56,033 333,450 62,652 1,469 25 453,629 
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. At September 30, 2020, the held to maturity debt securities portfolio was comprised of 13% rated AAA, 71% rated AA, 13% rated A, and less than 2% either below an A rating or not rated by Moody’s Investors Service or Standard and Poor’s. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.
At September 30, 2020, the allowance for credit losses on held to maturity debt securities was $76,000, an increase from $70,000 at January 1, 2020, when the Company adopted CECL.
Note 4. Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted CECL, which replaced the incurred loss methodology with an expected loss methodology. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses on loans with a corresponding cumulative effect adjustment to decrease retained earnings by $5.9 million, net of income taxes. (See Adoption of CECL table below for additional detail.)
Loans receivable at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):
September 30, 2020December 31, 2019
Mortgage loans:
Residential$1,320,222 1,077,689 
Commercial3,750,639 2,578,393 
Multi-family1,544,924 1,225,551 
Construction462,161 429,812 
Total mortgage loans7,077,946 5,311,445 
Commercial loans
Commercial owner occupied934,104 853,269 
Commercial non-owner occupied906,355 732,277 
Other commercial loans449,737 49,213 
Total commercial loans2,290,196 1,634,759 
Consumer loans406,451 391,360 
Total gross loans9,774,593 7,337,564 
PCI loans prior to CECL— 746 
Premiums on purchased loans1,514 2,474 
Unearned discounts(26)(26)
Net deferred fees(19,272)(7,873)
Total loans$9,756,809 7,332,885 
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The following tables summarize the aging of loans receivable by portfolio segment and class of loans (in thousands). The September 30, 2020 balances include PCD loans, while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020):
September 30, 2020
30-59 Days60-89 DaysNon-accrualRecorded
Investment
> 90 days
accruing		Total Past
Due 		CurrentTotal Loans
Receivable		Non-accrual loans with no related allowance
Mortgage loans:
Residential$8,719 7,215 9,424 — 25,358 1,294,864 1,320,222 1,491 
Commercial3,914 4,629 16,568 — 25,111 3,725,528 3,750,639 4,134 
Multi-family— 488 — — 488 1,544,436 1,544,924 — 
Construction7,396 918 151 — 8,465 453,696 462,161 — 
Total mortgage loans20,029 13,250 26,143 — 59,422 7,018,524 7,077,946 5,625 
Commercial loans5,575 949 21,269 — 27,793 2,262,403 2,290,196 6,060 
Consumer loans745 862 1,541 — 3,148 403,303 406,451 9 
Total gross loans$26,349 15,061 48,953 — 90,363 9,684,230 9,774,593 11,694 

December 31, 2019
30-59 Days60-89 DaysNon-accrualRecorded
Investment
> 90 days
accruing		Total Past
Due 		CurrentTotal Loans ReceivableNon-accrual loans with no related allowance
Mortgage loans:
Residential$5,905 2,579 8,543 — 17,027 1,060,662 1,077,689 2,989 
Commercial— — 5,270 — 5,270 2,573,123 2,578,393 — 
Multi-family— — — — — 1,225,551 1,225,551 — 
Construction— — — — — 429,812 429,812 — 
Total mortgage loans5,905 2,579 13,813 — 22,297 5,289,148 5,311,445 2,989 
Commercial loans2,383 95 25,160 — 27,638 1,607,121 1,634,759 3,238 
Consumer loans1,276 337 1,221 — 2,834 388,526 391,360 569 
Total gross loans$9,564 3,011 40,194 — 52,769 7,284,795 7,337,564 6,796 

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $49.0 million and $40.2 million at September 30, 2020 and December 31, 2019, respectively. Included in non-accrual loans were $4.9 million and $13.1 million of loans which were less than 90 days past due at September 30, 2020 and December 31, 2019, respectively. There were no loans 90 days or greater past due and still accruing interest at September 30, 2020 or December 31, 2019.

Management has elected to measure an allowance for credit losses for accrued interest receivables specifically related to any loan that has been deferred as a result of COVID-19. Generally, accrued interest is written off by reversing interest income during the quarter the loan is moved from an accrual to a non-accrual status.
The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million, for which, based on current information, the Bank does not expect to collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). An allowance for collateral-dependent impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs. The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analysis of collateral-dependent loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral-dependent loan and updated annually, or more frequently if required.
A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the collateral’s fair value less any selling costs. A specific allocation of the allowance for credit losses is established for each collateral-dependent loan with a carrying balance greater
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than the collateral’s fair value, less estimated selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less estimated selling costs. At each fiscal quarter end, if a loan is designated as collateral-dependent 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 resulting from this process.
At September 30, 2020, there were 151 impaired loans totaling $65.8 million. Included in this total were 122 TDRs related to 119 borrowers totaling $38.0 million that were performing in accordance with their restructured terms and which continued to accrue interest at September 30, 2020. At December 31, 2019, there were 158 impaired loans totaling $70.6 million, of which 147 loans totaling $48.3 million were TDRs. Included in this total were 133 TDRs to 128 borrowers totaling $42.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2019.
At September 30, 2020 and December 31, 2019, the Company had $18.0 million and $20.4 million of collateral-dependent impaired loans, respectively. The collateral-dependent impaired loans at September 30, 2020 consisted of $13.2 million in commercial loans, $4.7 million in residential real estate loans, and $9,000 in consumer loans. The collateral for these impaired loans was primarily real estate.
The activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):
Three months ended September 30,Mortgage loansCommercial loansConsumer loansTotal
2020
Balance at beginning of period$54,871 25,284 6,104 86,259 
Provision charged to operations2,922 2,767 722 6,411 
Initial allowance on credit loans related to PCD loans11,984 1,582 20 13,586 
Recoveries of loans previously charged-off35 679 144 858 
Loans charged-off(22)(727)(51)(800)
Balance at end of period$69,790 29,585 6,939 106,314 
2019
Balance at beginning of period$27,280 33,549 1,981 62,810 
Provision charged to operations(2,092)2,880 (288)500 
Recoveries of loans previously charged-off24 126 343 493 
Loans charged-off(131)(6,212)(116)(6,459)
Balance at end of period$25,081 30,343 1,920 57,344 

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Nine months ended September 30,Mortgage loansCommercial loansConsumer loansTotal
2020
Balance at beginning of period$25,511 28,263 1,751 55,525 
Increase (decrease) due to the initial adoption of CECL - Retained earnings14,188 (9,974)3,706 7,920 
Initial allowance on credit loans related to PCD loans11,984 1,582 20 13,586 
Provision charged to operations17,987 12,672 1,352 32,011 
Recoveries of loans previously charged-off143 1,597 370 2,110 
Loans charged-off(23)(4,555)(260)(4,838)
Balance at end of period$69,790 29,585 6,939 106,314 
2019
Balance at beginning of period$27,678 25,693 2,191 55,562 
Provision (credited) charged to operations(2,814)13,337 (323)10,200 
Recoveries of loans previously charged-off361 291 596 1,248 
Loans charged-off(144)(8,978)(544)(9,666)
Balance at end of period$25,081 30,343 1,920 57,344 

As a result of the January 1, 2020 adoption of CECL, the Company recorded a $7.9 million increase to the allowance for credit losses on loans. For the three and nine months ended September 30, 2020, the Company recorded a $6.4 million and $32.0 million provision for credit losses on loans, respectively. The increase in the provision for credit losses for the three and nine months ended September 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. The largest increase in the provision for credit losses on loans for the three and nine months ended September 30, 2020 was in the commercial real estate portfolio.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on the allowance for credits for the loan portfolio (in thousands):
January 1, 2020
As reported under CECLPrior to CECLImpact of CECL adoption
Loans
Residential$8,950 3,411 5,539 
Commercial17,118 12,885 4,233 
Multi-family9,519 3,370 6,149 
Construction4,152 5,885 (1,733)
Total mortgage loans39,739 25,551 14,188 
Commercial loans18,254 28,228 (9,974)
Consumer loans5,452 1,746 3,706 
Allowance for credit losses on loans$63,445 55,525 7,920 
The following tables summarize loans receivable by portfolio segment and impairment method (in thousands):
September 30, 2020
Mortgage
loans		Commercial
loans		Consumer
loans		Total Portfolio
Segments
Individually evaluated for impairment$43,397 20,963 1,449 65,809 
Collectively evaluated for impairment7,034,549 2,269,233 405,002 9,708,784 
Total gross loans$7,077,946 2,290,196 406,451 9,774,593 

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December 31, 2019
Mortgage
loans		Commercial
loans		Consumer
loans		Total Portfolio
Segments
Individually evaluated for impairment$39,910 28,357 2,374 70,641 
Collectively evaluated for impairment5,271,535 1,606,402 388,986 7,266,923 
Total gross loans$5,311,445 1,634,759 391,360 7,337,564 
The allowance for credit losses is summarized by portfolio segment and impairment classification as follows (in thousands):
September 30, 2020
Mortgage
loans		Commercial loansConsumer loansTotal
Individually evaluated for impairment$1,391 1,876 33 3,300 
Collectively evaluated for impairment68,399 27,709 6,906 103,014 
Total gross loans$69,790 29,585 6,939 106,314 

December 31, 2019
Mortgage
loans		Commercial loansConsumer
loans		Total
Individually evaluated for impairment$1,580 3,462 25 5,067 
Collectively evaluated for impairment23,931 24,801 1,726 50,458 
Total gross loans$25,511 28,263 1,751 55,525 
Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, management attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
The following tables present the number of loans modified as TDRs during the three and nine months ended September 30, 2020 and 2019, along with their balances immediately prior to the modification date and post-modification as of September 30, 2020 and 2019 (in thousands):
For the three months ended
September 30, 2020September 30, 2019
Troubled Debt RestructuringsNumber of
Loans		Pre-Modification
Outstanding
Recorded 
Investment		Post-Modification
Outstanding
Recorded Investment		Number of
Loans		Pre-Modification
Outstanding
Recorded  Investment		Post-Modification
Outstanding
Recorded  Investment
($ in thousands)
Mortgage loans:
Residential1 $91 $79 — $— $— 
Total mortgage loans1 91 79 — — — 
Commercial loans1 1,399 1,399 — — — 
Consumer loans— — — 1 20 16 
Total restructured loans2 $1,490 $1,478 1 $20 $16 

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For the nine months ended
September 30, 2020September 30, 2019
Troubled Debt RestructuringsNumber of
Loans		Pre-Modification
Outstanding
Recorded 
Investment		Post-Modification
Outstanding
Recorded  Investment		Number of
Loans		Pre-Modification
Outstanding
Recorded  Investment		Post-Modification
Outstanding
Recorded  Investment
($ in thousands)
Mortgage loans:
Residential2 $434 $360 2 $749 $716 
Commercial— — — 1 14,010 14,010 
Total mortgage loans2 434 360 3 14,759 14,726 
Commercial loans5 2,882 2,791 7 2,707 1,878 
Consumer loans— — — 1 20 16 
Total restructured loans7 $3,316 $3,151 11 $17,486 $16,620 
All TDRs are impaired loans, which are individually evaluated for impairment. During the three and nine months ended September 30, 2020, $612,000 and $3.8 million of charge-offs were recorded on collateral-dependent impaired loans. During the three and nine months ended September 30, 2019, $5.7 million and $7.7 million of charge-offs were recorded on collateral-dependent impaired loans, respectively. For the nine months ended September 30, 2020, the allowance for credit losses associated with the TDRs presented in the preceding tables totaled $421,000, while there was no allowance associated with TDRs for the three months ended September 30, 2020, and was included in the allowance for credit losses for loans individually evaluated for impairment. (See page 26 for further discussion related to COVID-19 loan modifications)
For the three and nine months ended September 30, 2020, the TDRs presented in the preceding tables had a weighted average modified interest rate of 4.82% and 5.46%, respectively, compared to a weighted average rate of 4.83% and 5.51% prior to modification, for the three and nine months ended September 30, 2020, respectively.
The following table presents loans modified as TDRs within the previous 12 months from September 30, 2020 and 2019, and for which there was a payment default (90 days or more past due) at the quarter ended September 30, 2020 and 2019.
September 30, 2020September 30, 2019
Troubled Debt Restructurings Subsequently DefaultedNumber of LoansOutstanding Recorded InvestmentNumber of LoansOutstanding Recorded 
Investment
($ in thousands)
Mortgage loans:
Residential— $— 1 $578 
Total mortgage loans— — 1 578 
Total restructured loans— $— 1 $578 
There were no loans which had a payment default (90 days or more past due) for loans modified as TDRs within the 12 month period ending September 30, 2020. There was one payment default (90 days or more past due) to one borrower for loans modified as TDRs within the 12 month period ending September 30, 2019. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for credit losses on loans individually evaluated for impairment.
As allowed by CECL, the Company elected to maintain pools of loans accounted for under ASC 310-30. At December 31, 2019, purchased credit impaired (“PCI”) loans totaled $746,000. In accordance with the CECL standard, management did not reassess whether modifications of individually acquired financial assets accounted for in pools were TDRs as of the date of adoption. Loans considered to be PCI prior to January 1, 2020 were converted to purchased credit deteriorated ("PCD") loans on that date. Any additional loans acquired by the Company after January 1, 2020, that experience more-than-insignificant deterioration in credit quality after origination, have been classified as PCD loans.
The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition as of the July 31, 2020 closing date (in thousands):
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Gross amortized cost basis at July 31, 2020$315,784 
Interest component of expected cash flows (accretable difference)(7,988)
Allowance for credit losses on PCD loans(13,586)
Net PCD loans$294,210 

The following table presents loans individually evaluated for impairment by class and loan category, excluding PCD loans (in thousands):
September 30, 2020December 31, 2019
Unpaid Principal BalanceRecorded InvestmentRelated AllowanceAverage Recorded InvestmentInterest Income RecognizedUnpaid Principal BalanceRecorded InvestmentRelated AllowanceAverage Recorded InvestmentInterest Income Recognized
Loans with no related allowance
Mortgage loans:
Residential$14,144 11,541 — 11,694 386 13,478 10,739 — 10,910 533 
Commercial19,543 19,543 — 19,548 431 — — — — — 
Total33,687 31,084 — 31,242 817 13,478 10,739 — 10,910 533 
Commercial loans7,959 5,713 — 7,300 29 3,927 3,696 — 4,015 17 
Consumer loans1,396 895 — 921 39 2,086 1,517 — 1,491 86 
Total impaired loans$43,042 37,692 — 39,463 885 19,491 15,952 — 16,416 636 
Loans with an allowance recorded
Mortgage loans:
Residential$7,922 7,503 728 7,440 235 10,860 10,326 829 10,454 428 
Commercial4,810 4,810 663 4,822 41 18,845 18,845 751 18,862 569 
Total12,732 12,313 1,391 12,262 276 29,705 29,171 1,580 29,316 997 
Commercial loans17,050 15,250 1,876 18,280 293 27,762 24,661 3,462 27,527 444 
Consumer loans569 554 33 560 13 868 857 25 878 46 
Total impaired loans$30,351 28,117 3,300 31,102 582 58,335 54,689 5,067 57,721 1,487 
Total impaired loans
Mortgage loans:
Residential$22,066 19,044 728 19,134 621 24,338 21,065 829 21,364 961 
Commercial24,353 24,353 663 24,370 472 18,845 18,845 751 18,862 569 
Total46,419 43,397 1,391 43,504 1,093 43,183 39,910 1,580 40,226 1,530 
Commercial loans25,009 20,963 1,876 25,580 322 31,689 28,357 3,462 31,542 461 
Consumer loans1,965 1,449 33 1,481 52 2,954 2,374 25 2,369 132 
Total impaired loans$73,393 65,809 3,300 70,565 1,467 77,826 70,641 5,067 74,137 2,123 
Specific allocations of the allowance for credit losses attributable to impaired loans totaled $3.3 million at September 30, 2020 and $5.1 million at December 31, 2019. At September 30, 2020 and December 31, 2019, impaired loans for which there was no related allowance for credit losses totaled $37.7 million and $16.0 million, respectively. The average balance of impaired loans for the nine months ended September 30, 2020 and December 31, 2019 was $70.6 million and $74.1 million, respectively.
Management utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with
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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 the Credit Department. The risk ratings are also confirmed through periodic loan review examinations which are currently performed by an independent third-party. Reports by the independent third-party are presented directly to the Audit Committee of the Board of Directors.
In response to the COVID-19 pandemic and its adverse economic impact on both our commercial and retail borrowers, the Company implemented a modification program to defer principal or principal and interest payments for borrowers directly impacted by the pandemic and who were not more than 30 days past due as of December 31, 2019, all in accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.
Loans that have been or are expected to be granted COVID-19 related deferrals or modifications have decreased from a peak level of $1.31 billion, or 16.8% of loans, to $310.8 million, or 3.2% of loans as of October 16, 2020. This $310.8 million of loans includes $47.5 million acquired from SB One and consists of $27.0 million in a first 90-day deferral period, $84.9 million in a second 90-day deferral period, and $198.9 million that have completed their initial deferral periods, but are expected to require ongoing assistance. Included in the $310.8 million of loans, $92.4 million are secured by hotels, $43.7 million are secured by retail properties, $31.4 million are secured by restaurants, $15.1 million are secured by suburban office space, and $42.7 million are secured by residential mortgages, with the balance comprised of diverse commercial loans. In accordance with the CARES Act, the Company has elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications are not classified as troubled debt restructurings (“TDRs”).
In addition, the Company participated in the Paycheck Protection Program (“PPP”) through the United States Department of the Treasury and Small Business Administration ("SBA"). As of September 30, 2020, the Company secured 1,289 PPP loans for its customers totaling $474.8 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the commercial loan portfolio.
The following table summarizes the Company's gross loans held for investment by year of origination and internally assigned credit grades (in thousands):
At September 30, 2020
Total portfolioResidentialCommercial mortgageMulti-familyConstructionTotal
mortgages		CommercialConsumer
Total Loans (1)
Special mention$4,483 54,368 101 872 59,824 168,833 362 229,019 
Substandard41,255 52,847 124 — 94,226 103,132 3,680 201,038 
Doubtful— — — — — 76 — 76 
Loss— — — — — — — — 
Total criticized and classified45,738 107,215 225 872 154,050 272,041 4,042 430,133 
Pass/Watch1,274,484 3,643,424 1,544,699 461,289 6,923,896 2,018,155 402,409 9,344,460 
Total$1,320,222 3,750,639 1,544,924 462,161 7,077,946 2,290,196 406,451 9,774,593 
2020
Special mention$— — — 872 872 657 — 1,529 
Substandard2,079 — — — 2,079 — 25 2,104 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total criticized and classified2,079 — — 872 2,951 657 25 3,633 
Pass/Watch198,722 375,324 230,034 28,187 832,267 586,510 27,605 1,446,382 
Total gross loans$200,801 375,324 230,034 29,059 835,218 587,167 27,630 1,450,015 
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2019
Special mention$1,753 $12,434 $— $— $14,187 $6,755 $— $20,942 
Substandard6,321 — — — 6,321 2,742 343 9,406 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total criticized and classified8,074 12,434 — — 20,508 9,497 343 30,348 
Pass/Watch139,391 547,969 139,633 164,333 991,326 225,447 46,745 1,263,518 
Total gross loans$147,465 560,403 139,633 164,333 1,011,834 234,944 47,088 1,293,866 
2018
Special mention$318 6,630 — — 6,948 10,908 — 17,856 
Substandard2,152 — — — 2,152 4,948 356 7,456 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total criticized and classified2,470 6,630 — — 9,100 15,856 356 25,312 
Pass/Watch79,552 361,309 171,555 119,980 732,396 169,974 40,927 943,297 
Total gross loans$82,022 367,939 171,555 119,980 741,496 185,830 41,283 968,609 
2017
Special mention$— — — — — 31,465 — 31,465 
Substandard3,233 17,529 — — 20,762 8,040 15 28,817 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total criticized and classified3,233 17,529 — — 20,762 39,505 15 60,282 
Pass/Watch80,813 387,846 134,166 37,564 640,389 148,737 33,340 822,466 
Total gross loans$84,046 405,375 134,166 37,564 661,151 188,242 33,355 882,748 
2016 and prior
Special mention$2,412 35,304 101 — 37,817 119,048 362 157,227 
Substandard27,470 35,318 124 — 62,912 87,402 2,941 153,255 
Doubtful— — — — — 76 — 76 
Loss— — — — — — — — 
Total criticized and classified29,882 70,622 225 — 100,729 206,526 3,303 310,558 
Pass/Watch805,888 2,041,598 869,536 111,225 3,828,247 1,094,013 257,095 5,179,355 
Total gross loans$835,770 2,112,220 869,761 111,225 3,928,976 1,300,539 260,398 5,489,913 
At December 31, 2019
ResidentialCommercial mortgageMulti-familyConstructionTotal
mortgages		CommercialConsumerTotal loans
Special mention$2,402 46,758 — — 49,160 79,248 286 128,694 
Substandard10,204 13,458 — 6,181 29,843 57,015 1,668 88,526 
Doubtful— — — — — 836 — 836 
Loss— — — — — — — — 
Total criticized and classified12,606 60,216 — 6,181 79,003 137,099 1,954 218,056 
Pass/Watch1,065,083 2,518,177 1,225,551 423,631 5,232,442 1,497,660 389,406 7,119,508 
Total$1,077,689 2,578,393 1,225,551 429,812 5,311,445 1,634,759 391,360 7,337,564 
(1) Contained within criticized and classified loans at September 30, 2020 are loans that were granted payment deferrals related to COVID-19 totaling $310.8 million.
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Note 5. Deposits
Deposits at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):
September 30, 2020December 31, 2019
Savings$1,310,231 983,714 
Money market2,124,907 1,738,202 
NOW2,603,551 2,092,413 
Non-interest bearing2,375,864 1,554,253 
Certificates of deposit1,144,688 734,027 
Total deposits$9,559,241 7,102,609 

Note 6. Components of Net Periodic Benefit Cost
The Bank has a noncontributory defined benefit pension plan covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003. The pension plan was frozen on April 1, 2003. All participants in the Plan are 100% vested. The pension 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 is fully eligible to receive the benefits. Effective January 1, 2003, eligibility for retiree health care benefits was frozen as to new entrants, and benefits were eliminated for employees with less than ten years of service as of December 31, 2002. Effective January 1, 2007, eligibility for retiree life insurance benefits was frozen as to new entrants and retiree life insurance benefits were eliminated for employees with less than ten years of service as of December 31, 2006.
Net periodic (decrease) increase in benefit cost for pension benefits and other post-retirement benefits for the three and nine months ended September 30, 2020 and 2019 includes the following components (in thousands):
Three months ended September 30,Nine months ended September 30,
Pension benefitsOther post-retirement benefitsPension benefitsOther post-retirement benefits
20202019202020192020201920202019
Service cost$— — 19 20 $— — 59 60 
Interest cost250 299 178 209 750 899 534 628 
Expected return on plan assets(737)(640)— — (2,211)(1,922)— — 
Amortization of prior service cost— — — — — — — — 
Amortization of the net loss (gain)174 254 (62)(206)522 762 (186)(620)
Net periodic (decrease) increase in benefit cost$(313)(87)135 23 $(939)(261)407 68 
In its consolidated financial statements for the year ended December 31, 2019, the Company previously disclosed that it does not expect to contribute to the pension plan in 2020. As of September 30, 2020, no contributions have been made to the pension plan.
The net periodic (decrease) increase in benefit cost for pension benefits and other post-retirement benefits for the three and nine months ended September 30, 2020 were calculated using the January 1, 2020 pension and other post-retirement benefits actuarial valuations.
Note 7. Impact of Recent Accounting Pronouncements
Accounting Pronouncements Adopted in 2020
In May 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief.” This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not
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apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 had the same effective date as ASU 2016-13 (i.e., the first quarter of 2020). The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" which clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, recognition and measurement. The most significant provisions of this ASU relate to how companies will estimate expected credit losses under Topic 326 by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. ASU No. 2019-04 is effective for reporting periods beginning January 1, 2020. The adoption of this guidance had no impact related to Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments on the Company’s consolidated financial statements. At January 1, 2020, a $1.3 million allowance for credit losses for off-balance sheet credit exposures was recorded related to extensions on construction loans and is reflected below in the ASU 2016-13 calculation.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 was effective for interim and annual reporting periods beginning after December 15, 2019; early adoption was permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Furthermore, ASU 2016-13 will necessitate establishing an allowance for expected credit losses on held to maturity debt securities. This also applies to off-balance sheet credit exposures, which includes loan commitments, unused lines of credit and other similar instruments. The amendments in ASU 2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of this ASU was permitted for fiscal years beginning after December 15, 2018. The adoption of ASU 2016-13 involves changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model (“CECL”), which encompasses allowances for losses expected to be incurred over the life of the portfolio. The Company adopted CECL on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet ("OBS") credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be recorded with previously applicable GAAP. The Company recorded a $7.9 million increase to the allowance for credit losses and a $3.2 million liability for off-balance sheet credit exposures, which resulted in an $8.3 million cumulative effect adjustment decrease, net of tax, to retained earnings. With regard to regulatory capital, the Company has elected to utilize the five-year CECL transition, which gives 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.
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Accounting Pronouncements Not Yet Adopted
ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company anticipates this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than the extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on the Company's business operations and consolidated financial statements.

Note 8. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
On January 1, 2020, the Company adopted CECL, which replaced the incurred loss methodology with an expected loss methodology. This new methodology applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of this new standard resulted in the Company recording a $3.2 million increase to the allowance for credit losses on off-balance sheet credit exposures with a corresponding cumulative effect adjustment to decrease retained earnings $2.4 million, net of income taxes.
Management analyzes the Company's exposure to credit losses for both on-balance sheet and off-balance sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework. For purposes of estimating the allowance for credit losses for off-balance sheet credit exposures, the exposure at default includes an estimated drawdown of unused credit based on historical credit utilization factors and current loss factors, resulting in a proportionate amount of expected credit losses.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on off-balance sheet credit exposures:
January 1, 2020
As reported under CECLPrior to CECLImpact of CECL adoption
Liabilities
Allowance for credit losses on off-balance sheet credit exposure$3,206 — 3,206 
For the three months ended September 30, 2020, the Company recorded a $575,000 credit to the provision for credit losses for off-balance sheet credit exposures. This was primarily due to a reduction in the required allowance for these exposures as loss factors decreased in the current economic forecast compared to the economic forecast in the prior period. The provision for credit losses for the nine months ended September 30, 2020, totaled $5.7 million.
The allowance for credit losses for off-balance sheet credit exposures was $8.9 million at September 30, 2020, included in other liabilities on the Consolidated Statements of Financial Condition.
Note 9. 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, Management utilizes various valuation techniques to estimate fair value.
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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 the fair value hierarchy are as follows:
Level 1:
Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.
Assets and Liabilities 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 September 30, 2020 and December 31, 2019.
Available for Sale Debt Securities, at Fair Value
For available for sale debt securities, 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 whom 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 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 Management 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, Management compares the prices received from the pricing service to a secondary pricing source. Additionally, Management 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 generally not resulted in an adjustment in the prices obtained from the pricing service.
Equity Securities, at Fair Value
The Company holds equity securities that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs.
Derivatives
The Company records all derivatives on the statements of financial condition at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company has interest rate derivatives resulting from a service provided to certain qualified borrowers in a loan related transaction which, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings.
The Company also uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges, and which satisfy hedge accounting requirements, involve the receipt of variable amounts from a
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counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. These derivatives were used to hedge the variable cash outflows associated with FHLBNY borrowings. The change in the fair value of these derivatives is recorded in accumulated other comprehensive income, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
The fair value of the Company's derivatives is determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 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 September 30, 2020 and December 31, 2019.
Collateral-Dependent Impaired Loans
For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case-by-case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell between 5% and 10%. Management classifies these loans as Level 3 within the fair value hierarchy.
Foreclosed Assets
Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated selling costs, which range between 5% and 10%. 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 selling costs is charged to the allowance for credit losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.
There were no changes to the valuation techniques for fair value measurements as of September 30, 2020 and December 31, 2019.
32

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of September 30, 2020 and December 31, 2019, by level within the fair value hierarchy (in thousands):
Fair Value Measurements at Reporting Date Using:
September 30, 2020Quoted 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:
Available for sale debt securities:
Agency obligations$1,084 1,084 — — 
Mortgage-backed securities934,171 — 934,171 — 
Asset-backed securities53,868 — 53,868 — 
State and municipal obligations70,518 — 70,518 — 
Corporate obligations40,750 — 40,750 — 
Total available for sale debt securities1,100,391 1,084 1,099,307 — 
Equity securities869 869 — — 
Derivative assets117,722 — 117,722 — 
$1,218,982 1,953 1,217,029 — 
Derivative liabilities$126,577 — 126,577 — 
Measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral$17,998 — — 17,998 
Foreclosed assets4,720 — — 4,720 
$22,718 — — 22,718 

Fair Value Measurements at Reporting Date Using:
December 31, 2019Quoted 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:
Available for sale debt securities:
Mortgage-backed securities$947,430 — 947,430 — 
State and municipal obligations4,079 — 4,079 — 
Corporate obligations25,410 — 25,410 — 
Total available for sale debt securities976,919 — 976,919 — 
Equity Securities825 825 — — 
Derivative assets39,305 — 39,305 — 
$1,017,049 825 1,016,224 — 
Derivative liabilities$39,356 — 39,356 — 
Measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral$20,403 — — 20,403 
Foreclosed assets2,715 — — 2,715 
$23,118 — — 23,118 
There were no transfers between Level 1, Level 2 and Level 3 during the three and nine months ended September 30, 2020.
33

Other Fair Value Disclosures
The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities.
Cash and Cash Equivalents
For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value. Included in cash and cash equivalents at September 30, 2020 and December 31, 2019 was $136.7 million and $77.0 million, respectively, representing cash collateral pledged to secure loan level swaps and reserves required by banking regulations.
Held to Maturity Debt Securities, Net of Allowance for Credit Losses
For held to maturity debt securities, 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 whom 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 to comparable securities. Management evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As management 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, management compares the prices received from the pricing service to a secondary pricing source. Additionally, management 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 generally not resulted in adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy.
Federal Home Loan Bank of New York ("FHLBNY") Stock
The carrying value of FHLBNY stock is its cost. The fair value of FHLBNY stock is based on redemption at par value. The Company classifies the estimated fair value as Level 1 within the fair value hierarchy.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date (i.e. exit pricing). The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifies the estimated fair value of its loan portfolio as Level 3.
The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. The Company classifies the estimated fair value of its non-performing loan portfolio as Level 3.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits and savings deposits, was equal to the amount payable on demand and classified as Level 1. The estimated fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifies the estimated fair value of its certificates of deposit portfolio as Level 2.
Borrowed Funds
The fair value of borrowed funds was estimated by discounting future cash flows using rates available for debt with similar terms and maturities and is classified by the Company as Level 2 within the fair value hierarchy.
34

Commitments to Extend Credit and Letters of Credit
The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
35

The following tables present the Company’s financial instruments at their carrying and fair values as of September 30, 2020 and December 31, 2019. Fair values are presented by level within the fair value hierarchy.
Fair Value Measurements at September 30, 2020 Using:
(Dollars in thousands)Carrying valueFair valueQuoted Prices in Active  Markets for Identical Assets (Level 1)Significant Other Observable  Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents$510,138 510,138 510,138 — — 
Available for sale debt securities:
Agency obligations1,084 1,084 1,084 — — 
Mortgage-backed securities934,171 934,171 — 934,171 — 
Asset-backed securities53,868 53,868 53,868 
State and municipal obligations70,518 70,518 — 70,518 — 
Corporate obligations40,750 40,750 — 40,750 — 
Total available for sale debt securities$1,100,391 1,100,391 1,084 1,099,307 — 
Held to maturity debt securities, net of allowance for credit losses:
Agency obligations9,100 9,088 9,088 — — 
Mortgage-backed securities75 77 — 77 — 
State and municipal obligations428,465 449,448 — 449,448 — 
Corporate obligations8,951 9,080 — 9,080 — 
Total held to maturity debt securities, net of allowance for credit losses$446,591 467,693 9,088 458,605 — 
FHLBNY stock69,975 69,975 69,975 — — 
Equity Securities869 869 869 — — 
Loans, net of allowance for credit losses9,650,495 9,917,269 — — 9,917,269 
Derivative assets117,722 117,722 — 117,722 — 
Financial liabilities:
Deposits other than certificates of deposits$8,414,553 8,414,553 8,414,553 — — 
Certificates of deposit1,144,688 1,148,156 — 1,148,156 — 
Total deposits$9,559,241 9,562,709 8,414,553 1,148,156 — 
Borrowings1,413,029 1,424,689 — 1,424,689 — 
Subordinated debentures25,099 24,050 — 24,050 — 
Derivative liabilities126,577 126,577 — 126,577 — 

36

Fair Value Measurements at December 31, 2019 Using:
(Dollars in thousands)Carrying valueFair valueQuoted Prices in Active  Markets for Identical Assets (Level 1)Significant Other Observable  Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents$186,748 186,748 186,748 — — 
Available for sale debt securities:
Mortgage-backed securities947,430 947,430 — 947,430 — 
State and municipal obligations4,079 4,079 — 4,079 — 
Corporate obligations25,410 25,410 — 25,410 — 
Total available for sale debt securities$976,919 976,919 — 976,919 — 
Held to maturity debt securities:
Agency obligations$6,599 6,601 6,601 — — 
Mortgage-backed securities118 122 — 122 — 
State and municipal obligations437,074 451,353 — 451,353 — 
Corporate obligations9,838 9,890 — 9,890 — 
Total held to maturity debt securities$453,629 467,966 6,601 461,365 — 
FHLBNY stock57,298 57,298 57,298 — — 
Equity Securities825 825 825 — — 
Loans, net of allowance for credit losses7,277,360 7,296,744 — — 7,296,744 
Derivative assets39,305 39,305 — 39,305 — 
Financial liabilities:
Deposits other than certificates of deposits$6,368,582 6,368,582 6,368,582 — — 
Certificates of deposit734,027 734,047 — 734,047 — 
Total deposits$7,102,609 7,102,629 6,368,582 734,047 — 
Borrowings1,125,146 1,127,569 — 1,127,569 — 
Derivative liabilities39,356 39,356 — 39,356 — 

37

Note 10. Other Comprehensive Income
The following table presents the components of other comprehensive income, both gross and net of tax, for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three months ended September 30,
20202019
Before
Tax		Tax
Effect		After
Tax		Before
Tax		Tax
Effect		After
Tax
Components of Other Comprehensive Income:
Unrealized gains and losses on available for sale debt securities:
Net unrealized (losses) gains arising during the period$(578)150 (428)3,594 (980)2,614 
Reclassification adjustment for gains included in net income— — — — — — 
Total(578)150 (428)3,594 (980)2,614 
Unrealized gains on derivatives (cash flow hedges) 1,186 (306)880 188 (51)137 
Amortization related to post-retirement obligations115 (30)85 48 (13)35 
Total other comprehensive income $723 (186)537 3,830 (1,044)2,786 

Nine months ended September 30,
20202019
Before
Tax		Tax
Effect		After
Tax		Before
Tax		Tax
Effect		After
Tax
Components of Other Comprehensive Income:
Unrealized gains and losses on available for sale debt securities:
Net unrealized gains arising during the period $20,733 (5,345)15,388 27,291 (7,437)19,854 
Reclassification adjustment for gains included in net income— — — — — — 
Total20,733 (5,345)15,388 27,291 (7,437)19,854 
Unrealized losses on derivatives (cash flow hedges)(8,242)2,125 (6,117)(1,119)306 (813)
Amortization related to post-retirement obligations322 (83)239 78 (21)57 
Total other comprehensive income$12,813 (3,303)9,510 26,250 (7,152)19,098 
38

The following tables present the changes in the components of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Changes in Accumulated Other Comprehensive Income (Loss) by Component, net of tax
for the three months ended September 30,
20202019
Unrealized
Gains (Losses) on
Available for Sale Debt Securities		Post- Retirement
Obligations		Unrealized (Losses) Gains on Derivatives (cash flow hedges)Accumulated
Other
Comprehensive
Income		Unrealized Gains on
Available for Sale Debt Securities		Post-  Retirement
Obligations		Unrealized Gains (Losses) on Derivatives (cash flow hedges)Accumulated
Other
Comprehensive(Loss) Income
Balance at
June 30,		$24,562 (5,086)(6,682)12,794 7,635 (3,603)(56)3,976 
Current - period other comprehensive income(428)85 880 537 2,614 35 137 2,786 
Balance at September 30,$24,134 (5,001)(5,802)13,331 10,249 (3,568)81 6,762 

Changes in Accumulated Other Comprehensive Income (Loss) by Component, net of tax
for the nine months ended September 30,
20202019
Unrealized
Gains on
Available for Sale Debt Securities		Post-  Retirement
Obligations		Unrealized (Losses) Gains on Derivatives (cash flow hedges)Accumulated
Other
Comprehensive
Income 		Unrealized Gains (Losses) on
Available for Sale Debt Securities		Post- Retirement
Obligations		Unrealized Gains (Losses) on Derivatives (cash flow hedges)Accumulated
Other
Comprehensive(Loss) Income
Balance at December 31,$8,746 (5,240)315 3,821 (9,605)(3,625)894 (12,336)
Current - period other comprehensive income15,388 239 (6,117)9,510 19,854 57 (813)19,098 
Balance at September 30,$24,134 (5,001)(5,802)13,331 10,249 (3,568)81 6,762 
The following tables summarize the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of income for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Reclassifications From Accumulated Other Comprehensive
Income ("AOCI")
Amount reclassified from AOCI for the three months ended September 30,Affected line item in the Consolidated
Statement of Income
20202019
Details of AOCI:
Post-retirement obligations:
Amortization of actuarial losses$112 48 
Compensation and employee benefits (1)
(27)(13)Income tax expense
Total reclassification$85 35 Net of tax

39

Reclassifications From Accumulated Other Comprehensive
Income ("AOCI")
Amount reclassified from AOCI for the nine months ended September 30,Affected line item in the Consolidated
Statement of Income
20202019
Details of AOCI:
Post-retirement obligations:
Amortization of actuarial losses$336 142 
Compensation and employee benefits (1)
(97)(39)Income tax expense
Total reclassification$239 103 Net of tax
(1) This item is included in the computation of net periodic benefit cost. See Note 6. Components of Net Periodic Benefit Cost.

Note 11. Derivative and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through the management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.
Non-designated Hedges. Derivatives not designated in qualifying hedging relationships are not speculative and result from a service the Company provides to certain qualified commercial borrowers in loan related transactions which, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company executes interest rate swaps with qualified commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. The interest rate swap agreement which the Company executes with the commercial borrower is collateralized by the borrower's commercial real estate financed by the Company. As the Company has not elected to apply hedge accounting and these interest rate swaps do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At September 30, 2020 and December 31, 2019, the Company had 158 and 92 loan related interest rate swaps, respectively, with aggregate notional amounts of $2.44 billion and $1.61 billion, respectively.
The Company periodically enters into risk participation agreements ("RPAs"), with the Company functioning as either the lead institution, or as a participant when another company is the lead institution on a commercial loan. These RPAs are entered into to manage the credit exposure on interest rate contracts associated with these loan participation agreements. Under the RPAs, the Company will either receive or make a payment in the event the borrower defaults on the related interest rate contract. The Company has minimum collateral posting thresholds with certain of its risk participation counterparties, and has posted collateral of $650,000 against the potential risk of default by the borrower under these agreements. At September 30, 2020 and December 31, 2019, the Company had 13 credit derivatives, with aggregate notional amounts of $111.8 million and $106.0 million, respectively, from participations in interest rate swaps as part of these loan participation arrangements. At September 30, 2020 and December 31, 2019, the fair value of these credit derivatives were $540,000 and $47,000, respectively.
Cash Flow Hedges of Interest Rate Risk. The Company’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable payment amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
Changes in the fair value of derivatives designated and that qualify as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended September 30, 2020 and 2019, such derivatives were used to hedge the variable cash outflows associated with FHLBNY borrowings.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $3.5 million will be reclassified as an increase to interest expense. As of September 30, 2020, the Company had 15 outstanding interest rate derivatives with an aggregate notional amount of $640.0 million that were each designated as a cash flow hedge of interest rate risk.
40

The tables below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at September 30, 2020 and December 31, 2019 (in thousands):
At September 30, 2020
Asset DerivativesLiability Derivatives
Consolidated Statements of Financial ConditionFair
Value		Consolidated Statements of Financial ConditionFair
Value
Derivatives not designated as a hedging instrument:
Interest rate productsOther assets$124,995 Other liabilities126,577 
Credit contractsOther assets540 Other liabilities— 
Total derivatives not designated as a hedging instrument$125,535 126,577 
Derivatives designated as a hedging instrument:
Interest rate productsOther assets$— Other liabilities7,813 
Total derivatives designated as a hedging instrument$— 7,813 

At December 31, 2019
Asset DerivativesLiability Derivatives
Consolidated Statements of Financial ConditionFair
Value		Consolidated Statements of Financial ConditionFair
Value
Derivatives not designated as a hedging instrument:
Interest rate productsOther assets$38,830 Other liabilities39,356 
Credit contractsOther assets47 Other liabilities— 
Total derivatives not designated as a hedging instrument$38,877 39,356 
Derivatives designated as a hedging instrument:
Interest rate productsOther assets$428 Other liabilities— 
Total derivatives designated as a hedging instrument$428 — 
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three and nine months ended September 30, 2020 and 2019 (in thousands).
Gain (loss) recognized in income on derivatives for the three months ended
Consolidated Statements of IncomeSeptember 30, 2020September 30, 2019
Derivatives not designated as a hedging instrument:
Interest rate productsOther income$26 2,307 
Credit contractsOther income460 (71)
Total$486 2,236 
Derivatives designated as a hedging instrument:
Interest rate productsInterest expense$855 157 
Total$855 157 

41

Gain (loss) recognized in income on derivatives for the nine months ended
Consolidated Statements of IncomeSeptember 30, 2020September 30, 2019
Derivatives not designated as a hedging instrument:
Interest rate productsOther income$(1,022)212 
Credit contractsOther income459 (56)
Total$(563)156 
Derivatives designated as a hedging instrument:
Interest rate productsInterest expense$875 466 
Total$875 466 
The Company has agreements with certain of its dealer counterparties which contain a provision that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be deemed in default on its derivative obligations.
In addition, the Company has agreements with certain of its dealer counterparties which contain a provision that if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
At September 30, 2020, the Company had four dealer counterparties. The Company had a net liability position with respect to all four of the counterparties. The termination value for this net liability position, which includes accrued interest, was $135.5 million at September 30, 2020. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $136.1 million against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2020, it could have been required to settle its obligations under the agreements at the termination value.
Note 12. Revenue Recognition
The Company generates revenue from several business channels. The guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606) does not apply to revenue associated with financial instruments, including interest income on loans and investments, which comprise the majority of the Company's revenue. For the three months and nine months ended September 30, 2020, the out-of-scope revenue related to financial instruments was 81.9% and 83.5% of the Company's total revenue, respectively, compared to 85.8% and 87.0% for the three and nine months ended September 30, 2019, respectively. Revenue-generating activities that are within the scope of Topic 606, are components of non-interest income. These revenue streams are generally classified into three categories: wealth management revenue, insurance agency income and banking service charges and other fees.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2020 and 2019:
Three months ended September 30,Nine months ended September 30,
(in-thousands)2020201920202019
Non-interest income
In-scope of Topic 606:
Wealth management fees$6,847 6,084 19,075 16,406 
Insurance agency income1,711 — 1,711 — 
Banking service charges and other fees:
Service charges on deposit accounts2,473 3,386 7,520 9,853 
Debit card and ATM fees1,693 1,474 4,167 4,271 
Total banking service charges and other fees4,166 4,860 11,687 14,124 
Total in-scope non-interest income12,724 10,944 32,473 30,530 
Total out-of-scope non-interest income7,902 7,103 19,509 15,539 
Total non-interest income$20,626 18,047 51,982 46,069 
42

Wealth management fee income represents fees earned from customers as consideration for asset management, investment advisory and trust services. The Company’s performance obligation is generally satisfied monthly and the resulting fees are recognized monthly. The fee is generally based upon the average market value of the assets under management ("AUM") for the month and the applicable fee rate. For customers acquired in the April 1, 2019, T&L transaction, the fee is based upon AUM at the end of the preceding quarter and the applicable fee rate. The monthly accrual of wealth management fees is recorded in other assets on the Company's Consolidated Statements of Financial Condition. Fees are received from the customer either on a monthly or quarterly basis. The Company does not earn performance-based incentives. Other optional services such as tax return preparation, financial planning and estate settlement are also available to existing customers. The Company’s performance obligation for these transaction-based services are generally satisfied, and related revenue recognized, at either a point in time when the service is completed, or in the case of estate settlement, over a relatively short period of time, as each service component is completed.
Insurance agency income, consisting of commissions and fees, are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into the Company's systems, whichever is later. Commission revenues related to installment billings are recognized on the later of the effective date of the policy or the invoice date. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments.
Service charges on deposit accounts include overdraft service fees, account analysis fees and other deposit related fees. These fees are generally transaction-based, or time-based services. The Company's performance obligation for these services are generally satisfied, and revenue recognized, at the time the transaction is completed, or the service rendered. Fees for these services are generally received from the customer either at the time of transaction, or monthly. Debit card and ATM fees are generally transaction-based. Debit card revenue is primarily comprised of interchange fees earned when a customer's Company card is processed through a card payment network. ATM fees are largely generated when a Company cardholder uses a non-Company ATM, or a non-Company cardholder uses a Company ATM. The Company's performance obligation for these services is satisfied when the service is rendered. Payment is generally received at time of transaction or monthly.
Out-of-scope non-interest income primarily consists of Bank-owned life insurance and net fees on loan level interest rate swaps, along with gains and losses on the sale of loans and foreclosed real estate, loan prepayment fees and loan servicing fees. None of these revenue streams are subject to the requirements of Topic 606.
Note 13. Leases
On January 1, 2019, the Company adopted ASU 2016-02, "Leases" (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. The Company elected the modified retrospective transition option effective with the period of adoption, elected not to recast comparative periods presented when transitioning to the new leasing standard and adjustments, if required, are made at the beginning of the period through a cumulative-effect adjustment to opening retained earnings. The Company also elected practical expedients, which allowed the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. The adoption of the new standard resulted in the Company recording a right-of-use asset and an operating lease liability of $44.9 million and $46.1 million, respectively, based on the present value of the expected remaining lease payments at January 1, 2019.
In addition, on January 1, 2019, the Company had $5.9 million of net deferred gains associated with several sale and leaseback transactions executed prior to the adoption of ASU 2016-02. In accordance with the guidance, these net deferred gains were adjusted, net of income tax, as a cumulative-effect adjustment to opening retained earnings.
All of the leases in which the Company is the lessee are classified as operating leases and are primarily comprised of real estate properties for branches and administrative offices with terms extending through 2040.
The following table represents the consolidated statements of financial condition classification of the Company’s right-of use-assets and lease liabilities at September 30, 2020 (in thousands):
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ClassificationSeptember 30, 2020December 31, 2019
Lease Right-of-Use Assets:
Operating lease right-of-use assetsOther assets$41,709 $41,754 
Lease Liabilities:
Operating lease liabilitiesOther liabilities$42,654 $42,815 
The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company considers the first renewal option to be reasonably certain and includes it in the calculation of the right-of use asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception based upon the term of the lease. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was applied.
At September 30, 2020, the weighted-average remaining lease term and the weighted-average discount rate for the Company's operating leases were 9.0 years and 3.25%, respectively.
The following tables represent lease costs and other lease information for the Company's operating leases. The variable lease cost primarily represents variable payments such as common area maintenance and utilities (in thousands):
Three months ended September 30, 2020Three months ended September 30, 2019
Lease Costs
Operating lease cost $2,303 $2,127 
Variable lease cost 754 727 
Total lease cost$3,057 $2,854 

Nine months ended September 30, 2020Nine months ended September 30, 2019
Lease Costs
Operating lease cost$6,565 $6,303 
Variable lease cost2,085 2,083 
Total lease cost$8,650 $8,386 

Cash paid for amounts included in the measurement of lease liabilities:Nine months ended September 30, 2020Nine months ended September 30, 2019
Operating cash flows from operating leases$6,528 6,179 
During the three and nine months ended September 30, 2020, the Company added nine new lease obligations related to the SB One acquisition. The Company recorded a $3.8 million right-of-use asset and lease liability for these lease obligations.
Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2020 were as follows (in thousands):
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Operating leases
Twelve months ended:
Remainder of 2020$2,322 
20217,018 
20226,137 
20235,622 
20245,219 
Thereafter23,584 
Total future minimum lease payments49,902 
Amounts representing interest7,248 
Present value of net future minimum lease payments$42,654 


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” "project," "intend," “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those set forth in Item 1A of the Company's Annual Report on Form 10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in accounting policies and practices that may be adopted by the regulatory agencies and the accounting standards setters, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
In addition, 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, financial condition and results of operations. 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 the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our wealth management revenues may decline with continuing market turmoil; we may face the risk of a goodwill write-down due to stock price decline; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.
The Company cautions readers not to place undue reliance on any forward-looking statements which speak only as of the date made. The Company advises readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not have any obligation to update any forward-looking statements to reflect events or circumstances after the date of this statement.
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Acquisition
SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans and $1.76 billion to total deposits, and added 18 full-service banking offices in New Jersey and New York. The Company expects to close three of the acquired banking offices in the fourth quarter of 2020. As part of the acquisition, the addition of SB One Insurance Agency allows the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid in the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.
Merger-related expenses, which are recorded in other operating expenses on the Consolidated Statements of Income, totaled $2.0 and $3.1 million for the three and nine months ended September 30, 2020, respectively, and primarily consist of consulting and legal expenses.
Acquisition of Tirschwell & Loewy, Inc.
On April 1, 2019, Beacon Trust Company ("Beacon") completed its acquisition of certain assets of Tirschwell & Loewy, Inc. ("T&L"), a New York City-based independent registered investment adviser. Beacon is a wholly owned subsidiary of Provident 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 nine months ended September 30, 2020 due to worsening economic conditions and declining asset valuations attributable to the COVID-19 pandemic, asset valuations improved in the third 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 at September 30, 2020, from December 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
On January 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
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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 historical average macroeconomic factors. 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 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 at January 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. As the impact of the COVID-19 pandemic continues to unfold, the effectiveness of medical advances, government programs, and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, credit losses and higher levels of provisions. 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
47

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 at September 30, 2020 or December 31, 2019.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2020 AND DECEMBER 31, 2019
Total assets at September 30, 2020 were $12.87 billion, a $3.06 billion increase from December 31, 2019. The increase in total assets was primarily due to $2.20 billion of assets acquired from SB One, which includes $22.4 million of goodwill and $10.0 million of other intangible assets, as well as an increase of $474.8 million related to commercial loans made under the Paycheck Protection Program ("PPP").
The Company’s loan portfolio increased $2.42 billion to $9.76 billion at September 30, 2020, from $7.33 billion at December 31, 2019, which included $1.77 billion of loans acquired from SB One and $474.8 million of commercial PPP loans. For the nine months ended September 30, 2020, loan originations, including advances on lines of credit, totaled $2.63 billion, compared with $2.04 billion for the same period in 2019. During the nine months ended September 30, 2020, the loan portfolio had net increases of $1.17 billion in commercial mortgage loans, $655.4 million in commercial loans, $319.2 million in multi-family mortgage loans, $242.0 million in residential mortgage loans, $32.3 million in construction loans and $15.1 million in consumer loans. Commercial real estate, commercial and construction loans represented 82.3% of the loan portfolio at September 30, 2020, compared to 80.0% at December 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 $218.2 million and $126.6 million, respectively, at September 30, 2020, compared to $213.2 million and $105.3 million, respectively, at December 31, 2019. One SNC relationship consisting of three individual loans was 90 days or more delinquent at September 30, 2020.
The Company had outstanding junior lien mortgages totaling $129.1 million at September 30, 2020. Of this total, 18 loans totaling $927,738 were 90 days or more delinquent. These loans were allocated a total loss reserve of $26,447.
The following table sets forth information regarding the Company’s non-performing assets as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020December 31, 2019
Mortgage loans:
Residential$9,424 8,543 
Commercial16,568 5,270 
Construction151 — 
Total mortgage loans26,143 13,813 
Commercial loans21,269 25,160 
Consumer loans1,541 1,221 
Total non-performing loans48,953 40,194 
Foreclosed assets4,720 2,715 
Total non-performing assets$53,673 42,909 
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The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020December 31, 2019
Mortgage loans:
Residential$7,215 2,579 
Commercial4,629 — 
Multi-family488 — 
Construction 918 — 
Total mortgage loans13,250 2,579 
Commercial loans949 95 
Consumer loans862 337 
Total 60-89 day delinquent loans$15,061 3,011 
At September 30, 2020, the allowance for loan losses totaled $106.3 million, representing 1.09% of total loans, or 1.16% 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. The allowance for loan losses increased $50.8 million for the nine months ended September 30, 2020. The increase in the allowance for credit losses was attributable to elevated provisions for credit losses primarily due to the current weak economic forecast attributable to the COVID-19 pandemic and the adoption of CECL, along with $15.5 million and $13.6 million additions to the allowance for credit losses for loans and purchased credit deteriorated ("PCD") loans, respectively, related to the acquisition of the SB One loan portfolio. In addition, the Company, for the three and nine months ended September 30, 2020, had net recoveries of $59,000 and net charge-offs of $5.5 million, respectively, compared to net charge-offs of $6.0 million and $8.4 million, respectively, for the same periods in 2019.
Total non-performing loans were $49.0 million, or 0.50% of total loans at September 30, 2020, compared to $40.2 million, or 0.55% of total loans at December 31, 2019. The $8.8 million increase in non-performing loans consisted of an $11.3 million increase in non-performing commercial mortgage loans, an $881,000 increase in non-performing residential mortgage loans and a $320,000 increase in non-performing consumer loans, partially offset by a $3.9 million decrease in non-performing commercial loans.
At September 30, 2020 and December 31, 2019, the Company held foreclosed assets of $4.7 million and $2.7 million, respectively. During the nine months ended September 30, 2020, there were three additions to foreclosed assets with a carrying value of $2.6 million and 11 properties sold with a carrying value of $2.5 million and valuation charges of $556,000. Foreclosed assets acquired from SB One totaled $2.4 million. Foreclosed assets at September 30, 2020 consisted of $2.8 million of commercial real estate, $1.5 million of commercial vehicles and $400,000 of residential real estate.
Non-performing assets totaled $53.7 million, or 0.42% of total assets at September 30, 2020, compared to $42.9 million, or 0.44% of total assets at December 31, 2019.
Cash and cash equivalents were $510.1 million at September 30, 2020, a $323.4 million increase from December 31, 2019, largely due to increases in cash collateral pledged to counterparties to secure loan-level swaps and short-term investments and $78.1 million of cash and cash equivalents acquired from SB One.
Total investments were $1.62 billion at September 30, 2020, a $129.2 million increase from December 31, 2019. This increase was mainly attributable to investment securities acquired from SB One, partially offset by repayments of mortgage-backed securities, maturities and calls of certain municipal and agency bonds.
Banking premises and equipment increased $17.7 million for the nine months ended September 30, 2020, to $72.9 million, primarily due to assets acquired from SB One at a fair value of $16.6 million.
Total deposits increased $2.46 billion during the nine months ended September 30, 2020 to $9.56 billion. The increase in total deposits consisted of $1.76 billion of deposits acquired from SB One and additional net deposit growth of $698.9 million. Total core deposits, consisting of savings and demand deposit accounts, increased $2.05 billion to $8.41 billion at September 30, 2020, while total time deposits increased $410.7 million to $1.14 billion at September 30, 2020. The increase in core deposits was largely attributable to an $821.6 million increase in non-interest bearing demand deposits, which partially benefited from deposits retained from activity associated with PPP loans and government stimulus, a $511.1 million increase in interest bearing demand deposits, a $386.7 million increase in money market deposits and a $326.5 million increase in savings deposits. The increase in time deposits was largely the result of $577.3 million acquired from SB One, partially offset by the outflow of time deposits totaling $166.6 million. Core deposits represented 88.0% of total deposits at September 30, 2020, compared to 89.7% at December 31, 2019.
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Borrowed funds increased $287.9 million during the nine months ended September 30, 2020, to $1.41 billion. The increase in borrowings for the period was primarily due to $201.6 million acquired from SB One and asset funding requirements. Borrowed funds represented 11.0% of total assets at September 30, 2020, a decrease from 11.5% at December 31, 2019.
Stockholders’ equity increased $187.7 million during the nine months ended September 30, 2020, to $1.60 billion, primarily due to common stock issued for the purchase of SB One, net income earned for the period and an increase in unrealized gains on available for sale debt securities, partially offset by 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, and common stock repurchases. The Company issued 12,788,370 shares of common stock from treasury stock in the acquisition of SB One. For the nine months ended September 30, 2020, common stock repurchases totaled 455,343 shares at an average cost of $18.04, of which 49,461 shares, at an average cost of $19.69, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At September 30, 2020, approximately 1.1 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 predictable sources of funds. Changes in interest rates, local, national and international economic conditions, along with the competitive marketplace can influence the repayment of loan principal, loan prepayments, prepayments on mortgage-backed securities and deposit flows. Cash flows may be further impacted by the COVID-19 pandemic and related government response.

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 September 30, 2020, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:
September 30, 2020
RequiredRequired with Capital Conservation BufferActual
AmountRatioAmountRatioAmountRatio
(Dollars in thousands)
Bank:(1)
Tier 1 leverage capital$464,247 4.00 %$464,247 4.00 %$1,074,518 9.26 %
Common equity Tier 1 risk-based capital477,948 4.50 743,475 7.00 1,074,518 10.12 
Tier 1 risk-based capital637,264 6.00 902,791 8.50 1,074,518 10.12 
Total risk-based capital849,686 8.00 1,115,212 10.50 1,207,888 11.37 
Company:
Tier 1 leverage capital$464,675 4.00 %$464,675 4.00 %$1,165,320 10.03 %
Common equity Tier 1 risk-based capital480,805 4.50 747,919 7.00 1,152,433 10.79 
Tier 1 risk-based capital641,073 6.00 908,187 8.50 1,165,320 10.91 
Total risk-based capital854,764 8.00 1,121,878 10.50 1,272,647 11.91 
(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 NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
General. The Company reported net income of $27.1 million, or $0.37 per basic and diluted share for the three months ended September 30, 2020, compared to net income of $31.4 million, or $0.49 per basic and diluted share for the three months ended September 30, 2019. For the nine months ended September 30, 2020, the Company reported net income of $56.4 million, or $0.84 per basic and diluted share, compared to net income of $86.7 million, or $1.34 per basic and diluted share, for the same period last year.
The Company’s earnings for the three and nine months ended September 30, 2020 were impacted by the January 1, 2020 adoption of a new accounting standard that requires the current recognition of allowances for losses expected to be incurred over the life of covered assets (“CECL”). The acquisition of SB One and changing economic forecasts attributable to the COVID-19 pandemic and projected economic recovery led to provisions for credit losses and off-balance sheet credit exposures totaling $6.7 million and $38.6 million for the three and nine months ended September 30, 2020, respectively. The Company's earnings were further impacted by COVID-19 related costs which totaled $200,000 and $1.2 million for the three and nine months ended September 30, 2020, respectively.
Net Interest Income. Total net interest income increased $8.5 million to $82.0 million for the quarter ended September 30, 2020, from $73.5 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, total net interest income decreased $1.3 million to $223.8 million, from $225.1 million for the same period in 2019. Interest income for the quarter ended September 30, 2020 increased $427,000 to $93.5 million, from $93.0 million for the same period in 2019. For the nine months ended September 30, 2020, interest income decreased $17.9 million to $263.2 million, from $281.1 million for the nine months ended September 30, 2019. Interest expense decreased $8.0 million to $11.5 million for the quarter ended September 30, 2020, from $19.5 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, interest expense decreased $16.7 million to $39.3 million, from $56.0 million for the nine months ended September 30, 2019. Both comparative periods were favorably impacted by the net assets acquired from SB One, partially offset by 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. For the three and nine months ended September 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.
The net interest margin decreased 22 basis points to 3.01% for the quarter ended September 30, 2020, compared to 3.23% for the quarter ended September 30, 2019. The weighted average yield on interest-earning assets decreased 65 basis points to 3.44% for the quarter ended September 30, 2020, compared to 4.09% for the quarter ended September 30, 2019, while the
51

weighted average cost of interest bearing liabilities decreased 56 basis points for the quarter ended September 30, 2020 to 0.57%, compared to the third quarter of 2019. The average cost of interest bearing deposits for the quarter ended September 30, 2020 was 0.44%, compared to 0.87% for the same period last year. Average non-interest bearing demand deposits totaled $2.21 billion for the quarter ended September 30, 2020, compared to $1.51 billion for the quarter ended September 30, 2019. The average cost of all deposits, including non-interest bearing deposits, was 33 basis points for the quarter ended September 30, 2020, compared with 68 basis points for the quarter ended September 30, 2019. The average cost of borrowed funds for the quarter ended September 30, 2020 was 1.19%, compared to 2.13% for the same period last year.
For the nine months ended September 30, 2020, the net interest margin decreased 29 basis points to 3.06%, compared to 3.35% for the nine months ended September 30, 2019. The weighted average yield on interest earning assets declined 59 basis points to 3.60% for the nine months ended September 30, 2020, compared to 4.19% for the nine months ended September 30, 2019, while the weighted average cost of interest bearing liabilities decreased 38 basis points to 0.72% for the nine months ended September 30, 2020, compared to 1.10% for the same period last year. The average cost of interest bearing deposits decreased 26 basis points to 0.58% for the nine months ended September 30, 2020, compared to 0.84% for the same period last year. Average non-interest bearing demand deposits totaled $1.85 billion for the nine months ended September 30, 2020, compared with $1.47 billion for the nine months ended September 30, 2019. The average cost of all deposits, including non-interest bearing deposits, was 44 basis points for the nine months ended September 30, 2020, compared with 61 basis points for the nine months ended September 30, 2019. The average cost of borrowings for the nine months ended September 30, 2020 was 1.42%, compared to 2.13% for the same period last year.
Interest income on loans secured by real estate increased $2.5 million to $58.9 million for the three months ended September 30, 2020, from $56.4 million for the three months ended September 30, 2019. Commercial loan interest income increased $518,000 to $20.6 million for the three months ended September 30, 2020, from $20.1 million for the three months ended September 30, 2019. Consumer loan interest income decreased $343,000 to $4.3 million for the three months ended September 30, 2020, from $4.6 million for the three months ended September 30, 2019. For the three months ended September 30, 2020, the average balance of total loans increased $1.73 billion to $8.93 billion, compared to the same period in 2019, largely due to total loans acquired from SB One. The average yield on total loans for the three months ended September 30, 2020 decreased 73 basis points to 3.71%, from 4.44% for the same period in 2019.
Interest income on loans secured by real estate decreased $4.4 million to $162.6 million for the nine months ended September 30, 2020, from $167.1 million for the nine months ended September 30, 2019. Commercial loan interest income decreased $5.6 million to $58.2 million for the nine months ended September 30, 2020, from $63.8 million for the nine months ended September 30, 2019. Consumer loan interest income decreased $2.2 million to $12.0 million for the nine months ended September 30, 2020, from $14.2 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, the average balance of total loans increased $760.6 million to $7.93 billion, from $7.17 billion for the same period in 2019, primarily due to total loans acquired from SB One, and organic growth, including PPP loans. The average yield on total loans for the nine months ended September 30, 2020 decreased 65 basis points to 3.88%, from 4.53% for the same period in 2019.
Interest income on held to maturity debt securities decreased $239,000 to $2.8 million for the quarter ended September 30, 2020, compared to the same period last year. Average held to maturity debt securities decreased $20.3 million to $444.2 million for the quarter ended September 30, 2020, from $464.6 million for the same period last year. Interest income on held to maturity debt securities decreased $747,000 to $8.7 million for the nine months ended September 30, 2020, compared to the same period in 2019. Average held to maturity debt securities decreased $24.9 million to $445.9 million for the nine months ended September 30, 2020, from $470.8 million for the same period last year.
Interest income on available for sale debt securities and FHLBNY stock decreased $1.6 million to $6.3 million for the quarter ended September 30, 2020, from $7.9 million for the quarter ended September 30, 2019. The average balance of available for sale debt securities and FHLBNY stock decreased $2.7 million to $1.16 billion for the three months ended September 30, 2020, compared to the same period in 2019. Interest income on available for sale debt securities and FHLBNY stock decreased $4.9 million to $19.7 million for the nine months ended September 30, 2020, from $24.6 million for the same period last year. The average balance of available for sale debt securities and FHLBNY stock decreased $71.5 million to $1.08 billion for the nine months ended September 30, 2020.
The average yield on total securities decreased to 2.12% for the three months ended September 30, 2020, compared with 2.71% for the same period in 2019. For the nine months ended September 30, 2020, the average yield on total securities decreased to 2.31%, compared with 2.80% for the same period in 2019.
Interest expense on deposit accounts decreased $4.3 million to $7.4 million for the quarter ended September 30, 2020, compared with $11.7 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020,
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interest expense on deposit accounts decreased $7.9 million to $26.0 million, from $33.9 million for the same period last year. The average cost of interest bearing deposits decreased to 0.44% for the third quarter of 2020 and 0.58% for the nine months ended September 30, 2020, from 0.87% and 0.84% for the three and nine months ended September 30, 2019, respectively. The average balance of interest bearing core deposits for the quarter ended September 30, 2020 increased $1.23 billion to $5.78 billion. For the nine months ended September 30, 2020, average interest bearing core deposits increased $627.1 million, to $5.25 billion, from $4.62 billion for the same period in 2019. The increase in average core deposits for both the three and nine months ended September 30, 2020 was largely due to deposits acquired from SB One, combined with organic growth, activity associated with PPP loans and government stimulus. Average time deposit account balances increased $130.4 million, to $957.5 million for the quarter ended September 30, 2020, from $827.1 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, average time deposit account balances decreased $23.6 million, to $778.8 million, from $802.4 million for the same period in 2019.
Interest expense on borrowed funds decreased $3.9 million to $3.9 million for the quarter ended September 30, 2020, from $7.8 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, interest expense on borrowed funds decreased $8.9 million to $13.1 million, from $22.1 million for the nine months ended September 30, 2019. The average cost of borrowings decreased to 1.19% for the three months ended September 30, 2020, from 2.13% for the three months ended September 30, 2019. The average cost of borrowings decreased to 1.42% for the nine months ended September 30, 2020, from 2.13% for the same period last year. Average borrowings decreased $152.5 million to $1.29 billion for the quarter ended September 30, 2020, from $1.45 billion for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, average borrowings decreased $152.8 million to $1.23 billion, compared to $1.39 billion for the nine months ended September 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 valuation of the allowance.
The Company recorded provisions for credit losses of $6.4 million and $32.0 million for the three and nine months ended September 30, 2020, respectively, compared with provisions of $500,000 and $10.2 million for the three and nine months ended September 30, 2019, respectively. The increase in the provision for credit losses for the three months ended September 30, 2020 compared to the same period in 2019 was related to the January 1, 2020 adoption of CECL and a $15.5 million provision for credit losses related to the acquisition of the SB One loan portfolio, partially offset by a $9.1 million reversal attributable to a still concerning, but improved economic forecast when compared with the trailing quarter. The increase in the provision for credit losses for the nine months ended September 30, 2020 compared to the same period in 2019 was related to the January 1, 2020 adoption of CECL, the current weak economic forecast attributable to the COVID-19 pandemic and a $15.5 million provision for credit losses related to the acquisition of the SB One loan portfolio. Future credit loss provisions are subject to significant uncertainty given the undetermined nature of prospective changes in economic conditions, as the impact of the COVID-19 pandemic 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 $20.6 million for the quarter ended September 30, 2020, an increase of $2.6 million, compared to the same period in 2019. Non-interest income for the three months ended September 30, 2020, included two months of income associated with the operation of the former SB One franchise. Insurance agency income, a new revenue opportunity for the Company resulting from the SB One acquisition, totaled $1.7 million for the quarter ended September 30, 2020. Other income increased $1.6 million to $4.7 million for the three months ended September 30, 2020, compared to the quarter ended September 30, 2019, primarily due to a $1.2 million increase in net fees on loan-level interest rate swap transactions, a $171,000 increase in net gains on the sale of foreclosed real estate and a $159,000 increase in net gains on the sale of fixed assets. Wealth management income increased $763,000 to $6.8 million for the three months ended September 30, 2020. The increase was largely a function of market improvements in the value of assets under management and an increase in managed mutual fund fees. Also, income from Bank-owned life insurance ("BOLI") increased $372,000 to $1.6 million for the three months ended September 30, 2020, compared to the same period in 2019, primarily due to an increase in benefit claims, partially offset by lower equity valuations. Partially offsetting these increases, fee income decreased $1.9 million to $5.7 million for the three months ended September 30, 2020, compared to the same period in 2019, largely due to a $1.0 million
53

decrease in commercial loan prepayment fees and an $850,000 decrease in deposit related fees. The decrease in fee income is largely due to the effects of COVID-19 on consumer and business activities.
For the nine months ended September 30, 2020, non-interest income totaled $52.0 million, an increase of $5.9 million, compared to the same period in 2019. Other income increased $4.9 million to $9.7 million for the nine months ended September 30, 2020, compared to $4.8 million for the same period in 2019, due to a $3.9 million increase in net fees on loan-level interest rate swap transactions, an $800,000 increase in net gains on the sale of fixed assets and a $684,000 increase in net gains on the sale of foreclosed real estate, partially offset by a $300,000 decrease in net gains from the sale of loans. Wealth management income increased $2.7 million to $19.1 million for the nine months ended September 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. Also, insurance agency income totaled $1.7 million derived from the July 31, 2020 acquisition of SB One. Partially offsetting these increases, fee income decreased $3.4 million, primarily due to a $2.1 million decrease in deposit related fees, an $838,000 decrease in commercial loan prepayment fees and a $100,000 decrease in non-deposit investment fee income, all largely due to the effects of COVID-19 on consumer and business activities.
Non-Interest Expense. For the three months ended September 30, 2020, non-interest expense totaled $59.8 million, an increase of $10.0 million, compared to the three months ended September 30, 2019. Non-interest expense for the three months ended September 30, 2020, included non-recurring costs related to the acquisition of SB One and two months of expenses associated with the operation of the former SB One franchise. Compensation and benefits expense increased $6.3 million to $35.7 million for the three months ended September 30, 2020, compared to $29.4 million for the same period in 2019. This increase was principally due to an increase in salary expense associated with the addition of former SB One employees, COVID-19 supplemental pay for branch employees and an increase in severance expense, partially offset by a decrease in stock-based compensation. Other operating expenses increased $1.9 million to $9.8 million for the three months ended September 30, 2020, compared to the same period in 2019, largely due to increases in legal and consulting expenses, which included $1.8 million related to the acquisition of SB One. FDIC insurance increased $1.2 million due to the addition of SB One, along with increases in both the insurance assessment rate and total assets subject to assessment. Data processing expense increased $912,000 to $5.0 million for the three months ended September 30, 2020, compared with the same period in 2019, primarily due to increases in software subscription service expense and on-line banking costs. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures under the CECL standard was reduced $575,000 in the quarter, due to a decrease in loss factors associated with the current economic forecast, partially offset by an increase in the pipeline of loans approved awaiting closing, largely due to the addition of the SB One loan pipeline.
Non-interest expense totaled $169.2 million for the nine months ended September 30, 2020, an increase of $21.3 million, compared to $147.8 million for the nine months ended September 30, 2019. Compensation and benefits expense increased $9.4 million to $96.1 million for the nine months ended September 30, 2020, compared to $86.7 million for the nine months ended September 30, 2019, primarily due to an increase in salary expense associated with the addition of former SB One and T&L employees, an increase in severance expense and COVID-19 supplemental pay for branch employees, partially offset by the increased deferral of salary expense related to PPP loan originations. For the nine months ended September 30, 2020, credit loss expense for off-balance sheet credit exposures was $5.7 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. Other operating expenses increased $3.8 million to $26.4 million for the nine months ended September 30, 2020, compared to the same period in 2019, largely due to an increase in legal and consulting expenses related to the SB One transaction and a market valuation adjustment on foreclosed real estate. Data processing expense increased $2.0 million to $14.4 million for the nine months ended September 30, 2020, compared to $12.4 million for the same period in 2019, principally due to increases in software subscription service expense and on-line banking costs. FDIC insurance increased $786,000 for the nine months ended September 30, 2020, primarily due to the addition of SB One and increases in both the insurance assessment rate and total assets subject to assessment. Partially offsetting these increases, net occupancy expense decreased $267,000 to $19.4 million for the nine months ended September 30, 2020, compared to the same period in 2019, due to reductions in snow removal, depreciation expenses and branch closures, partially offset by additional occupancy expense related to SB One.
Income Tax Expense. For the three months ended September 30, 2020, the Company’s income tax expense was $9.3 million with an effective tax rate of 25.5%, compared with income tax expense of $9.9 million with an effective tax rate of 24.0% for the three months ended September 30, 2019. For the nine months ended September 30, 2020, the Company's income tax expense was $18.3 million with an effective tax rate of 24.5%, compared with $26.4 million with an effective tax rate of 23.4% for the nine months ended September 30, 2019. The decreases in tax expense for the three and nine months ended September 30, 2020 compared with the same periods in 2019 were largely the result of decreases in taxable income, while the increases in the effective tax rates for the three and nine months ended September 30, 2020 compared with the same periods in 2019 were
54

primarily due to increased projections of taxable income for the remainder of the year and decreases in the proportion of income derived from tax exempt sources to total pre-tax income.

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Analysis. Interest rate risk is the exposure of a bank’s current and future earnings and capital arising from adverse movements in interest rates. The guidelines of the Company’s interest rate risk policy seek to limit the exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. To minimize interest rate risk, the Company generally sells all 20- and 30-year fixed-rate mortgage loans at origination. Commercial real estate loans generally have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the Prime rate, the Federal Funds rate or LIBOR. Investment securities purchases generally have maturities of five years or less, and mortgage-backed securities have weighted average lives between three and five years.
The Asset/Liability Committee meets on at least a monthly basis to review the impact of interest rate changes on net interest income, net interest margin, net income and the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net income.
The Company’s strategy for liabilities has been to maintain a stable core-funding base by focusing on core deposit account acquisition and increasing products and services per household. The Company’s ability to retain maturing time deposit accounts is the result of its strategy to remain competitively priced within its marketplace. The Company’s pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLBNY during periods of pricing dislocation.
Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation models. The analysis captures changes in net interest income using flat rates as a base, a most likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to policy limits for acceptable change. The Company periodically reviews historical deposit repricing activity and makes modifications to certain assumptions used in its income simulation model regarding the interest rate sensitivity of deposits without maturity dates. These modifications are made to more closely reflect the most likely results under the various interest rate change scenarios. Since it is inherently difficult to predict the sensitivity of interest bearing deposits to changes in interest rates, the changes in net interest income due to changes in interest rates cannot be precisely predicted. There are a variety of reasons that may cause actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes.
Specific assumptions used in the simulation model include:
•Parallel yield curve shifts for market rates;
•Current asset and liability spreads to market interest rates are fixed;
•Traditional savings and interest-bearing demand accounts move at 10% of the rate ramp in either direction;
•Retail Money Market and Business Money Market accounts move at 25% and 75% of the rate ramp in either direction respectively, subject to certain interest rate floors; and
•Higher-balance demand deposit tiers and promotional demand accounts move at 50% to 75% of the rate ramp in either direction, subject to certain interest rate floors.
The following table sets forth the results of a twelve-month net interest income projection model as of September 30, 2020 (dollars in thousands):
Change in interest rates (basis points) - Rate RampNet Interest Income
Dollar AmountDollar ChangePercent Change
-100$326,241 $(10,885)(3.2)%
Static337,126 — — 
+100
339,822 2,696 0.8 
+200
341,120 3,994 1.2 
+300
341,971 4,845 1.4 
55

The preceding table indicates that, as of September 30, 2020, in the event of a 300 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would increase 1.4%, or $4.8 million. In the event of a 100 basis point decrease in interest rates, net interest income would decrease 3.2%, or $10.9 million over the same period.

Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained interest rate shocks. The following table illustrates the result of the economic value of equity model as of September 30, 2020 (dollars in thousands):
  Present Value of EquityPresent Value of Equity as Percent of Present Value of Assets
Change in interest rates (basis points)Dollar AmountDollar ChangePercent
Change		Present Value
 Ratio		Percent
Change
-100$1,249,446 $(271,227)(17.8)%9.6 %(18.7)%
Flat1,520,673 — — 11.8 — 
+100
1,530,725 10,052 0.7 12.1 2.7 
+200
1,555,203 34,530 2.3 12.5 6.2 
+300
1,566,332 45,659 3.0 12.9 8.9 
The preceding table indicates that as of September 30, 2020, in the event of an immediate and sustained 300 basis point increase in interest rates, the present value of equity is projected to increase 3.0%, or $45.7 million. If rates were to decrease 100 basis points, the present value of equity would decrease 17.8%, or $271.2 million.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the use of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
 

56


Item 4.
CONTROLS AND PROCEDURES.
Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) were evaluated at the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. The Company’s internal control over financial reporting was modified due to the January 1, 2020 adoption of CECL and controls related to SB One.

PART II—OTHER INFORMATION
 

Item 1.
Legal Proceedings
The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition.

Item 1A.
Risk Factors
The risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 were supplemented by the Company in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Period(a) Total Number of Shares
Purchased		(b) Average
Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1)
July 1, 2020 through July 31, 202069,045 $13.90 69,045 1,139,892 
August 1, 2020 through August 31, 2020302 13.65 302 1,139,590 
September 1, 2020 through September 30, 2020202 12.81 202 1,139,388 
Total69,549 13.90 69,549 
(1) On December 20, 2012, the Company’s Board of Directors approved the purchase of up to 3,017,770 shares of its common stock under an eighth general repurchase program which commenced upon completion of the previous repurchase program. The repurchase program has no expiration date.

Item 3.
Defaults Upon Senior Securities.
Not Applicable 

Item 4.
Mine Safety Disclosures
Not Applicable

Item 5.
Other Information.
None




57


Item 6.
Exhibits.
The following exhibits are filed herewith:
2.1
3.1
3.2
4.1
31.1
31.2
32
101
The following financial statements from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, has been formatted in iXBRL.

58

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
PROVIDENT FINANCIAL SERVICES, INC.
Date:November 9, 2020By:/s/ Christopher Martin
Christopher Martin
Chairman and Chief Executive Officer (Principal Executive Officer)
Date:November 9, 2020By:/s/ Thomas M. Lyons
Thomas M. Lyons
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date:November 9, 2020By:/s/ Frank S. Muzio
Frank S. Muzio
Executive Vice President and Chief Accounting Officer

59

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