PFS-3.31.2015-10Q


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 March 31, 2015
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 May 1, 2015 there were 83,209,293 shares issued and 65,623,167 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 404,243 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 March 31, 2015 (unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (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
March 31, 2015 (Unaudited) and December 31, 2014
(Dollars in Thousands)
 
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
89,760

 
$
102,484

Short-term investments
 
1,114

 
1,278

Total cash and cash equivalents
 
90,874

 
103,762

Securities available for sale, at fair value
 
1,047,559

 
1,074,395

Investment securities held to maturity (fair value of $487,671 at March 31, 2015 (unaudited)
and $482,473 at December 31, 2014)
 
473,704

 
469,528

Federal Home Loan Bank stock
 
67,455

 
69,789

Loans
 
6,124,699

 
6,085,505

Less allowance for loan losses
 
61,110

 
61,734

Net loans
 
6,063,589

 
6,023,771

Foreclosed assets, net
 
5,924

 
5,098

Banking premises and equipment, net
 
92,498

 
92,990

Accrued interest receivable
 
24,542

 
25,228

Intangible assets
 
403,505

 
404,422

Bank-owned life insurance
 
179,060

 
177,712

Other assets
 
76,427

 
76,682

Total assets
 
$
8,525,137

 
$
8,523,377

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 
$
4,031,665

 
$
3,971,487

Savings deposits
 
985,464

 
995,347

Certificates of deposit of $100,000 or more
 
342,506

 
342,072

Other time deposits
 
463,416

 
483,617

Total deposits
 
5,823,051

 
5,792,523

Mortgage escrow deposits
 
23,653

 
21,649

Borrowed funds
 
1,468,404

 
1,509,851

Other liabilities
 
52,358

 
55,255

Total liabilities
 
7,367,466

 
7,379,278

Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
 

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,293 shares issued
and 65,171,983 shares outstanding at March 31, 2015 (unaudited) and 64,905,905 outstanding at December 31, 2014
 
832

 
832

Additional paid-in capital
 
996,382

 
995,053

Retained earnings
 
474,280

 
465,276

Accumulated other comprehensive income
 
3,735

 
29

Treasury stock
 
(272,895
)
 
(271,779
)
Unallocated common stock held by the Employee Stock Ownership Plan
 
(44,663
)
 
(45,312
)
Common stock acquired by the Directors’ Deferred Fee Plan
 
(7,090
)
 
(7,113
)
Deferred compensation – Directors’ Deferred Fee Plan
 
7,090

 
7,113

Total stockholders’ equity
 
1,157,671

 
1,144,099

Total liabilities and stockholders’ equity
 
$
8,525,137

 
$
8,523,377

See accompanying notes to unaudited consolidated financial statements.

3



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three months ended March 31, 2015 and 2014 (Unaudited)
(Dollars in Thousands, except per share data)
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Interest income:
 
 
 
 
Real estate secured loans
 
$
43,289

 
$
38,552

Commercial loans
 
13,439

 
10,547

Consumer loans
 
5,794

 
5,662

Securities available for sale and Federal Home Loan Bank Stock
 
6,301

 
7,082

Investment securities held to maturity
 
3,396

 
2,670

Deposits, Federal funds sold and other short-term investments
 
12

 
10

Total interest income
 
72,231

 
64,523

Interest expense:
 
 
 
 
Deposits
 
3,588

 
3,738

Borrowed funds
 
6,715

 
5,584

Total interest expense
 
10,303

 
9,322

Net interest income
 
61,928

 
55,201

Provision for loan losses
 
600

 
400

Net interest income after provision for loan losses
 
61,328

 
54,801

Non-interest income:
 
 
 
 
Fees
 
6,054

 
4,802

Wealth management income
 
2,558

 
2,053

Bank-owned life insurance
 
1,348

 
1,302

Net gain (loss) on securities transactions
 
2

 
(350
)
Other income
 
341

 
309

Total non-interest income
 
10,303

 
8,116

Non-interest expense:
 
 
 
 
Compensation and employee benefits
 
24,201

 
21,393

Net occupancy expense
 
7,172

 
6,089

Data processing expense
 
3,027

 
2,797

FDIC insurance
 
1,218

 
1,136

Amortization of intangibles
 
927

 
283

Advertising and promotion expense
 
761

 
1,065

Other operating expenses
 
6,131

 
5,427

Total non-interest expense
 
43,437

 
38,190

Income before income tax expense
 
28,194

 
24,727

Income tax expense
 
8,392

 
7,698

Net income
 
$
19,802

 
$
17,029

Basic earnings per share
 
$
0.32

 
$
0.30

Weighted average basic shares outstanding
 
62,673,887

 
57,369,039

Diluted earnings per share
 
$
0.32

 
$
0.30

Weighted average diluted shares outstanding
 
62,840,951

 
57,528,419


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, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Net income
 
$
19,802

 
$
17,029

Other comprehensive income, net of tax:
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
Net unrealized gains arising during the period
 
3,711

 
3,719

Reclassification adjustment for (gains) losses included in net income
 
(1
)
 
207

Total
 
3,710

 
3,926

Amortization related to post-retirement obligations
 
(4
)
 
(48
)
Total other comprehensive income
 
3,706

 
3,878

Total comprehensive income
 
$
23,508

 
$
20,907

See accompanying notes to unaudited consolidated financial statements.


5



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Three months ended March 31, 2015 and 2014 (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, 2013
 
$
832

 
$
1,026,144

 
$
427,763

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

 
$
1,010,753

Net income
 

 

 
17,029

 

 

 

 

 

 
17,029

Other comprehensive income, net of tax
 

 

 

 
3,878

 

 

 

 

 
3,878

Cash dividends declared
 

 

 
(9,190
)
 

 

 

 

 

 
(9,190
)
Distributions from DDFP
 

 

 

 

 

 

 
23

 
(23
)
 

Purchases of treasury stock
 

 

 

 

 
(3,881
)
 

 

 

 
(3,881
)
Shares issued dividend reinvestment plan
 

 

 

 

 
334

 

 

 

 
334

Allocation of ESOP shares
 

 
42

 

 

 

 
714

 

 

 
756

Allocation of SAP shares
 

 
1,583

 

 

 

 

 

 

 
1,583

Transfer of treasury shares to SAP
 

 
(4,253
)
 

 

 
4,253

 

 

 

 

Allocation of stock options
 

 
79

 

 

 

 

 

 

 
79

Balance at March 31, 2014
 
$
832

 
$
1,023,595

 
$
435,602

 
$
(973
)
 
$
(389,674
)
 
$
(48,041
)
 
$
(7,182
)
 
$
7,182

 
$
1,021,341

See accompanying notes to unaudited consolidated financial statements.

6




PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Three months ended March 31, 2015 and 2014 (Unaudited) (Continued)
(Dollars in thousands)
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
RETAINED
EARNINGS
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
 
TREASURY
STOCK
 
UNALLOCATED
ESOP
SHARES
 
COMMON
STOCK
ACQUIRED
BY DDFP
 
DEFERRED
COMPENSATION
DDFP
 
TOTAL
STOCKHOLDERS’
EQUITY
Balance at December 31, 2014
 
$
832

 
$
995,053

 
$
465,276

 
$
29

 
$
(271,779
)
 
$
(45,312
)
 
$
(7,113
)
 
$
7,113

 
$
1,144,099

Net income
 

 

 
19,802

 

 

 

 

 

 
19,802

Other comprehensive income, net of tax
 

 

 

 
3,706

 

 

 

 

 
3,706

Cash dividends declared
 

 

 
(10,798
)
 

 

 

 

 

 
(10,798
)
Distributions from DDFP
 

 

 

 

 

 

 
23

 
(23
)
 

Purchases of treasury stock
 

 

 

 

 
(1,882
)
 

 

 

 
(1,882
)
Shares issued dividend reinvestment plan
 

 
23

 

 

 
354

 

 

 

 
377

Stock option exercises
 

 
(17
)
 

 

 
412

 

 

 

 
395

Allocation of ESOP shares
 

 
38

 

 

 

 
649

 

 

 
687

Allocation of SAP shares
 

 
1,213

 

 

 

 

 

 

 
1,213

Allocation of stock options
 

 
72

 

 

 

 

 

 

 
72

Balance at March 31, 2015
 
$
832

 
$
996,382

 
$
474,280

 
$
3,735

 
$
(272,895
)
 
$
(44,663
)
 
$
(7,090
)
 
$
7,090

 
$
1,157,671

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, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
19,802

 
$
17,029

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
3,333

 
2,094

Provision for loan losses
 
600

 
400

Deferred tax expense
 
1,748

 
2,396

Increase in cash surrender value of Bank-owned life insurance
 
(1,348
)
 
(1,302
)
Net amortization of premiums and discounts on securities
 
2,655

 
2,276

Accretion of net deferred loan fees
 
(946
)
 
(746
)
Amortization of premiums on purchased loans, net
 
292

 
153

Net increase in loans originated for sale
 
(3,869
)
 
(8,267
)
Proceeds from sales of loans originated for sale
 
4,056

 
8,390

Proceeds from sales of foreclosed assets
 
288

 
1,374

ESOP expense
 
687

 
756

Allocation of stock award shares
 
852

 
1,306

Allocation of stock options
 
72

 
79

Net gain on sale of loans
 
(187
)
 
(123
)
Net (gain) loss on securities transactions
 
(2
)
 
350

Net gain on sale of premises and equipment
 
(5
)
 
(1
)
Net loss (gain) on sale of foreclosed assets
 
32

 
(110
)
Decrease in accrued interest receivable
 
686

 
1,216

(Increase) decrease in other assets
 
(2,287
)
 
269

Decrease in other liabilities
 
(2,897
)
 
(4,224
)
Net cash provided by operating activities
 
23,562

 
23,315

Cash flows from investing activities:
 
 
 
 
Proceeds from maturities, calls and paydowns of investment securities held to maturity
 
5,343

 
19,388

Purchases of investment securities held to maturity
 
(10,220
)
 
(19,926
)
Proceeds from sales of securities
 

 
6,085

Proceeds from maturities, calls and paydowns of securities available for sale
 
45,848

 
44,462

Purchases of securities available for sale
 
(14,769
)
 
(18,566
)
BOLI benefits received
 

 
1,905

Purchases of loans
 
(23,692
)
 
(8,546
)
Net increase in loans
 
(15,994
)
 
(56,304
)
Proceeds from sales of premises and equipment
 
5

 

Purchases of premises and equipment
 
(2,148
)
 
(5,776
)
Net cash used in investing activities
 
(15,627
)
 
(37,278
)
Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
30,528

 
(11,051
)
Increase in mortgage escrow deposits
 
2,004

 
1,852

Purchases of treasury stock
 
(1,882
)
 
(3,881
)
Cash dividends paid to stockholders
 
(10,798
)
 
(9,190
)
Shares issued dividend reinvestment plan
 
377

 
334

Stock options exercised
 
395

 


8



 
 
Three months ended March 31,
 
 
2015
 
2014
Proceeds from long-term borrowings
 
82,917

 
181,991

Payments on long-term borrowings
 
(87,000
)
 
(25,000
)
Net (decrease) increase in short-term borrowings
 
(37,364
)
 
(140,658
)
Net cash used in financing activities
 
(20,823
)
 
(5,603
)
Net decrease in cash and cash equivalents
 
(12,888
)
 
(19,566
)
Cash and cash equivalents at beginning of period
 
103,762

 
101,224

Cash and cash equivalents at end of period
 
$
90,874

 
$
81,658

Cash paid during the period for:
 
 
 
 
Interest on deposits and borrowings
 
$
9,804

 
$
9,176

Income taxes
 
$
8,057

 
$
1,502

Non-cash investing activities:
 
 
 
 
Transfer of loans receivable to foreclosed assets
 
$
1,146

 
$
2,481

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 months ended March 31, 2015 are not necessarily indicative of the results of operations that may be expected for all of 2015.
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, 2014 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, 2015 and 2014 (dollars in thousands, except per share amounts):
 
 
Three months ended March 31,
 
 
 
2015
 
2014
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
19,802

 
 
 
 
 
$
17,029

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
19,802

 
62,673,887

 
$
0.32

 
$
17,029

 
57,369,039

 
$
0.30

 
Dilutive shares
 
 
 
167,064

 
 
 
 
 
159,380

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
19,802

 
62,840,951

 
$
0.32

 
$
17,029

 
57,528,419

 
$
0.30

 
Anti-dilutive stock options and awards at March 31, 2015 and 2014, totaling 818,059 shares and 838,801 shares, respectively, 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.

10



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

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.
Fair Value Measurement of Assets 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.

11



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 of alternative funding sources, and was valued utilizing Level 2 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.
Borrowed Funds
The fair value for borrowed funds was obtained from actual prepayment rates from the Federal Home Loan Bank ("FHLB") of 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 March 31, 2015, the Company had $1.05 billion and $473.7 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 March 31, 2015 totaled 131, compared with 206 at December 31, 2014. All securities with unrealized losses at March 31, 2015 were analyzed for other-than-temporary impairment. Based upon this analysis, the Company believes that as of March 31, 2015, such securities with unrealized loss positions do not represent impairments that are other-than-temporary.
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 March 31, 2015 and December 31, 2014 (in thousands):
 

March 31, 2015
 

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,013

 
58

 

 
8,071

Agency obligations

94,719


442


(4
)
 
95,157

Mortgage-backed securities

913,848


19,120


(855
)
 
932,113

State and municipal obligations

5,934


149



 
6,083

Corporate obligations
 
5,517

 
87

 
(8
)
 
5,596

Equity securities

397


142



 
539

 

$
1,028,428


19,998


(867
)
 
1,047,559


12



 
 
December 31, 2014
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,016

 
3

 
(3
)
 
8,016

Agency obligations
 
94,871

 
268

 
(63
)
 
95,076

Mortgage-backed securities
 
944,796

 
15,610

 
(3,149
)
 
957,257

State and municipal obligations
 
6,855

 
147

 

 
7,002

Corporate obligations
 
6,526

 
9

 
(15
)
 
6,520

Equity securities
 
397

 
127

 

 
524

 
 
$
1,061,461

 
16,164

 
(3,230
)
 
1,074,395

The amortized cost and fair value of securities available for sale at March 31, 2015, 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, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
30,687

 
30,771

Due after one year through five years
 
77,505

 
77,984

Due after five years through ten years
 
3,017

 
3,102

Due after ten years
 
2,974

 
3,050

 
 
$
114,183

 
114,907

Mortgage-backed securities totaling $913.8 million at amortized cost and $932.1 million at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments. Also excluded from the table above are equity securities of $397,000 at amortized cost and $539,000 at fair value.
There were no sales of securities from the available for sale portfolio during the three months ended March 31, 2015. For the same period last year, proceeds from the sale of securities available for sale were $6,085,000, resulting in gross losses of $365,000 and no gross gains. Also, for the three months ended March 31, 2015, proceeds from calls on securities available for sale totaled $465,000, resulting in gross gains of $2,000 and no gross losses. For the three months ended March 31, 2014, proceeds from calls on securities available for sale totaled $740,000 resulting in gross gains of $2,000 and no gross losses.
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 March 31,
 
 
2015
 
2014
Beginning credit loss amount

$

 
1,674

Add: Initial OTTI credit losses


 

Subsequent OTTI credit losses


 

Less: Realized losses for securities sold


 
1,540

Securities intended or required to be sold


 

Increases in expected cash flows on debt securities


 

Ending credit loss amount

$

 
134

The Company did not incur an OTTI charge on securities in the available for sale portfolio for the three months ended March 31, 2015 or 2014. For the three months ended March 31, 2014, the Company realized a $365,000 loss on the sale of a previously impaired non-agency mortgage-backed security, and had previously incurred cumulative credit losses of $1.5 million on this security.

13



The following tables represent the Company’s disclosure regarding securities available for sale with temporary impairment at March 31, 2015 and December 31, 2014 (in thousands):
 

March 31, 2015 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

8,092

 
(4
)
 

 

 
8,092

 
(4
)
Mortgage-backed securities

97,490

 
(350
)
 
54,204

 
(505
)
 
151,694

 
(855
)
Corporate obligations
 
995

 
(8
)
 

 

 
995

 
(8
)


$
106,577

 
(362
)
 
54,204

 
(505
)
 
160,781

 
(867
)
 

December 31, 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
 
$
5,937

 
(3
)
 

 

5,937,000

5,937

 
(3
)
Agency obligations

$
24,404

 
(40
)
 
5,010

 
(23
)
 
29,414

 
(63
)
Mortgage-backed securities

55,488

 
(221
)
 
206,669

 
(2,928
)
 
262,157

 
(3,149
)
Corporate obligations
 
3,466

 
(15
)
 

 

3,466,000

3,466

 
(15
)


$
89,295

 
(279
)
 
211,679

 
(2,951
)
 
300,974

 
(3,230
)
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 March 31, 2015, 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 March 31, 2015 totaled 21, compared with 43 at December 31, 2014. At March 31, 2015, there were four private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $3,003,000 and an unrealized loss of $21,000. These private label mortgage-backed securities were above investment grade at March 31, 2015.
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 months ended March 31, 2015. The Company believes that no other-than-temporary impairment of the securities available for sale portfolio existed at March 31, 2015.
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 March 31, 2015 and December 31, 2014 (in thousands):

14



 
 
March 31, 2015
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
7,131

 
21

 
(9
)
 
7,143

Mortgage-backed securities

2,511

 
109

 

 
2,620

State and municipal obligations

453,339

 
14,715

 
(933
)
 
467,121

Corporate obligations

10,723

 
65

 
(1
)
 
10,787

 

$
473,704

 
14,910

 
(943
)
 
487,671

 
 
 
 
 
 
 
 
 
 

December 31, 2014
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
6,813

 
17

 
(20
)
 
6,810

Mortgage-backed securities

2,816

 
123

 

 
2,939

State and municipal obligations

449,410

 
13,814

 
(986
)
 
462,238

Corporate obligations

10,489

 
29

 
(32
)
 
10,486

 

$
469,528

 
13,983

 
(1,038
)
 
482,473

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 months ended March 31, 2015, proceeds from calls on securities available for sale totaled $4,073,000, with no gross gains or losses recognized. For the three months ended March 31, 2014, the Company recognized gains of $13,000 and no gross losses related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $6,395,000. There were no sales of securities from the held to maturity portfolio for the three months ended March 31, 2015 and 2014.
The amortized cost and fair value of investment securities in the held to maturity portfolio at March 31, 2015 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, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
8,452

 
8,503

Due after one year through five years

59,079

 
60,587

Due after five years through ten years

186,690

 
194,565

Due after ten years

216,972

 
221,396

 

$
471,193

 
485,051

Mortgage-backed securities totaling $2.5 million at amortized cost and $2.6 million at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments.
The following tables represent the Company’s disclosure on investment securities held to maturity with temporary impairment at March 31, 2015 and December 31, 2014 (in thousands):
 
 
March 31, 2015 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

$
299

 
(1
)
 
1,972

 
(8
)
 
2,271

 
(9
)
State and municipal obligations

42,209

 
(470
)
 
16,422

 
(463
)
 
58,631

 
(933
)
Corporate obligations

250

 

 
501

 
(1
)
 
751

 
(1
)
 

$
42,758

 
(471
)
 
18,895

 
(472
)
 
61,653

 
(943
)

15



 
 
December 31, 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
 
$
3,735

 
(20
)
 

 

 
3,735

 
(20
)
State and municipal obligations
 
27,679

 
(217
)
 
47,079

 
(769
)
 
74,758

 
(986
)
Corporate obligations
 
6,888

 
(32
)
 

 

 
6,888

 
(32
)
 
 
$
38,302

 
(269
)
 
47,079

 
(769
)
 
85,381

 
(1,038
)
Based upon the review of the held to maturity securities portfolio, the Company believes that as of March 31, 2015, 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 March 31, 2015 totaled 110, compared with 163 at December 31, 2014. The decrease in the number of securities in an unrealized loss position at March 31, 2015, was largely due to a reduction in market interest rates from December 31, 2014. All temporarily impaired investment securities were investment grade at March 31, 2015.

16



Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable at March 31, 2015 and December 31, 2014 are summarized as follows (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Mortgage loans:
 
 
 
 
Residential
 
$
1,245,711

 
1,251,445

Commercial
 
1,688,083

 
1,694,359

Multi-family
 
1,070,294

 
1,041,582

Construction
 
274,001

 
221,102

Total mortgage loans
 
4,278,089

 
4,208,488

Commercial loans
 
1,242,565

 
1,262,422

Consumer loans
 
601,190

 
611,467

Total gross loans
 
6,121,844

 
6,082,377

Purchased credit-impaired ("PCI") loans
 
4,285

 
4,510

Premiums on purchased loans
 
5,386

 
5,307

Unearned discounts
 
(47
)
 
(53
)
Net deferred fees
 
(6,769
)
 
(6,636
)
Total loans
 
$
6,124,699

 
6,085,505

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
March 31, 2015
 
 
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
 
$
8,871

 
5,832

 
16,913

 
31,616

 
1,214,095

 
1,245,711

 

Commercial
 
1,485

 
292

 
18,203

 
19,980

 
1,668,103

 
1,688,083

 

Multi-family
 
526

 

 
322

 
848

 
1,069,446

 
1,070,294

 

Construction
 

 

 

 

 
274,001

 
274,001

 

Total mortgage loans
 
10,882

 
6,124

 
35,438

 
52,444

 
4,225,645

 
4,278,089

 

Commercial loans
 
3,352

 
18

 
12,035

 
15,405

 
1,227,160

 
1,242,565

 

Consumer loans
 
3,599

 
1,020

 
3,415

 
8,034

 
593,156

 
601,190

 

Total gross loans
 
$
17,833

 
7,162

 
50,888

 
75,883

 
6,045,961

 
6,121,844

 

 
 
December 31, 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
 
$
10,121

 
4,331

 
17,222

 
31,674

 
1,219,771

 
1,251,445

 

Commercial
 
146

 
30

 
20,026

 
20,202

 
1,674,157

 
1,694,359

 

Multi-family
 

 

 
321

 
321

 
1,041,261

 
1,041,582

 

Construction
 

 

 

 

 
221,102

 
221,102

 

Total mortgage loans
 
10,267

 
4,361

 
37,569

 
52,197

 
4,156,291

 
4,208,488

 

Commercial loans
 
1,000

 
371

 
12,342

 
13,713

 
1,248,709

 
1,262,422

 

Consumer loans
 
2,398

 
2,509

 
3,944

 
8,851

 
602,616

 
611,467

 

Total gross loans
 
$
13,665

 
7,241

 
53,855

 
74,761

 
6,007,616

 
6,082,377

 


17



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 $50.9 million and $53.9 million at March 31, 2015 and December 31, 2014, respectively. Included in non-accrual loans were $7.3 million and $8.4 million of loans which were less than 90 days past due at March 31, 2015 and December 31, 2014, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2015, or December 31, 2014.
The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million for which it is probable that, based on current information, that the Bank will not collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a loan modification resulting in a concession is made in an effort to mitigate potential loss arising from a borrower’s financial difficulty. Smaller balance homogeneous loans, including residential mortgages and other consumer loans, are evaluated collectively for impairment and are excluded from the definition of impaired loans, unless modified as TDRs. The Company separately calculates the reserve for loan losses on impaired loans. The Company may recognize impairment of a loan based upon: (1) the present value of expected cash flows discounted at the effective interest rate; or (2) if a loan is collateral dependent, the fair value of collateral; or (3) the market price of the loan. Additionally, if impaired loans have risk characteristics in common, those loans may be aggregated and historical statistics may be used as a means of measuring those impaired loans.
The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analyses of collateral dependent impaired loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral dependent impaired loan and is updated annually or more frequently, if required.
A specific allocation of the allowance for loan losses is established for each impaired loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. Charge-offs are generally taken for the amount of the specific allocation when operations associated with the respective property cease and it is determined that collection of amounts due will be derived primarily from the disposition of the collateral. At each quarter end, if a loan is designated as a collateral dependent impaired loan and the third party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value. The Company believes there have been no significant time lapses as a result of this process.
At March 31, 2015, there were 153 impaired loans totaling $90.8 million. Included in this total were 131 TDRs related to 123 borrowers totaling $61.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2015. At December 31, 2014, there were 147 impaired loans totaling $85.4 million. Included in this total were 123 TDRs to 120 borrowers totaling $54.8 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2014.
The following table summarizes loans receivable by portfolio segment and impairment method, excluding PCI loans (in thousands):
 

March 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
65,563

 
22,849

 
2,396

 
90,808

Collectively evaluated for impairment

4,212,526

 
1,219,716

 
598,794

 
6,031,036

Total

$
4,278,089

 
1,242,565

 
601,190

 
6,121,844

 

December 31, 2014
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
66,548

 
16,463

 
2,384

 
85,395

Collectively evaluated for impairment

4,141,940

 
1,245,959

 
609,083

 
5,996,982

Total

$
4,208,488

 
1,262,422

 
611,467

 
6,082,377


18



The allowance for loan losses is summarized by portfolio segment and impairment classification as follows (in thousands):
 

March 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Unallocated

Total
Individually evaluated for impairment

$
4,896

 
1,648

 
109

 
6,653

 

 
6,653

Collectively evaluated for impairment

27,990

 
22,049

 
4,168

 
54,207

 
250

 
54,457

Total

$
32,886

 
23,697

 
4,277

 
60,860

 
250

 
61,110

 

December 31, 2014
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Unallocated

Total
Individually evaluated for impairment

$
4,696

 
2,318

 
113

 
7,127

 

 
7,127

Collectively evaluated for impairment

27,281

 
22,063

 
4,768

 
54,112

 
495

 
54,607



$
31,977

 
24,381

 
4,881

 
61,239

 
495

 
61,734

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, the Company 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, 2015 and 2014 along with their balances immediately prior to the modification date and post-modification as of March 31, 2015 and 2014:
 

For the three months ended
 

March 31, 2015

March 31, 2014
Troubled Debt Restructuring

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)
Mortgage loans:












Residential

2

 
$
322

 
$
321

 
4

 
$
875

 
$
835

Construction
 
1

 
2,600

 
347

 

 

 

Total mortgage loans

3

 
2,922

 
668

 
4

 
875

 
835

Commercial loans

4

 
6,659

 
6,898

 
1

 
116

 
28

Consumer loans

1

 
44

 
42

 

 

 

Total restructured loans

8

 
$
9,625

 
$
7,608

 
5

 
$
991

 
$
863

All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. Estimated collateral values of collateral dependent impaired loans modified during the three months ended March 31, 2015 and 2014 exceeded the carrying amounts of such loans. As a result, there were no charge-offs recorded on collateral dependent impaired loans presented in the preceding tables for the three months ended March 31, 2015 and 2014. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $31,000 and $41,000 for the three months ended March 31, 2015 and 2014, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment.
For the three months ended March 31, 2015, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 5.90%, compared to a rate of 5.83% prior to modification. For the three months ended March 31, 2014, the TDRs had a weighted average modified interest rate of approximately 4.31%, compared to a rate of 5.23% prior to modification.

19



The following table presents loans modified as TDRs within the previous 12 months from March 31, 2015 and 2014, and for which there was a payment default (90 days or more past due) at the quarter ended March 31, 2015 and 2014.
 
 
March 31, 2015
 
March 31, 2014
Troubled Debt Restructurings Subsequently Defaulted
 
Number of
Loans
 
Outstanding
Recorded  Investment
 
Number of
Loans