PFS-6.30.2015-10Q



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 June 30, 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 August 1, 2015 there were 83,209,293 shares issued and 65,682,059 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 383,731 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 June 30, 2015 (unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
Defaults Upon Senior Securities
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 

2



PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 2015 (Unaudited) and December 31, 2014
(Dollars in Thousands)
 
 
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
102,346

 
$
102,484

Short-term investments
 
2,386

 
1,278

Total cash and cash equivalents
 
104,732

 
103,762

Securities available for sale, at fair value
 
1,031,325

 
1,074,395

Investment securities held to maturity (fair value of $476,792 at June 30, 2015 (unaudited)
and $482,473 at December 31, 2014)
 
471,984

 
469,528

Federal Home Loan Bank stock
 
77,892

 
69,789

Loans
 
6,308,353

 
6,085,505

Less allowance for loan losses
 
59,624

 
61,734

Net loans
 
6,248,729

 
6,023,771

Foreclosed assets, net
 
8,088

 
5,098

Banking premises and equipment, net
 
91,380

 
92,990

Accrued interest receivable
 
25,628

 
25,228

Intangible assets
 
432,879

 
404,422

Bank-owned life insurance
 
180,377

 
177,712

Other assets
 
78,400

 
76,682

Total assets
 
$
8,751,414

 
$
8,523,377

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 
$
4,030,152

 
$
3,971,487

Savings deposits
 
988,131

 
995,347

Certificates of deposit of $100,000 or more
 
350,004

 
342,072

Other time deposits
 
445,934

 
483,617

Total deposits
 
5,814,221

 
5,792,523

Mortgage escrow deposits
 
25,970

 
21,649

Borrowed funds
 
1,684,574

 
1,509,851

Other liabilities
 
59,525

 
55,255

Total liabilities
 
7,584,290

 
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 65,287,831 shares outstanding at June 30, 2015 (unaudited) and 64,905,905 outstanding at December 31, 2014
 
832

 
832

Additional paid-in capital
 
998,096

 
995,053

Retained earnings
 
485,577

 
465,276

Accumulated other comprehensive (loss) income
 
(1,463
)
 
29

Treasury stock
 
(271,904
)
 
(271,779
)
Unallocated common stock held by the Employee Stock Ownership Plan
 
(44,014
)
 
(45,312
)
Common stock acquired by the Directors’ Deferred Fee Plan
 
(6,899
)
 
(7,113
)
Deferred compensation – Directors’ Deferred Fee Plan
 
6,899

 
7,113

Total stockholders’ equity
 
1,167,124

 
1,144,099

Total liabilities and stockholders’ equity
 
$
8,751,414

 
$
8,523,377

See accompanying notes to unaudited consolidated financial statements.

3



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three and six months ended June 30, 2015 and 2014 (Unaudited)
(Dollars in Thousands, except per share data)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Real estate secured loans
 
$
43,594

 
$
40,381

 
$
86,883

 
$
78,933

Commercial loans
 
13,669

 
11,548

 
27,108

 
22,095

Consumer loans
 
5,794

 
5,869

 
11,588

 
11,531

Securities available for sale and Federal Home Loan Bank Stock
 
5,735

 
6,663

 
12,036

 
13,745

Investment securities held to maturity
 
3,386

 
2,906

 
6,782

 
5,576

Deposits, Federal funds sold and other short-term investments
 
10

 
19

 
22

 
29

Total interest income
 
72,188

 
67,386

 
144,419

 
131,909

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
3,624

 
3,687

 
7,212

 
7,425

Borrowed funds
 
6,890

 
6,298

 
13,605

 
11,882

Total interest expense
 
10,514

 
9,985

 
20,817

 
19,307

Net interest income
 
61,674

 
57,401

 
123,602

 
112,602

Provision for loan losses
 
1,100

 
1,500

 
1,700

 
1,900

Net interest income after provision for loan losses
 
60,574

 
55,901

 
121,902

 
110,702

Non-interest income:
 
 
 
 
 
 
 
 
Fees
 
7,181

 
5,074

 
13,235

 
9,876

Wealth management income
 
5,097

 
2,545

 
7,655

 
4,598

Bank-owned life insurance
 
1,317

 
1,577

 
2,665

 
2,879

Net gain (loss) on securities transactions
 
643

 
110

 
645

 
(240
)
Other income
 
2,704

 
1,021

 
3,045

 
1,330

Total non-interest income
 
16,942

 
10,327

 
27,245

 
18,443

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
24,414

 
23,581

 
48,615

 
44,974

Net occupancy expense
 
6,577

 
5,623

 
13,749

 
11,712

Data processing expense
 
3,159

 
2,761

 
6,186

 
5,558

FDIC insurance
 
1,272

 
1,144

 
2,490

 
2,280

Amortization of intangibles
 
1,124

 
519

 
2,051

 
802

Advertising and promotion expense
 
1,381

 
1,081

 
2,142

 
2,146

Other operating expenses
 
8,192

 
8,962

 
14,323

 
14,389

Total non-interest expense
 
46,119

 
43,671

 
89,556

 
81,861

Income before income tax expense
 
31,397

 
22,557

 
59,591

 
47,284

Income tax expense
 
9,601

 
6,206

 
17,993

 
13,904

Net income
 
$
21,796

 
$
16,351

 
$
41,598

 
$
33,380

Basic earnings per share
 
$
0.35

 
$
0.28

 
$
0.66

 
$
0.57

Weighted average basic shares outstanding
 
62,894,213

 
59,147,241

 
62,784,655

 
58,263,052

Diluted earnings per share
 
$
0.35

 
$
0.28

 
$
0.66

 
$
0.57

Weighted average diluted shares outstanding
 
63,044,965

 
59,269,262

 
62,943,563

 
58,403,753


See accompanying notes to unaudited consolidated financial statements.

4



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
21,796

 
$
16,351

 
$
41,598

 
$
33,380

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains arising during the period
 
(4,929
)
 
6,339

 
(1,218
)
 
10,058

Reclassification adjustment for gains included in net income
 
(385
)
 
(65
)
 
(386
)
 
142

Total
 
(5,314
)
 
6,274

 
(1,604
)
 
10,200

Amortization related to post-retirement obligations
 
116

 
(615
)
 
112

 
(663
)
Total other comprehensive (loss) income
 
(5,198
)
 
5,659

 
(1,492
)
 
9,537

Total comprehensive income
 
$
16,598

 
$
22,010

 
$
40,106

 
$
42,917

See accompanying notes to unaudited consolidated financial statements.


5



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Six months ended June 30, 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
 

 

 
33,380

 

 

 

 

 

 
33,380

Other comprehensive income, net of tax
 

 

 

 
9,537

 

 

 

 

 
9,537

Cash dividends declared
 

 

 
(18,234
)
 

 

 

 

 

 
(18,234
)
Distributions from DDFP
 

 

 

 

 

 

 
46

 
(46
)
 

Purchases of treasury stock
 

 

 

 

 
(3,880
)
 

 

 

 
(3,880
)
Shares issued dividend reinvestment plan
 

 

 

 

 
659

 

 

 

 
659

Stock option exercises
 

 
(22
)
 

 

 
128

 

 

 

 
106

Allocation of ESOP shares
 

 
53

 

 

 

 
1,429

 

 

 
1,482

Allocation of SAP shares
 

 
3,919

 

 

 

 

 

 

 
3,919

Allocation of stock options
 

 
152

 

 

 

 

 

 

 
152

Balance at June 30, 2014
 
$
832

 
$
1,025,031

 
$
442,909

 
$
4,686

 
$
(304,741
)
 
$
(47,326
)
 
$
(7,159
)
 
$
7,159

 
$
1,121,391

See accompanying notes to unaudited consolidated financial statements.

6





PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Six months ended June 30, 2015 and 2014 (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, 2014
 
$
832

 
$
995,053

 
$
465,276

 
$
29

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

 
$
1,144,099

Net income
 

 

 
41,598

 

 

 

 

 

 
41,598

Other comprehensive loss, net of tax
 

 

 

 
(1,492
)
 

 

 

 

 
(1,492
)
Cash dividends declared
 

 

 
(21,297
)
 

 

 

 

 

 
(21,297
)
Distributions from DDFP
 

 
21

 

 

 

 

 
214

 
(214
)
 
21

Purchases of treasury stock
 

 

 

 

 
(1,933
)
 

 

 

 
(1,933
)
Shares issued dividend reinvestment plan
 

 
44

 

 

 
685

 

 

 

 
729

Stock option exercises
 

 
(58
)
 

 

 
1,123

 

 

 

 
1,065

Allocation of ESOP shares
 

 
92

 

 

 

 
1,298

 

 

 
1,390

Allocation of SAP shares
 

 
2,816

 

 

 

 

 

 

 
2,816

Allocation of Treasury Shares
 

 

 

 

 

 

 

 

 

Allocation of stock options
 

 
128

 

 

 

 

 

 

 
128

Balance at June 30, 2015
 
$
832

 
$
998,096

 
$
485,577

 
$
(1,463
)
 
$
(271,904
)
 
$
(44,014
)
 
$
(6,899
)
 
$
6,899

 
$
1,167,124

See accompanying notes to unaudited consolidated financial statements.


7



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six months ended June 30, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Six months ended June 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
41,598

 
$
33,380

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
6,886

 
4,562

Provision for loan losses
 
1,700

 
1,900

Deferred tax expense
 
2,197

 
1,820

Increase in cash surrender value of Bank-owned life insurance
 
(2,665
)
 
(2,879
)
Net amortization of premiums and discounts on securities
 
5,397

 
4,792

Accretion of net deferred loan fees
 
(1,905
)
 
(1,541
)
Amortization of premiums on purchased loans, net
 
564

 
353

Net increase in loans originated for sale
 
(4,713
)
 
(3,524
)
Proceeds from sales of loans originated for sale
 
5,214

 
3,807

Proceeds from sales of foreclosed assets
 
2,277

 
3,539

ESOP expense
 
1,390

 
1,483

Allocation of stock award shares
 
2,452

 
3,654

Allocation of stock options
 
128

 
152

Net gain on sale of loans
 
(501
)
 
(283
)
Net (gain) loss on securities transactions
 
(645
)
 
240

Net loss (gain) on sale of premises and equipment
 
6

 
(1
)
Net gain on sale of foreclosed assets
 
(140
)
 
(385
)
(Increase) decrease in accrued interest receivable
 
(400
)
 
405

Increase in other assets
 
(11,052
)
 
(2,276
)
Increase in other liabilities
 
4,270

 
961

Net cash provided by operating activities
 
52,058

 
50,159

Cash flows from investing activities:
 
 
 
 
Proceeds from maturities, calls and paydowns of investment securities held to maturity
 
16,581

 
24,481

Purchases of investment securities held to maturity
 
(20,443
)
 
(40,577
)
Proceeds from sales of securities
 
14,005

 
15,007

Proceeds from maturities, calls and paydowns of securities available for sale
 
96,155

 
91,710

Purchases of securities available for sale
 
(73,120
)
 
(18,566
)
Net increase in Federal Home Loan Bank stock
 
(8,103
)
 
(12,504
)
Net cash and cash equivalents (paid) received in acquisition
 
(25,613
)
 
68,650

Purchases of loans
 
(49,762
)
 
(31,027
)
Net increase in loans
 
(176,873
)
 
(54,216
)
Purchases of premises and equipment
 
(3,222
)
 
(10,890
)
Net cash (used in) provided by investing activities
 
(230,395
)
 
32,068

Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
21,698

 
(134,377
)
Increase in mortgage escrow deposits
 
4,321

 
2,586

Purchases of treasury stock
 
(1,933
)
 
(3,880
)
Cash dividends paid to stockholders
 
(21,297
)
 
(18,234
)
Shares issued through the dividend reinvestment plan
 
729

 
659

Stock options exercised
 
1,065

 
106


8



 
 
Six months ended June 30,
 
 
2015
 
2014
Proceeds from long-term borrowings
 
329,937

 
322,231

Payments on long-term borrowings
 
(157,096
)
 
(161,959
)
Net increase (decrease) in short-term borrowings
 
1,883

 
(58,144
)
Net cash provided by (used in) financing activities
 
179,307

 
(51,012
)
Net increase in cash and cash equivalents
 
970

 
31,215

Cash and cash equivalents at beginning of period
 
103,762

 
101,224

Cash and cash equivalents at end of period
 
$
104,732

 
$
132,439

Cash paid during the period for:
 
 
 
 
Interest on deposits and borrowings
 
$
20,323

 
$
19,283

Income taxes
 
$
18,365

 
$
12,531

Non-cash investing activities:
 
 
 
 
Transfer of loans receivable to foreclosed assets
 
$
5,127

 
$
4,206

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

 
$
157,635

Loans
 

 
631,390

Bank-owned life insurance
 

 
22,319

Goodwill and other intangible assets, net
 
29,953

 
50,584

Other assets
 
112

 
33,396

Total non-cash assets acquired
 
$
30,065

 
$
895,324

Liabilities assumed:
 
 
 
 
Deposits
 
$

 
$
769,936

Borrowings
 

 
112,835

Other Liabilities
 
366

 
(2,314
)
Total liabilities assumed
 
$
366

 
$
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 six months ended June 30, 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 and six months ended June 30, 2015 and 2014 (dollars in thousands, except per share amounts):
 
 
Three months ended June 30,
 
 
 
2015
 
2014
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
21,796

 
 
 
 
 
$
16,351

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
21,796

 
62,894,213

 
$
0.35

 
$
16,351

 
59,147,241

 
$
0.28

 
Dilutive shares
 
 
 
150,752

 
 
 
 
 
122,021

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
21,796

 
63,044,965

 
$
0.35

 
$
16,351

 
59,269,262

 
$
0.28

 


10



 
 
Six months ended June 30,
 
 
2015
 
2014
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
Net income
 
$
41,598

 
 
 
 
 
$
33,380

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
41,598

 
62,784,655

 
$
0.66

 
$
33,380

 
58,263,052

 
$
0.57

Dilutive shares
 
 
 
158,908

 
 
 
 
 
140,701

 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
41,598

 
62,943,563

 
$
0.66

 
$
33,380

 
58,403,753

 
$
0.57

Anti-dilutive stock options and awards at June 30, 2015 and 2014, totaling 693,721 shares and 1,116,839 shares, respectively, were excluded from the earnings per share calculations.
Note 2. Business Combinations
On April 1, 2015, Beacon Trust Company ("Beacon"), a wholly owned subsidiary of The Provident Bank, completed its acquisition of The MDE Group, Inc. and the equity interests of Acertus Capital Management, LLC (collectively "MDE"), both Morristown, New Jersey-based registered investment advisory firms that manage assets for affluent and high net-worth clients and their financial advisors. MDE was acquired with both cash and contingent consideration.
The Company recognized goodwill of $22.9 million and a customer relationship intangible of $7.0 million related to the acquisition. The Company recognized a contingent consideration liability at its fair value of $2.0 million. The contingent consideration arrangement requires the Company to pay additional cash consideration to MDE’s former stakeholders in four years if certain revenue targets are met. The fair value of the contingent consideration was estimated using a discounted cash flow model. The acquisition agreement limits the total payment to a maximum of $12.5 million, to be determined based on actual future results.
On October 31, 2014, Beacon acquired the fiduciary account relationships of Suffolk County National Bank, a subsidiary of Suffolk Bancorp, in Suffolk County, New York.
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.

11



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
 
40,897

Other intangibles assets
 
9,868

Foreclosed assets, net
 
653

Other assets
 
4,905

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

Upon the completion and filing of the Team Capital short-period tax return for the period ended May 30, 2014, a net operating loss carryback claim was filed with the Internal Revenue Service to reclaim taxes previously paid by Team Capital in the prior two years. As a result of the claim process, the Company determined that the tax receivable established by Team Capital at the May 30, 2014 acquisition date was overstated by $543,000. In May 2015, the Company decreased the tax receivable recorded at the date of acquisition by $543,000, along with a corresponding increase to goodwill. The purchase accounting for the Team Capital transaction was completed, and is reflected in both the table above and the Company's Consolidated Financial Statements.
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

12



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 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 June 30, 2015, the Company had $1.03 billion and $472.0 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 June 30, 2015 totaled 379, compared with 206 at December 31, 2014. All securities with unrealized losses at June 30, 2015 were analyzed for other-than-temporary impairment. Based upon this analysis, the Company believes that as of June 30, 2015, such securities with unrealized losses 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 June 30, 2015 and December 31, 2014 (in thousands):
 

June 30, 2015
 

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,010

 
51

 

 
8,061

Agency obligations

94,567


340


(1
)
 
94,906

Mortgage-backed securities

906,656


12,884


(3,165
)
 
916,375

State and municipal obligations

5,925


51


(16
)
 
5,960

Corporate obligations
 
5,517

 
1

 
(29
)
 
5,489

Equity securities

397


137



 
534

 

$
1,021,072


13,464


(3,211
)
 
1,031,325


13



 
 
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 June 30, 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.
 
 
June 30, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
27,616

 
27,650

Due after one year through five years
 
80,422

 
80,821

Due after five years through ten years
 
3,684

 
3,653

Due after ten years
 
2,297

 
2,292

 
 
$
114,019

 
114,416

Mortgage-backed securities totaling $906.7 million at amortized cost and $916.4 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 $534,000 at fair value.
During the three months ended June 30, 2015, proceeds from the sale of securities available for sale were $14,005,000 resulting in gross gains of $643,000 and no gross losses. For the same period last year, proceeds from the sale of securities available for sale were $8,398,000 resulting in gross gains of $150,000 and gross losses of $39,000.
For the six months ended June 30, 2015, proceeds from the sale of securities available for sale were $14,005,000, resulting in gross gains of $643,000 and no gross losses. For the same period last year, proceeds from the sale of securities available for sale were $14,483,000, resulting in gross gains of $150,000 and gross losses of $404,000. Also, for the six months ended June 30, 2015, proceeds from calls of securities available for sale totaled $465,000, resulting in gross gains of $2,000 gains and no gross losses. For the six months ended June 30, 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 June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning credit loss amount

$

 
134

 

 
1,674

Add: Initial OTTI credit losses


 

 

 

Subsequent OTTI credit losses


 

 

 

Less: Realized losses for securities sold


 
134

 

 
1,674

Securities intended or required to be sold


 

 

 

Increases in expected cash flows on debt securities


 

 

 

Ending credit loss amount

$

 

 

 

The Company did not incur an OTTI charge on securities for the three and six months ended June 30, 2015 or 2014. For the three and six months ended June 30, 2014, the Company realized a $59,000 gain and a $365,000 loss on the sales of previously impaired

14



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 June 30, 2015 and December 31, 2014 (in thousands):
 

June 30, 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

3,053

 
(1
)
 

 

 
3,053

 
(1
)
Mortgage-backed securities

282,309

 
(2,311
)
 
51,909

 
(854
)
 
334,218

 
(3,165
)
State and municipal obligations

2,949

 
(16
)
 

 

 
2,949

 
(16
)
Corporate obligations
 
4,988

 
(29
)
 

 

 
4,988

 
(29
)


$
293,299

 
(2,357
)
 
51,909

 
(854
)
 
345,208

 
(3,211
)
 

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
U.S. Treasury obligations
 
$
5,937

 
(3
)
 

 

 
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

 
(15
)


$
89,295

 
(279
)
 
211,679

 
(2,951
)
 
300,974

 
(3,230
)
The temporary loss position associated with certain 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 June 30, 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 June 30, 2015 totaled 47, compared with 43 at December 31, 2014. At June 30, 2015, there were three private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $1,118,000 and an unrealized loss of $7,000. These private label mortgage-backed securities were investment grade at June 30, 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 and six months ended June 30, 2015. The Company believes that no other-than-temporary impairment of the securities available for sale portfolio existed for the three and six months ended June 30, 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 June 30, 2015 and December 31, 2014 (in thousands):

15



 
 
June 30, 2015
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
5,999

 
12

 
(10
)
 
6,001

Mortgage-backed securities

2,169

 
91

 

 
2,260

State and municipal obligations

453,484

 
8,572

 
(3,880
)
 
458,176

Corporate obligations

10,332

 
32

 
(9
)
 
10,355

 

$
471,984

 
8,707

 
(3,899
)
 
476,792

 
 
 
 
 
 
 
 
 
 

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 and six months ended June 30, 2015, the Company recognized no gross gains and no gross losses, respectively, related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $9,147,000 and $13,220,000 for the three and six months ended June 30, 2015, respectively. There were no sales of securities from the held to maturity portfolio for the three and six months ended June 30, 2015.
For the three and six months ended June 30, 2014, the Company recognized gains of $2,000 and $15,000, and no gross losses, respectively, related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $2,415,000 and $8,810,000, respectively. In addition, for the three and six months ended June 30, 2014, the Company recognized a gross loss of $3,000, and no gross gain, related to the sale of a security in the held to maturity portfolio, with the proceeds from the sale totaling $524,000. The sale of this security was in response to credit deterioration of the issuer.
The amortized cost and fair value of investment securities in the held to maturity portfolio at June 30, 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.
 
 
June 30, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
10,687

 
10,795

Due after one year through five years

51,655

 
52,692

Due after five years through ten years

198,165

 
202,991

Due after ten years

209,308

 
208,054



$
469,815

 
474,532

Mortgage-backed securities totaling $2.2 million at amortized cost and $2.3 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.

16



The following tables represent the Company’s disclosure on investment securities held to maturity with temporary impairment at June 30, 2015 and December 31, 2014 (in thousands):
 
 
June 30, 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

$
796

 
(5
)
 
1,775

 
(5
)
 
2,571

 
(10
)
State and municipal obligations

159,837

 
(3,038
)
 
17,879

 
(842
)
 
177,716

 
(3,880
)
Corporate obligations

2,549

 
(6
)
 
499

 
(3
)
 
3,048

 
(9
)
 

$
163,182

 
(3,049
)
 
20,153

 
(850
)
 
183,335

 
(3,899
)
 
 
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 June 30, 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 held to maturity securities in an unrealized loss position at June 30, 2015 totaled 332, compared with 163 at December 31, 2014. The increase in the number of securities in an unrealized loss position at June 30, 2015, was largely due to an increase in market interest rates from December 31, 2014. All temporarily impaired investment securities were investment grade at June 30, 2015.

17



Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable at June 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
 
 
June 30, 2015
 
December 31, 2014
Mortgage loans:
 
 
 
 
Residential
 
$
1,249,882

 
1,251,445

Commercial
 
1,739,189

 
1,694,359

Multi-family
 
1,170,281

 
1,041,582

Construction
 
301,328

 
221,102

Total mortgage loans
 
4,460,680

 
4,208,488

Commercial loans
 
1,255,152

 
1,262,422

Consumer loans
 
589,987

 
611,467

Total gross loans
 
6,305,819

 
6,082,377

Purchased credit-impaired ("PCI") loans
 
3,796

 
4,510

Premiums on purchased loans
 
5,543

 
5,307

Unearned discounts
 
(47
)
 
(53
)
Net deferred fees
 
(6,758
)
 
(6,636
)
 
 
$
6,308,353

 
6,085,505

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
June 30, 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
 
$
7,610

 
3,673

 
11,961

 
23,244

 
1,226,638

 
1,249,882

 

Commercial
 
564

 
873

 
17,440

 
18,877

 
1,720,312

 
1,739,189

 

Multi-family
 

 

 
847

 
847

 
1,169,434

 
1,170,281

 

Construction
 

 

 

 

 
301,328

 
301,328

 

Total mortgage loans
 
8,174

 
4,546

 
30,248

 
42,968

 
4,417,712

 
4,460,680

 

Commercial loans
 
1,012

 
10

 
11,805

 
12,827

 
1,242,325

 
1,255,152

 

Consumer loans
 
2,702

 
1,463

 
4,022

 
8,187

 
581,800

 
589,987

 

Total loans
 
$
11,888

 
6,019

 
46,075

 
63,982

 
6,241,837

 
6,305,819

 

 
 
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