10-K 1 pfs-12312017x10k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2017
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
Commission File No. 1-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
42-1547151
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
239 Washington Street, Jersey City, New Jersey
 
07302
(Address of Principal Executive Offices)
 
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
 
New York Stock Exchange
(Title of Class)
 
(Name of Exchange on Which Registered)
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ý    NO  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.    YES  ¨    NO  ý
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
ý
  
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 February 2, 2018, there were 83,209,293 issued and 66,842,531 outstanding shares of the Registrant’s Common Stock, including 286,453 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under accounting principles generally accepted in the United States of America. The aggregate value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the Common Stock as of June 30, 2017, as quoted by the NYSE, was approximately $1.55 billion.
DOCUMENTS INCORPORATED BY REFERENCE
(1)
Proxy Statement for the 2018 Annual Meeting of Stockholders of the Registrant (Part III).




PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-K
 
Item Number
 
Page Number
PART I
1.
1A.
1B.
2.
3.
4.
 
PART II
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
PART III
10.
11.
12.
13.
14.
 
PART IV
15.
16.
 
 
 
 




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 related to the economic environment, particularly in the market areas in which Provident Financial Services, Inc. (the "Company") operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company also advises readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not have any obligation to update any forward-looking statements to reflect any subsequent events or circumstances after the date of this statement.



PART I
 
Item 1.
Business
Provident Financial Services, Inc.
The Company is a Delaware corporation which became the holding company for Provident Bank (the “Bank”) on January 15, 2003, following the completion of the conversion of the Bank to a New Jersey-chartered capital stock savings bank. On January 15, 2003, the Company issued an aggregate of 59,618,300 shares of its common stock, par value $0.01 per share in a subscription offering, and contributed $4.8 million in cash and 1,920,000 shares of its common stock to The Provident Bank Foundation, a charitable foundation established by the Bank. As a result of the conversion and related stock offering, the Company raised $567.2 million in net proceeds, of which $293.2 million was utilized to acquire all of the outstanding common stock of the Bank. The Company owns all of the outstanding common stock of the Bank, and as such, is a bank holding company subject to regulation by the Federal Reserve Board.
At December 31, 2017, the Company had total assets of $9.85 billion, total loans of $7.33 billion, total deposits of $6.71 billion, and total stockholders’ equity of $1.30 billion. The Company’s mailing address is 239 Washington Street, Jersey City, New Jersey 07302, and the Company’s telephone number is (732) 590-9200.
Capital Management. The Company paid cash dividends totaling $60.0 million and repurchased 45,123 shares of its common stock at a cost of $1.2 million in 2017. At December 31, 2017, 3.1 million shares were eligible for repurchase under the board approved stock repurchase program. The Company and the Bank were “well capitalized” at December 31, 2017 under current regulatory standards.
Available Information. The Company is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission (“SEC”). These respective reports are on file and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov). All SEC reports and amendments to these reports are available as soon as practical after they have been filed or furnished to the SEC on the Bank’s website, www.provident.bank, on the “Investor Relations” page, without charge from the Company. Information on our website should not be considered a part of this Annual Report on Form 10-K.
Provident Bank
Established in 1839, the Bank is a New Jersey-chartered capital stock savings bank operating full-service branch offices in the New Jersey counties of Hudson, Bergen, Essex, Mercer, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Union and Warren, as well as in Bucks, Lehigh and Northampton counties in Pennsylvania. As a community- and customer-oriented institution, the Bank emphasizes personal service and customer convenience in serving the financial needs of the

1



individuals, families and businesses residing in its primary market areas. The Bank attracts deposits from the general public and businesses primarily in the areas surrounding its banking offices and uses those funds, together with funds generated from operations and borrowings, to originate commercial real estate loans, commercial business loans, residential mortgage loans, and consumer loans. The Bank also invests in mortgage-backed securities and other permissible investments.
The following are highlights of Provident Bank’s operations:
Diversified Loan Portfolio. To improve asset yields and reduce its exposure to interest rate risk, the Bank continues to diversify its loan portfolio and has emphasized the origination of commercial real estate loans, multi-family loans and commercial business loans. These loans generally have adjustable rates or shorter fixed terms and interest rates that are higher than the rates applicable to one-to four-family residential mortgage loans. However, these loans generally have a higher risk of loss than one- to four-family residential mortgage loans.
Asset Quality. As of December 31, 2017, non-performing assets were $41.8 million or 0.42% of total assets, compared to $50.4 million or 0.53% of total assets at December 31, 2016. The Bank’s non-performing asset levels continued to decline from higher levels reported in prior years as local and national economic conditions have gradually improved. The Bank continues to focus on conservative underwriting criteria and on active and timely collection efforts.
Emphasis on Relationship Banking and Core Deposits. The Bank emphasizes the acquisition and retention of core deposit accounts, consisting of savings and demand deposit accounts, and expanding customer relationships. Core deposit accounts totaled $6.08 billion at December 31, 2017, representing 90.5% of total deposits, compared with $5.90 billion, or 90.1% of total deposits at December 31, 2016. The Bank also focuses on increasing the number of households and businesses served and the number of banking products per customer.
Non-Interest Income. The Bank’s focus on transaction accounts and expanded products and services has enabled the Bank to generate non-interest income. Fees derived from core deposit accounts are a primary source of non-interest income. The Bank also offers investment, wealth and asset management services through its subsidiaries to generate non-interest income. Total non-interest income was $55.7 million for the year ended December 31, 2017, compared with $55.4 million for the year ended December 31, 2016, of which fee income was $27.2 million for the year ended December 31, 2017, compared with $26.0 million for the year ended December 31, 2016.
Managing Interest Rate Risk. The Bank manages its exposure to interest rate risk through the origination and retention of adjustable rate and shorter-term loans, and its investments in securities. In addition, the Bank 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 amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At December 31, 2017, 64.6% of the Bank’s loan portfolio had a term to maturity of one year or less, or had adjustable interest rates. At December 31, 2017, the Bank’s securities portfolio totaled $1.60 billion and had an expected average life of 4.34 years to manage its exposure to interest rate movements.
MARKET AREA
The Company and the Bank are headquartered in Jersey City, which is located in Hudson County, New Jersey. At December 31, 2017, the Bank operated a network of 84 full-service banking offices throughout thirteen counties in northern and central New Jersey, as well as in Bucks, Lehigh and Northampton counties in Pennsylvania. The Bank maintains its administrative offices in Iselin, New Jersey and satellite loan production offices in Convent Station, Flemington, Paramus and Princeton, New Jersey, as well as in Bethlehem, Newtown and Wayne, Pennsylvania. The Bank’s lending activities, though concentrated in the communities surrounding its offices, extend predominantly throughout New Jersey and eastern Pennsylvania.
The Bank’s primary market area includes a mix of urban and suburban communities, and has a diversified mix of industries including pharmaceutical, manufacturing companies, network communications, insurance and financial services, healthcare, and retail. According to the U.S. Census Bureau’s most recent population data, the Bank’s New Jersey market area has a population of approximately 7.0 million, which was 77.7% of the state’s total population. The Bank’s Pennsylvania market area has a population of approximately 1.3 million, which was 10.4% of that state’s total population. Because of the diversity of industries within the Bank’s market area and, to a lesser extent, its proximity to the New York City financial markets, the area’s economy can be significantly affected by changes in national and international economies. According to the U.S. Bureau of Labor Statistics, the unemployment rate in New Jersey was 5.0% at December 31, 2017, an increase from 4.7% at December 31, 2016. The unemployment rate in Pennsylvania was 4.7% for December 31, 2017, a decrease from 5.6% at December 31, 2016.
Within its primary market areas in New Jersey and Pennsylvania, the Bank had an approximate 2.18% and 0.78% share of bank deposits as of June 30, 2017, respectively, the latest date for which statistics are available. On a statewide basis, the Bank

2



had an approximate 1.90% deposit share of the New Jersey market and an approximate 0.06% deposit share of the Pennsylvania market.
COMPETITION
The Bank faces intense competition in originating and retaining loans and attracting deposits. The northern and central New Jersey and eastern Pennsylvania market areas have a high concentration of financial institutions, including large money center and regional banks, community banks, credit unions, investment brokerage firms and insurance companies. The Bank faces direct competition for loans from each of these institutions as well as from mortgage companies and other loan origination firms operating in its market area. The Bank’s most direct competition for deposits comes from several commercial banks and savings banks in its market area. Certain of these banks have substantially greater financial resources than the Bank. In addition, the Bank faces significant competition for deposits from the mutual fund and investment advisory industries and from investors’ direct purchases of short-term money market securities and other corporate and government securities.
The Bank competes in this environment by maintaining a diversified product line, including mutual funds, annuities and other investment services made available through its investment subsidiaries. Relationships with customers are built and maintained through the Bank’s branch network, its deployment of branch ATMs, and its mobile, telephone and web-based banking services.
LENDING ACTIVITIES
The Bank originates commercial real estate loans, commercial business loans, fixed-rate and adjustable-rate mortgage loans collateralized by one- to four-family residential real estate and other consumer loans, for borrowers generally located within its primary market area.
Residential mortgage loans are primarily underwritten to standards that allow the sale of the loans to the secondary markets, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”), the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Bank of New York ("FHLBNY"). To manage interest rate risk, the Bank generally sells fixed-rate residential mortgages that it originates with terms greater than 15 years. The Bank commonly retains biweekly payment fixed-rate residential mortgage loans with a maturity of 30 years or less and a majority of the originated adjustable-rate mortgages for its portfolio.
The Bank originates commercial real estate loans that are secured by income-producing properties such as multi-family apartment buildings, office buildings, and retail and industrial properties. Generally, these loans have maturities of either 5 or 10 years. For loans greater than $5.0 million originated with maturities in excess of 7 years, the Bank generally requires loan-level interest rate swaps for qualified borrowers.

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

3



Loan Portfolio Composition. Set forth below is selected information concerning the composition of the loan portfolio by type, including Purchased Credit Impaired ("PCI") loans, (after deductions for deferred fees and costs, unearned discounts and premiums and allowances for losses) at the dates indicated.
 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Residential mortgage loans
$
1,142,914

 
15.73
 %
 
$
1,212,255

 
17.46
 %
 
$
1,255,159

 
19.38
 %
 
$
1,252,526

 
20.79
 %
 
$
1,174,043

 
22.89
 %
Commercial mortgage loans
2,171,174

 
29.88

 
1,978,700

 
28.50

 
1,716,117

 
26.50

 
1,695,822

 
28.15

 
1,400,624

 
27.30

Multi-family mortgage loans
1,404,005

 
19.32

 
1,402,169

 
20.20

 
1,234,066

 
19.06

 
1,042,223

 
17.30

 
928,906

 
18.11

Construction loans
392,580

 
5.40

 
264,814

 
3.81

 
331,649

 
5.12

 
221,102

 
3.67

 
183,289

 
3.57

Total mortgage loans
5,110,673

 
70.33

 
4,857,938

 
69.97

 
4,536,991

 
70.06

 
4,211,673

 
69.91

 
3,686,862

 
71.87

Commercial loans
1,745,301

 
124.93

 
1,630,887

 
23.49

 
1,434,291

 
22.15

 
1,263,618

 
20.98

 
932,199

 
18.17

Consumer loans
473,958

 
219.98

 
516,755

 
7.44

 
566,175

 
8.74

 
611,596

 
10.15

 
577,602

 
11.26

Total gross loans
7,329,932

 
420.64

 
7,005,580

 
100.90

 
6,537,457

 
100.95

 
6,086,887

 
101.04

 
5,196,663

 
101.30

Premiums on purchased loans
4,029

 
0.06

 
4,968

 
0.07

 
5,740

 
0.09

 
5,307

 
0.09

 
4,202

 
0.08

Unearned discounts
(36
)
 

 
(39
)
 

 
(41
)
 

 
(53
)
 

 
(62
)
 

Net deferred fees
(8,207
)
 
(0.09
)
 
(7,023
)
 
(0.08
)
 
(5,482
)
 
(0.09
)
 
(6,636
)
 
(0.11
)
 
(5,990
)
 
(0.12
)
Total loans
7,325,718

 
420.60

 
7,003,486

 
100.89

 
6,537,674

 
100.95

 
6,085,505

 
101.02

 
5,194,813

 
101.26

Allowance for loan losses
(60,195
)
 
(0.83
)
 
(61,883
)
 
(0.89
)
 
(61,424
)
 
(0.95
)
 
(61,734
)
 
(1.02
)
 
(64,664
)
 
(1.26
)
Total loans, net
$
7,265,523

 
419.77
 %
 
$
6,941,603

 
100.00
 %
 
$
6,476,250

 
100.00
 %
 
$
6,023,771

 
100.00
 %
 
$
5,130,149

 
100.00
 %
Loan Maturity Schedule. The following table sets forth certain information as of December 31, 2017, regarding the maturities of loans in the loan portfolio, including PCI loans. Demand loans having no stated schedule of repayment and no stated maturity, and overdrafts are reported as due within one year.
 
Within
One Year
 
One
Through
Three
Years
 
Three
Through
Five Years
 
Five
Through
Ten Years
 
Ten
Through
Twenty
Years
 
Beyond
Twenty
Years
 
Total
 
(Dollars in thousands)
Residential mortgage loans
$
2,836

 
$
5,148

 
$
10,679

 
$
89,706

 
$
490,887

 
$
543,658

 
$
1,142,914

Commercial mortgage loans
197,530

 
258,830

 
439,897

 
980,765

 
284,062

 
10,090

 
2,171,174

Multi-family mortgage loans
47,424

 
154,387

 
206,612

 
885,281

 
104,337

 
5,964

 
1,404,005

Construction loans
172,611

 
204,116

 
11,161

 

 
4,692

 

 
392,580

Total mortgage loans
420,401

 
622,481

 
668,349

 
1,955,752

 
883,978

 
559,712

 
5,110,673

Commercial loans
344,523

 
190,376

 
489,064

 
458,746

 
210,808

 
51,784

 
1,745,301

Consumer loans
15,192

 
6,398

 
17,305

 
85,563

 
262,431

 
87,069

 
473,958

Total gross loans
$
780,116

 
$
819,255

 
$
1,174,718

 
$
2,500,061

 
$
1,357,217

 
$
698,565

 
$
7,329,932


4



Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth as of December 31, 2017 the amount of all fixed-rate and adjustable-rate loans due after December 31, 2018.
 
Due After December 31, 2018
 
Fixed
 
Adjustable
 
Total
 
(Dollars in thousands)
Residential mortgage loans
$
765,654

 
$
374,424

 
$
1,140,078

Commercial mortgage loans
702,412

 
1,271,232

 
1,973,644

Multi-family mortgage loans
449,532

 
907,049

 
1,356,581

Construction loans
1,355

 
218,614

 
219,969

Total mortgage loans
1,918,953

 
2,771,319

 
4,690,272

Commercial loans
436,931

 
963,847

 
1,400,778

Consumer loans
280,855

 
177,911

 
458,766

Total loans
$
2,636,739

 
$
3,913,077

 
$
6,549,816


Residential Mortgage Loans. The Bank originates residential mortgage loans secured by first mortgages on one- to four-family residences, generally located in the State of New Jersey and the eastern part of Pennsylvania. The Bank originates residential mortgages primarily through commissioned mortgage representatives and via the Internet. The Bank originates both fixed-rate and adjustable-rate mortgages. As of December 31, 2017, $1.14 billion or 15.7% of the total portfolio consisted of residential real estate loans. Of the one- to four-family loans at that date, 67.2% were fixed-rate and 32.8% were adjustable-rate loans.
The Bank originates fixed-rate fully amortizing residential mortgage loans with the principal and interest payments due each month, that typically have maturities ranging from 10 to 30 years. The Bank also originates fixed-rate residential mortgage loans with maturities of 10, 15, 20 and 30 years that require the payment of principal and interest on a biweekly basis. Fixed-rate jumbo residential mortgage loans (loans over the maximum that one of the government-sponsored agencies will purchase) are originated with maturities of up to 30 years. The Bank currently offers adjustable-rate mortgage loans with a fixed-rate period of 5, 7 or 10 years prior to the first annual interest rate adjustment. The standard adjustment formula is the one-year constant maturity Treasury rate plus 2.75%, adjusting annually after its first re-set period, with a 2% maximum annual adjustment and a 6% maximum adjustment over the life of the loan.
Residential mortgage loans are primarily underwritten to Freddie Mac and Fannie Mae standards. The Bank’s standard maximum loan to value ratio is 80%. However, working through mortgage insurance companies, the Bank underwrites loans for sale to Freddie Mac or Fannie Mae programs that will finance up to 95% of the value of the residence. Generally all fixed-rate loans with terms of 20 years or more are sold into the secondary market with servicing rights retained. Fixed-rate residential mortgage loans retained in the Bank’s portfolio generally include loans with a term of 15 years or less and biweekly payment residential mortgage loans with a term of 30 years or less. The Bank retains the majority of the originated adjustable-rate mortgages for its portfolio.
Loans are sold without recourse, generally with servicing rights retained by the Bank. The percentage of loans sold into the secondary market will vary depending upon interest rates and the Bank’s strategies for reducing exposure to interest rate risk. In 2017, $2.3 million or 1.9% of residential real estate loans originated were sold into the secondary market. All of the loans sold in 2017 were long-term, fixed-rate mortgages.
The retention of adjustable-rate mortgages, as opposed to longer-term, fixed-rate residential mortgage loans, helps reduce the Bank’s exposure to interest rate risk. However, adjustable-rate mortgages generally pose credit risks different from the credit risks inherent in fixed-rate loans primarily because as interest rates rise, the underlying debt service payments of the borrowers rise, thereby increasing the potential for default. The Bank believes that these credit risks, which have not had a material adverse effect on the Bank to date, generally are less onerous than the interest rate risk associated with holding 20- and 30-year fixed-rate loans in its loan portfolio.
For many years, the Bank has offered discounted rates on residential mortgage loans to low- to moderate-income individuals. Loans originated in this category over the last five years have totaled $21.8 million. The Bank also offers a special rate program for first-time homebuyers under which originations have totaled over $9.2 million for the past five years. The Bank does not originate or purchase sub-prime or option ARM loans.
Commercial Real Estate Loans. The Bank originates loans secured by mortgages on various commercial income producing properties, including multi-family apartment buildings, office buildings and retail and industrial properties. Commercial real estate

5



loans were 29.9% of the loan portfolio at December 31, 2017. A substantial majority of the Bank’s commercial real estate loans are secured by properties located in the State of New Jersey.
The Bank originates commercial real estate loans with adjustable rates and with fixed interest rates for a period that is generally five to ten years or less, which may adjust after the initial period. Typically these loans are written for maturities of ten years or less and generally have an amortization schedule of 20 or 25 years. As a result, the typical amortization schedule will result in a substantial principal payment upon maturity. The Bank generally underwrites commercial real estate loans to a maximum 75% advance against either the appraised value of the property, or its purchase price (for loans to fund the acquisition of real estate), whichever is less. The Bank generally requires minimum debt service coverage of 1.20 times. There is a potential risk that the borrower may be unable to pay off or refinance the outstanding balance at the loan maturity date. The Bank typically lends to experienced owners or developers who have knowledge and expertise in the commercial real estate market.
Among the reasons for the Bank’s continued emphasis on commercial real estate lending is the desire to invest in assets bearing interest rates that are generally higher than interest rates on residential mortgage loans and more sensitive to changes in market interest rates. Commercial real estate loans, however, entail significant additional credit risk as compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on commercial real estate loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project, and thus may be more significantly impacted by adverse conditions in the real estate market or in the economy generally.
The Bank performs more extensive due diligence in underwriting commercial real estate loans than loans secured by owner-occupied one- to four-family residential properties due to the larger loan amounts and the riskier nature of such loans. The Bank assesses and mitigates the risk in several ways, including inspection of all such properties and the review of the overall financial condition of the borrower and guarantors, which may include, for example, the review of the rent rolls and the verification of income. If applicable, a tenant analysis and market analysis are part of the underwriting. Generally, for commercial real estate secured loans in excess of $1.0 million and for all other commercial real estate loans where it is deemed appropriate, the Bank requires environmental professionals to inspect the property and ascertain any potential environmental risks.
In accordance with regulatory guidelines, the Bank requires a full independent appraisal for commercial real estate properties. The appraiser must be selected from the Bank’s approved list, or otherwise approved by the Chief Credit Officer in instances such as out-of-state or special use property. The Bank also employs an independent review appraiser to ensure that the appraisal meets the Bank’s standards. Financial statements are also required annually for review. The Bank’s policy also requires that a property inspection of commercial mortgages over $2.5 million be completed at least every 18 months, or more frequently when warranted.
The Bank’s largest commercial mortgage loan as of December 31, 2017 was a $39.1 million loan secured by a first mortgage lien on eight office buildings and five industrial/flex buildings located throughout Middlesex and Somerset counties in New Jersey. This was a refinance and consolidation of several loans to an existing customer with extensive experience and a successful track record. The loan has a risk rating of “2” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2017.
Multi-family Loans. The Bank underwrites loans secured by apartment buildings that have five or more units. The Bank considers multi-family lending a component of the commercial real estate lending portfolio. The underwriting standards and procedures that are used to underwrite commercial real estate loans are used to underwrite multi-family loans, except the loan-to-value ratio shall not exceed 80% of the appraised value of the property, the debt-service coverage should be a minimum of 1.15 times and an amortization period of up to 30 years may be used.
The Bank’s largest multi-family loan as of December 31, 2017 was a $41.0 million loan secured by a first leasehold mortgage lien on a newly renovated 129-unit, six story class A luxury rental apartment building with 12,000 square feet of office/retail space located in Morristown, New Jersey. The project sponsor is one of the largest privately-held real estate owner/developers in the United States, and has extensive experience and a successful track record in the development and management of multi-family projects. The loan has a risk rating of “3” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2017.
Construction Loans. The Bank originates commercial construction loans. Commercial construction lending includes both new construction of residential and commercial real estate projects and the rehabilitation of existing structures.
The Bank’s commercial construction financing includes projects constructed for investment purposes (rental property), projects for sale (single family/condominiums) and to a lesser extent, owner-occupied business properties. To mitigate the speculative nature of construction loans, the Bank generally requires significant pre-leasing on rental properties; requires that a

6



percentage of the for-sale single-family residences or condominiums be under contract to support construction loan advances; and requires other covenants on residential for rental projects depending on whether the project is vertical or horizontal construction.
The Bank underwrites construction loans for a term of three years or less. The majority of the Bank’s construction loans are floating-rate loans with a maximum 75% loan-to-value ratio for the completed project. The Bank employs professional engineering firms to assist in the review of construction cost estimates and make site inspections to determine if the work has been completed prior to the advance of funds for the project.
Construction lending generally involves a greater degree of risk than commercial real estate or multi-family lending. Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject project and the successful marketing of the sale or lease of the project. Construction delays, slower than anticipated absorption or the financial impairment of the builder may negatively affect the borrower’s ability to repay the loan.
For all construction loans, the Bank requires an independent appraisal, which includes information on market rents and/or comparable sales for competing projects. The Bank also obtains personal guarantees and conducts environmental due diligence as appropriate.
The Bank also employs other means to mitigate the risk of the construction lending process. On commercial construction projects that the developer maintains for rental, the Bank typically holds back funds for tenant improvements until a lease is executed. For single family and condominium financing, the Bank generally requires payment for the release of a unit that exceeds the amount of the loan advance attributable to such unit.
The Bank’s largest construction loan at December 31, 2017 was a $31.0 million commitment secured by a first mortgage lien on an existing 252,076 square foot industrial building under renovation with an additional 131,520 square foot industrial building under construction in Totowa, New Jersey. The loan had an outstanding balance of $9.3 million at December 31, 2017, $7.0 million of which related to a refinance of an existing Provident Bank loan. This loan closed in late 2017 with renovation and construction completion expected by the end of 2018. The project sponsor is an experienced and long standing real estate investment fund manager with a successful track record in the development and management of commercial real estate. The loan is risk rating of “4” (loans rated “4” are deemed “acceptable quality” - see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2017.
Commercial Loans. The Bank underwrites commercial loans to corporations, partnerships and other businesses. Commercial loans represented 124.9% of the loan portfolio at December 31, 2017. The majority of the Bank’s commercial loan customers are local businesses with revenues of less than $50.0 million. The Bank primarily offers commercial loans for equipment purchases, lines of credit for working capital purposes, letters of credit, asset-based lines of credit and real estate loans where the borrower is the primary occupant of the property. Most commercial loans are originated on a floating-rate basis and the majority of fixed-rate commercial term loans are fully amortized over a five-year period. Owner-occupied commercial real estate loans are generally underwritten to terms consistent with those utilized for commercial real estate; however, the maximum loan-to-value ratio for owner-occupied commercial real estate loans is 80%.
The Bank also underwrites Small Business Administration (“SBA”) guaranteed loans and guaranteed or assisted loans through various state, county and municipal programs. These governmental guarantees are typically used in cases where the borrower requires additional credit support. The Bank has “Preferred Lender” status with the SBA, allowing a more streamlined application and approval process.
The underwriting of a commercial loan is based upon a review of the financial statements of the prospective borrower and guarantors. In most cases the Bank obtains a general lien on accounts receivable and inventory, along with the specific collateral such as real estate or equipment, as appropriate.
Commercial loans generally bear higher interest rates than mortgage loans, but they also involve a higher risk of default since their repayment is generally dependent on the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself and the general economic environment.
The Bank’s largest commercial loan as of December 31, 2017 was a $35.0 million revolving line of credit to a large importer of aluminum with a risk rating of “4” (loans rated “4” are deemed “acceptable quality” - see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section). The line is used primarily for working capital purposes and is well secured with advances governed by a formula against eligible accounts receivable. As of December 31, 2017, there was a $33.5 million outstanding balance under the line.

7



Consumer Loans. The Bank offers a variety of consumer loans on a direct basis to individuals. Consumer loans represented 220.0% of the loan portfolio at December 31, 2017. Home equity loans and home equity lines of credit constituted 95.0% of the consumer loan portfolio and indirect marine loans constituted 2.1% of the consumer loan portfolio as of December 31, 2017. The remaining 2.9% of the consumer loan portfolio includes personal loans and unsecured lines of credit, direct auto loans and recreational vehicle loans. The Bank no longer purchases indirect auto, marine or recreational vehicle loans.
Interest rates on home equity loans are fixed for a term not to exceed 20 years and the maximum loan amount is $650,000. A portion of the home equity loan portfolio includes “first lien product loans,” under which the Bank has offered special rates to borrowers who refinance first mortgage loans on the home equity (first lien) basis. As of December 31, 2017, there was $245.2 million of first-lien home equity loans outstanding. The Bank’s home equity lines are made at floating interest rates and the Bank provides lines of credit of up to $500,000. The approved home equity lines and utilization amounts as of December 31, 2017 were $459.9 million and $178.7 million, respectively, representing utilization of 38.9%.
Consumer loans generally entail greater credit risk than residential mortgage loans, particularly in the case of home equity loans and lines of credit secured by second lien positions, consumer loans that are unsecured or that are secured by assets that tend to depreciate, such as automobiles, boats and recreational vehicles. Collateral repossessed by the Bank from a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance, and the remaining deficiency may warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent upon the borrower’s continued financial stability, and which is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount the Bank can recover on such loans.
Loan Originations, Purchases, and Repayments. The following table sets forth the Bank’s loan origination, purchase and repayment activities for the periods indicated.
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Originations:
 
 
 
 
 
Residential mortgage
$
121,901

 
$
145,684

 
$
117,397

Commercial mortgage
525,900

 
427,442

 
332,940

Multi-family mortgage
51,371

 
238,386

 
308,298

Construction
354,594

 
265,623

 
304,733

Commercial
2,525,921

 
1,891,067

 
1,437,749

Consumer
121,790

 
125,515

 
154,781

Subtotal of loans originated
3,701,477

 
3,093,717

 
2,655,898

Loans purchased

 
28,590

 
95,283

Total loans originated and purchased
3,701,477

 
3,122,307

 
2,751,181

 
 
 
 
 
 
Loans sold
24,938

 
34,976

 
11,918

 
 
 
 
 
 
Repayments:
 
 
 
 
 
Residential mortgage
188,103

 
197,701

 
204,863

Commercial mortgage
188,352

 
273,469

 
303,165

Multi-family mortgage
150,205

 
102,939

 
176,312

Construction
249,872

 
129,918

 
119,784

Commercial
2,403,945

 
1,735,420

 
1,279,978

Consumer
163,041

 
175,658

 
196,819

Total repayments
3,343,518

 
2,615,105

 
2,280,921

Total reductions
3,368,456

 
2,650,081

 
2,292,839

Other items, net(1)
(10,789
)
 
(6,414
)
 
(6,173
)
Net increase
$
322,232

 
$
465,812

 
$
452,169


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

8



Loan Approval Procedures and Authority. The Bank’s Board of Directors approves the Lending Policy on an annual basis as well as on an interim basis as modifications are warranted. The Lending Policy sets the Bank’s lending authority for each type of loan. The Bank’s lending officers are assigned dollar authority limits based upon their experience and expertise. All commercial loan approvals require dual signature authority.
The largest individual lending authority is $10.0 million, which is only available to the Chief Executive Officer, the Chief Lending Officer and the Chief Credit Officer. The authority of the Chief Lending Officer and Chief Credit Officer may be increased to $15.0 million for permanent commercial real estate loans on a joint basis. Loans in excess of these limits, or which when combined with existing credits of the borrower or related borrowers exceed these limits, are presented to the management Credit Committee for approval. The Credit Committee currently consists of ten senior officers including the Chief Executive Officer, the Chief Lending Officer, the Chief Financial Officer, the Chief Credit Officer, the Chief Administrative Officer and the Credit Risk Manager, and requires a majority vote for credit approval.
While the Bank discourages loan policy exceptions, based upon reasonable business considerations exceptions to the policy may be warranted. The business reason and mitigants for the exception must be noted on the loan approval document. The policy exception requires the approval of the Chief Lending Officer or the Department Manager of the lending department responsible for the underlying loan, if it is within his or her approval authority limit. All other policy exceptions must be approved by the Credit Committee. The Credit Administration Department reports the type and frequency of loan policy exceptions to the Credit Committee and the Risk Committee of the Board of Directors on a quarterly basis, or more frequently if necessary.
The Bank has adopted a risk rating system as part of the credit risk assessment of its loan portfolio. The Bank’s commercial real estate and commercial lending officers are required to maintain an appropriate risk rating to each loan in their portfolio. When the lender learns of important financial developments, the risk rating is reviewed accordingly. Risk ratings are subject to review by the Credit Department during the underwriting and loan review processes. Loan review examinations are performed by an independent third party which validates the risk ratings on a sample basis. In addition, a risk rating can be adjusted at the weekly Credit Committee meeting and quarterly at management’s Credit Risk Management Committee where they meet to review all loans rated a “watch” ("5") or worse. The Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk ratings. The risk ratings play an important role in the establishment of the loan loss provision and to confirm the adequacy of the allowance for loan losses.
Loans to One Borrower. The regulatory limit on total loans to any borrower or attributed to any one borrower is 15% of the Bank’s unimpaired capital and surplus. As of December 31, 2017, the regulatory lending limit was $132.8 million. The Bank’s current internal policy limit on total loans to a borrower or related borrowers that constitute a group exposure is up to $80.0 million for loans with a risk rating of "2" or better, up to $70.0 million for loans with a risk rating of "3", and up to $50.0 million for loans with a risk rating of "4". Maximum group exposure limits may be lower depending on the type of loans involved. The Bank reviews these group exposures on a quarterly basis. The Bank also sets additional limits on size of loans by loan type.
At December 31, 2017, the Bank’s largest group exposure with an individual borrower and its related entities was $107.0 million, consisting of eight commercial real estate loans totaling $98.2 million, secured by seven retail and office buildings located in New Jersey, a $6.0 million unsecured line of credit, a $2.7 million letter of credit and two ACH lines of credit totaling $125,000. The loans have an average risk rating of “3”. The borrower, headquartered in New Jersey, is an experienced real estate owner and developer in the state of New Jersey. Management has determined that this exception to the internal group exposure policy limit is manageable and is mitigated by the borrower’s diverse revenue mix, as well as its reputation and proven successful track record. This lending relationship was approved as an exception to the internal policy limits by the management Credit Committee and reported to the Risk Committee of the Board of Directors, and conformed to the regulatory limit applicable to the Bank at the time the loan was originated. As of December 31, 2017, all of the loans in this lending relationship were performing in accordance with their respective terms and conditions.
As of December 31, 2017, the Bank had $2.1 billion in loans outstanding to its 50 largest borrowers and their related entities.
ASSET QUALITY
General. One of the Bank’s key objectives has been and continues to be to maintain a high level of asset quality. In addition to maintaining sound credit standards for new loan originations, the Bank employs proactive collection and workout processes in dealing with delinquent or problem loans. The Bank actively markets properties that it acquires through foreclosure or otherwise in the loan collection process.
Collection Procedures. In the case of residential mortgage and consumer loans, the collections personnel in the Bank’s Asset Recovery Department are responsible for collection activities from the sixteenth day of delinquency. Collection efforts include automated notices of delinquency, telephone calls, letters and other notices to delinquent borrowers. Foreclosure proceedings and other appropriate collection activities such as repossession of collateral are commenced within at least 90 to 120 days after a loan

9



is delinquent provided a plan of repayment to cure the delinquency or other loss mitigation arrangement cannot be reached with the borrower. Periodic inspections of real estate and other collateral are conducted throughout the collection process. The Bank’s collection procedures for Federal Housing Association (“FHA”) and Veteran’s Administration (“VA”) one- to four-family mortgage loans follow the collection and loss mitigation guidelines outlined by those agencies.
Real estate and other assets acquired through foreclosure or in connection with a loan workout are held as foreclosed assets. The Bank carries other real estate owned and other foreclosed assets at the lower of their cost or their fair value less estimated selling costs. The Bank attempts to sell the property at foreclosure sale or as soon as practical after the foreclosure sale through a proactive marketing effort.
The collection procedures for commercial real estate and commercial loans include sending periodic late notices and letters to a borrower once a loan is past due. The Bank attempts to make direct contact with a borrower once a loan is 16 days past due, usually by telephone. The Chief Lending Officer and Chief Credit Officer review all commercial real estate and commercial loan delinquencies on a weekly basis. Generally, delinquent commercial real estate and commercial loans are transferred to the Asset Recovery Department for further action if the delinquency is not cured within a reasonable period of time, typically 90 days. The Chief Lending Officer and Chief Credit Officer have the authority to transfer performing commercial real estate or commercial loans to the Asset Recovery Department if, in their opinion, a credit problem exists or is likely to occur.
Loans deemed uncollectible are proposed for charge-off on a monthly basis. Any charge-off recommendation of $500,000 or greater is submitted to executive management.
Delinquent Loans and Non-performing Loans and Assets. The Bank’s policies require that the Chief Credit Officer continuously monitor the status of the loan portfolios and report to the Board of Directors on at least a quarterly basis. These reports include information on impaired loans, delinquent loans, criticized and classified assets, and foreclosed assets. An impaired loan is defined as a non-homogeneous loan greater than $1.0 million for which it is probable, based on current information, that the Bank will not collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a modification resulting in a concession is made by the Bank in an effort to mitigate potential loss arising from a borrower’s financial difficulty. Smaller balance homogeneous loans including residential mortgages and other consumer loans are evaluated collectively for impairment and are excluded from the definition of impaired loans, except for TDRs. Impaired loans are individually identified and reviewed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. As of December 31, 2017, there were 149 impaired loans totaling $52.0 million, of which 141 loans totaling $41.7 million were TDRs. Included in this total were 125 TDRs to 121 borrowers totaling $31.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2017.
Interest income stops accruing on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectability of such interest or principal is doubtful. When the accrual of interest on a loan is stopped, the loan is designated as a non-accrual loan and the outstanding unpaid interest previously credited is reversed. A non-accrual loan is returned to accrual status when factors indicating doubtful collection no longer exist, the loan has been brought current and the borrower demonstrates some period (generally six months) of timely contractual payments.
Federal and state regulations as well as the Bank’s policy require the Bank to utilize an internal risk rating system as a means of reporting problem and potential problem assets. Under this system, the Bank classifies problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories, but possess potential weaknesses, are designated “special mention.”
Management estimates the amount of loan losses for groups of loans by applying quantitative loss factors to loan segments at the risk rating level, and applying qualitative adjustments to each loan segment at the portfolio level. Quantitative loss factors give consideration to historical loss experience by loan type based upon an appropriate look back period and adjusted for a loss emergence period. Qualitative adjustments give consideration to other qualitative or environmental factors such as trends and levels of delinquencies, impaired loans, charge-offs, recoveries and loan volumes, as well as national and local economic trends and conditions. Qualitative adjustments reflect risks in the loan portfolio not captured by the quantitative loss factors and, as such, are evaluated from a risk level perspective relative to the risk levels present over the look back period. The reserves resulting from

10



the application of both of these sets of loss factors are combined to arrive at the allowance for loan losses. When the Bank classifies one or more assets, or portions thereof, as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount.
The Bank’s determination as to the classification of assets and the amount of the valuation allowances is subject to review by the FDIC and the New Jersey Department of Banking and Insurance, each of which can require the establishment of additional general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, issued an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of the board of directors and management for the maintenance of adequate allowances, and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement reaffirms that institutions should have effective loan review systems and controls to identify, monitor and address asset quality problems; that loans deemed uncollectible are promptly charged off; and that the institution’s process for determining an adequate level for its valuation allowance is based on a comprehensive, adequately documented, and consistently applied analysis of the institution’s loan and lease portfolio. While management believes that on the basis of information currently available to it, the allowance for loans losses is adequate as of December 31, 2017, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary.
Loans are classified in accordance with the risk rating system described previously. At December 31, 2017, $65.4 million of loans were classified as “substandard,” which consisted of $29.7 million in commercial loans, $25.1 million in commercial and multi-family mortgage loans, $8.1 million in residential loans and $2.5 million in consumer loans. At that same date, there were $428,000 loans classified as “doubtful”. Also, there were no loans classified as “loss” at December 31, 2017. As of December 31, 2017, $44.7 million of loans were designated “special mention.”
The following table sets forth delinquencies in the loan portfolio as of the dates indicated.
 
At December 31, 2017
 
At December 31, 2016
 
At December 31, 2015
 
60-89 Days
 
90 Days or More
 
60-89 Days
 
90 Days or More
 
60-89 Days
 
90 Days or More
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
Number
of
Loans
 
Principal
Balance
of Loans
 
(Dollars in thousands)
Residential mortgage loans
27

 
$
4,325

 
49

 
$
8,105

 
33

 
$
6,563

 
67

 
$
12,021

 
29

 
$
5,434

 
71

 
$
12,031

Commercial mortgage loans

 

 
8

 
5,887

 
1

 
80

 
6

 
5,192

 
1

 
543

 
8

 
1,263

Multi-family mortgage loans

 

 

 

 

 

 
2

 
553

 
1

 
506

 
2

 
741

Construction loans

 

 

 

 

 

 
1

 
2,517

 

 

 
1

 
2,351

Total mortgage loans
27

 
4,325

 
57

 
13,992

 
34

 
6,643

 
76

 
20,283

 
31

 
6,483

 
82

 
16,386

Commercial loans
2

 
406

 
24

 
6,901

 
4

 
357

 
29

 
11,857

 
4

 
801

 
26

 
5,812

Consumer loans
12

 
487

 
41

 
2,491

 
19

 
1,199

 
43

 
2,940

 
19

 
1,194

 
50

 
4,054

Total loans
41

 
$
5,218

 
122

 
$
23,384

 
57

 
$
8,199

 
148

 
$
35,080

 
54

 
$
8,478

 
158

 
$
26,252


11



Non-Accrual Loans and Non-Performing Assets. The following table sets forth information regarding non-accrual loans and other non-performing assets. At December 31, 2017, there were 16 TDRs totaling $10.0 million that were classified as non-accrual, compared to 22 non-accrual TDRs which totaled $11.7 million at December 31, 2016. Loans are generally placed on non-accrual status when they become 90 days or more past due or if they have been identified as presenting uncertainty with respect to the collectability of interest or principal.
 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in thousands)
Non-accruing loans:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
8,105

 
$
12,021

 
$
12,031

 
$
17,222

 
$
23,011

Commercial mortgage loans
7,090

 
7,493

 
1,263

 
20,026

 
18,662

Multi-family mortgage loans

 
553

 
742

 
322

 
403

Construction loans

 
2,517

 
2,351

 

 
8,448

Commercial loans
17,243

 
16,787

 
23,875

 
12,342

 
22,228

Consumer loans
2,491

 
3,030

 
4,109

 
3,944

 
3,928

Total non-accruing loans
34,929

 
42,401

 
44,371

 
53,856

 
76,680

Accruing loans - 90 days or more delinquent

 

 
165

 

 

Total non-performing loans
34,929

 
42,401

 
44,536

 
53,856

 
76,680

Foreclosed assets
6,864

 
7,991

 
10,546

 
5,098

 
5,486

Total non-performing assets
$
41,793

 
$
50,392

 
$
55,082

 
$
58,954

 
$
82,166

Total non-performing assets as a percentage of total assets
0.42
%
 
0.53
%
 
0.62
%
 
0.69
%
 
1.10
%
Total non-performing loans to total loans
0.48
%
 
0.61
%
 
0.68
%
 
0.88
%
 
1.48
%
Non-performing commercial mortgage loans decreased $403,000 to $7.1 million at December 31, 2017, from $7.5 million at December 31, 2016. At December 31, 2017, the Company held 10 non-performing commercial mortgage loans. The largest non-performing commercial mortgage loan was a $2.9 million loan secured by a first mortgage on a retail property located in Washington Township, New Jersey.  The loan is presently in default.  There is no contractual commitment to advance additional funds to this borrower.
Non-performing commercial loans increased $456,000, to $17.2 million at December 31, 2017, from $16.8 million at December 31, 2016. Non-performing commercial loans at December 31, 2017 consisted of 30 loans. The largest non-performing commercial loan relationship consisted of two loans to a health and fitness club with total outstanding balances of $8.4 million at December 31, 2017. Both of these loans are secured by liens on a commercial property. These loans are currently paying in accordance with their restructured terms.
There were no non-performing constructions loans at December 31, 2017. Non-performing constructions loans in the prior year amounted to $2.5 million.
At December 31, 2017, the Company held $6.9 million of foreclosed assets, compared with $8.0 million at December 31, 2016. Foreclosed assets at December 31, 2017 are carried at fair value based on recent appraisals and valuation estimates, less estimated selling costs. During the year ended December 31, 2017, there were 16 additions to foreclosed assets with a carrying value of $3.8 million and 26 properties sold with a carrying value of $4.3 million. Foreclosed assets at December 31, 2017, consisted of $3.9 million of commercial real estate and $3.0 million of residential real estate.
Non-performing assets totaled $41.8 million, or 0.42% of total assets at December 31, 2017, compared to $50.4 million, or 0.53% of total assets at December 31, 2016. If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $1.9 million during the year ended December 31, 2017. The amount of cash basis interest income that was recognized on impaired loans during the year ended December 31, 2017 was not material.
Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects an evaluation of the probable losses in the loan portfolio. The allowance for loan losses is maintained through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where it is determined the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses.

12



Management’s evaluation of the adequacy of the allowance for loan losses includes the review of all loans on which the collectability of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.
As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating.
When assigning a risk rating to a loan, management utilizes the Bank’s internal nine-point risk rating system. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in 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 for loans requiring Credit Committee approval are periodically reviewed by the Credit Committee in the credit approval or renewal process. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party. Reports by the independent third party are presented directly to the Audit Committee of the Board of Directors.
Each quarter, the lending groups prepare individual Credit Risk Management Reports for the Credit Administration Department. These reports review all commercial loans and commercial mortgage loans that have been determined to involve above-average risk (risk rating of 5 or worse). The Credit Risk Management Reports contain the reason for the risk rating assigned to each loan, status of the loan and any current developments. These reports are submitted to a committee chaired by the Chief Credit Officer. Each loan officer reviews the loan and the corresponding Credit Risk Management Report with the committee and the risk rating is evaluated for appropriateness.
Management estimates the amount of loan losses for groups of loans by applying quantitative loss factors to loan segments at the risk rating level, and applying qualitative adjustments to each loan segment at the portfolio level. Quantitative loss factors give consideration to historical loss experience by loan type based upon an appropriate look-back period and adjusted for a loss emergence period; these factors are evaluated at least annually. The most recent periodic review and recalculation of quantitative loss factors was completed in the third quarter of 2017 using historical loss data through June 30, 2017 and was applied effective September 30, 2017. Qualitative adjustments give consideration to other qualitative or environmental factors such as:
levels of and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries;
trends in volume and terms of loans;
effects of any changes in lending policies, procedures and practices;
changes in the quality or results of the Bank’s loan review system;
experience, ability, and depth of lending management and other relevant staff;
national and local economic trends and conditions;
industry conditions;
effects of changes in credit concentration; and
changes in collateral values.
Qualitative adjustments reflect risks in the loan portfolio not captured by the quantitative loss factors and, as such, are evaluated from a risk level perspective relative to the risk levels present over the look-back period; qualitative adjustments are recalibrated at least annually and evaluated at least quarterly. The range of adjustments to historical loss rates applicable to qualitative factors were updated in the third quarter of 2017 in conjunction with the review and recalculation of quantitative loss factors. The reserves resulting from the application of both of these sets of loss factors are combined to arrive at the general allowance for loan losses.
The reserve factors applied to each loan risk rating are inherently subjective in nature. Reserve factors are assigned to each of the risk rating categories. This methodology permits adjustments to the allowance for loan losses in the event that, in management’s judgment, significant conditions impacting the credit quality and collectability of the loan portfolio as of the evaluation date are not otherwise adequately reflected in the analysis.

13



The provision for loan losses is established after considering the allowance for loan loss analysis, the amount of the allowance for loan losses in relation to the total loan balance, loan portfolio growth, loan portfolio composition, loan delinquency and non-performing loan trends and peer group analysis.
Management believes the primary risks inherent in the portfolio are a decline in the economy, generally, a decline in real estate market values, rising unemployment or a protracted period of unemployment at elevated levels, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. The allowance for loan losses is maintained at a level that represents management’s best estimate of probable losses related to specifically identified loans as well as probable losses inherent in the remaining loan portfolio. There can be no assurance that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future or that additional provisions for loan losses will not be required.
Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in thousands)
Balance at beginning of period
$
61,883

 
$
61,424

 
$
61,734

 
$
64,664

 
$
70,348

Charge offs:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
421

 
1,033

 
1,296

 
3,184

 
3,900

Commercial mortgage loans
72

 
35

 
1,086

 
705

 
2,882

Multi-family mortgage loans
2

 

 
105

 
4

 

Construction loans
6

 

 

 
15

 
234

Commercial loans
7,187

 
4,862

 
2,863

 
4,449

 
3,686

Consumer loans
1,253

 
1,020

 
3,478

 
2,515

 
3,704

Total
8,941

 
6,950

 
8,828

 
10,872

 
14,406

Recoveries:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
1

 
57

 
102

 
73

 
160

Commercial mortgage loans
59

 
504

 
86

 
131

 
104

Multi-family mortgage loans

 
67

 
2

 
1

 

Construction loans
6

 

 
57

 
80

 
869

Commercial loans
800

 
570

 
2,413

 
1,776

 
1,075

Consumer loans
787

 
811

 
1,508

 
1,231

 
1,014

Total
1,653

 
2,009

 
4,168

 
3,292

 
3,222

Net charge-offs
7,288

 
4,941

 
4,660

 
7,580

 
11,184

Provision for loan losses
5,600

 
5,400

 
4,350

 
4,650

 
5,500

Balance at end of period
$
60,195

 
$
61,883

 
$
61,424

 
$
61,734

 
$
64,664

Ratio of net charge-offs to average loans outstanding during the period
0.10
%
 
0.07
%
 
0.07
%
 
0.13
%
 
0.22
%
Allowance for loan losses to total loans
0.82
%
 
0.88
%
 
0.94
%
 
1.01
%
 
1.24
%
Allowance for loan losses to non-performing loans
172.34
%
 
145.95
%
 
137.92
%
 
114.63
%
 
84.33
%

14



Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may be taken, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.
 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans  in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
Amount of
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
(Dollars in thousands)
Residential mortgage loans
$
4,328

 
15.59
%
 
$
5,540

 
17.30
%
 
$
5,110

 
19.20
%
 
$
4,805

 
20.58
%
 
$
5,500

 
22.60
%
Commercial mortgage loans
13,136

 
29.62

 
12,234

 
28.24

 
12,798

 
26.25

 
16,645

 
27.86

 
16,404

 
26.96

Multi-family mortgage loans
4,919

 
19.15

 
7,481

 
20.02

 
7,841

 
18.88

 
6,258

 
17.12

 
5,933

 
17.87

Construction loans
5,669

 
5.35

 
4,371

 
3.77

 
6,345

 
5.06

 
4,269

 
3.62

 
6,307

 
3.52

Commercial loans
29,814

 
23.81

 
29,143

 
23.28

 
25,829

 
21.94

 
24,381

 
20.76

 
24,107

 
17.93

Consumer loans
2,329

 
6.48

 
3,114

 
7.39

 
3,501

 
8.67

 
4,881

 
10.06

 
4,929

 
11.12

Unallocated

 

 

 

 

 

 
495

 

 
1,484

 

Total
$
60,195

 
100.00
%
 
$
61,883

 
100.00
%
 
$
61,424

 
100.00
%
 
$
61,734

 
100.00
%
 
$
64,664

 
100.00
%
INVESTMENT ACTIVITIES
General. The Board of Directors annually approves the Investment Policy for the Bank and the Company. The Chief Financial Officer and the Treasurer are authorized by the Board to implement the Investment Policy and establish investment strategies. Each of the Chief Executive Officer, Chief Financial Officer, Treasurer and Assistant Treasurer is authorized to make investment decisions consistent with the Investment Policy. Investment transactions for the Bank are reported to the Board of Directors of the Bank on a monthly basis.
The Investment Policy is designed to generate a favorable rate of return, consistent with established guidelines for liquidity, safety, duration and diversification, and to complement the lending activities of the Bank. Investment decisions are made in accordance with the policy and are based on credit quality, interest rate risk, balance sheet composition, market expectations, liquidity, income and collateral needs.
The Investment Policy does not currently permit the purchase of any securities that are below investment grade.
The investment strategy is to maximize the return on the investment portfolio consistent with the Investment Policy. The investment strategy considers the Bank’s and the Company’s interest rate risk position as well as liquidity, loan demand and other factors. Acceptable investment securities include U.S. Treasury and Agency obligations, collateralized mortgage obligations (“CMOs”), corporate debt obligations, municipal bonds, mortgage-backed securities, commercial paper, mutual funds, bankers’ acceptances and Federal funds. Securities purchased for the investment portfolio require a minimum credit rating of “A” by Moody’s or Standard & Poor’s at the time of purchase.
Securities in the investment portfolio are classified as held to maturity, available for sale or held for trading. Securities that are classified as held to maturity are securities that the Bank or the Company has the intent and ability to hold until their contractual maturity date and are reported at cost. Securities that are classified as available for sale are reported at fair value. Available for sale securities include U.S. Treasury and Agency obligations, U.S. Agency and privately-issued CMOs, corporate debt obligations and equities. Sales of securities may occur from time to time in response to changes in market rates and liquidity needs and to facilitate balance sheet reallocation to effectively manage interest rate risk. At the present time, there are no securities that are classified as held for trading.
Management conducts a periodic review and evaluation of the securities portfolio to determine if any securities with a market value below book value were other-than-temporarily impaired. If such an impairment was deemed other-than-temporary, management would measure the total credit-related component of the unrealized loss, and the Company would recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income (loss). The fair value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed-rate securities decreases and as interest rates fall, the fair value of fixed-rate securities increases.

15



CMOs are a type of debt security issued by a special-purpose entity that aggregates pools of mortgages and mortgage-related securities and creates different classes of CMO securities with varying maturities and amortization schedules as well as a residual interest with each class possessing different risk characteristics. In contrast to pass-through mortgage-backed securities from which cash flow is received (and prepayment risk is shared) pro rata by all securities holders, the cash flow from the mortgages or mortgage-related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage-related securities resulting from unexpected prepayment activity. In declining interest rate environments, the Bank attempts to purchase CMOs with principal lock-out periods, reducing prepayment risk in the investment portfolio. During rising interest rate periods, the Bank’s strategy is to purchase CMOs that are receiving principal payments that can be reinvested at higher current yields. Investments in CMOs involve a risk that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Additionally, the fair value of such securities may be adversely affected by changes in the market interest rates. Management believes these securities may represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available.
At December 31, 2017, the Bank held $102,000 in privately-issued CMOs in the investment portfolio. The Bank and the Company do not invest in collateralized debt obligations, mortgage-related securities secured by sub-prime loans, or any preferred equity securities.
Amortized Cost and Fair Value of Securities. The following table sets forth certain information regarding the amortized cost and fair values of the Company’s securities as of the dates indicated.
 
At December 31,
 
2017
 
2016
 
2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(Dollars in thousands)
Held to Maturity:
 
Mortgage-backed securities
$
382

 
$
396

 
$
893

 
$
924

 
$
1,597

 
$
1,658

FHLB obligations
410

 
403

 
409

 
407

 
500

 
498

FHLMC obligations
1,600

 
1,564

 
1,600

 
1,560

 
500

 
500

FNMA obligations
1,799

 
1,763

 
1,798

 
1,762

 
3,096

 
3,099

FFCB obligations
499

 
491

 
499

 
496

 

 

State and municipal obligations
462,942

 
470,484

 
473,653

 
474,852

 
458,062

 
472,661

Corporate obligations
10,020

 
9,938

 
9,331

 
9,286

 
9,929

 
9,915

Total held-to-maturity
$
477,652

 
$
485,039

 
$
488,183

 
$
489,287

 
$
473,684

 
$
488,331

Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
U.S Treasury obligations

 

 
7,995

 
8,008

 
8,006

 
8,004

Mortgage-backed securities
993,548

 
988,367

 
952,992

 
951,861

 
857,430

 
863,861

FHLMC obligations

 

 
10,009

 
10,014

 
20,101

 
20,059

FHLB obligations
19,014

 
19,005

 
25,136

 
25,164

 
30,298

 
30,273

FNMA obligations

 

 
21,978

 
22,010

 
31,997

 
31,998

State and municipal obligations
3,259

 
3,388

 
3,727

 
3,743

 
4,193

 
4,308

Corporate obligations
26,047

 
26,394

 
19,013

 
19,037

 
5,516

 
5,512

Equity securities
417

 
658

 
397

 
549

 
397

 
519

Total available for sale
$
1,042,285

 
$
1,037,812

 
$
1,041,247

 
$
1,040,386

 
$
957,938

 
$
964,534

Average expected life of
securities(1)
4.34 years

 
 
 
4.24 years

 
 
 
4.40 years

 
 
(1)
Average expected life is based on prepayment assumptions utilizing prevailing interest rates as of the reporting dates and excludes equity securities.

16



The aggregate carrying values and fair values of securities by issuer, where the aggregate book value of such securities exceeds ten percent of stockholders’ equity are as follows (in thousands):
 
Amortized
Cost
 
Fair
Value
At December 31, 2017:
 
 
 
FNMA
$
476,768

 
$
473,608

FHLMC
440,362

 
437,855

The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company’s debt securities portfolio as of December 31, 2017. No tax equivalent adjustments were made to the weighted average yields. Amounts are shown at amortized cost for held to maturity securities and at fair value for available for sale securities.
  
At December 31, 2017
  
One Year or Less
 
More Than One
Year to Five Years
 
More Than Five
Years to Ten Years
 
After Ten Years
 
Total
  
Carrying
Value
 
Weighted
Average
Yield (1)
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Carrying
Value
 
Weighted
Average
Yield(1)
 
(Dollars in thousands)
Held to Maturity:
 
Mortgage-backed securities
$
110

 
3.49
%
 
$
272

 
5.37
%
 
$

 
%
 
$

 
%
 
$
382

 
4.83
%
Agency obligations
600

 
1.03

 
3,708

 
1.57

 

 

 

 

 
4,308

 
1.49

Corporate obligations
1,565

 
1.55

 
8,455

 
2.50

 

 

 

 

 
10,020

 
2.35

State and municipal obligations
4,958

 
3.47

 
55,189

 
3.12

 
260,937

 
2.61

 
141,858

 
2.72

 
462,942

 
2.71

Total held to maturity
$
7,233

 
2.85
%
 
$
67,624

 
2.97
%
 
$
260,937

 
2.61
%
 
$
141,858

 
2.72
%
 
$
477,652

 
2.70
%
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
$
396

 
3.92
%
 
$

 
%
 
$
2,992

 
2.78
%
 
$

 
%
 
$
3,388

 
2.91
%
Mortgage-backed securities
401

 
3.68

 
25,789

 
1.70

 
205,439

 
2.50

 
756,738

 
2.61

 
988,367

 
2.56

Agency obligations
19,005

 
1.15

 

 

 

 

 

 

 
19,005

 
1.15

Corporate obligations
989

 
2.60

 
3,048

 
2.99

 
22,357

 
4.99

 

 

 
26,394

 
4.67

Total available for sale(2)
$
20,791

 
1.32
%
 
$
28,837

 
1.84
%
 
$
230,788

 
2.74
%
 
$
756,738

 
2.61
%
 
$
1,037,154

 
2.59
%
 
(1)
Yields are not tax equivalent.
(2)
Totals exclude $658,000 of available for sale equity securities at fair value.
SOURCES OF FUNDS
General. Primary sources of funds consist of principal and interest cash flows received from loans and mortgage-backed securities, contractual maturities on investments, deposits, FHLBNY advances and proceeds from sales of loans and investments. These sources of funds are used for lending, investing and general corporate purposes, including acquisitions and common stock repurchases.
Deposits. The Bank offers a variety of deposits for retail and business accounts. Deposit products include savings accounts, checking accounts, interest-bearing checking accounts, money market deposit accounts and certificate of deposit accounts at varying interest rates and terms. The Bank also offers investment, insurance, IRA and KEOGH products. Business customers are offered several checking account and savings plans, cash management services, remote deposit capture services, payroll origination services, escrow account management and business credit cards. The Bank focuses on relationship banking for retail and business customers to enhance the customer experience. Deposit activity is influenced by state and local economic conditions, changes in interest rates, internal pricing decisions and competition. Deposits are primarily obtained from the areas surrounding the Bank’s branch locations. To attract and retain deposits, the Bank offers competitive rates, quality customer service and a wide variety of products and services that meet customers’ needs, including online and mobile banking.
Deposit pricing strategy is monitored monthly by the management Asset/Liability Committee and Pricing Committee. Deposit pricing is set weekly by the Bank’s Treasury Department. When setting deposit pricing, the Bank considers competitive

17



market rates, FHLBNY advance rates and rates on other sources of funds. Core deposits, defined as savings accounts, interest and non-interest bearing checking accounts and money market deposit accounts, represented 90.5% of total deposits at December 31, 2017 and 90.1% of total deposits at December 31, 2016. As of December 31, 2017 and 2016, time deposits maturing in less than one year amounted to $424.4 million and $439.0 million, respectively.
The following table indicates the amount of certificates of deposit by time remaining until maturity as of December 31, 2017.
 
Maturity
 
Total
 
3 Months
or Less
 
Over 3 to
6 Months
 
Over 6 to
12 Months
 
Over 12
Months
 
 
(Dollars in thousands)
Certificates of deposit of $100,000 or more
$
143,270

 
$
44,581

 
$
33,288

 
$
94,935

 
$
316,074

Certificates of deposit less than $100,000
75,241

 
62,882

 
65,186

 
115,426

 
318,735

Total certificates of deposit
$
218,511

 
$
107,463

 
$
98,474

 
$
210,361

 
$
634,809


Certificates of Deposit Maturities. The following table sets forth certain information regarding certificates of deposit.
 
Period to Maturity from December 31, 2017
 
At December 31,
 
Less Than
One Year
 
One to
Two
Years
 
Two to
Three
Years
 
Three to
Four Years
 
Four to
Five Years
 
Five Years
or More
 
2017
 
2016
 
2015
 
(Dollars in thousands)
Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.00 to 0.99%
$
249,087

 
$
30,103

 
$
4,115

 
$

 
$
9

 
$
255

 
$
283,569

 
$
421,772

 
$
497,327

1.00 to 2.00%
175,361

 
65,190

 
49,875

 
24,992

 
23,978

 
3,296

 
342,692

 
228,111

 
226,456

2.01 to 3.00%

 
284

 
713

 
155

 
7,392

 

 
8,544

 
950

 
15,081

3.01 to 4.00%

 

 

 
4

 

 

 
4

 
4

 
23

4.01 to 5.00%

 

 

 

 

 

 

 
104

 
492

5.01 to 6.00%

 

 

 

 

 

 

 
200

 
302

6.01 to 7.00%

 

 

 

 

 

 

 
6

 
6

Over 7.01%

 

 

 

 

 

 

 
36

 
34

Total
$
424,448

 
$
95,577

 
$
54,703

 
$
25,151

 
$
31,379

 
$
3,551

 
$
634,809

 
$
651,183

 
$
739,721


Borrowed Funds. At December 31, 2017, the Bank had $1.74 billion of borrowed funds. Borrowed funds consist primarily of FHLBNY advances and repurchase agreements. Repurchase agreements are contracts for the sale of securities owned or borrowed by the Bank, with an agreement to repurchase those securities at an agreed-upon price and date. The Bank uses wholesale repurchase agreements, as well as retail repurchase agreements as an investment vehicle for its commercial sweep checking product. Bank policies limit the use of repurchase agreements to collateral consisting of U.S. Treasury obligations, U.S. government agency obligations or mortgage-related securities.
As a member of the FHLBNY, the Bank is eligible to obtain advances upon the security of the FHLBNY common stock owned and certain residential mortgage loans, provided certain standards related to credit-worthiness have been met. FHLBNY advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities.

18



The following table sets forth the maximum month-end balance and average balance of FHLBNY advances and securities sold under agreements to repurchase for the periods indicated.
 
Years Ended December 31,
 
2017

2016

2015
 
(Dollars in thousands)
Maximum Balance:





FHLBNY advances
$
1,288,448

 
$
1,343,095

 
$
1,363,122

FHLBNY line of credit
472,000

 
173,000

 
160,000

Securities sold under agreements to repurchase
210,702

 
283,233

 
346,361

Average Balance:
 
 
 
 
 
FHLBNY advances
1,237,979

 
1,315,278

 
1,249,193

FHLBNY line of credit
179,003

 
37,608

 
80,847

Securities sold under agreements to repurchase
164,982

 
224,421

 
273,934

Weighted Average Interest Rate:
 
 
 
 
 
FHLBNY advances
1.78
%
 
1.76
%
 
1.84
%
FHLBNY line of credit
1.17

 
0.61

 
0.40

Securities sold under agreements to repurchase
1.26

 
1.42

 
1.49

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

2017

2016

2015
 
(Dollars in thousands)
FHLBNY advances
1,127,335

 
1,295,080

 
1,350,282

FHLBNY line of credit
472,000

 
161,000

 
96,000

Securities sold under repurchase agreements
143,179

 
156,665

 
261,350

Total borrowed funds
$
1,742,514

 
$
1,612,745

 
$
1,707,632

Weighted average interest rate of FHLBNY advances
1.74
%
 
1.77
%
 
1.77
%
Weighted average interest rate of FHLBNY line of credit
1.53
%
 
0.79
%
 
0.49
%
Weighted average interest rate of securities sold under agreements to repurchase
1.00
%
 
1.35
%
 
1.47
%
WEALTH MANAGEMENT SERVICES
As part of the Company’s strategy to increase fee related income, the Company’s wholly owned subsidiary, Beacon Trust Company (“Beacon”) is engaged in providing wealth management and asset management services. In addition to its trust and estate administration services, Beacon is also a provider of asset management services which are often introduced to existing clients through the Bank’s extensive branch network. Beacon offers a full range of asset management services to individuals, municipalities, non-profits, corporations and pension funds. These services include investment management, asset allocation, trust and fiduciary services, financial and tax planning, family office services, estate settlement services and custody.
Beacon focuses on delivering personalized investment strategies based on each client’s risk profile. These strategies are focused on maximizing clients’ investment returns, while minimizing expenses. Most of the fee income generated by Beacon is based on assets under management.
SUBSIDIARY ACTIVITIES
PFS Insurance Services, Inc., formerly Provident Investment Services, Inc., is a wholly owned subsidiary of the Bank, and a New Jersey licensed insurance producer that sells insurance and investment products, including annuities to customers through a third-party networking arrangement.
Dudley Investment Corporation is a wholly owned subsidiary of the Bank which operates as a New Jersey Investment Company. Dudley Investment Corporation owns all of the outstanding common stock of Gregory Investment Corporation.

19



Gregory Investment Corporation is a wholly owned subsidiary of Dudley Investment Corporation. Gregory Investment Corporation operates as a Delaware Investment Company. Gregory Investment Corporation owns all of the outstanding common stock of PSB Funding Corporation.
PSB Funding Corporation is a majority owned subsidiary of Gregory Investment Corporation. It was established as a New Jersey corporation to engage in the business of a real estate investment trust for the purpose of acquiring mortgage loans and other real estate related assets from the Bank.
Bergen Avenue Realty, LLC, a New Jersey limited liability company is a wholly owned subsidiary of the Bank formed to manage and sell real estate acquired through foreclosure. At December 31, 2017, Bergen Avenue Realty, LLC had total assets of $4.1 million.
Bergen Avenue Realty PA, LLC, a Pennsylvania limited liability company is a wholly owned subsidiary of the Bank formed to manage and sell real estate acquired through foreclosure in Pennsylvania. At December 31, 2017, Bergen Avenue Realty PA, LLC had total assets of $854,000.
Beacon Trust Company, a New Jersey limited purpose trust company, is a wholly owned subsidiary of the Bank.
Beacon Investment Advisory Services, Inc. is a wholly owned subsidiary of Beacon Trust Company, incorporated under Delaware law and is a registered investment advisor.
PERSONNEL
As of December 31, 2017, the Company had 957 full-time and 97 part-time employees. None of the Company’s employees are represented by a collective bargaining group. The Company believes its working relationship with its employees is good.
REGULATION and SUPERVISION
General
As a bank holding company controlling the Bank, the Company is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA. The Company is also subject to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”) and the regulations of the Commissioner of the New Jersey Department of Banking and Insurance (“Commissioner”) under the New Jersey Banking Act applicable to bank holding companies. The Company and the Bank are required to file reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board and the Commissioner. The Federal Reserve Board and the Commissioner conduct periodic examinations to assess the Company’s compliance with various regulatory requirements. The Company files certain reports with, and otherwise complies with, the rules and regulations of the SEC under the federal securities laws and the listing requirements of the New York Stock Exchange.
The Bank is a New Jersey chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to extensive regulation, examination and supervision by the Commissioner as the issuer of its charter, and by the FDIC as its deposit insurer. The Bank files reports with the Commissioner and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the FDIC conduct periodic examinations to assess the Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Any change in applicable laws and regulations, whether by the Commissioner, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on the Company and the Bank and their operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes in the regulation of depository institutions and their holding companies. Certain provisions of the Dodd-Frank Act have impacted, and will continue to impact the Company and the Bank. For example, the Dodd-Frank Act created the Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau has assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has the authority to impose new requirements. However, institutions with less than $10 billion in assets, such as the Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and are subject to the enforcement

20



authority of their principal regulator, although the Consumer Financial Protection Bureau has back-up authority to examine and enforce consumer protection laws against all institutions, including those with less than $10 billion in assets.
As of December 31, 2017, the Bank had consolidated assets of $9.85 billion. The Dodd-Frank Act established several measures that apply to institutions and holding companies once they reach $10 billion in assets. In addition to Consumer Financial Protection Bureau compliance examinations, as discussed above, limits on debit card interchange fees apply, which will reduce the Bank’s fee income. Certain enhanced prudential standards will also become applicable such as additional risk management requirements, both from a framework and corporate governance perspective. Stress testing requirements and related filing requirements, which involve assessing the potential impact on the Bank and Company of various scenarios prescribed by the federal regulatory agencies, also become applicable. These and other supervisory and regulatory implications of crossing the $10 billion threshold would likely result in increased regulatory costs.
The material laws and regulations applicable to the Company and the Bank are summarized below and elsewhere in this Annual Report on Form 10-K.
New Jersey Banking Regulation
Activity Powers. The Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including the Bank, generally may, subject to certain limits, invest in:
(1)
real estate mortgages;
(2)
consumer and commercial loans;
(3)
specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;
(4)
certain types of corporate equity securities; and
(5)
certain other assets.
A savings bank may also invest pursuant to a “leeway” power that permits investments not otherwise permitted by the New Jersey Banking Act, subject to certain restrictions imposed by the FDIC. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of such investments. A savings bank may also exercise trust powers upon the approval of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Commissioner by regulation or by specific authorization is required. The exercise of these lending, investment and activity powers is limited by federal law and the related regulations. See “Federal Banking Regulation-Activity Restrictions on State-Chartered Bank” below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey chartered savings bank may not make loans or extend credit to a single borrower and to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A New Jersey chartered savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. The Bank currently complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by the Bank.
Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey chartered depository institutions, including the Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. At December 31, 2017, the Bank was considered “well capitalized” under FDIC guidelines.
Examination and Enforcement. The New Jersey Department of Banking and Insurance may examine the Company and the Bank whenever it deems an examination advisable. The Department examines the Bank at least every two years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed.

21



Federal Banking Regulation
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act, and were effective January 1, 2015.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was effective on January 1, 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer during the calendar year 2017 was 1.25% and increased to 1.875% on January 1, 2018.
The following table shows the Bank’s Tier 1 leverage ratio, common equity Tier 1 risk-based capital ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio, at December 31, 2017:
 
As of December 31, 2017
 
Capital
 
Percent  of
Assets
(1)
 
Capital
Requirements
(1)
 
Capital
Requirements with Capital Conservation Buffer (1)
 
(Dollars in thousands)
Tier 1 leverage capital
$
834,084

 
9.07
%
 
4.00
%
 
4.00
%
Common equity Tier 1 risk-based capital
834,084

 
11.15

 
4.50

 
5.75

Tier 1 risk-based capital
834,084

 
11.15

 
6.00

 
7.25

Total risk-based capital
894,430

 
11.95

 
8.00

 
9.25

(1) For purposes of calculating regulatory Tier 1 leverage capital, assets are based on adjusted total leverage assets. In calculating common equity Tier 1 risk-based capital, Tier 1 risk-based capital and total risk-based capital, assets are based on total risk-weighted assets.
As of December 31, 2017, the Bank was considered “well capitalized” under FDIC guidelines.
Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the FDIC.
Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and

22



the FDIC determines that the activity does not present a significant risk to the FDIC insurance fund. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.
Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 billion. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. The Bank currently meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries.
Federal Home Loan Bank System. The Bank is a member of the FHLB system which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLB provides a central credit facility primarily for member institutions. As a member of the FHLB of New York, the Bank is required to purchase and hold shares of capital stock in that FHLB in an amount as required by that FHLB’s capital plan and minimum capital requirements. The Bank is in compliance with these requirements. The Bank has received dividends on its FHLBNY stock, although no assurance can be given that these dividends will continue to be paid. For the year ended December 31, 2017, dividends paid by the FHLBNY to the Bank totaled $4.1 million.
Deposit Insurance. As a member institution of the FDIC, deposit accounts at the Bank are generally insured by the FDIC’s Deposit Insurance Fund (“DIF”) up to a maximum of $250,000 for each separately insured depositor.
Under the FDIC’s risk-based assessment system, insured institutions were originally assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depended upon the category to which it was assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky paid lower assessments. No institution may pay a dividend if it is in default of its federal deposit insurance assessment.
The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range (inclusive of possible adjustments) at 25 to 45 basis points of total assets less tangible equity. However, as described below, there were recent changes to both the FDIC’s assessment range and its risk-based assessment procedures.
The FDIC has established a long range target size for the DIF of 2 percent of insured deposits. The FDIC’s regulations also provided for a lower assessment rate schedule when the DIF reached 1.15% of total insured deposits. The 1.15% ratio was achieved as of June 30, 2016. As a result, effective July 1, 2016, the assessment range (inclusive of possible adjustments) has been lowered to 1.5 to 30 basis points for banks of less than $10 billion in consolidated assets. The Dodd-Frank Act requires banks of greater than $10 billion of assets to pay to increase the DIF reserve ratio from 1.15% to 1.35%. Consequently, also effective July 1, 2016, banks of greater than $10 billion of assets now pay a surcharge of 4.5 basis points on assets above $10 billion until the earlier of the reserve ratio reaching 1.35% or December 31, 2018 (when a short fall assessment would be applied). At the same time, the FDIC eliminated the risk categories. Most institutions are now assessed based on financial ratios derived from statistical models that estimate the probability of a bank’s failure within three years. Banks of greater than $10 billion are assessed based on a rate derived from a scorecard which assesses certain factors such as examination ratings, financial measures related to the bank’s ability to withstand stress and measures of loss severity to the DIF if the bank should fail.
Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of law and to unsafe or unsound practices.
Transactions with Affiliates. Transactions between an insured bank, such as the Bank, and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and its implementing regulations. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution, financial subsidiary or other entity defined by the regulation generally is not treated as an affiliate of the bank for purposes of Sections 23A and 23B.

23



Section 23A:
limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and retained earnings, and limits all such transactions with all affiliates to an amount equal to 20% of such capital stock and retained earnings; and
requires that all such transactions be on terms that are consistent with safe and sound banking practices.
The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or s