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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to

Commission File Number: 001-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)  
Delaware
42-1547151
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
239 Washington Street Jersey City New Jersey 07302
(Address of Principal Executive Offices)
(City) (State)
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Symbol(s)
Name of each exchange on which registered
Common
PFS
New York Stock Exchange

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ý
As of May 3, 2021 there were 83,209,012 shares issued and 77,966,795 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 161,705 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.
1


PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page Number
1
Consolidated Statements of Financial Condition as of March 31, 2021 (unaudited) and December 31, 2020
3
Consolidated Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)
8
10
2
41
3
49
4
51
1
52
1A.
52
2
52
3
Defaults Upon Senior Securities
52
4
52
5
52
6
Exhibits
53
54



2

PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 2021 (Unaudited) and December 31, 2020
(Dollars in Thousands)
 
March 31, 2021 December 31, 2020
ASSETS
Cash and due from banks $ 559,235  $ 404,355 
Short-term investments 128,335  127,998 
Total cash and cash equivalents 687,570  532,353 
Available for sale debt securities, at fair value 1,216,936  1,105,489 
Held to maturity debt securities, net (fair value of $463,993 at March 31, 2021 (unaudited) and $472,529 at December 31, 2020)
447,902  450,965 
Equity securities, at fair value 1,026  971 
Federal Home Loan Bank stock 48,998  59,489 
Loans 9,803,536  9,822,890 
Less allowance for credit losses 85,591  101,466 
Net loans 9,717,945  9,721,424 
Foreclosed assets, net 3,554  4,475 
Banking premises and equipment, net 75,344  75,946 
Accrued interest receivable 43,883  46,450 
Intangible assets 465,335  466,212 
Bank-owned life insurance 235,112  234,607 
Other assets 186,840  221,360 
Total assets $ 13,130,445  $ 12,919,741 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits $ 7,932,146  $ 7,395,508 
Savings deposits 1,402,363  1,348,147 
Certificates of deposit of $100,000 or more 604,732  717,216 
Other time deposits 358,272  376,958 
Total deposits 10,297,513  9,837,829 
Mortgage escrow deposits 37,772  34,298 
Borrowed funds 940,611  1,175,972 
Subordinated debentures 25,173  25,135 
Other liabilities 182,145  226,710 
Total liabilities 11,483,214  11,299,944 
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
—  — 
Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,012 shares issued and 77,798,624 shares outstanding at March 31, 2021 and 77,611,107 outstanding at December 31, 2020
832  832 
Additional paid-in capital 963,556  962,453 
Retained earnings 748,574  718,090 
Accumulated other comprehensive income 12,977  17,655 
Treasury stock (59,261) (59,018)
Unallocated common stock held by the Employee Stock Ownership Plan (19,447) (20,215)
Common stock acquired by deferred compensation plans (4,381) (4,549)
Deferred compensation plans 4,381  4,549 
Total stockholders’ equity 1,647,231  1,619,797 
Total liabilities and stockholders’ equity $ 13,130,445  $ 12,919,741 
See accompanying notes to unaudited consolidated financial statements.
3

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three months ended March 31, 2021 and 2020 (Unaudited)
(Dollars in Thousands, except per share data)
 
Three months ended March 31,
2021 2020
Interest income:
Real estate secured loans $ 62,016  $ 54,441 
Commercial loans 26,143  18,672 
Consumer loans 3,492  4,172 
Available for sale debt securities, equity securities and Federal Home Loan Bank stock 5,612  7,069 
Held to maturity debt securities 2,784  2,940 
Deposits, Federal funds sold and other short-term investments 484  875 
Total interest income 100,531  88,169 
Interest expense:
Deposits 7,417  10,958 
Borrowed funds 2,809  5,190 
Subordinated debt 305  — 
Total interest expense 10,531  16,148 
Net interest income 90,000  72,021 
Provision (benefit) charge for credit losses (15,001) 14,717 
Net interest income after provision for credit losses 105,001  57,304 
Non-interest income:
Fees 7,192  6,529 
Wealth management income 7,134  6,251 
Insurance agency income 2,727  — 
Bank-owned life insurance 2,567  787 
Net gains on securities transactions 197  11 
Other income 1,820  3,413 
Total non-interest income 21,637  16,991 
Non-interest expense:
Compensation and employee benefits 35,312  31,195 
Net occupancy expense 9,301  6,203 
Data processing expense 4,393  4,430 
FDIC insurance 1,770  — 
Amortization of intangibles 972  744 
Advertising and promotion expense 877  1,369 
Credit loss (benefit) expense for off-balance sheet credit exposures (875) 1,000 
Other operating expenses 10,103  9,166 
Total non-interest expense 61,853  54,107 
Income before income tax expense 64,785  20,188 
Income tax expense 16,226  5,257 
Net income $ 48,559  $ 14,931 
Basic earnings per share $ 0.63  $ 0.23 
Weighted average basic shares outstanding 76,516,543  64,386,138 
Diluted earnings per share $ 0.63  $ 0.23 
Weighted average diluted shares outstanding 76,580,862  64,457,263 

See accompanying notes to unaudited consolidated financial statements.
4

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2021 and 2020 (Unaudited)
(Dollars in Thousands)
 
Three months ended March 31,
2021 2020
Net income $ 48,559  $ 14,931 
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale debt securities:
Net unrealized (losses) gains arising during the period (9,019) 16,746 
Reclassification adjustment for gains included in net income (171) — 
Total (9,190) 16,746 
Unrealized gains (losses) on derivatives 4,621  (5,713)
Amortization related to post-retirement obligations (109) 84 
Total other comprehensive (loss) income (4,678) 11,117 
Total comprehensive income $ 43,881  $ 26,048 

See accompanying notes to unaudited consolidated financial statements.

5

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2020 (Unaudited)
(Dollars in Thousands)
For the three months ended March 31, 2020
COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS ACCUMULATED OTHER COMPREHENSIVE INCOME TREASURYSTOCK UNALLOCATED ESOP SHARES COMMON STOCK ACQUIRED BY DEFERRED COMP PLANS DEFERRED COMPENSATION PLANS TOTAL STOCKHOLDERS’ EQUITY
Balance at December 31, 2019 $ 832  $ 1,007,303  $ 695,273  $ 3,821  $ (268,504) $ (24,885) $ (3,833) $ 3,833  $ 1,413,840 
Net income —  —  14,931  —  —  —  —  —  14,931 
Other comprehensive income, net of tax —  —  11,117  —  —  —  —  11,117 
Cash dividends paid —  —  (15,496) —  —  —  —  —  (15,496)
Distributions from DDFP —  37  —  —  —  —  167  (167) 37 
Purchases of treasury stock —  —  —  —  (4,985) —  —  —  (4,985)
Purchase of employee restricted shares to fund statutory tax withholding —  —  —  (956) —  —  —  (956)
Shares issued dividend reinvestment plan —  50  —  —  401  —  —  —  451 
Allocation of ESOP shares —  152  —  —  —  769  —  —  921 
Allocation of Stock Award Plan ("SAP") shares —  993  —  —  —  —  —  —  993 
Allocation of stock options —  47  —  —  —  —  —  —  47 
Balance at March 31, 2020 $ 832  $ 1,008,582  $ 686,397  $ 14,938  $ (274,044) $ (24,116) $ (3,666) $ 3,666  $ 1,412,589 

See accompanying notes to unaudited consolidated financial statements.






















6


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2021 (Unaudited)
(Dollars in Thousands)

For the three months ended March 31, 2021
COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TREASURY STOCK UNALLOCATED ESOP SHARES COMMON STOCK ACQUIRED BY DEFERRED COMP PLANS DEFERRED COMPENSATION PLANS TOTAL STOCKHOLDERS’ EQUITY
Balance at December 31, 2020 832  962,453  718,090  17,655  (59,018) (20,215) (4,549) 4,549  1,619,797 
Net income —  —  48,559  —  —  —  —  —  48,559 
Other comprehensive loss, net of tax —  —  —  (4,678) —  —  —  —  (4,678)
Cash dividends paid —  —  (18,075) —  —  —  —  —  (18,075)
Distributions from DDFP —  28  —  —  —  —  168  (168) 28 
Purchases of treasury stock —  —  —  —  (48) —  —  —  (48)
Purchase of employee restricted shares to fund statutory tax withholding —  —  —  —  (915) —  —  —  (915)
Shares issued dividend reinvestment plan —  —  —  —  —  —  —  —  — 
Stock option exercised —  (82) —  —  720  —  —  —  638 
Allocation of ESOP shares —  145  —  —  —  768  —  —  913 
Allocation of SAP shares —  959  —  —  —  —  —  —  959 
Allocation of stock options —  53  —  —  —  —  —  —  53 
Balance at March 31, 2021 $ 832  $ 963,556  $ 748,574  $ 12,977  $ (59,261) $ (19,447) $ (4,381) $ 4,381  $ 1,647,231 

See accompanying notes to unaudited consolidated financial statements.
7


PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended March 31, 2021 and 2020 (Unaudited)
(Dollars in Thousands)
 
Three months ended March 31,
2021 2020
Cash flows from operating activities:
Net income $ 48,559  $ 14,931 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangibles 3,264  2,494 
Provision (benefit) charge for credit losses on loans and securities (15,001) 14,717 
Credit loss (benefit) expense for off-balance sheet credit exposures (875) 1,000 
Deferred tax expense (benefit) 6,271  (1,492)
Amortization of operating lease right-of-use assets 2,812  2,130 
Income on Bank-owned life insurance (2,567) (787)
Net amortization of premiums and discounts on securities 3,110  1,913 
Accretion of net deferred loan fees (5,487) (1,521)
Amortization of premiums on purchased loans, net 190  192 
Net increase in loans originated for sale (14,492) (4,022)
Proceeds from sales of loans originated for sale 15,260  4,335 
Proceeds from sales and paydowns of foreclosed assets 569  256 
ESOP expense 913  921 
Allocation of stock award shares 959  993 
Allocation of stock options 53  47 
Net gain on sale of loans (768) (313)
Net gain on securities transactions (197) (11)
Net gain on sale of premises and equipment (15) (641)
Net gain on sale of foreclosed assets (170) (29)
(Increase) decrease in accrued interest receivable (2,567) 1,232 
Decrease (increase) in other assets 41,160  (82,099)
(Decrease) increase in other liabilities (44,565) 79,111 
Net cash provided by operating activities 36,416  33,357 
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of held to maturity debt securities 10,236  17,225 
Purchases of held to maturity debt securities (7,541) (9,674)
Proceeds from sales of securities 9,442  — 
Proceeds from maturities and paydowns of available for sale debt securities 90,807  64,466 
Purchases of available for sale debt securities (226,417) (56,172)
Proceeds from redemption of Federal Home Loan Bank stock 12,147  28,549 
Purchases of Federal Home Loan Bank stock (1,656) (32,449)
BOLI claim benefits received —  1,985 
Net decrease (increase) in loans 24,217  (39,897)
Proceeds from sales of premises and equipment 15  641 
Purchases of premises and equipment (1,846) (1,664)
Net cash used in investing activities (90,596) (26,990)
Cash flows from financing activities:
Net increase in deposits 459,684  108,151 
Increase in mortgage escrow deposits 3,474  1,666 
Cash dividends paid to stockholders (18,075) (15,496)
Shares issued dividend reinvestment plan —  451 
8

Three months ended March 31,
2021 2020
Purchase of treasury stock (48) (4,985)
Purchase of employee restricted shares to fund statutory tax withholding (915) (956)
Stock options exercised 638  — 
Proceeds from long-term borrowings 400,000  632,554 
Payments on long-term borrowings (619,265) (300,159)
Net decrease in short-term borrowings (16,096) (243,764)
Net cash provided by financing activities 209,397  177,462 
Net increase in cash and cash equivalents 155,217  183,829 
Cash and cash equivalents at beginning of period 532,353  186,748 
Cash and cash equivalents at end of period $ 687,570  $ 370,577 
Cash paid during the period for:
Interest on deposits and borrowings $ 10,399  $ 15,819 
Income taxes $ 270  $ 115 
Non-cash investing activities:
Transfer of loans receivable to foreclosed assets $ 434  $ 2,067 
See accompanying notes to unaudited consolidated financial statements.
9

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly owned subsidiary, Provident Bank (the “Bank,” together with Provident Financial Services, Inc., the “Company”).
In preparing the interim unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and the consolidated statements of income for the periods presented. Actual results could differ from these estimates. The allowance for credit losses and the valuation of deferred tax assets are material estimates that are particularly susceptible to near-term change.
The interim unaudited consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for all of 2021.
Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction with the December 31, 2020 Annual Report to Stockholders on Form 10-K.
B. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the three months ended March 31, 2021 and 2020 (dollars in thousands, except per share amounts):
Three months ended March 31,
2021 2020
Net
Income 		Weighted
Average
Common
Shares
Outstanding 		Per
Share
Amount 		Net
Income 		Weighted
Average
Common
Shares
Outstanding 		Per
Share
Amount
Net income $ 48,559  $ 14,931 
Basic earnings per share:
Income available to common stockholders $ 48,559  76,516,543  $ 0.63  $ 14,931  64,386,138  $ 0.23 
Dilutive shares 64,319  71,125 
Diluted earnings per share:
Income available to common stockholders $ 48,559  76,580,862  $ 0.63  $ 14,931  64,457,263  $ 0.23 
Anti-dilutive stock options and awards at March 31, 2021 and 2020, totaling 1.2 million shares and 905,673 shares, respectively, were excluded from the earnings per share calculations.
C. Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,” which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company used the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL.
Going forward, the impact of utilizing the CECL approach to calculate the allowance for credit losses on loans will be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the
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prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company’s reported earnings. For the three months ended March 31, 2021, the improved economic outlook and the resulting lower allowance requirements led to reductions to the provisions for credit losses and off-balance sheet credit exposures. See Note 4 to the Consolidated Financial Statements for more information on the allowance for credit losses on loans.
Note 2. Business Combinations
SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans and $1.76 billion to total deposits, and added 18 full-service banking offices in New Jersey and New York. As part of the acquisition, the addition of SB One Insurance Agency allowed the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outstanding SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid for the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the respective assets acquired and liabilities assumed were recorded at their estimated fair value. The excess of consideration paid over the estimated fair value of the net assets acquired totaled $22.4 million and was recorded as goodwill.
The calculation of goodwill is subject to change for up to one year after the closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available. As the Company finalizes its analysis of these assets and liabilities, there may be adjustments to the recorded carrying values.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition from SB One (in thousands):

11

At July 31, 2020
Assets acquired:
Cash and cash equivalents, net $ 78,089 
Available for sale debt securities 231,645 
Held to maturity debt securities 12,381 
Federal Home Loan Bank stock 11,216 
Loans 1,766,115 
Allowance for credit losses on PCD loans (13,586)
Loans, net 1,752,529 
Bank-owned life insurance 37,237 
Banking premises and equipment 16,620 
Accrued interest receivable 8,947 
Goodwill 22,439 
Other intangibles assets 9,965 
Foreclosed assets, net 2,441 
Other assets 12,199 
Total assets acquired $ 2,195,708 
Liabilities assumed:
Deposits $ 1,757,777 
Borrowed funds 201,582 
Subordinated debentures 25,074 
Other liabilities 30,447 
Total liabilities assumed $ 2,014,880 
Net assets acquired $ 180,828 
Fair Value Measurement of Assets Assumed and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the SB One acquisition were as follows:
Securities Available for Sale
The estimated fair values of the available for sale debt securities, primarily comprised of U.S. Government agency mortgage-backed securities and U.S. government agencies and municipal bonds carried on SB One's balance sheet was confirmed using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities and a fair value adjustment was not recorded on the investments.
Held to Maturity Debt Securities
The estimated fair values of the held to maturity debt securities, primarily comprised of municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value premium of $133,000 was recorded on the investments.
Loans
Loans acquired in the SB One acquisition were recorded at fair value, and there was no carryover related allowance for credit losses. The fair values of loans acquired from SB One were estimated using the discounted cash flow method based on the remaining maturity and repricing terms. Cash flows were adjusted for expected losses and prepayments. Projected cash flows were then discounted to present value based on: the relative risk of the cash flows, taking into account the loan type, liquidity risk, the maturity of the loans, servicing costs, and a required return on capital; and monthly principal and interest cash flows were discounted to present value and summed to arrive at the calculated value of the loans. The fair value of the acquired loans receivable was $1.77 billion.  
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For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into pools based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The loans were valued at the sub-pool level and were pooled at the summary level based on loan type. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these market rates was used as the fair value interest rate that a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $8.4 million.
Loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated ("PCD") loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that were current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics.
Additionally for PCD loans, an allowance for credit losses was calculated using management's best estimate of projected losses over the remaining life of the loans in accordance with ASC 326-20. This represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective PCD loan pool, given the outlook and forecast inclusive of the impact of the COVID-19 pandemic ("COVID-19") and related fiscal and regulatory interventions. The expected lifetime losses were calculated using historical losses observed at the Bank, SB One and peer banks. A $13.6 million allowance for credit losses was recorded on PCD loans. The interest rate fair value adjustment related to PCD loans will be substantially recognized as interest income on a level yield amortization or straight line method over the expected life of the loans. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.
The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired (in thousands):
Gross amortized cost basis at July 31, 2020 $ 1,787,057 
Interest rate fair value adjustment on all loans 455 
Credit fair value adjustment on non-PCD loans (21,397)
Fair value of acquired loans at July 31, 2020 1,766,115 
Allowance for credit losses on PCD loans (13,586)
Fair value of acquired loans, net at July 31, 2020 $ 1,752,529 
The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition as of the closing date (in thousands):
Gross amortized cost basis at July 31, 2020 $ 315,784 
Interest component of expected cash flows (accretable difference) (7,988)
Allowance for credit losses on PCD loans (13,586)
Net PCD loans $ 294,210 
Banking Premises and Equipment
The Company acquired 18 branches from SB One, eight of which were owned premises. The fair value of properties acquired was derived by valuations prepared by an independent third party utilizing the sales comparison approach to value the property as improved.
Core Deposit Intangible and Customer Relationship Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates.
The fair value of the customer relationship intangible was determined based on a discounted cash flow analysis using the excess of the future cash inflows (i.e., revenue from existing customer relationships) over the related cash outflows (i.e., operating costs) generated over the useful life of the acquired customer base. These cash flows were discounted to present value using an
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asset-specific risk-adjusted discount rate. The projected cash flows were developed using projected customer revenue retention rates.
The core deposit intangible totaled $3.2 million and is being amortized over its estimated useful life of approximately 10 years based on dollar weighted deposit runoff on an annualized basis. The insurance agency customer relationship intangible totaled $6.8 million and is being amortized over its estimated useful life of approximately 13 years based on customer revenue attrition on an annualized basis.
Goodwill
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
Bank Owned Life Insurance ("BOLI")
SB One's BOLI cash surrender value was $37.2 million with no fair value adjustment.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $4.3 million is being amortized into income on a level yield amortization method over the contractual life of the deposits.
Borrowings
The fair value of Federal Home Loan Bank of New York ("FHLBNY") advances was determined based on a discounted cash flow analysis using a discount rate commensurate with FHLBNY rates as of July 31, 2020. The cash flows of the advances were projected based on the scheduled payments of the fixed rate of each advance.
Subordinated Debentures
At the valuation date, SB One had one outstanding Trust Preferred and one subordinated debt issuance with an aggregate balance of $27.5 million. The fair value of Trust Preferred and subordinated debt issuances was determined based on a discounted cash flow analysis using a discount rate commensurate with yields and terms of comparable issuances. The cash flows were projected through the remaining contractual term of the Trust Preferred issuance and based on the call date for the subordinated debt issuance.
Note 3. Investment Securities
At March 31, 2021, the Company had $1.22 billion and $447.9 million in available for sale debt securities and held to maturity debt securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, variations in pricing information, regulatory actions, changes in the business environment or any changes in the competitive marketplace could have an adverse effect on the Company’s investment portfolio. The total number of available for sale and held to maturity debt securities in an unrealized loss position at March 31, 2021 totaled 122, compared with 49 at December 31, 2020. The increase in the number of securities in an unrealized loss position at March 31, 2021 was due to higher current market interest rates compared to rates at December 31, 2020.
On January 1, 2020, the Company adopted CECL which replaces the incurred loss methodology with an expected loss methodology. The Company did not record an allowance for credit losses on available for sale debt securities as this portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed immaterial. The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods. The Company recorded a $70,000 increase to the allowance for credit losses on held to maturity debt securities with a corresponding cumulative effect adjustment to decrease retained earnings by $52,000, net of income taxes. (See Adoption of CECL table below for additional detail.)
Management measures expected credit losses on held to maturity debt securities on a collective basis by security type. Management classifies the held to maturity debt securities portfolio into the following security types:
•Agency obligations;
•Mortgage-backed securities;
•State and municipal obligations; and
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•Corporate obligations.

All of the agency obligations held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The majority of the state and municipal, and corporate obligations carry no lower than A ratings from the rating agencies at March 31, 2021 and the Company had one security rated with a triple-B by Moody’s Investors Service.
The Company adopted CECL using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of CECL.
Available for Sale Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the fair value for available for sale debt securities at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021
Amortized
cost 		Gross
unrealized
gains 		Gross
unrealized
losses 		Fair
value
Mortgage-backed securities $ 1,042,480  23,915  (6,243) 1,060,152 
Asset-backed securities 47,329  1,876  —  49,205 
State and municipal obligations 69,443  429  (938) 68,934 
Corporate obligations 38,149  739  (243) 38,645 
$ 1,197,401  26,959  (7,424) 1,216,936 

December 31, 2020
Amortized
cost 		Gross
unrealized
gains 		Gross
unrealized
losses 		Fair
value
Agency obligations $ 1,001  8  —  1,009 
Mortgage-backed securities 910,393  28,872  (852) 938,413 
Asset-backed securities 52,295  1,535  —  53,830 
State and municipal obligations 69,687  1,666  (95) 71,258 
Corporate obligations 40,194  809  (24) 40,979 
$ 1,073,570  32,890  (971) 1,105,489 
The amortized cost and fair value of available for sale debt securities at March 31, 2021, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
March 31, 2021
Amortized
cost 		Fair
value
Due in one year or less $ —  — 
Due after one year through five years 3,651  3,761 
Due after five years through ten years 38,002  38,532 
Due after ten years 65,939  65,286 
$ 107,592  107,579 
Investments which pay principal on a periodic basis totaling $1.09 billion at amortized cost and $1.11 billion at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments.
For the three months ended March 31, 2021, proceeds from sales on securities in the available for sale debt securities portfolio totaled $9.4 million, with gains of $230,000 and no loss recognized. No securities were sold or called from the available for sale debt securities portfolio for the three month periods ended March 31, 2020.
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The following tables present the fair values and gross unrealized losses for available for sale debt securities in an unrealized loss position at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021
Less than 12 months 12 months or longer Total
Fair
value 		Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses
Mortgage-backed securities $ 345,988  (6,209) 8,110  (34) 354,098  (6,243)
State and municipal obligations 40,517  (938) —  —  40,517  (938)
Corporate obligations 6,655  (243) —  —  6,655  (243)
$ 393,160  (7,390) 8,110  (34) 401,270  (7,424)

December 31, 2020
Less than 12 months 12 months or longer Total
Fair
value
 Gross
unrealized
losses
Fair
value
Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses
Mortgage-backed securities $ 127,600  (824) 8,007  (28) 135,607  (852)
State and municipal obligations 5,275  (95) —  —  5,275  (95)
Corporate obligations —  —  2,000  (24) 2,000  (24)
$ 132,875  (919) 10,007  (52) 142,882  (971)
The number of available for sale debt securities in an unrealized loss position at March 31, 2021 totaled 81, compared with 42 at December 31, 2020. The increase in the number of securities in an unrealized loss position at March 31, 2021 was due to higher current market interest rates compared to rates at December 31, 2020. At March 31, 2021, there was one private label mortgage-backed security in an unrealized loss position, with an amortized cost of $17,445 and unrealized loss of $690. This private-label mortgage-backed security was investment grade at March 31, 2021.
Held to Maturity Debt Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses and the estimated fair value for held to maturity debt securities at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021
Amortized
cost 		Gross
unrealized
gains 		Gross
unrealized
losses 		Fair
value
Agency obligations $ 8,998  1  (95) 8,904 
Mortgage-backed securities 50  1  —  51 
State and municipal obligations 428,631  16,970  (825) 444,776 
Corporate obligations 10,300  65  (103) 10,262 
$ 447,979  17,037  (1,023) 463,993 
At March 31, 2021, the allowance for credit losses on held to maturity debt securities totaled $77,000.
December 31, 2020
Amortized
cost 		Gross
unrealized
gains 		Gross
unrealized
losses 		Fair
value
Agency obligations $ 7,600  6  (5) 7,601 
Mortgage-backed securities 62  2  —  64 
State and municipal obligations 433,655  21,442  (58) 455,039 
Corporate obligations 9,726  101  (2) 9,825 
$ 451,043  21,551  (65) 472,529 
At December 31, 2020, the allowance for credit losses on held to maturity debt securities totaled $78,000.
16

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair value may fluctuate during the investment period. There were no sales of securities from the held to maturity debt securities portfolio for the three months ended March 31, 2021 and 2020. For the three months ended March 31, 2021, proceeds from calls on securities in the held to maturity debt securities portfolio totaled $6.8 million with gross losses of $33,000 and no gross gains. For the three months ended March 31, 2020, proceeds from calls of securities in the held to maturity debt securities portfolio totaled $13.3 million with gross gains of $11,000 and no gross losses.
The amortized cost and fair value of investment securities in the held to maturity debt securities portfolio at March 31, 2021 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
March 31, 2021
Amortized
cost 		Fair
value
Due in one year or less $ —  — 
Due after one year through five years 163,682  167,460 
Due after five years through ten years 213,875  224,327 
Due after ten years 70,372  72,155 
$ 447,929  463,942 
Mortgage-backed securities totaling $50,000 at amortized cost and $51,000 at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments. Additionally, allowance for credit losses totaling $77,000 is excluded from the table above.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on held to maturity debt securities (in thousands):
January 1, 2020
As reported under CECL Prior to CECL Impact of CECL adoption
Held to Maturity Debt Securities
Allowance for credit losses on corporate securities $ 6  —  6 
Allowance for credit losses on municipal securities 64  —  64 
Allowance for credit losses on held to maturity debt securities $ 70  —  70 
The following tables present the fair values and gross unrealized losses for held to maturity debt securities in an unrealized loss position at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021 Unrealized Losses
Less than 12 months 12 months or longer Total
Fair
value 		Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses
Agency obligations $ 6,903  (95) —  —  6,903  (95)
State and municipal obligations 19,697  (809) 406  (16) 20,103  (825)
Corporate obligations 6,146  (103) —  —  6,146  (103)
$ 32,746  (1,007) 406  (16) 33,152  (1,023)

December 31, 2020 Unrealized Losses
Less than 12 months 12 months or longer Total
Fair
value 		Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses 		Fair
value 		Gross
unrealized
losses
Agency obligations $ 1,995  (5) —  —  1,995  (5)
State and municipal obligations 4,846  (41) 406  (17) 5,252  (58)
Corporate obligations 786  (2) —  —  786  (2)
$ 7,627  (48) 406  (17) 8,033  (65)
17

The number of held to maturity debt securities in an unrealized loss position at March 31, 2021 totaled 41, compared with 7 at December 31, 2020. The increase in the number of securities in an unrealized loss position at March 31, 2021, was due to higher current market interest rates compared to prevailing market rates at December 31, 2020.
Credit Quality Indicators. The following table provides the amortized cost of held to maturity debt securities by credit rating as of March 31, 2021 (in thousands):
March 31, 2021
Total Portfolio AAA AA A BBB Not Rated Total
Agency obligations $ 8,998  —  —  —  —  8,998 
Mortgage-backed securities 50  —  —  —  —  50 
State and municipal obligations 57,207  308,572  51,678  1,115  10,059  428,631 
Corporate obligations —  3,087  7,188  —  25  10,300 
$ 66,255  311,659  58,866  1,115  10,084  447,979 
December 31, 2020
Total Portfolio AAA AA A BBB Not Rated Total
Agency obligations $ 7,600  —  —  —  —  7,600 
Mortgage-backed securities 62  —  —  —  —  62 
State and municipal obligations 57,830  311,155  53,302  1,115  10,253  433,655 
Corporate obligations —  3,255  6,446  —  25  9,726 
$ 65,492  314,410  59,748  1,115  10,278  451,043 
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. At March 31, 2021, the held to maturity debt securities portfolio was comprised of 15% rated AAA, 70% rated AA, 13% rated A, and less than 2% either below an A rating or not rated by Moody’s Investors Service or Standard and Poor’s. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.
At March 31, 2021, the allowance for credit losses on held to maturity debt securities was $77,000, a decrease from $78,000 at December 31, 2020.
Note 4. Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted CECL, which replaced the incurred loss methodology with an expected loss methodology. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses on loans with a corresponding cumulative effect adjustment to decrease retained earnings by $5.9 million, net of income taxes. (See Adoption of CECL table below for additional detail.)
Loans receivable at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
March 31, 2021 December 31, 2020
Mortgage loans:
Residential $ 1,277,376  1,294,702 
Commercial 3,594,012  3,458,666 
Multi-family 1,458,193  1,484,515 
Construction 615,706  541,939 
Total mortgage loans 6,945,287  6,779,822 
Commercial loans 2,510,708  2,567,470 
Consumer loans 363,648  492,566 
Total gross loans 9,819,643  9,839,858 
Premiums on purchased loans 1,378  1,566 
Unearned discounts (7) (12)
Net deferred fees (17,478) (18,522)
Total loans $ 9,803,536  9,822,890 
18

At March 31, 2021, $101.7 million of loans purchased from SB One that were previously classified as consumer loans were classified as commercial mortgage loans, following further analysis of the underwriting documents and operational intent of the borrower. These loans are comprised of term loans and lines of credit secured by 1-4 family residential properties that are held by borrowers to generate rental income.
The following tables summarize the aging of loans receivable by portfolio segment and class of loans (in thousands):
March 31, 2021
30-59 Days 60-89 Days Non-accrual Recorded
Investment
> 90 days
accruing 		Total Past
Due 		Current Total Loans
Receivable 		Non-accrual loans with no related allowance
Mortgage loans:
Residential $ 6,862  6,161  7,797  —  20,820  1,256,556  1,277,376  7,797 
Commercial 2,183  520  33,742  —  36,445  3,557,567  3,594,012  33,742 
Multi-family 1,327  —  101  —  1,428  1,456,765  1,458,193  101 
Construction 1,123  1,656  1,392  —  4,171  611,535  615,706  1,392 
Total mortgage loans 11,495  8,337  43,032  —  62,864  6,882,423  6,945,287  43,032 
Commercial loans 393  235  36,042  —  36,670  2,474,038  2,510,708  21,298 
Consumer loans 1,356  277  3,010  —  4,643  359,005  363,648  3,009 
Total gross loans $ 13,244  8,849  82,084  —  104,177  9,715,466  9,819,643  67,339 

December 31, 2020
30-59 Days 60-89 Days Non-accrual Recorded
Investment
> 90 days
accruing 		Total Past
Due 		Current Total Loans Receivable Non-accrual loans with no related allowance
Mortgage loans:
Residential $ 15,789  8,852  9,315  —  33,956  1,260,746  1,294,702  9,315 
Commercial 761  113  31,982  —  32,856  3,425,810  3,458,666  20,482 
Multi-family 206  585  —  —  791  1,483,724  1,484,515  — 
Construction —  —  1,392  —  1,392  540,547  541,939  1,392 
Total mortgage loans 16,756  9,550  42,689  —  68,995  6,710,827  6,779,822  31,189 
Commercial loans 1,658  1,179  42,118  —  44,955  2,522,515  2,567,470  15,541 
Consumer loans 4,348  4,519  2,283  —  11,150  481,416  492,566  2,283 
Total gross loans $ 22,762  15,248  87,090  —  125,100  9,714,758  9,839,858  49,013 

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $82.1 million and $87.1 million at March 31, 2021 and December 31, 2020, respectively. Included in non-accrual loans were $27.1 million and $35.3 million of loans which were less than 90 days past due at March 31, 2021 and December 31, 2020, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2021 or December 31, 2020.

Management has elected to measure an allowance for credit losses for accrued interest receivables specifically related to any loan that has been deferred as a result of COVID-19. Generally, accrued interest is written off by reversing interest income during the quarter the loan is moved from an accrual to a non-accrual status.
The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million, for which, based on current information, the Bank does not expect to collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). An allowance for collateral-dependent impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs. The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analysis of collateral-dependent loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral-dependent loan and updated annually, or more frequently if required.
19

A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs. A specific allocation of the allowance for credit losses is established for each collateral-dependent loan with a carrying balance greater than the collateral’s fair value, less estimated selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less estimated selling costs. At each fiscal quarter end, if a loan is designated as collateral-dependent and the third-party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value and evaluated for charge offs. The Company believes there have been no significant time lapses resulting from this process.
At March 31, 2021, there were 167 impaired loans totaling $79.5 million. Included in this total were 115 TDRs related to 112 borrowers totaling $22.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2021. At December 31, 2020, there were 169 impaired loans totaling $86.0 million, of which 135 loans totaling $39.6 million were TDRs. Included in this total were 112 TDRs to 110 borrowers totaling $23.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2020.
At March 31, 2021 and December 31, 2020, the Company had $30.1 million and $26.3 million of collateral-dependent impaired loans, respectively. The collateral-dependent impaired loans at March 31, 2021 consisted of $28.3 million in commercial loans, $1.6 million in residential real estate loans, and $216,000 in consumer loans. The collateral for these impaired loans was primarily real estate.
The activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2021 and 2020 was as follows (in thousands):
March 31, 2021 Mortgage loans Commercial loans Consumer loans Total
Balance at beginning of period $ 68,307  27,084  6,075  101,466 
Provision benefit to operations (13,467) (467) (1,066) (15,000)
Recoveries of loans previously charged-off 276  528  303  1,107 
Loans charged-off (918) (843) (221) (1,982)
Balance at end of period $ 54,198  26,302  5,091  85,591 
March 31, 2020 Mortgage loans Commercial loans Consumer loans Total
Balance at beginning of period $ 25,511  28,263  1,751  55,525 
Provision charge (benefit) to operations 7,710  7,619  (629) 14,700 
Retained earnings (due to initial CECL adoption) 14,188  (9,974) 3,706  7,920 
Recoveries of loans previously charged-off 93  313  123  529 
Loans charged-off (2) (3,380) (149) (3,531)
Balance at end of period $ 47,500  22,841  4,802  75,143 
As a result of the January 1, 2020 adoption of CECL, the Company recorded a $7.9 million increase to the allowance for credit losses on loans. For the three months ended March 31, 2021, the Company recorded a negative provision for credit losses on loans of $15.0 million. The decrease in the provision for credit losses for the year ended March 31, 2021 was the result of an improved current economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak economic forecast and uncertain outlook attributable to the COVID-19. The largest decrease in the provision for credit losses on loans for the year ended March 31, 2021 was in the commercial real estate portfolio.
20

The following table illustrates the impact the January 1, 2020 adoption of CECL had on the allowance for credits losses for the loan portfolio (in thousands):
January 1, 2020
As reported under CECL Prior to CECL Impact of CECL adoption
Loans
Residential $ 8,950  3,414  5,536 
Commercial 17,118  12,831  4,287 
Multi-family 9,519  3,374  6,145 
Construction 4,152  5,892  (1,740)
Total mortgage loans 39,739  25,511  14,228 
Commercial loans 18,254  28,263  (10,009)
Consumer loans 5,452  1,751  3,701 
Allowance for credit losses on loans $ 63,445  55,525  7,920 
The following tables summarize loans receivable by portfolio segment and impairment method (in thousands):
March 31, 2021
Mortgage
loans 		Commercial
loans 		Consumer
loans 		Total Portfolio
Segments
Individually evaluated for impairment $ 49,783  28,359  1,405  79,547 
Collectively evaluated for impairment 6,895,504  2,482,349  362,243  9,740,096 
Total gross loans $ 6,945,287  2,510,708  363,648  9,819,643 

December 31, 2020
Mortgage
loans 		Commercial
loans 		Consumer
loans 		Total Portfolio
Segments
Individually evaluated for impairment $ 48,783  35,832  1,431  86,046 
Collectively evaluated for impairment 6,731,039  2,531,638  491,135  9,753,812 
Total gross loans $ 6,779,822  2,567,470  492,566  9,839,858 
The allowance for credit losses is summarized by portfolio segment and impairment classification as follows (in thousands):
March 31, 2021
Mortgage
loans 		Commercial loans Consumer loans Total
Individually evaluated for impairment $ 927  3,832  43  4,802 
Collectively evaluated for impairment 53,271  22,470  5,048  80,789 
Total gross loans $ 54,198  26,302  5,091  85,591 

December 31, 2020
Mortgage
loans 		Commercial loans Consumer
loans 		Total
Individually evaluated for impairment $ 4,220  4,715  39  8,974 
Collectively evaluated for impairment 64,087  22,369  6,036  92,492 
Total gross loans $ 68,307  27,084  6,075  101,466 
21

Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, management attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
The following tables present the number of loans modified as TDRs during the three months ended March 31, 2021 and 2020, along with their balances immediately prior to the modification date and post-modification as of March 31, 2021 and 2020 (in thousands):
For the three months ended
March 31, 2021 March 31, 2020
Troubled Debt Restructurings Number of
Loans 		Pre-Modification
Outstanding
Recorded 
Investment 		Post-Modification
Outstanding
Recorded Investment 		Number of
Loans 		Pre-Modification
Outstanding
Recorded  Investment 		Post-Modification
Outstanding
Recorded  Investment
($ in thousands)
Commercial loans 3  $ 1,361  $ 1,359  2  $ 746  $ 731 
Total restructured loans 3  $ 1,361  $ 1,359  2  $ 746  $ 731 
For loans modified as TDRs in the preceding table, there were no allowance for credit losses required at March 31, 2021.
There were no payment defaults (90 days or more past due) at the quarter ended March 31, 2021 and 2020 for loans modified as TDRs within the previous 12 month periods ending March 31, 2021 and March 31, 2020. For TDRs that subsequently default, the Company determines the amount of the allowance for the respective loans in accordance with the accounting policy for the allowance for credit losses on loans individually evaluated for impairment.
All TDRs are impaired loans, which are individually evaluated for impairment. During the three months ended March 31, 2021, $1.5 million of charge-offs were recorded on TDRs. (See subsequent discussion related to COVID-19 loan modifications.)
As allowed by CECL, the Company elected to maintain pools of loans accounted for under ASC 310-30. At December 31, 2020, purchased credit impaired (“PCI”) loans totaled $746,000. In accordance with the CECL standard, management did not reassess whether modifications of individually acquired financial assets accounted for in pools were TDRs as of the date of adoption. Loans considered to be PCI prior to January 1, 2020 were converted to PCD loans on that date. Any additional loans acquired by the Company after January 1, 2020, that experience more-than-insignificant deterioration in credit quality after origination, have been classified as PCD loans.
The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition at the July 31, 2020 closing date (in thousands):
Gross amortized cost basis at July 31, 2020 $ 315,784 
Interest component of expected cash flows (accretable difference) (7,988)
Fair value of PCD loans 307,796 
Allowance for credit losses on PCD loans (13,586)
Net PCD loans $ 294,210 
At March 31, 2021, the balance of PCD loans totaled $283.9 million with a related allowance for credit losses of $10.8 million. The balance of PCD loans at December 31, 2020 was $296.6 million with a related allowance for credit losses of $13.1 million.
22

The following table presents loans individually evaluated for impairment by class and loan category (in thousands):
March 31, 2021 December 31, 2020
Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized
Loans with no related allowance
Mortgage loans:
Residential $ 12,267  9,794  —  10,083  118  13,981  11,380  —  11,587  511 
Commercial 34,125  30,656  —  31,555  17  17,414  17,414  —  16,026  60 
Total 46,392  40,450  —  41,638  135  31,395  28,794  —  27,613  571 
Commercial loans 11,630  8,963  —  9,082  —  15,895  14,009  —  12,791  46 
Consumer loans 1,360  857  —  2,319  13  1,382  880  —  7  50 
Total impaired loans $ 59,382  50,270  —  53,039  148  48,672  43,683  —  40,411  667 
Loans with an allowance recorded
Mortgage loans:
Residential $ 8,938  8,438  904  8,461  77  7,950  7,506  806  7,604  307 
Commercial 895  895  23  925  13  14,993  12,483  3,414  123  570 
Total 9,833  9,333  927  9,386  90  22,943  19,989  4,220  7,727  877 
Commercial loans 22,622  19,396  3,832  23,451  123  24,947  21,823  4,715  18,620  311 
Consumer loans 563  548  43  550  10  565  551  39  5  20 
Total impaired loans $ 33,018  29,277  4,802  33,387  223  48,455  42,363  8,974  26,352  1,208 
Total impaired loans
Mortgage loans:
Residential $ 21,205  18,232  904  18,544  195  21,931  18,886  806  19,191  818 
Commercial 35,020  31,551  23  32,480  30  32,407  29,897  3,414  16,149  630 
Total 56,225  49,783  927  51,024  225  54,338  48,783  4,220  35,340  1,448 
Commercial loans 34,252  28,359  3,832  32,533  123  40,842  35,832  4,715  31,411  357 
Consumer loans 1,923  1,405  43  2,869  23  1,947  1,431  39  12  70 
Total impaired loans $ 92,400  79,547  4,802  86,426  371  97,127  86,046  8,974  66,763  1,875 
Specific allocations of the allowance for credit losses attributable to impaired loans totaled $4.8 million at March 31, 2021 and $9.0 million at December 31, 2020. At March 31, 2021 and December 31, 2020, impaired loans for which there was no related allowance for credit losses totaled $50.3 million and $43.7 million, respectively. The average balance of impaired loans for the three months ended March 31, 2021 and December 31, 2020 was $86.4 million and $66.8 million, respectively.
Management utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Department. The risk ratings are also confirmed through periodic loan review examinations which are currently performed by an independent third-party. Reports by the independent third-party are presented directly to the Audit Committee of the Board of Directors.
23

In response to COVID-19 and its adverse economic impact on both our commercial and retail borrowers, the Company implemented a modification program to defer principal or principal and interest payments for borrowers directly impacted by the pandemic and who were not more than 30 days past due as of December 31, 2019, all in accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.
Loans that have been or are expected to be granted COVID-19 related deferrals or modifications have decreased from a peak level of $1.31 billion, or 16.8% of loans, to $132.0 million, or 1.3% of loans as of April 20, 2021. This $132.0 million of loans includes $300,000 in a first 90-day deferral period, $46.6 million in a second 90-day deferral period, and $85.1 million in a third deferral period. Of the $123.5 million in commercial loans in deferral, $119.0 million or 96.4% are under principal only deferral and are paying interest. Included in the $132.0 million of loans, $40.9 million are secured by hotels, $33.1 million are secured by multi-family properties (the majority of which is student housing related), $8.6 million are secured by retail properties, $6.5 million are secured by restaurants, and $8.5 million are secured by residential mortgages, with the balance comprised of diverse commercial loans. In accordance with the CARES Act, the Company has elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications are not classified as TDRs.
In addition, the Company participated in the Paycheck Protection Program (“PPP”) through the United States Department of the Treasury and Small Business Administration ("SBA"). As of March 31, 2021, the Company secured a total of 1,318 PPP loans for its customers totaling $664.5 million, which includes both the initial round and the second round of PPP. Additionally, as of March 31, 2021, 670 PPP loans totaling $182.6 million were forgiven. The balance at March 31, 2021 for PPP loans was $481.9 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the commercial loan portfolio.
The following table summarizes the Company's gross loans held for investment by year of origination and internally assigned credit grades (in thousands):
At March 31, 2021
Total portfolio Residential Commercial mortgage Multi-family Construction Total
mortgages 		Commercial Consumer
Total Loans (1)
Special mention $ 5,847  129,051  35,885  25,409  196,192  115,619  529  312,340 
Substandard 23,416  109,689  1,552  5,736  140,393  124,581  3,836  268,810 
Doubtful —  —  —  —  —  20  —  20 
Loss —  —  —  —  —  —  —  — 
Total criticized and classified 29,263  238,740  37,437  31,145  336,585  240,220  4,365  581,170 
Pass/Watch 1,248,113  3,355,272  1,420,756  584,561  6,608,702  2,270,488  359,283  9,238,473 
Total $ 1,277,376  3,594,012  1,458,193  615,706  6,945,287  2,510,708  363,648  9,819,643 
2021
Special mention $ —  —  —  —  —  23  —  23 
Substandard —  —  —  —  —  391  —  391 
Doubtful —  —  —  —  —  —  —  — 
Loss —  —  —  —  —  —  —  — 
Total criticized and classified —  —  —  —  —  414  —  414 
Pass/Watch 82,831  78,552  31,141  14,913  207,437  252,045  8,947  468,429 
Total gross loans $ 82,831  78,552  31,141  14,913  207,437  252,459  8,947  468,843 
2020
Special mention $ —  $ —  $ —  $ 1,986  $ 1,986  $ 345  $ —  $ 2,331 
Substandard 163  —  —  —  163  1,824  —  1,987 
Doubtful —  —  —  —  —  —  —  — 
Loss —  —  —  —  —  —  —  — 
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Total criticized and classified 163  —  —  1,986  2,149  2,169  —  4,318 
Pass/Watch 262,032  670,040  296,124  123,927  1,352,123  595,559  39,107  1,986,789 
Total gross loans $ 262,195  670,040  296,124  125,913  1,354,272  597,728  39,107  1,991,107 
2019
Special mention $ 661  30,310  679  16,189  47,839  8,819  —  56,658 
Substandard 3,773  2,426  —  —  6,199  9,856  361  16,416 
Doubtful —  —  —  —  —  —  —  — 
Loss —  —  —  —  —  —  —  — 
Total criticized and classified 4,434  32,736  679  16,189  54,038  18,675  361  73,074 
Pass/Watch 139,951  632,084  177,648  259,223  1,208,906  246,072  46,155  1,501,133 
Total gross loans $ 144,385  664,820  178,327  275,412  1,262,944  264,747  46,516  1,574,207 
2018
Special mention $ 2,425  39,825  20,125  —  62,375  3,578  —  65,953 
Substandard 744  5,383  —  5,121  11,248  6,568  120  17,936 
Doubtful —  —  —  —  —  —  —  — 
Loss —  —  —  —  —  —  —  — 
Total criticized and classified 3,169  45,208  20,125  5,121  73,623  10,146  120  83,889 
Pass/Watch 81,320  385,080  183,343  145,307  795,050  228,963  44,128  1,068,141 
Total gross loans $ 84,489  430,288  203,468  150,428  868,673  239,109  44,248  1,152,030 
2017 and prior
Special mention $ 2,761  58,916  15,081  7,234  83,992  102,854  529  187,375 
Substandard 18,736  101,880  1,552  615  122,783  105,942  3,355  232,080 
Doubtful —  —  —  —  —  20  —  20 
Loss —  —  —  —  —  —  —  — 
Total criticized and classified 21,497  160,796  16,633  7,849  206,775  208,816  3,884  419,475 
Pass/Watch 681,979  1,589,516  732,500  41,191  3,045,186  947,849  220,946  4,213,981 
Total gross loans $ 703,476  1,750,312  749,133  49,040  3,251,961  1,156,665  224,830  4,633,456 
At December 31, 2020
Residential Commercial mortgage Multi-family Construction Total
mortgages 		Commercial Consumer Total loans
Special mention $ 2,882  124,631  29,781  24,376  181,670  157,080  1,867  340,617 
Substandard 26,651  98,313  1,568  4,924  131,456  127,092  6,746  265,294 
Doubtful —  —  —  —  —  52  —  52 
Loss —  —  —  —  —  —  —  — 
Total criticized and classified 29,533  222,944  31,349  29,300  313,126  284,224  8,613  605,963 
Pass/Watch 1,265,169  3,235,722  1,453,166  512,639  6,466,696  2,283,246  483,953  9,233,895 
Total $ 1,294,702  3,458,666  1,484,515  541,939  6,779,822  2,567,470  492,566  9,839,858 
(1) Contained within criticized and classified loans at March 31, 2021 are loans that were granted payment deferrals related to COVID-19 totaling $132.0 million.
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Note 5. Deposits
Deposits at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
March 31, 2021 December 31, 2020
Savings $ 1,402,363  1,348,147 
Money market 2,345,640  2,245,412 
NOW 3,075,098  2,808,637 
Non-interest bearing 2,511,408  2,341,459 
Certificates of deposit 963,004  1,094,174 
Total deposits $ 10,297,513  9,837,829 

Note 6. Components of Net Periodic Benefit Cost
The Bank has a noncontributory defined benefit pension plan covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003. The pension plan was frozen on April 1, 2003. All participants in the Plan are 100% vested. The pension plan’s assets are invested in investment funds and group annuity contracts currently managed by the Principal Financial Group and Allmerica Financial.
In addition to pension benefits, certain health care and life insurance benefits are currently made available to certain of the Bank’s retired employees. The costs of such benefits are accrued based on actuarial assumptions from the date of hire to the date the employee is fully eligible to receive the benefits. Effective January 1, 2003, eligibility for retiree health care benefits was frozen as to new entrants, and benefits were eliminated for employees with less than ten years of service as of December 31, 2002. Effective January 1, 2007, eligibility for retiree life insurance benefits was frozen as to new entrants and retiree life insurance benefits were eliminated for employees with less than ten years of service as of December 31, 2006.
Net periodic (benefit) increase cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2021 and 2020 includes the following components (in thousands):
Three months ended March 31,
Pension benefits Other post-retirement benefits
2021 2020 2021 2020
Service cost $ —  —  9  20 
Interest cost 198  250  106  178 
Expected return on plan assets (807) (737) —  — 
Amortization of prior service cost —  —  —  — 
Amortization of the net loss (gain) 118  174  (268) (62)
Net periodic (benefit) increase cost $ (491) (313) (153) 136 
In its consolidated financial statements for the year ended December 31, 2020, the Company previously disclosed that it does not expect to contribute to the pension plan in 2021. As of March 31, 2021, no contributions have been made to the pension plan.
The net periodic (decrease) increase in benefit cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2021 were calculated using the January 1, 2021 pension and other post-retirement benefits actuarial valuations.
Note 7. Impact of Recent Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
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ASU 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance: (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized; and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company anticipates this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than the extinguishment of the old contract resulting in writing off unamortized fees/costs. In addition, in January 2021 the FASB issued ASU No. 2021-01 “Reference Rate Reform — Scope,” which clarified the scope of ASC 848 relating to contract modifications. The Company is evaluating the impacts of this guidance and has not determined whether LIBOR transition and this guidance will have material effects on the Company's business operations and consolidated financial statements.

Note 8. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
On January 1, 2020, the Company adopted CECL, which replaced the incurred loss methodology with an expected loss methodology. This new methodology applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of this new standard resulted in the Company recording a $3.2 million increase to the allowance for credit losses on off-balance sheet credit exposures with a corresponding cumulative effect adjustment to decrease retained earnings $2.4 million, net of income taxes.
Management analyzes the Company's exposure to credit losses for both on-balance sheet and off-balance sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework. For purposes of estimating the allowance for credit losses for off-balance sheet credit exposures, the exposure at default includes an estimated drawdown of unused credit based on historical credit utilization factors and current loss factors, resulting in a proportionate amount of expected credit losses.
The following table illustrates the impact of the January 1, 2020 adoption of CECL on off-balance sheet credit exposures:
January 1, 2020
As reported under CECL Prior to CECL Impact of CECL adoption
Liabilities
Allowance for credit losses on off-balance sheet credit exposure $ 3,206  —  3,206 
For the three months ended March 31, 2021, the Company recorded an $875,000 benefit to the provision for credit losses for off-balance sheet credit exposures, compared to $1.0 million provision for the three months ended March 31, 2020. This decrease in the provision for credit losses for off-balance sheet credit exposures was primarily due to a reduction in the required allowance for these exposures as loss factors decreased resulting from an improved economic forecast compared to the prior year.
The allowance for credit losses for off-balance sheet credit exposures was $4.1 million and $5.0 million at March 31, 2021 and December 31, 2020, respectively, and are included in other liabilities on the Consolidated Statements of Financial Condition.
Note 9. Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, Management utilizes various valuation techniques to estimate fair value.
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Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the financial instrument.
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1:
Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The valuation techniques described below were used to measure fair value of financial instruments in the table below on a recurring basis as of March 31, 2021 and December 31, 2020.
Available for Sale Debt Securities, at Fair Value
For available for sale debt securities, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third-party data service providers or dealer market participants with whom the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark to comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As Management is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, Management compares the prices received from the pricing service to a secondary pricing source. Additionally, Management compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has generally not resulted in an adjustment in the prices obtained from the pricing service.
Equity Securities, at Fair Value
The Company holds equity securities that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs.
Derivatives
The Company records all derivatives on the statements of financial condition at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company has interest rate derivatives resulting from a service provided to certain qualified borrowers in a loan related transaction which, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings.
The Company also uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges, and which satisfy hedge accounting requirements, involve the receipt of variable amounts from a
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counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. These derivatives were used to hedge the variable cash outflows associated with FHLBNY borrowings. The change in the fair value of these derivatives is recorded in accumulated other comprehensive income, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
The fair value of the Company's derivatives is determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 inputs.
Assets Measured at Fair Value on a Non-Recurring Basis
The valuation techniques described below were used to estimate fair value of financial instruments measured on a non-recurring basis as of March 31, 2021 and December 31, 2020.
Collateral-Dependent Impaired Loans
For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case-by-case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell between 5% and 10%. Management classifies these loans as Level 3 within the fair value hierarchy.
Foreclosed Assets
Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated selling costs, which range between 5% and 10%. Fair value is generally based on independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraisers’ market knowledge and experience, and are classified as Level 3. When an asset is acquired, the excess of the loan balance over fair value less estimated selling costs is charged to the allowance for credit losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.
There were no changes to the valuation techniques for fair value measurements as of March 31, 2021 and December 31, 2020.
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The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of March 31, 2021 and December 31, 2020, by level within the fair value hierarchy (in thousands):
Fair Value Measurements at Reporting Date Using:
March 31, 2021 Quoted Prices in Active  Markets for Identical Assets (Level 1) Significant Other Observable  Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Available for sale debt securities:
Mortgage-backed securities $ 1,060,152  —  1,060,152  — 
Asset-backed securities 49,205  —  49,205  — 
State and municipal obligations 68,934  —  68,934  — 
Corporate obligations 38,645  —  38,645  — 
Total available for sale debt securities 1,216,936  —  1,216,936  — 
Equity securities 1,026  1,026  —  — 
Derivative assets 76,542  —  76,542  — 
$ 1,294,504  1,026  1,293,478  — 
Derivative liabilities $ 78,228  —  78,228  — 
Measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral $ 30,120  —  —  30,120 
Foreclosed assets 3,554  —  —  3,554 
$ 33,674  —  —  33,674 

Fair Value Measurements at Reporting Date Using:
December 31, 2020 Quoted Prices in Active  Markets for Identical Assets (Level 1) Significant Other Observable  Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Available for sale debt securities:
Agency obligations $ 1,009  1,009  —  — 
Mortgage-backed securities 938,413  —  938,413  — 
Asset-backed securities 53,830  53,830 
State and municipal obligations 71,258  —  71,258  — 
Corporate obligations 40,979  —  40,979  — 
Total available for sale debt securities 1,105,489  1,009  1,104,480  — 
Equity Securities 971  971  —  — 
Derivative assets 101,079  —  101,079  — 
$ 1,207,539  1,980  1,205,559  — 
Derivative liabilities $ 109,148  —  109,148  — 
Measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral $ 26,250  —  —  26,250 
Foreclosed assets 4,475  —  —  4,475 
$ 30,725  —  —  30,725 
There were no transfers between Level 1, Level 2 and Level 3 during the three months ended March 31, 2021.
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Other Fair Value Disclosures
The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities.
Cash and Cash Equivalents
For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value. Included in cash and cash equivalents at March 31, 2021 and December 31, 2020 was $42.6 million and $114.3 million, respectively, representing cash collateral pledged to secure loan level swaps and reserves required by banking regulations.
Held to Maturity Debt Securities
For held to maturity debt securities, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with whom the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark to comparable securities. Management evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As management is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, management compares the prices received from the pricing service to a secondary pricing source. Additionally, management compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has generally not resulted in adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy.
Federal Home Loan Bank of New York ("FHLBNY") Stock
The carrying value of FHLBNY stock is its cost. The fair value of FHLBNY stock is based on redemption at par value. The Company classifies the estimated fair value as Level 1 within the fair value hierarchy.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date (i.e. exit pricing). The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifies the estimated fair value of its loan portfolio as Level 3.
The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. The Company classifies the estimated fair value of its non-performing loan portfolio as Level 3.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits and savings deposits, was equal to the amount payable on demand and classified as Level 1. The estimated fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifies the estimated fair value of its certificates of deposit portfolio as Level 2.
Borrowed Funds
The fair value of borrowed funds was estimated by discounting future cash flows using rates available for debt with similar terms and maturities and is classified by the Company as Level 2 within the fair value hierarchy.
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Commitments to Extend Credit and Letters of Credit
The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
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The following tables present the Company’s financial instruments at their carrying and fair values as of March 31, 2021 and December 31, 2020. Fair values are presented by level within the fair value hierarchy.
Fair Value Measurements at March 31, 2021 Using:
(Dollars in thousands) Carrying value Fair value Quoted Prices in Active  Markets for Identical Assets (Level 1) Significant Other Observable  Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents $ 687,570  687,570  687,570  —  — 
Available for sale debt securities:
Mortgage-backed securities 1,060,152  1,060,152  —  1,060,152  — 
Asset-backed securities 49,205  49,205  49,205 
State and municipal obligations 68,934  68,934  —  68,934  — 
Corporate obligations 38,645  38,645  —  38,645  — 
Total available for sale debt securities $ 1,216,936  1,216,936  —  1,216,936  — 
Held to maturity debt securities, net of allowance for credit losses:
Agency obligations 8,998  8,904  8,904  —  — 
Mortgage-backed securities 50  51  —  51  — 
State and municipal obligations 428,571  444,776  —  444,776  — 
Corporate obligations 10,283  10,262  —  10,262  — 
Total held to maturity debt securities, net of allowance for credit losses $ 447,902  463,993  8,904  455,089  — 
FHLBNY stock 48,998  48,998  48,998  —  — 
Equity Securities 1,026  1,026  1,026  —  — 
Loans, net of allowance for credit losses 9,717,945  9,857,891  —  —  9,857,891 
Derivative assets 76,542  76,542  —  76,542  — 
Financial liabilities:
Deposits other than certificates of deposits $ 9,334,509  9,334,509  9,334,509  —  — 
Certificates of deposit 963,004  967,088  —  967,088  — 
Total deposits $ 10,297,513  10,301,597  9,334,509  967,088  — 
Borrowings 940,611  945,538  —  945,538  — 
Subordinated debentures 25,173  30,325  —  30,325  — 
Derivative liabilities 78,228  78,228  —  78,228  — 

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Fair Value Measurements at December 31, 2020 Using:
(Dollars in thousands) Carrying value Fair value Quoted Prices in Active  Markets for Identical Assets (Level 1) Significant Other Observable  Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents $ 532,353  532,353  532,353  —  — 
Available for sale debt securities:
U.S. Treasury obligations —  —  —  — 
Agency obligations 1,009  1,009  1,009  —  — 
Mortgage-backed securities 938,413  938,413  —  938,413  — 
Asset-backed securities 53,830  53,830  53,830 
State and municipal obligations 71,258  71,258  —  71,258  — 
Corporate obligations 40,979  40,979  —  40,979  — 
Total available for sale debt securities $ 1,105,489  1,105,489  1,009  1,104,480  — 
Held to maturity debt securities:
Agency obligations $ 7,600  7,601  7,601  —  — 
Mortgage-backed securities 62  64  —  64  — 
State and municipal obligations 433,589  454,973  —  454,973  — 
Corporate obligations 9,714  9,813  —  9,813  — 
Total held to maturity debt securities, net of allowance for credit losses $ 450,965  472,451  7,601  464,850  — 
FHLBNY stock 59,489  59,489  59,489  —  — 
Equity securities 971  971  971  —  — 
Loans, net of allowance for credit losses 9,721,424  9,969,330  —  —  9,969,330 
Derivative assets 101,079  101,079  —  101,079  — 
Financial liabilities:
Deposits other than certificates of deposits $ 8,743,655  8,743,655  8,743,655  —  — 
Certificates of deposit 1,094,174  1,097,993  —  1,097,993  — 
Total deposits $ 9,837,829  9,841,648  8,743,655  1,097,993  — 
Borrowings 1,175,972  1,193,024  —  1,193,024  — 
Subordinated debentures 25,135  24,375  —  24,375  — 
Derivative liabilities 109,148  109,148  —  109,148  — 

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Note 10. Other Comprehensive Income
The following table presents the components of other comprehensive (loss) income, both gross and net of tax, for the three months ended March 31, 2021 and 2020 (in thousands):
Three months ended March 31,
2021 2020
Before
Tax 		Tax
Effect 		After
Tax 		Before
Tax 		Tax
Effect 		After
Tax
Components of Other Comprehensive (Loss) Income:
Unrealized gains and losses on available for sale debt securities:
Net unrealized (losses) gains arising during the period $ (12,152) 3,133  (9,019) 22,563  (5,817) 16,746 
Reclassification adjustment for gains included in net income (230) 59  (171) —  —  — 
Total (12,382) 3,192  (9,190) 22,563  (5,817) 16,746 
Unrealized gains (losses) on derivatives (cash flow hedges) 6,226  (1,605) 4,621  (7,697) 1,984  (5,713)
Amortization related to post-retirement obligations (150) 41  (109) 112  (28) 84 
Total other comprehensive (loss) income $ (6,306) 1,628  (4,678) 14,978  (3,861) 11,117 
The following tables present the changes in the components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2021 and 2020 (in thousands):
Changes in Accumulated Other Comprehensive Income (Loss) by Component, net of tax
for the three months ended March 31,
2021 2020
Unrealized
Gains (Losses) on
Available for Sale Debt Securities 		Post- Retirement
Obligations 		Unrealized (Losses) Gains on Derivatives (cash flow hedges) Accumulated
Other
Comprehensive
Income (Loss) 		Unrealized Gains on
 Available for Sale Debt Securities 		Post-  Retirement
Obligations 		Unrealized Gains (Losses) on Derivatives (cash flow hedges) Accumulated
Other
Comprehensive Income
Balance at
December 31, 		$ 23,690  (1,081) (4,954) 17,655  8,746  (5,240) 315  3,821 
Current - period other comprehensive (loss) income (9,190) (109) 4,621  (4,678) 16,746  84  (5,713) 11,117 
Balance at March 31, $ 14,500  (1,190) (333) 12,977  25,492  (5,156) (5,398) 14,938 
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The following tables summarize the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of income for the three months ended March 31, 2021 and 2020 (in thousands):
Reclassifications From Accumulated Other Comprehensive
Income ("AOCI")
Amount reclassified from AOCI for the three months ended March 31, Affected line item in the Consolidated
Statement of Income
2021 2020
Details of AOCI:
Available for sale debt securities:
Realized net gains on the sale of securities available for sale $ 230  —  Net gain on securities transactions
(59) —  Income tax expense
171  —  Net of tax
Post-retirement obligations:
Amortization of actuarial (losses) gains $ (150) 112 
Compensation and employee benefits (1)
41  (28) Income tax expense
Total reclassification $ (109) 84  Net of tax
(1) This item is included in the computation of net periodic benefit cost. See Note 6. Components of Net Periodic Benefit Cost.

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Note 11. Derivative and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through the management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.
Non-designated Hedges. Derivatives not designated in qualifying hedging relationships are not speculative and result from a service the Company provides to certain qualified commercial borrowers in loan related transactions which, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company may execute interest rate swaps with qualified commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. The interest rate swap agreement which the Company executes with the commercial borrower is collateralized by the borrower's commercial real estate financed by the Company. As the Company has not elected to apply hedge accounting and these interest rate swaps do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At March 31, 2021 and December 31, 2020, the Company had 174 and 172 loan related interest rate swaps, respectively, with aggregate notional amounts of $2.62 billion and $2.63 billion, respectively.
The Company periodically enters into risk participation agreements ("RPAs"), with the Company functioning as either the lead institution, or as a participant when another company is the lead institution on a commercial loan. These RPAs are entered into to manage the credit exposure on interest rate contracts associated with these loan participation agreements. Under the RPAs, the Company will either receive or make a payment in the event the borrower defaults on the related interest rate contract. The Company has minimum collateral posting thresholds with certain of its risk participation counterparties, and has posted collateral of $650,000 against the potential risk of default by the borrower under these agreements. At March 31, 2021 and December 31, 2020, the Company had 13 credit derivatives, with aggregate notional amounts of $131.4 million and $121.7 million, respectively, from participations in interest rate swaps as part of these loan participation arrangements. At March 31, 2021 and December 31, 2020, the fair value of these credit derivatives were $96,000 and $97,000, respectively.
Cash Flow Hedges of Interest Rate Risk. The Company’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable payment amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
Changes in the fair value of derivatives designated and that qualify as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2021 and 2020, such derivatives were used to hedge the variable cash outflows associated with borrowings and brokered money market deposits.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $3.5 million will be reclassified as an increase to interest expense. As of March 31, 2021, the Company had 14 outstanding interest rate derivatives with an aggregate notional amount of $600.0 million that were each designated as a cash flow hedge of interest rate risk.
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The tables below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at March 31, 2021 and December 31, 2020 (in thousands):
At March 31, 2021
Asset Derivatives Liability Derivatives
Consolidated Statements of Financial Condition Fair
 Value 		Consolidated Statements of Financial Condition Fair
 Value
Derivatives not designated as a hedging instrument:
Interest rate products Other assets $ 74,668  Other liabilities $ 75,740 
Credit contracts Other assets 96  Other liabilities — 
Total derivatives not designated as a hedging instrument $ 74,764  $ 75,740 
Derivatives designated as a hedging instrument:
Interest rate products Other assets $ 1,778  Other liabilities $ 2,488 
Total derivatives designated as a hedging instrument $ 1,778  $ 2,488 

At December 31, 2020
Asset Derivatives Liability Derivatives
Consolidated Statements of Financial Condition Fair
Value 		Consolidated Statements of Financial Condition Fair
Value
Derivatives not designated as a hedging instrument:
Interest rate products Other assets $ 107,652  Other liabilities $ 109,148 
Credit contracts Other assets 97  Other liabilities — 
Total derivatives not designated as a hedging instrument $ 107,749  $ 109,148 
Derivatives designated as a hedging instrument:
Interest rate products Other assets $ (6,671) Other liabilities $ — 
Total derivatives designated as a hedging instrument $ (6,671) $ — 
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three months ended March 31, 2021 and 2020 (in thousands).
Gain (loss) recognized in income on derivatives for the three months ended
Consolidated Statements of Income March 31, 2021 March 31, 2020
Derivatives not designated as a hedging instrument:
Interest rate products Other income $ 400  (819)
Credit contracts Other income 23  (1)
Total $ 423  (820)
Derivatives designated as a hedging instrument:
Loss recognized in
 expense on derivatives
Interest rate products Interest expense $ 879  106 
Total $ 879  106 
The Company has agreements with certain of its dealer counterparties which contain a provision that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be deemed in default on its derivative obligations.
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In addition, the Company has agreements with certain of its dealer counterparties which contain a provision that if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
At March 31, 2021, the Company had four dealer counterparties. The Company had a net liability position with respect to all four of the counterparties. The termination value for this net liability position, which includes accrued interest, was $38.5 million at March 31, 2021. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $42.0 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2021, it could have been required to settle its obligations under the agreements at the termination value.
Note 12. Revenue Recognition
The Company generates revenue from several business channels. The guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606) does not apply to revenue associated with financial instruments, including interest income on loans and investments, which comprise the majority of the Company's revenue. For the three months ended March 31, 2021 and 2020, the out-of-scope revenue related to financial instruments was 82.3% and 84% of the Company's total revenue, respectively. Revenue-generating activities that are within the scope of Topic 606, are components of non-interest income. These revenue streams can generally be classified into wealth management revenue, insurance agency income and banking service charges and other fees.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2021 and 2020:
Three months ended March 31,
(in-thousands) 2021 2020
Non-interest income
In-scope of Topic 606:
Wealth management fees $ 7,134  6,251 
Insurance agency income 2,727  — 
Banking service charges and other fees:
Service charges on deposit accounts 2,497  2,977 
Debit card and ATM fees 1,778  1,210 
Total banking service charges and other fees 4,275  4,187 
Total in-scope non-interest income 14,136  10,438 
Total out-of-scope non-interest income 7,501  6,553 
Total non-interest income $ 21,637  16,991 
Wealth management fee income represents fees earned from customers as consideration for asset management, investment advisory and trust services. The Company’s performance obligation is generally satisfied monthly and the resulting fees are recognized monthly. The fee is generally based upon the average market value of the assets under management ("AUM") for the month and the applicable fee rate. The monthly accrual of wealth management fees is recorded in other assets on the Company's Consolidated Statements of Financial Condition. Fees are received from the customer on a monthly basis. The Company does not earn performance-based incentives. To a lesser extent, optional services such as tax return preparation and estate settlement are also available to existing customers. The Company’s performance obligation for these transaction-based services are generally satisfied, and related revenue recognized, at either a point in time when the service is completed, or in the case of estate settlement, over a relatively short period of time, as each service component is completed.
Insurance agency income, consisting of commissions and fees, is generally recognized as of the effective date of the insurance policy. Commission revenues related to installment billings are recognized on the invoice date. Subsequent commission adjustments are recognized upon the receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or when the Company receives formal notification of the amount of such payments.
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Service charges on deposit accounts include overdraft service fees, account analysis fees and other deposit related fees. These fees are generally transaction-based, or time-based services. The Company's performance obligation for these services are generally satisfied, and revenue recognized, at the time the transaction is completed, or the service rendered. Fees for these services are generally received from the customer either at the time of transaction, or monthly. Debit card and ATM fees are generally transaction-based. Debit card revenue is primarily comprised of interchange fees earned when a customer's Company card is processed through a card payment network. ATM fees are largely generated when a Company cardholder uses a non-Company ATM, or a non-Company cardholder uses a Company ATM. The Company's performance obligation for these services is satisfied when the service is rendered. Payment is generally received at time of transaction or monthly.
Out-of-scope non-interest income primarily consists of Bank-owned life insurance and net fees on loan level interest rate swaps, along with gains and losses on the sale of loans and foreclosed real estate, loan prepayment fees and loan servicing fees. None of these revenue streams are subject to the requirements of Topic 606.
Note 13. Leases
The following table represents the consolidated statements of financial condition classification of the Company’s right-of use-assets and lease liabilities at March 31, 2021 and December 31, 2020 (in thousands):
Classification March 31, 2021 December 31, 2020
Lease Right-of-Use Assets:
Operating lease right-of-use assets Other assets $ 40,960  $ 41,142 
Lease Liabilities:
Operating lease liabilities Other liabilities $ 42,323  $ 42,042 
The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company considers the first renewal option to be reasonably certain and includes it in the calculation of the right-of use asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception based upon the term of the lease. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was applied.
All of the leases in which the Company is the lessee are classified as operating leases and are primarily comprised of real estate properties for branches and administrative offices with terms extending through 2040.
At March 31, 2021, the weighted-average remaining lease term and the weighted-average discount rate for the Company's operating leases were 8.8 years and 3.14%, respectively.
The following tables represent lease costs and other lease information for the Company's operating leases. The variable lease cost primarily represents variable payments such as common area maintenance and utilities (in thousands):
Three months ended March 31, 2021 Three months ended March 31, 2020
Lease Costs
Operating lease cost $ 2,812  $ 2,130 
Variable lease cost 803  607 
Total lease cost $ 3,615  $ 2,737 

Cash paid for amounts included in the measurement of lease liabilities: Three months ended March 31, 2021 Three months ended March 31, 2020
Operating cash flows from operating leases $ 2,345  2,125 

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Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2021 were as follows (in thousands):
Operating leases
Twelve months ended:
Remainder of 2021 $ 6,472 
2022 6,391 
2023 5,878 
2024 5,475 
2025 4,887 
Thereafter 20,027 
Total future minimum lease payments 49,130 
Amounts representing interest 6,807 
Present value of net future minimum lease payments $ 42,323 


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” "project," "intend," “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those set forth in Item 1A of the Company's Annual Report on Form 10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in accounting policies and practices that may be adopted by the regulatory agencies and the accounting standards setters, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
In addition, COVID-19 continues to have an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the pandemic on the Company's business, financial condition or results of operations. The extent of such impact will depend on future developments, which are highly uncertain, including when the pandemic will be controlled and abated, and the extent to which the economy can remain open. As the result of the pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to remain substantially open, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our wealth management revenues may decline with continuing market turmoil; we may face the risk of a goodwill write-down due to stock price decline; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.
The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company advises readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with
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respect to future periods in any current statements. The Company does not have any obligation to update any forward-looking statements to reflect events or circumstances after the date of this statement.
Acquisition
SB One Bancorp Acquisition
On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans and $1.76 billion to total deposits, and added 18 full-service banking offices in New Jersey and New York. As part of the acquisition, the addition of SB One Insurance Agency allows the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products.
Under the merger agreement, each share of outstanding SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid for the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.
Critical Accounting Policies
The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies:
•Adequacy of the allowance for credit losses; and
•Valuation of deferred tax assets
On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. It also applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses and a $3.2 million liability for off-balance sheet credit exposures. The adoption of the standard did not result in a change to the Company's results of operations upon adoption as it was recorded as an $8.3 million cumulative effect adjustment, net of income taxes, to retained earnings.
The allowance for credit losses is a valuation account that reflects management’s evaluation of the current expected credit losses in the loan portfolio. The Company maintains the allowance for credit losses through provisions for credit losses that are charged to income. Charge-offs against the allowance for credit losses are taken on loans where management determines that the collection of loan principal and interest is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses.
The calculation of the allowance for credit losses is a critical accounting policy of the Company. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience for both the Company and peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PDR”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each segment, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.
Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using an externally developed economic forecast. This forecast is applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The Company's current forecast period is six quarters, with a four quarter reversion period to historical average macroeconomic factors. The Company's economic forecast is approved by the Company's Asset-Liability Committee.
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The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to an external economic forecast. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (“TDR”) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; portfolio concentrations that may affect loss experience across one or more components of the portfolio; changes in industry conditions; changes in the Company’s loan review process; changes in the Company's loan policies and procedures, economic forecast uncertainty and model imprecision.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled. As of March 31, 2021, the portfolio and class segments for the Company’s loan portfolio were:
•Mortgage Loans – Residential, Commercial Real Estate, Multi-Family and Construction
•Commercial Loans – Commercial Owner Occupied and Commercial Non-Owner Occupied
•Consumer Loans – First Lien Home Equity and Other Consumer
The allowance for credit losses on loans individually evaluated for impairment is based upon loans that have been identified through the Company’s normal loan monitoring process. This process includes the review of delinquent and problem loans at the Company’s Delinquency, Credit, Credit Risk Management and Allowance Committees; or which may be identified through the Company’s loan review process. Generally, the Company only evaluates loans individually for impairment if the loan is non-accrual, non-homogeneous and the balance is at least $1.0 million, or if the loan was modified in a TDR.
For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate.
A loan for which the terms have been modified resulting in a concession by the Company, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other impaired loans, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.
As previously noted, in accordance with the CARES Act, the Company elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that occurred after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications were not classified as TDRs. In addition, for loans modified in response to COVID-19 that did not meet the above criteria (e.g., current payment status at December 31, 2019), the Company applied the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of COVID-19, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were current as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are not TDRs.
Loans that have been or are expected to be granted short-term COVID-19 related deferrals have decreased from a peak level of $1.31 billion, or 16.8% of loans, to $132.0 million, or 1.3% of loans as of April 20, 2021. This $132.0 million of loans consists of $300,000 in a first 90-day deferral period, $46.6 million in a second 90-day deferral period, and $85.1 million in a third deferral period. Of the $123.5 million in commercial loans in deferral, $119.0 million (96.4%) are under principal only deferral and are paying interest. Included in the $132.0 million of total loans in deferral, $40.9 million are secured by hotels, $33.1 million are secured by multi-family properties (of which $20.1 million is student housing related), $8.6 million are secured by retail properties, $6.5 million are secured by restaurants, and $8.5 million are secured by residential mortgages, with the balance comprised of diverse commercial loans.
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For loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.
Management believes the primary risks inherent in the portfolio are a general decline in the economy, a decline in real estate market values, rising unemployment or a protracted period of elevated unemployment, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. As the impact of COVID-19 continues to unfold, the effectiveness of medical advances, government programs, and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, credit losses and higher levels of provisions. Management considers it important to maintain the ratio of the allowance for credit losses to total loans at an acceptable level given current and forecasted economic conditions, interest rates and the composition of the portfolio.
Although management believes that the Company has established and maintained the allowance for credit losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment and economic forecast. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to forecasted economic factors, historical loss experience and other factors. Such estimates and assumptions are adjusted when facts and circumstances dictate. In addition to the ongoing impact of COVID-19, illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy in general may increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for credit losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for credit losses remains an estimate that is subject to significant judgment and short-term change.
The CECL approach to calculate the allowance for credit losses on loans is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors creates greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company’s reported earnings. For the three months ended March 31, 2021, the changing economic forecasts attributable to COVID-19 and projected economic recovery led to the Company recording negative provisions for credit losses and off-balance sheet credit exposures. See Note 4 to the Consolidated Financial Statements and the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for more information on the allowance for credit losses on loans.
The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities and estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company did not require a valuation allowance at March 31, 2021 or December 31, 2020.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2021 AND DECEMBER 31, 2020
Total assets at March 31, 2021 were $13.13 billion, a $210.7 million increase from December 31, 2020. The increase in total assets was primarily due to a $155.2 million increase in cash and cash equivalents and a $97.9 million increase in total investments.
The loan portfolio decreased $19.4 million from December 31, 2020 to $9.80 billion at March 31, 2021, despite strong originations, as prepayments, including Paycheck Protection Program ("PPP") loan forgiveness, were elevated. For the three months ended March 31, 2021, loan originations, including advances on lines of credit, totaled $770.5 million, compared with $678.3 million for the same period in 2020. During the quarter ended March 31, 2021, the Company originated $190.1 million of loans under the current round of the PPP. Total PPP loans outstanding increased to $486.6 million at March 31, 2021, from
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$473.2 million at December 31, 2020. In addition to net growth in PPP loans, the Company had net growth in commercial real estate and construction loans during the three months ended March 31, 2021, with all other loan categories decreasing. Commercial real estate, commercial and construction loans represented 83.3% of the loan portfolio at March 31, 2021, compared to 81.8% at December 31, 2020.
The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNCs”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $198.5 million and $99.7 million, respectively, at March 31, 2021, compared to $225.4 million and $110.6 million, respectively, at December 31, 2020. One SNC relationship consisting of two individual loans was 90 days or more delinquent at March 31, 2021. All of these loans are unsecured/non-real estate secured. These loans are currently not paying in accordance with their restructured terms. The Company's share of the outstanding balances for this substandard SNC relationship totaled $10.2 million.
The Company had outstanding junior lien mortgages totaling $156.4 million at March 31, 2021. Of this total, 14 loans totaling $1.9 million were 90 days or more delinquent. These loans were allocated a total loss reserve of $51,000.
The following table sets forth information regarding the Company’s non-performing assets as of March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021 December 31, 2020
Mortgage loans:
Residential $ 7,797  9,315 
Commercial 33,742  31,982 
Multi-family 101  — 
Construction 1,392  1,392 
Total mortgage loans 43,032  42,689 
Commercial loans 36,042  42,118 
Consumer loans 3,010  2,283 
Total non-performing loans 82,084  87,090 
Foreclosed assets 3,554  4,475 
Total non-performing assets $ 85,638  91,565 
The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021 December 31, 2020
Mortgage loans:
Residential $ 6,161  8,852 
Commercial 520  113 
Multi-family —  585 
Construction 1656  — 
Total mortgage loans 8,337  9,550 
Commercial loans 235  1,179 
Consumer loans 277  4,519 
Total 60-89 day delinquent loans $ 8,849  15,248 
At March 31, 2021, the Company’s allowance for credit losses related to the loan portfolio was 0.87% of total loans, compared to 1.03% and 1.02% at December 31, 2020 and March 31, 2020, respectively. Excluding PPP loans, the Company’s allowance for credit losses related to the loan portfolio was 0.92% at March 31, 2021. The Company recorded a $15.0 million negative provision for credit losses related to loans for the three months ended March 31, 2021, compared with a $14.7 million provision for credit losses for the three months ended March 31, 2020. For the three months ended March 31, 2021, the Company had net charge-offs of $875,000, compared to net charge-offs of $3.0 million for the same period in 2020. The allowance for loan losses decreased $15.9 million to $85.6 million at March 31, 2021 from $101.5 million at December 31, 2020. The negative provision for credit losses for the first quarter of 2021 was primarily the result of an improved economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak economic forecast and more uncertain outlook attributable to COVID-19. Future credit loss provisions are subject to significant uncertainty given the undetermined nature of prospective changes in economic conditions, as the impact of COVID-19 and recovery continues to unfold. The effectiveness of medical advances, government programs, and the
45

resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions and reserve requirements.
At March 31, 2021 and December 31, 2020, the Company held foreclosed assets of $3.6 million and $4.5 million, respectively. During the three months ended March 31, 2021, there were two additions to foreclosed assets with an aggregate carrying value of $434,000, four assets sold with an aggregate carrying value of $580,000 and valuation charges of $775,000. Foreclosed assets at March 31, 2021 consisted of $2.6 million of commercial real estate, $434,000 of residential real estate and $530,000 of commercial vehicles.
Total non-performing loans were $82.1 million, or 0.84% of total loans at March 31, 2021, compared to $87.1 million, or 0.89% of total loans at December 31, 2020.
Cash and cash equivalents were $687.6 million at March 31, 2021, a $155.2 million increase from December 31, 2020, due to net deposit inflows and loan repayments, largely attributable to government stimulus programs, proceeds from the forgiveness of PPP loan and a seasonal increase in municipal deposits.
Total investments were $1.71 billion at March 31, 2021, a $97.9 million increase from December 31, 2020. This increase was primarily due to purchases of mortgage-backed and municipal securities, partially offset by repayments of mortgage-backed securities, maturities and calls of certain municipal and agency bonds, and a decrease in unrealized gains on available for sale debt securities.
Total deposits increased $459.7 million during the three months ended March 31, 2021 to $10.30 billion. Total core deposits, consisting of savings and demand deposit accounts, increased $590.9 million to $9.33 billion at March 31, 2021, while total time deposits decreased $131.2 million to $963.0 million at March 31, 2021. The increase in core deposits was largely attributable to a $266.5 million increase in interest bearing demand deposits, a $169.9 million increase in non-interest bearing demand deposits, a $100.2 million increase in money market deposits and a $54.2 million increase in savings deposits. Core deposit growth benefited from the deposit of PPP loan proceeds and government stimulus payments. The decrease in time deposits was largely the result of a $75.1 million decrease in brokered deposits and a $56.1 million decrease in retail time deposits. Core deposits represented 90.6% of total deposits at March 31, 2021, compared to 88.9% at December 31, 2020.
Borrowed funds decreased $235.4 million during the three months ended March 31, 2021, to $940.6 million. The decrease in borrowings for the period was primarily a function of wholesale funding being partially replaced by the net inflows of lower-costing deposits. Borrowed funds represented 7.2% of total assets at March 31, 2021, a decrease from 9.1% at December 31, 2020.
Stockholders’ equity increased $27.4 million during the three months ended March 31, 2021, to $1.65 billion, primarily due to net income earned for the period, partially offset by dividends paid to stockholders, a decrease in unrealized gains on available for sale debt securities and common stock repurchases. For the three months ended March 31, 2021, common stock repurchases totaled 44,937 shares at an average cost of $21.42 per share, of which 42,224 shares, at an average cost of $21.67 per share, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At March 31, 2021, approximately 4.1 million shares remained eligible for repurchase under the current stock repurchase authorization.
Liquidity and Capital Resources. Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases, deposit outflows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLBNY and approved broker-dealers.
Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds. Changes in interest rates, local economic conditions, COVID-19 and related government response and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows. For each of the years ended March 31, 2021 and 2020, loan repayments totaled $773.5 million and $633.2 billion, respectively.
In response to COVID-19, the Company has escalated the monitoring of deposit behavior, utilization of credit lines, and borrowing capacity with the FHLBNY and FRBNY, and is enhancing its collateral position with these funding sources.
The Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effective January 1, 2015. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopted a uniform minimum leverage capital ratio at 4%, increased the minimum
46

Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out was exercised. The Company exercised the option to exclude unrealized gains and losses from the calculation of regulatory capital. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer,” of 2.5% in addition to the amount necessary to meet its minimum risk-based capital requirements.
In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule providing banking institutions that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five year transition in total). In connection with its adoption of CECL on January 1, 2020, the Company elected to utilize the five-year CECL transition.
At March 31, 2021, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:
March 31, 2021
Required Required with Capital Conservation Buffer Actual
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Bank:(1)
Tier 1 leverage capital $ 502,556  4.00  % $ 502,556  4.00  % $ 1,112,034  8.85  %
Common equity Tier 1 risk-based capital 482,030  4.50  749,825  7.00  1,112,034  10.38 
Tier 1 risk-based capital 642,707  6.00  910,502  8.50  1,112,034  10.38 
Total risk-based capital 856,943  8.00  1,124,738  10.50  1,197,762  11.18 
Company:
Tier 1 leverage capital $ 502,770  4.00  % $ 502,770  4.00  % $ 1,182,231  9.41  %
Common equity Tier 1 risk-based capital 482,255  4.50  750,174  7.00  1,169,344  10.91 
Tier 1 risk-based capital 643,006  6.00  910,926  8.50  1,182,231  11.03 
Total risk-based capital 857,342  8.00  1,125,261  10.50  1,280,245  11.95 
(1) Under the FDIC's prompt corrective action provisions, the Bank is considered well capitalized if it has: a leverage (Tier 1) capital ratio of at least 5.00%; a common equity Tier 1 risk-based capital ratio of 6.50%; a Tier 1 risk-based capital ratio of at least 8.00%; and a total risk-based capital ratio of at least 10.00%.
COMPARISON OF OPERATING RESULTS FOR THREE MONTHS ENDED MARCH 31, 2021 AND 2020
General. The Company reported net income of $48.6 million, or $0.63 per basic and diluted share, for the three months ended March 31, 2021, compared to net income of $14.9 million, or $0.23 per basic and diluted share, for the three months ended March 31, 2020.
Earnings for the quarter were aided by an improved economic outlook and resulting lower allowance for credit loss requirements, as well as additional earnings attributable to the July 31, 2020 acquisition of SB One Bancorp ("SB One"). For the three months ended March 31, 2021, the Company recorded a negative provision for credit losses on loans of $15.0 million and a negative provision for off-balance sheet credit exposures of $875,000.
Net Interest Income. Total net interest income increased $18.0 million to $90.0 million for the quarter ended March 31, 2021, from $72.0 million for the quarter ended March 31, 2020. For the three months ended March 31, 2021, interest income increased $12.4 million to $100.5 million, from $88.2 million for the three months ended March 31, 2020. Interest expense decreased $5.6 million to $10.5 million for the quarter ended March 31, 2021, from $16.1 million for the quarter ended March 31, 2020. The increase in net interest income was favorably impacted by the net earning assets acquired from SB One and the accelerated recognition of fees related to PPP loan forgiveness, partially offset by period-over-period compression in the net interest margin. The degree of net interest margin compression was tempered by growth in both average loans outstanding and lower-costing average interest-bearing and non-interest bearing core deposits.
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The net interest margin decreased 10 basis points to 3.10% for the quarter ended March 31, 2021, compared to 3.20% for the quarter ended March 31, 2020. The weighted average yield on interest-earning assets decreased 45 basis points to 3.47% for the quarter ended March 31, 2021, compared to 3.92% for the quarter ended March 31, 2020, while the weighted average cost of interest bearing liabilities decreased 46 basis points for the quarter ended March 31, 2021 to 0.49%, compared to the first quarter of 2020. The average cost of interest bearing deposits for the quarter ended March 31, 2021 was 0.39%, compared to 0.78% for the same period last year. Average non-interest bearing demand deposits totaled $2.38 billion for the quarter ended March 31, 2021, compared to $1.50 billion for the quarter ended March 31, 2020. The average cost of all deposits, including non-interest bearing deposits, was 0.30% for the quarter ended March 31, 2021, compared with 0.62% for the quarter ended March 31, 2020. The average cost of borrowed funds for the quarter ended March 31, 2021 was 1.12%, compared to 1.80% for the same period last year.
Interest income on loans secured by real estate increased $7.6 million to $62.0 million for the three months ended March 31, 2021, from $54.4 million for the three months ended March 31, 2020. Commercial loan interest income increased $7.5 million to $26.1 million for the three months ended March 31, 2021, from $18.7 million for the three months ended March 31, 2020. Consumer loan interest income decreased $680,000 to $3.5 million for the three months ended March 31, 2021, from $4.2 million for the three months ended March 31, 2020. For the three months ended March 31, 2021, the average balance of total loans increased $2.47 billion to $9.72 billion, from $7.26 billion for the same period in 2020, primarily due to total loans acquired from SB One and organic growth, including PPP loans. The average yield on total loans for the three months ended March 31, 2021 decreased 45 basis points to 3.78%, from 4.23% for the same period in 2020.
Interest income on held to maturity debt securities decreased $156,000 to $2.8 million for the quarter ended March 31, 2021, compared to the same period last year. Average held to maturity debt securities increased $1.3 million to $450.4 million for the quarter ended March 31, 2021, from $449.1 million for the same period last year.
Interest income on available for sale debt securities and FHLBNY stock decreased $1.5 million to $5.6 million for the quarter ended March 31, 2021, from $7.1 million for the quarter ended March 31, 2020. The average balance of available for sale debt securities and FHLBNY stock increased $125.6 million to $1.19 billion for the three months ended March 31, 2021, compared to the same period in 2020.
The average yield on total securities decreased to 1.87% for the three months ended March 31, 2021, compared with 2.57% for the same period in 2020.
Interest expense on deposit accounts decreased $3.5 million to $7.4 million for the quarter ended March 31, 2021, compared with $11.0 million for the quarter ended March 31, 2020. The average cost of interest bearing deposits decreased to 0.39% for the three months ended March 31, 2021, from 0.78% for the three months ended March 31, 2020, respectively. The average balance of interest bearing core deposits for the quarter ended March 31, 2021 increased $1.79 billion to $6.69 billion, from $4.89 billion for the same period in 2020. The increase in average core deposits for the three months ended March 31, 2021 was largely due to deposits acquired from SB One, combined with organic growth, activity associated with PPP loans and government stimulus payments. Average time deposit account balances increased $271.9 million, to $1.04 billion for the quarter ended March 31, 2021, from $771.2 million for the quarter ended March 31, 2020, largely due to time deposits associated with the SB One acquisition.
Interest expense on borrowed funds decreased $2.4 million to $2.8 million for the quarter ended March 31, 2021, from $5.2 million for the quarter ended March 31, 2020. The average cost of borrowings decreased to 1.12% for the three months ended March 31, 2021, from 1.80% for the three months ended March 31, 2020. Average borrowings decreased $142.5 million to $1.02 billion for the quarter ended March 31, 2021, from $1.16 billion for the quarter ended March 31, 2020.
Provision for Credit Losses. Provisions for credit losses are charged to operations in order to maintain the allowance for credit losses at a level management considers necessary to absorb projected credit losses that may arise over the expected term of each loan in the portfolio. In determining the level of the allowance for credit losses, management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and a reasonable and supportable forecast. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for credit losses on a quarterly basis and makes provisions for credit losses, if necessary, in order to maintain the valuation of the allowance.
The Company recorded a $15.0 million negative provision for credit losses related to loans for the three months ended March 31, 2021, compared with provisions of $14.7 million for the three months ended March 31, 2020. The negative provision for credit losses for the first quarter of 2021 was primarily the result of an improved economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak
48

economic forecast and a more uncertain outlook attributable to COVID-19. Future credit loss provisions are subject to significant uncertainty given the undetermined nature of prospective changes in economic conditions, as the impact of COVID-19 and recovery continues to unfold. The effectiveness of medical advances, government programs, and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions and reserve requirements.
Non-Interest Income. Non-interest income totaled $21.6 million for the quarter ended March 31, 2021, an increase of $4.6 million, compared to the same period in 2020. Insurance agency income, a new fee revenue source for the Company resulting from the SB One acquisition, totaled $2.7 million for the three months ended March 31, 2021. Income from Bank-owned life insurance ("BOLI") increased $1.8 million to $2.6 million for the three months ended March 31, 2021, compared to the same period in 2020, primarily due to an increase in benefit claims, increased equity valuations and additional income related to the BOLI assets acquired from SB One. Wealth management income increased $883,000 to $7.1 million for the three months ended March 31, 2021. The increase was largely a function of an increase in the market value of assets under management as a result of strong equity market performance and solid new business results, and an increase in the level of managed mutual funds. Also, fee income increased $663,000 to $7.2 million for the three months ended March 31, 2021, compared to the same period in 2020, largely due to an increase in ATM and debit card revenue, a portion of which is attributable to the addition of the SB One customer base, and increases in commercial loan prepayment fees and late charges, partially offset by a decrease in deposit-related fees. Other income decreased $1.6 million to $1.8 million for the three months ended March 31, 2021, compared to the quarter ended March 31, 2020, primarily due to a $1.8 million decrease in net fees on loan-level interest rate swap transactions, partially offset by a $455,000 increase in net gains on the sale of loans.
Non-Interest Expense. For the three months ended March 31, 2021, non-interest expense totaled $61.9 million, an increase of $7.7 million, compared to the three months ended March 31, 2020. Compensation and benefits expense increased $4.1 million to $35.3 million for the three months ended March 31, 2021, compared to $31.2 million for the same period in 2020. The increase was principally due to increases in salary expense, the accrual for incentive compensation and employee benefits, each associated with the addition of former SB One employees, as well as company-wide annual merit increases, partially offset by a decrease in severance expense. Net occupancy expense increased $3.1 million primarily due to increases in rent, depreciation, utility and maintenance expenses related to the facilities acquired from SB One, along with an increase in snow removal costs. FDIC insurance increased $1.8 million due to an increase in the insurance assessment rate, an increase in total assets subject to assessment, including assets acquired from SB One, and the receipt of the small bank assessment credit in the prior year quarter that was not available in the current quarter. Other operating expenses increased $937,000 to $10.1 million for the three months ended March 31, 2021, compared to $9.2 million for the same period in 2020. The increase in other operating expense was largely due to a valuation adjustment on foreclosed assets and an increase in debit card maintenance expense, partially offset by non-recurring merger related and COVID-19 expenses incurred in the prior year quarter. Also, the amortization of intangibles increased $228,000 for the three months ended March 31, 2021, compared with the same period in 2020, mainly due to increases in the amortization of the customer relationship and core-deposit intangibles attributable to the acquisition of SB One. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures decreased $1.9 million for the three months ended March 31, 2021, compared to the same period in 2020. The decrease was primarily a function of an improved economic forecast resulting in a decline in projected loss factors, partially offset by an increase in the availability of committed lines of credit due to below average utilization.
Income Tax Expense. For the three months ended March 31, 2021, income tax expense was $16.2 million with an effective tax rate of 25.0%, compared with income tax expense of $5.3 million with an effective tax rate of 26.0% for the three months ended March 31, 2020. The increase in tax expense for the three months ended March 31, 2021, compared with the same period last year was largely the result of an increase in taxable income, while the decrease in the effective tax rate for the three months ended March 31, 2021 compared with the same period in 2020 was primarily due to a discrete item related to the vesting of stock awards at a market value below the fair value used for expense recognition which resulted in a higher effective tax rate in the prior year, partially offset by increased projections of taxable income for the remainder of 2021.

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Analysis. Interest rate risk is the exposure of a bank’s current and future earnings and capital arising from adverse movements in interest rates. The guidelines of the Company’s interest rate risk policy seek to limit the exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. To minimize interest rate risk, the Company generally sells all 20- and 30-year fixed-rate residential mortgage loans at origination. The Company retains residential fixed rate mortgages with terms of 15 years or less and biweekly payment residential mortgages with a term of 30 years or less. Commercial real estate loans generally have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the Prime rate, the Federal Funds rate or LIBOR.
49

Investment securities purchases generally have maturities of five years or less, and mortgage-backed securities have weighted average lives between three and five years.
The Asset/Liability Committee meets on at least a monthly basis to review the impact of interest rate changes on net interest income, net interest margin, net income and the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net income.
The Company’s strategy for liabilities has been to maintain a stable core-funding base by focusing on core deposit account acquisition and increasing products and services per household. The Company’s ability to retain maturing time deposit accounts is the result of its strategy to remain competitively priced within its marketplace. The Company’s pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLBNY during periods of pricing dislocation.
Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation models. The analysis captures changes in net interest income using flat rates as a base, a most likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to policy limits for acceptable change. The Company periodically reviews historical deposit re-pricing activity and makes modifications to certain assumptions used in its income simulation model regarding the interest rate sensitivity of deposits without maturity dates. These modifications are made to more closely reflect the most likely results under the various interest rate change scenarios. Since it is inherently difficult to predict the sensitivity of interest bearing deposits to changes in interest rates, the changes in net interest income due to changes in interest rates cannot be precisely predicted. There are a variety of reasons that may cause actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes. Specific assumptions used in the simulation model include:
•Parallel yield curve shifts for market rates;
•Current asset and liability spreads to market interest rates are fixed;
•Traditional savings and interest-bearing demand accounts move at 10% of the rate ramp in either direction;
•Retail Money Market and Business Money Market accounts move at 25% and 75% of the rate ramp in either direction respectively, subject to certain interest rate floors; and
•Higher-balance demand deposit tiers and promotional demand accounts move at 50% to 75% of the rate ramp in either direction, subject to certain interest rate floors.
The following table sets forth the results of a twelve-month net interest income projection model as of March 31, 2021 (dollars in thousands):
Change in interest rates (basis points) - Rate Ramp Net Interest Income
Dollar Amount Dollar Change Percent Change
-100 $ 330,246  $ (11,175) (3.3) %
Static 341,421  —  — 
+100
344,136  2,715  0.8 
+200
346,903  5,482  1.6 
+300
349,477  8,056  2.4 
The preceding table indicates that, as of March 31, 2021, in the event of a 300 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would increase 2.4%, or $8.1 million. In the event of a 100 basis point decrease in interest rates, net interest income would decrease 3.3%, or $11.2 million over the same period.

Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained interest rate shocks. The following table illustrates the result of the economic value of equity model as of March 31, 2021 (dollars in thousands):
50

   Present Value of Equity Present Value of Equity as Percent of Present Value of Assets
Change in interest rates (basis points) Dollar Amount Dollar Change Percent
Change 		Present Value
 Ratio 		Percent
Change
-100 $ 1,451,808  $ (204,394) (12.3) % 10.7  % (14.2) %
Flat 1,656,202  —  —  12.5  — 
+100
1,707,465  51,263  3.1  13.2  5.3 
+200
1,744,322  88,120  5.3  13.7  10.0 
+300
1,774,522  118,320  7.1  14.3  14.2 
The preceding table indicates that as of March 31, 2021, in the event of an immediate and sustained 300 basis point increase in interest rates, the present value of equity is projected to increase 7.1%, or $118.3 million. If rates were to decrease 100 basis points, the present value of equity would decrease 12.3%, or $204.4 million.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the use of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
 

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

PART II—OTHER INFORMATION
 

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

Item 1A.
Risk Factors
There were no changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) Total Number of Shares
Purchased 		(b) Average
Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1)
January 1, 2021 through January 31, 2021 2,713  $ 17.50  2,713  4,113,773 
February 1, 2021 through February 28, 2021 42,224  21.67  42,224  4,071,549 
March 1, 2021 through March 31, 2021 —  —  —  4,071,549 
Total 44,937  21.42  44,937 
(1) On December 20, 2012, the Company’s Board of Directors approved the purchase of up to 3,017,770 shares of its common stock under an eighth general repurchase program which commenced upon completion of the seventh repurchase program. The repurchase program has no expiration date. On December 28, 2020, the Company’s Board of Directors approved the purchase of up to 3,900,000 shares of its common stock under a ninth general repurchase program to commence upon completion of the eighth repurchase program. The repurchase program has no expiration date.

Item 3.
Defaults Upon Senior Securities.
Not Applicable 

Item 4.
Mine Safety Disclosures
Not Applicable

Item 5.
Other Information.
None



52



Item 6.
Exhibits.
The following exhibits are filed herewith:
2.1
3.1
3.2
4.1
31.1
31.2
32
101
The following financial statements from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, has been formatted in iXBRL.

53

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
PROVIDENT FINANCIAL SERVICES, INC.
Date: May 10, 2021 By: /s/ Christopher Martin
Christopher Martin
Chairman and Chief Executive Officer (Principal Executive Officer)
Date: May 10, 2021 By: /s/ Thomas M. Lyons
Thomas M. Lyons
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: May 10, 2021 By: /s/ Frank S. Muzio
Frank S. Muzio
Executive Vice President and Chief Accounting Officer

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