PFS-9.30.2014-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2014
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from              to
Commission File Number: 001-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
42-1547151
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
239 Washington Street, Jersey City, New Jersey
 
07302
(Address of Principal Executive Offices)
 
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 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, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
As of November 1, 2014 there were 83,209,285 shares issued and 65,294,163 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 406,883 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.




PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page Number
 
 
 
 
1.
 
 
 
 
 
Consolidated Statements of Financial Condition as of September 30, 2014 (unaudited) and December 31, 2013
 
 
 
 
Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 

2



PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2014 (Unaudited) and December 31, 2013
(Dollars in Thousands)
 
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Cash and due from banks
 
$
87,439

 
$
100,053

Short-term investments
 
1,366

 
1,171

Total cash and cash equivalents
 
88,805

 
101,224

Securities available for sale, at fair value
 
1,110,323

 
1,157,594

Investment securities held to maturity (fair value of $471,173 at September 30, 2014 (unaudited)
and $355,913 at December 31, 2013)
 
460,014

 
357,500

Federal Home Loan Bank stock
 
68,725

 
58,070

Loans
 
5,966,198

 
5,194,813

Less allowance for loan losses
 
63,330

 
64,664

Net loans
 
5,902,868

 
5,130,149

Foreclosed assets, net
 
6,334

 
5,486

Banking premises and equipment, net
 
96,558

 
66,448

Accrued interest receivable
 
24,189

 
22,956

Intangible assets
 
404,948

 
356,432

Bank-owned life insurance
 
176,307

 
150,511

Other assets
 
79,487

 
80,958

Total assets
 
$
8,418,558

 
$
7,487,328

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 
$
3,928,254

 
$
3,473,724

Savings deposits
 
983,831

 
921,993

Certificates of deposit of $100,000 or more
 
314,027

 
270,631

Other time deposits
 
501,841

 
536,123

Total deposits
 
5,727,953

 
5,202,471

Mortgage escrow deposits
 
21,544

 
20,376

Borrowed funds
 
1,490,983

 
1,203,879

Other liabilities
 
49,036

 
49,849

Total liabilities
 
7,289,516

 
6,476,575

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, 83,209,285 shares issued
and 64,887,339 shares outstanding at September 30, 2014 (unaudited) and 59,917,649 outstanding at December 31, 2013
 
832

 
832

Additional paid-in capital
 
1,026,479

 
1,026,144

Retained earnings
 
452,152

 
427,763

Accumulated other comprehensive income (loss)
 
1,054

 
(4,851
)
Treasury stock
 
(304,864
)
 
(390,380
)
Unallocated common stock held by the Employee Stock Ownership Plan
 
(46,611
)
 
(48,755
)
Common stock acquired by the Directors’ Deferred Fee Plan
 
(7,136
)
 
(7,205
)
Deferred compensation – Directors’ Deferred Fee Plan
 
7,136

 
7,205

Total stockholders’ equity
 
1,129,042

 
1,010,753

Total liabilities and stockholders’ equity
 
$
8,418,558

 
$
7,487,328

See accompanying notes to unaudited consolidated financial statements.

3



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three and nine months ended September 30, 2014 and 2013 (Unaudited)
(Dollars in Thousands, except per share data)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
 
Real estate secured loans
 
$
43,837

 
$
38,238

 
$
122,770

 
$
114,158

Commercial loans
 
13,961

 
10,092

 
36,056

 
30,118

Consumer loans
 
6,106

 
5,918

 
17,637

 
17,750

Securities available for sale and Federal Home Loan Bank Stock
 
6,410

 
6,033

 
20,155

 
18,345

Investment securities held to maturity
 
3,323

 
2,694

 
8,899

 
8,300

Deposits, Federal funds sold and other short-term investments
 
15

 
9

 
44

 
30

Total interest income
 
73,652

 
62,984

 
205,561

 
188,701

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
4,054

 
4,354

 
11,479

 
13,917

Borrowed funds
 
6,629

 
4,633

 
18,511

 
13,481

Total interest expense
 
10,683

 
8,987

 
29,990

 
27,398

Net interest income
 
62,969

 
53,997

 
175,571

 
161,303

Provision for loan losses
 
1,500

 
1,200

 
3,400

 
3,700

Net interest income after provision for loan losses
 
61,469

 
52,797

 
172,171

 
157,603

Non-interest income:
 
 
 
 
 
 
 
 
Fees
 
8,512

 
9,792

 
22,986

 
26,070

Bank-owned life insurance
 
1,349

 
1,201

 
4,228

 
5,355

Net gain on securities transactions
 
487

 
40

 
247

 
974

Other income
 
961

 
697

 
2,291

 
1,913

Total non-interest income
 
11,309

 
11,730

 
29,752

 
34,312

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
24,947

 
21,106

 
69,921

 
62,103

Net occupancy expense
 
5,950

 
5,072

 
17,662

 
15,322

Data processing expense
 
5,029

 
2,644

 
10,587

 
7,913

FDIC insurance
 
1,141

 
1,073

 
3,421

 
3,547

Amortization of intangibles
 
976

 
318

 
1,778

 
1,345

Advertising and promotion expense
 
1,281

 
718

 
3,427

 
2,741

Other operating expenses
 
6,509

 
5,533

 
20,898

 
18,252

Total non-interest expense
 
45,833

 
36,464

 
127,694

 
111,223

Income before income tax expense
 
26,945

 
28,063

 
74,229

 
80,692

Income tax expense
 
7,913

 
11,987

 
21,817

 
27,560

Net income
 
$
19,032

 
$
16,076

 
$
52,412

 
$
53,132

Basic earnings per share
 
$
0.30

 
$
0.28

 
$
0.88

 
$
0.93

Weighted average basic shares outstanding
 
62,440,310

 
57,241,270

 
59,670,773

 
57,205,175

Diluted earnings per share
 
$
0.30

 
$
0.28

 
$
0.88

 
$
0.93

Weighted average diluted shares outstanding
 
62,559,207

 
57,357,344

 
59,804,205

 
57,279,935


See accompanying notes to unaudited consolidated financial statements.

4



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2014 and 2013 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
19,032

 
$
16,076

 
$
52,412

 
$
53,132

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains arising during the period
 
(3,389
)
 
779

 
6,669

 
(13,403
)
Reclassification adjustment for gains included in net income
 
(288
)
 
(24
)
 
(146
)
 
(576
)
Total
 
(3,677
)
 
755

 
6,523

 
(13,979
)
Amortization related to post-retirement obligations
 
45

 
202

 
(618
)
 
663

Total other comprehensive (loss) income
 
(3,632
)
 
957

 
5,905

 
(13,316
)
Total comprehensive income
 
$
15,400

 
$
17,033

 
$
58,317

 
$
39,816

See accompanying notes to unaudited consolidated financial statements.


5



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Nine months ended September 30, 2014 and 2013 (Unaudited)
(Dollars in Thousands)
 
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
RETAINED
EARNINGS
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
TREASURY
STOCK
 
UNALLOCATED
ESOP
SHARES
 
COMMON
STOCK
ACQUIRED
BY DDFP
 
DEFERRED
COMPENSATION
DDFP
 
TOTAL
STOCKHOLDERS’
EQUITY
Balance at December 31, 2012
 
$
832

 
$
1,021,507

 
$
389,549

 
$
7,716

 
$
(386,270
)
 
$
(52,088
)
 
$
(7,298
)
 
$
7,298

 
$
981,246

Net income
 

 

 
53,132

 

 

 

 

 

 
53,132

Other comprehensive loss, net of tax
 

 

 

 
(13,316
)
 

 

 

 

 
(13,316
)
Cash dividends declared
 

 

 
(24,965
)
 

 

 

 

 

 
(24,965
)
Distributions from DDFP
 

 

 

 

 

 

 
70

 
(70
)
 

Purchases of treasury stock
 

 

 

 

 
(5,883
)
 

 

 

 
(5,883
)
Shares issued dividend reinvestment plan
 

 
(96
)
 

 

 
997

 

 

 

 
901

Stock option exercises
 

 
(76
)
 

 

 
275

 

 

 

 
199

Allocation of ESOP shares
 

 
(168
)
 

 

 

 
2,124

 

 

 
1,956

Allocation of SAP shares
 

 
3,212

 

 

 

 

 

 

 
3,212

Allocation of stock options
 

 
210

 

 

 

 

 

 

 
210

Balance at September 30, 2013
 
$
832

 
$
1,024,589

 
$
417,716

 
$
(5,600
)
 
$
(390,881
)
 
$
(49,964
)
 
$
(7,228
)
 
$
7,228

 
$
996,692

See accompanying notes to unaudited consolidated financial statements.

6





PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Nine months ended September 30, 2014 and 2013 (Unaudited) (Continued)
(Dollars in thousands)
 
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
RETAINED
EARNINGS
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
TREASURY
STOCK
 
UNALLOCATED
ESOP
SHARES
 
COMMON
STOCK
ACQUIRED
BY DDFP
 
DEFERRED
COMPENSATION
DDFP
 
TOTAL
STOCKHOLDERS’
EQUITY
Balance at December 31, 2013
 
$
832

 
$
1,026,144

 
$
427,763

 
$
(4,851
)
 
$
(390,380
)
 
$
(48,755
)
 
$
(7,205
)
 
$
7,205

 
$
1,010,753

Net income
 

 

 
52,412

 

 

 

 

 

 
52,412

Other comprehensive income, net of tax
 

 

 

 
5,905

 

 

 

 

 
5,905

Cash dividends declared
 

 

 
(28,023
)
 

 

 

 

 

 
(28,023
)
Distributions from DDFP
 

 

 

 

 

 

 
69

 
(69
)
 

Purchases of treasury stock
 

 

 

 

 
(4,401
)
 

 

 

 
(4,401
)
Treasury shares issued to finance acquisition
 

 
(962
)
 

 

 
84,479

 

 

 

 
83,517

Shares issued dividend reinvestment plan
 

 

 

 

 
1,019

 

 

 

 
1,019

Stock option exercises
 

 
(22
)
 

 

 
166

 

 

 

 
144

Allocation of ESOP shares
 

 
46

 

 

 

 
2,144

 

 

 
2,190

Allocation of SAP shares
 

 
5,301

 

 

 

 

 

 

 
5,301

Allocation of Treasury Shares
 

 
(4,253
)
 

 

 
4,253

 

 

 

 

Allocation of stock options
 

 
225

 

 

 

 

 

 

 
225

Balance at September 30, 2014
 
$
832

 
$
1,026,479

 
$
452,152

 
$
1,054

 
$
(304,864
)
 
$
(46,611
)
 
$
(7,136
)
 
$
7,136

 
$
1,129,042

See accompanying notes to unaudited consolidated financial statements.


7



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine months ended September 30, 2014 and 2013 (Unaudited)
(Dollars in Thousands)
 
 
 
Nine months ended September 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
52,412

 
$
53,132

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
7,752

 
6,691

Provision for loan losses
 
3,400

 
3,700

Deferred tax expense
 
667

 
4,863

Increase in cash surrender value of Bank-owned life insurance
 
(4,228
)
 
(5,355
)
Net amortization of premiums and discounts on securities
 
7,701

 
10,482

Accretion of net deferred loan fees
 
(2,376
)
 
(2,957
)
Amortization of premiums on purchased loans, net
 
526

 
1,068

Net increase in loans originated for sale
 
(7,280
)
 
(20,539
)
Proceeds from sales of loans originated for sale
 
7,864

 
21,500

Proceeds from sales of foreclosed assets
 
4,580

 
10,998

ESOP expense
 
2,190

 
1,956

Allocation of stock award shares
 
5,049

 
3,562

Allocation of stock options
 
225

 
210

Net gain on sale of loans
 
(584
)
 
(961
)
Net gain on securities transactions
 
(247
)
 
(974
)
Net gain on sale of premises and equipment
 
(5
)
 
(42
)
Net gain on sale of foreclosed assets
 
(497
)
 
(18
)
Decrease in accrued interest receivable
 
1,828

 
2,700

Increase in other assets
 
(12,411
)
 
(7,008
)
Increase in other liabilities
 
1,501

 
575

Net cash provided by operating activities
 
68,067

 
83,583

Cash flows from investing activities:
 
 
 
 
Proceeds from maturities, calls and paydowns of investment securities held to maturity
 
36,062

 
77,817

Purchases of investment securities held to maturity
 
(58,192
)
 
(78,608
)
Proceeds from sales of securities
 
24,953

 
14,834

Proceeds from maturities, calls and paydowns of securities available for sale
 
157,765

 
298,894

Purchases of securities available for sale
 
(54,581
)
 
(227,101
)
Cash received, net of cash consideration paid for acquisition
 
68,650

 

Purchases of loans
 
(94,464
)
 
(22,005
)
Net increase in loans
 
(45,982
)
 
(160,914
)
Proceeds from sales of premises and equipment
 
5

 
35

Purchases of premises and equipment
 
(14,404
)
 
(6,623
)
Net cash provided by (used) in in investing activities
 
19,812

 
(103,671
)
Cash flows from financing activities:
 
 
 
 
Net decrease in deposits
 
(244,454
)
 
(172,598
)
Increase in mortgage escrow deposits
 
1,146

 
715

Purchases of treasury stock
 
(4,401
)
 
(5,883
)
Cash dividends paid to stockholders
 
(28,023
)
 
(24,965
)
Shares issued dividend reinvestment plan
 
1,019

 
901

Stock options exercised
 
144

 
199


8



Proceeds from long-term borrowings
 
404,334

 
215,000

Payments on long-term borrowings
 
(201,856
)
 
(52,193
)
Net (decrease) increase in short-term borrowings
 
(28,207
)
 
50,375

Net cash (used in) provided by financing activities
 
(100,298
)
 
11,551

Net decrease in cash and cash equivalents
 
(12,419
)
 
(8,537
)
Cash and cash equivalents at beginning of period
 
101,224

 
103,823

Cash and cash equivalents at end of period
 
$
88,805

 
$
95,286

Cash paid during the period for:
 
 
 
 
Interest on deposits and borrowings
 
$
29,910

 
$
27,532

Income taxes
 
$
19,742

 
$
21,321

Non-cash investing activities:
 
 
 
 
Transfer of loans receivable to foreclosed assets
 
$
4,535

 
$
6,408

Acquisition:
 
 
 
 
Non-cash assets acquired:
 
 
 
 
Investment securities available for sale
 
$
157,635

 
$

Loans
 
631,209

 

Bank-owned life insurance
 
22,319

 

Goodwill and other intangible assets, net
 
50,222

 

Other assets
 
33,939

 

Total non-cash assets acquired
 
$
895,324

 
$

Liabilities assumed:
 
 
 
 
Deposits
 
$
769,936

 
$

Borrowings
 
112,835

 

Other Liabilities
 
(2,314
)
 

Total liabilities assumed
 
$
880,457

 
$

 
 
 
 
 
Common stock issued for acquisitions
 
$
83,517

 
$

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, The Provident Bank (the “Bank,” together with Provident Financial Services, Inc., the “Company”).
In preparing the interim unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates. The allowance for loan losses, the valuation of securities available for sale 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 and nine months ended September 30, 2014 are not necessarily indicative of the results of operations that may be expected for all of 2014.
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, 2013 Annual Report to Stockholders on Form 10-K.
B. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands, except per share amounts):
 
 
Three months ended September 30,
 
 
 
2014
 
2013
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
19,032

 
 
 
 
 
$
16,076

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
19,032

 
62,440,310

 
$
0.30

 
$
16,076

 
57,241,270

 
$
0.28

 
Dilutive shares
 
 
 
118,897

 
 
 
 
 
116,074

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
19,032

 
62,559,207

 
$
0.30

 
$
16,076

 
57,357,344

 
$
0.28

 


10



 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
Net income
 
$
52,412

 
 
 
 
 
$
53,132

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
52,412

 
59,670,773

 
$
0.88

 
$
53,132

 
57,205,175

 
$
0.93

Dilutive shares
 
 
 
133,432

 
 
 
 
 
74,760

 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
52,412

 
59,804,205

 
$
0.88

 
$
53,132

 
57,279,935

 
$
0.93

Anti-dilutive stock options and awards totaling 1,099,371 shares at September 30, 2014, were excluded from the earnings per share calculations.

Note 2. Business Combinations
On May 30, 2014, the Company completed its acquisition of Team Capital Bank ("Team Capital"), which after purchase accounting adjustments added $964.0 million to total assets, $631.2 million to loans, and $769.9 million to deposits. Total consideration paid for Team Capital was $115.1 million: $31.6 million in cash and 4.9 million shares of common stock valued at $83.5 million on the acquisition date. Team Capital was merged with and into the Company's subsidiary, The Provident Bank as of the close of business on the date of acquisition.
The transaction was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition from Team Capital, net of cash consideration paid (in thousands):
 
 
At May 30, 2014
Assets acquired:
 
 
Cash and cash equivalents, net
 
$
68,650

Securities available for sale
 
157,635

Loans
 
631,209

Bank-owned life insurance
 
22,319

Banking premises and equipment
 
24,778

Accrued interest receivable
 
3,060

Goodwill
 
40,354

Other intangibles assets
 
9,868

Foreclosed assets, net
 
653

Other assets
 
5,448

Total assets acquired
 
963,974

 
 
 
Liabilities assumed:
 
 
Deposits
 
769,936

Borrowed Funds
 
112,835

Other liabilities
 
(2,314
)
Total liabilities assumed
 
880,457

Net assets acquired
 
$
83,517


11



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.
In the quarter ended September 30, 2014, the Company decreased the estimated fair value of the acquired loan portfolio by $181,000, to $631.2 million, from $631.4 million, with a corresponding increase to goodwill. This change in the estimated fair value of the loan portfolio was based upon a subsequent review of certain acquired loans and their respective cash flow characteristics at May 30, 2014, the date of acquisition of Team Capital.
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 Team Capital acquisition were as follows:
Securities Available for Sale
The estimated fair values of the investment securities classified as available for sale were calculated utilizing Level 1 and Level 2 inputs. Management reviewed the data and assumptions used by its third party provider in pricing the securities to ensure the highest level of significant inputs is derived from observable market data. These prices were validated against other pricing sources and broker-dealer indications.
Loans
The acquired loan portfolio was valued based on current guidance which defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the portfolio and included the use of present value techniques employing cash flow estimates and the incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, Management utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.
To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.
The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses; and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the Company, the acquired bank and peer banks. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of familiarity with the originator's underwriting process.
To calculate the specific credit fair value adjustment, management reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting this definition were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount. The accretable yield amount will be recognized over the life of the loans on a level yield basis as an adjustment to yield.
Deposits and Core Deposit Premium
Core deposit premium represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost alternative funding sources and was valued utilizing Level 1 inputs.
Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and was valued utilizing Level 2 inputs.

12



Borrowed Funds
The fair value for borrowed funds was obtained from actual prepayment rates from the FHLB - Pittsburgh, a Level 2 input. These borrowings were redeemed after the acquisition date and the fair value adjustment was fully amortized in the quarter ended June 30, 2014.

Note 3. Investment Securities
At September 30, 2014, the Company had $1.11 billion and $460.0 million in available for sale and held to maturity investment securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, 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 which could result in other-than-temporary impairment on certain investment securities in future periods. The total number of held to maturity and available for sale securities in an unrealized loss position as of September 30, 2014 totaled 261, compared with 346 at December 31, 2013. All securities with unrealized losses at September 30, 2014 were analyzed for other-than-temporary impairment. Based upon this analysis, no other-than-temporary impairment existed at September 30, 2014.
Securities Available for Sale
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the fair value for securities available for sale at September 30, 2014 and December 31, 2013 (in thousands):
 

September 30, 2014
 

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,018

 

 
(32
)
 
7,986

Agency obligations

87,767


271


(94
)
 
87,944

Mortgage-backed securities

991,369


13,259


(7,329
)
 
997,299

State and municipal obligations

6,944


160


(7
)
 
7,097

Corporate obligations
 
9,538

 
4

 
(57
)
 
9,485

Equity securities

397


115



 
512

 

$
1,104,033


13,809


(7,519
)
 
1,110,323

 
 
December 31, 2013
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations
 
$
93,223

 
372

 
(179
)
 
93,416

Mortgage-backed securities
 
1,060,013

 
14,493

 
(19,532
)
 
1,054,974

State and municipal obligations
 
8,739

 
171

 
(152
)
 
8,758

Equity securities
 
357

 
89

 

 
446

 
 
$
1,162,332

 
15,125

 
(19,863
)
 
1,157,594

The amortized cost and fair value of securities available for sale at September 30, 2014, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
 
 
September 30, 2014
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
27,678

 
27,813

Due after one year through five years
 
78,579

 
78,711

Due after five years through ten years
 
3,018

 
2,964

Due after ten years
 
2,992

 
3,024

Mortgage-backed securities
 
991,369

 
997,299

Equity securities
 
397

 
512

 
 
$
1,104,033

 
1,110,323



13



During the three months ending September 30, 2014, proceeds from the sale of securities available for sale were $9,946,000 resulting in gross gains of $482,000 and no gross losses. For the same period last year, no securities were sold from the available for sale portfolio.
For the nine months ended September 30, 2014, proceeds from the sale of securities available for sale were $24,429,000, resulting in gross gains of $632,000 and gross losses of $404,000. For the same period last year, proceeds from the sale of securities available for sale were $14,310,000, resulting in gross gains of $888,000 and no gross losses. Also, for the nine months ended September 30, 2014, proceeds from calls of securities available for sale totaled $740,000, resulting in gross gains of $2,000 gains and no gross losses. For the nine months ended September 30, 2013, proceeds from calls on securities available for sale totaled $896,000, with no gains or losses recognized.
The following table presents a roll-forward of the credit loss component of other-than-temporary impairment (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income. OTTI recognized in earnings for credit-impaired debt securities is presented in two components based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment), or whether the current period is not the first time a debt security was credit-impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows (in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Beginning credit loss amount

$

 
1,240

 
1,674

 
1,240

Add: Initial OTTI credit losses


 

 

 

Subsequent OTTI credit losses


 

 

 

Less: Realized losses for securities sold


 

 
1,674

 

Securities intended or required to be sold


 

 

 

Increases in expected cash flows on debt securities


 

 

 

Ending credit loss amount

$

 
1,240

 

 
1,240

The Company did not incur an OTTI charge on securities for the three and nine months ended September 30, 2014 or 2013. For the nine months ended September 30, 2014, the Company realized a $59,000 gain and a $365,000 loss on the sales of previously impaired non-agency mortgage-backed securities, respectively. The Company previously incurred cumulative credit losses of $1.7 million on these securities.
The following tables represent the Company’s disclosure regarding securities available for sale with temporary impairment at September 30, 2014 and December 31, 2013 (in thousands):
 

September 30, 2014 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
US Treasury obligations
 
$
7,986

 
(32
)
 

 

 
7,986

 
(32
)
Agency obligations

28,129

 
(50
)
 
4,992

 
(44
)
 
33,121

 
(94
)
Mortgage-backed securities

174,267

 
(687
)
 
296,736

 
(6,642
)
 
471,003

 
(7,329
)
State and municipal obligations


 

 
663

 
(7
)
 
663

 
(7
)
Corporate obligations
 
4,985

 
(57
)
 

 

 
4,985

 
(57
)


$
215,367

 
(826
)
 
302,391

 
(6,693
)
 
517,758

 
(7,519
)
 

December 31, 2013 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

$
34,355

 
(179
)
 

 

 
34,355

 
(179
)
Mortgage-backed securities

604,778

 
(18,850
)
 
13,521

 
(682
)
 
618,299

 
(19,532
)
State and municipal obligations
 
2,867

 
(152
)
 
 
 
 
 
2,867

 
(152
)


$
642,000

 
(19,181
)
 
13,521

 
(682
)
 
655,521

 
(19,863
)

14



The temporary loss position associated with securities available for sale was the result of changes in market interest rates relative to the coupon of the individual security and changes in credit spreads. The Company does not have the intent to sell securities in a temporary loss position at September 30, 2014, nor is it more likely than not that the Company will be required to sell the securities before their prices recover.
The number of available for sale securities in an unrealized loss position at September 30, 2014 totaled 81, compared with 76 at December 31, 2013. At September 30, 2014, there were two private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $2,039,000 and an unrealized loss of $6,000. These private label mortgage-backed securities were above investment grade at September 30, 2014.
The Company estimates the loss projections for each security by stressing the individual loans collateralizing the security and applying a range of expected default rates, loss severities, and prepayment speeds in conjunction with the underlying credit enhancement for each security. Based on specific assumptions about collateral and vintage, a range of possible cash flows was identified to determine whether other-than-temporary impairment existed during the three and nine months ended September 30, 2014. The Company concluded that no other-than-temporary impairment of the securities available for sale portfolio existed at September 30, 2014.
Investment Securities Held to Maturity
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the estimated fair value for investment securities held to maturity at September 30, 2014 and December 31, 2013 (in thousands):
 
 
September 30, 2014
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
7,108

 
20

 
(31
)
 
7,097

Mortgage-backed securities

3,239

 
146

 

 
3,385

State and municipal obligations

439,162

 
12,385

 
(1,361
)
 
450,186

Corporate obligations

10,505

 
38

 
(38
)
 
10,505

 

$
460,014

 
12,589

 
(1,430
)
 
471,173

 
 
 
 
 
 
 
 
 
 

December 31, 2013
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
7,523

 
13

 
(66
)
 
7,470

Mortgage-backed securities

5,273

 
247

 

 
5,520

State and municipal obligations

334,750

 
5,435

 
(7,198
)
 
332,987

Corporate obligations

9,954

 
58

 
(76
)
 
9,936

 

$
357,500

 
5,753

 
(7,340
)
 
355,913

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. For the three and nine months ended September 30, 2014, the Company recognized gross gains of $5,000 and $20,000, and no gross losses, respectively, related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $3,566,000 and $12,376,000 for the three and nine months ended September 30, 2014, respectively. In addition, for the nine months ended September 30, 2014, the Company recognized a gross loss of $3,000 and no gross gain related to the sale of a security with proceeds of $524,000. The sale of this security was in response to the credit deterioration of the issuer.
For the three and nine months ended September 30, 2013, the Company recognized gains of $40,000 and $70,000, and gross losses of $0 and $2,000, respectively, related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $19,635,000 and $42,113,000, respectively. In addition, for the nine months ended September 30, 2013, the Company recognized gross gains of $18,000, and no gross losses, related to the sales of certain securities, with the proceeds totaling $524,000. The sales of these securities were in response to the credit deterioration of the issuers. There were no sales of securities from the held to maturity portfolio for the three months ended September 30, 2013.
The amortized cost and fair value of investment securities in the held to maturity portfolio at September 30, 2014 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.

15



 
 
September 30, 2014
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
6,814

 
6,863

Due after one year through five years

53,690

 
55,074

Due after five years through ten years

165,552

 
171,594

Due after ten years

230,719

 
234,257

Mortgage-backed securities

3,239

 
3,385



$
460,014

 
471,173

The following tables represent the Company’s disclosure on investment securities held to maturity with temporary impairment at September 30, 2014 and December 31, 2013 (in thousands):
 
 
September 30, 2014 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

$
1,166

 
(4
)
 
2,953

 
(27
)
 
4,119

 
(31
)
State and municipal obligations

28,109

 
(255
)
 
56,726

 
(1,106
)
 
84,835

 
(1,361
)
Corporate obligations

3,325

 
(13
)
 
2,802

 
(25
)
 
6,127

 
(38
)
 

$
32,600

 
(272
)
 
62,481

 
(1,158
)
 
95,081

 
(1,430
)
 
 
December 31, 2013 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
 
$
5,766

 
(66
)
 

 

 
5,766

 
(66
)
State and municipal obligations
 
123,988

 
(5,376
)
 
19,051

 
(1,822
)
 
143,039

 
(7,198
)
Corporate obligations
 
5,387

 
(76
)
 

 

 
5,387

 
(76
)
 
 
$
135,141

 
(5,518
)
 
19,051

 
(1,822
)
 
154,192

 
(7,340
)
Based upon the review of the held to maturity securities portfolio, the Company believes that as of September 30, 2014, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the fair value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risks, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company would be required to sell the securities before their prices recover.
The number of securities in an unrealized loss position at September 30, 2014 totaled 180, compared with 270 at December 31, 2013. The decrease in the number of securities in an unrealized loss position at September 30, 2014, was largely due to a reduction in market interest rates from December 31, 2103. All temporarily impaired investment securities were investment grade at September 30, 2014.

16



Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable at September 30, 2014 and December 31, 2013 are summarized as follows (in thousands):
 
 
September 30, 2014
 
December 31, 2013
Mortgage loans:
 
 
 
 
Residential
 
$
1,236,566

 
1,174,043

Commercial
 
1,687,132

 
1,400,624

Multi-family
 
941,863

 
928,906

Construction
 
235,700

 
183,289

Total mortgage loans
 
4,101,261

 
3,686,862

Commercial loans
 
1,249,480

 
932,199

Consumer loans
 
612,765

 
577,602

Total gross loans
 
5,963,506

 
5,196,663

Purchased credit-impaired ("PCI") loans
 
4,511

 

Premiums on purchased loans
 
4,895

 
4,202

Unearned discounts
 
(54
)
 
(62
)
Net deferred fees
 
(6,660
)
 
(5,990
)
 
 
$
5,966,198

 
5,194,813

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
September 30, 2014
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Total Past
Due and
Non-accrual
 
Current
 
Total Loans
Receivable
 
Recorded
Investment
> 90 days
accruing
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
9,028

 
4,005

 
20,044

 
33,077

 
1,203,489

 
1,236,566

 

Commercial
 
94

 
766

 
19,371

 
20,231

 
1,666,901

 
1,687,132

 

Multi-family
 

 

 
403

 
403

 
941,460

 
941,863

 

Construction
 

 

 

 

 
235,700

 
235,700

 

Total mortgage loans
 
9,122

 
4,771

 
39,818

 
53,711

 
4,047,550

 
4,101,261

 

Commercial loans
 
770

 
589

 
20,167

 
21,526

 
1,227,954

 
1,249,480

 

Consumer loans
 
2,618

 
735

 
4,087

 
7,440

 
605,325

 
612,765

 

Total loans
 
$
12,510

 
6,095

 
64,072

 
82,677

 
5,880,829

 
5,963,506

 

 
 
December 31, 2013
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Total Past
Due and
Non-accrual
 
Current
 
Total Loans
Receivable
 
Recorded
Investment
> 90 days
accruing
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
10,639

 
5,062

 
23,011

 
38,712

 
1,135,331

 
1,174,043

 

Commercial
 
687

 
318

 
18,662

 
19,667

 
1,380,957

 
1,400,624

 

Multi-family
 

 

 
403

 
403

 
928,503

 
928,906

 

Construction
 

 

 
8,448