10-Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 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 November 1, 2015 there were 83,209,293 shares issued and 65,762,936 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 372,817 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.




PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page Number
 
 
 
 
1.
 
 
 
 
 
Consolidated Statements of Financial Condition as of September 30, 2015 (unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 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
September 30, 2015 (Unaudited) and December 31, 2014
(Dollars in Thousands)
 
 
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
127,105

 
$
102,484

Short-term investments
 
1,328

 
1,278

Total cash and cash equivalents
 
128,433

 
103,762

Securities available for sale, at fair value
 
994,771

 
1,074,395

Investment securities held to maturity (fair value of $482,495 at September 30, 2015 (unaudited)
and $482,473 at December 31, 2014)
 
471,723

 
469,528

Federal Home Loan Bank stock
 
78,974

 
69,789

Loans
 
6,430,944

 
6,085,505

Less allowance for loan losses
 
60,464

 
61,734

Net loans
 
6,370,480

 
6,023,771

Foreclosed assets, net
 
10,128

 
5,098

Banking premises and equipment, net
 
90,395

 
92,990

Accrued interest receivable
 
24,234

 
25,228

Intangible assets
 
429,001

 
404,422

Bank-owned life insurance
 
181,625

 
177,712

Other assets
 
78,824

 
76,682

Total assets
 
$
8,858,588

 
$
8,523,377

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 
$
4,083,741

 
$
3,971,487

Savings deposits
 
982,815

 
995,347

Certificates of deposit of $100,000 or more
 
328,734

 
342,072

Other time deposits
 
430,323

 
483,617

Total deposits
 
5,825,613

 
5,792,523

Mortgage escrow deposits
 
24,120

 
21,649

Borrowed funds
 
1,760,628

 
1,509,851

Other liabilities
 
64,254

 
55,255

Total liabilities
 
7,674,615

 
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 65,378,205 shares outstanding at September 30, 2015 (unaudited) and 64,905,905 outstanding at December 31, 2014
 
832

 
832

Additional paid-in capital
 
999,236

 
995,053

Retained earnings
 
495,673

 
465,276

Accumulated other comprehensive income
 
2,098

 
29

Treasury stock
 
(270,502
)
 
(271,779
)
Unallocated common stock held by the Employee Stock Ownership Plan
 
(43,364
)
 
(45,312
)
Common stock acquired by the Directors’ Deferred Fee Plan
 
(6,708
)
 
(7,113
)
Deferred compensation – Directors’ Deferred Fee Plan
 
6,708

 
7,113

Total stockholders’ equity
 
1,183,973

 
1,144,099

Total liabilities and stockholders’ equity
 
$
8,858,588

 
$
8,523,377

See accompanying notes to unaudited consolidated financial statements.

3



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three and nine months ended September 30, 2015 and 2014 (Unaudited)
(Dollars in Thousands, except per share data)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Real estate secured loans
 
$
44,541

 
$
43,837

 
$
131,424

 
$
122,770

Commercial loans
 
13,767

 
13,961

 
40,875

 
36,056

Consumer loans
 
5,646

 
6,106

 
17,234

 
17,637

Securities available for sale and Federal Home Loan Bank Stock
 
5,672

 
6,410

 
17,708

 
20,155

Investment securities held to maturity
 
3,368

 
3,323

 
10,150

 
8,899

Deposits, Federal funds sold and other short-term investments
 
19

 
15

 
41

 
44

Total interest income
 
73,013

 
73,652

 
217,432

 
205,561

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
3,639

 
4,054

 
10,851

 
11,479

Borrowed funds
 
6,827

 
6,629

 
20,432

 
18,511

Total interest expense
 
10,466

 
10,683

 
31,283

 
29,990

Net interest income
 
62,547

 
62,969

 
186,149

 
175,571

Provision for loan losses
 
1,400

 
1,500

 
3,100

 
3,400

Net interest income after provision for loan losses
 
61,147

 
61,469

 
183,049

 
172,171

Non-interest income:
 
 
 
 
 
 
 
 
Fees
 
6,230

 
6,126

 
19,465

 
16,002

Wealth management income
 
4,750

 
2,386

 
12,405

 
6,984

Bank-owned life insurance
 
1,247

 
1,349

 
3,913

 
4,228

Net gain on securities transactions
 
5

 
487

 
650

 
247

Other income
 
(122
)
 
961

 
2,922

 
2,291

Total non-interest income
 
12,110

 
11,309

 
39,355

 
29,752

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
24,784

 
24,947

 
73,399

 
69,921

Net occupancy expense
 
6,186

 
5,950

 
19,935

 
17,662

Data processing expense
 
3,239

 
5,029

 
9,425

 
10,587

FDIC insurance
 
1,273

 
1,141

 
3,763

 
3,421

Amortization of intangibles
 
1,012

 
976

 
3,063

 
1,778

Advertising and promotion expense
 
598

 
1,281

 
2,740

 
3,427

Other operating expenses
 
6,522

 
6,509

 
20,845

 
20,898

Total non-interest expense
 
43,614

 
45,833

 
133,170

 
127,694

Income before income tax expense
 
29,643

 
26,945

 
89,234

 
74,229

Income tax expense
 
9,034

 
7,913

 
27,027

 
21,817

Net income
 
$
20,609

 
$
19,032

 
$
62,207

 
$
52,412

Basic earnings per share
 
$
0.33

 
$
0.30

 
$
0.99

 
$
0.88

Weighted average basic shares outstanding
 
63,034,185

 
62,440,310

 
62,868,745

 
59,670,773

Diluted earnings per share
 
$
0.33

 
$
0.30

 
$
0.99

 
$
0.88

Weighted average diluted shares outstanding
 
63,198,299

 
62,559,207

 
63,029,389

 
59,804,205


See accompanying notes to unaudited consolidated financial statements.

4



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
20,609

 
$
19,032

 
$
62,207

 
$
52,412

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
 
3,678

 
(3,389
)
 
2,460

 
6,669

Reclassification adjustment for gains included in net income
 

 
(288
)
 
(386
)
 
(146
)
Total
 
3,678

 
(3,677
)
 
2,074

 
6,523

Unrealized losses on derivatives
 
(232
)
 

 
(232
)
 

Amortization (accretion) related to post-retirement obligations
 
115

 
45

 
227

 
(618
)
Total other comprehensive income (loss)
 
3,561

 
(3,632
)
 
2,069

 
5,905

Total comprehensive income
 
$
24,170

 
$
15,400

 
$
64,276

 
$
58,317

See accompanying notes to unaudited consolidated financial statements.


5



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

 

 
52,412

 

 

 

 

 

 
52,412

Other comprehensive income, net of tax
 

 

 

 
5,905

 

 

 

 

 
5,905

Cash dividends declared
 

 

 
(28,023
)
 

 

 

 

 

 
(28,023
)
Distributions from DDFP
 

 

 

 

 

 

 
69

 
(69
)
 

Purchases of treasury stock
 

 

 

 

 
(4,401
)
 

 

 

 
(4,401
)
Treasury shares issued - Team Capital acquisition
 

 
(962
)
 

 

 
84,479

 

 

 

 
83,517

Shares issued dividend reinvestment plan
 

 

 

 

 
1,019

 

 

 

 
1,019

Stock option exercises
 

 
(22
)
 

 

 
166

 

 

 

 
144

Allocation of ESOP shares
 

 
46

 

 

 

 
2,144

 

 

 
2,190

Allocation of SAP shares
 

 
5,301

 

 

 

 

 

 

 
5,301

Allocation of treasury shares
 

 
(4,253
)
 

 

 
4,253

 

 

 

 

Allocation of stock options
 

 
225

 

 

 

 

 

 

 
225

Balance at September 30, 2014
 
$
832

 
$
1,026,479

 
$
452,152

 
$
1,054

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

 
$
1,129,042

See accompanying notes to unaudited consolidated financial statements.

6





PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Nine months ended September 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
 

 

 
62,207

 

 

 

 

 

 
62,207

Other comprehensive income, net of tax
 

 

 

 
2,069

 

 

 

 

 
2,069

Cash dividends declared
 

 

 
(31,810
)
 

 

 

 

 

 
(31,810
)
Distributions from DDFP
 

 
49

 

 

 

 

 
405

 
(405
)
 
49

Purchases of treasury stock
 

 

 

 

 
(1,946
)
 

 

 

 
(1,946
)
Shares issued dividend reinvestment plan
 

 
75

 

 

 
994

 

 

 

 
1,069

Stock option exercises
 

 
(175
)
 

 

 
2,229

 

 

 

 
2,054

Allocation of ESOP shares
 

 
171

 

 

 

 
1,948

 

 

 
2,119

Allocation of SAP shares
 

 
3,863

 

 

 

 

 

 

 
3,863

Allocation of stock options
 

 
200

 

 

 

 

 

 

 
200

Balance at September 30, 2015
 
$
832

 
$
999,236

 
$
495,673

 
$
2,098

 
$
(270,502
)
 
$
(43,364
)
 
$
(6,708
)
 
$
6,708

 
$
1,183,973

See accompanying notes to unaudited consolidated financial statements.


7



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine months ended September 30, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Nine months ended September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
62,207

 
$
52,412

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
10,311

 
7,752

Provision for loan losses
 
3,100

 
3,400

Deferred tax expense
 
604

 
667

Increase in cash surrender value of Bank-owned life insurance
 
(3,913
)
 
(4,228
)
Net amortization of premiums and discounts on securities
 
8,154

 
7,701

Accretion of net deferred loan fees
 
(2,752
)
 
(2,376
)
Amortization of premiums on purchased loans, net
 
821

 
526

Net increase in loans originated for sale
 
(6,987
)
 
(7,280
)
Proceeds from sales of loans originated for sale
 
7,533

 
7,864

Proceeds from sales of foreclosed assets
 
2,897

 
4,580

ESOP expense
 
2,119

 
2,190

Allocation of stock award shares
 
3,495

 
5,049

Allocation of stock options
 
200

 
225

Net gain on sale of loans
 
(546
)
 
(584
)
Net gain on securities transactions
 
(650
)
 
(247
)
Net gain on sale of premises and equipment
 
(4
)
 
(5
)
Net gain on sale of foreclosed assets
 
(196
)
 
(497
)
Decrease in accrued interest receivable
 
994

 
1,828

Increase in other assets
 
(10,466
)
 
(692
)
Increase in other liabilities
 
8,999

 
1,501

Net cash provided by operating activities
 
85,920

 
79,786

Cash flows from investing activities:
 
 
 
 
Proceeds from maturities, calls and paydowns of investment securities held to maturity
 
27,208

 
36,062

Purchases of investment securities held to maturity
 
(31,515
)
 
(58,192
)
Proceeds from sales of securities
 
14,005

 
24,953

Proceeds from maturities, calls and paydowns of securities available for sale
 
165,609

 
157,765

Purchases of securities available for sale
 
(101,922
)
 
(54,581
)
Net increase in Federal Home Loan Bank stock
 
(9,185
)
 
(11,719
)
Net cash and cash equivalents (paid) received in acquisition
 
(25,613
)
 
68,650

Death benefit proceeds from bank-owned life insurance
 
776

 

Purchases of loans
 
(76,486
)
 
(94,464
)
Net increase in loans
 
(275,164
)
 
(45,982
)
Proceeds from sales of premises and equipment
 
19

 
5

Purchases of premises and equipment
 
(4,686
)
 
(14,404
)
Net cash (used in) provided by investing activities
 
(316,954
)
 
8,093

Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
33,090

 
(244,454
)
Increase in mortgage escrow deposits
 
2,471

 
1,146

Purchases of treasury stock
 
(1,946
)
 
(4,401
)
Cash dividends paid to stockholders
 
(31,810
)
 
(28,023
)

8



 
 
Nine months ended September 30,
 
 
2015
 
2014
Shares issued through the dividend reinvestment plan
 
1,069

 
1,019

Stock options exercised
 
2,054

 
144

Proceeds from long-term borrowings
 
459,937

 
404,334

Payments on long-term borrowings
 
(322,907
)
 
(201,856
)
Net increase (decrease) in short-term borrowings
 
113,747

 
(28,207
)
Net cash provided by (used in) financing activities
 
255,705

 
(100,298
)
Net increase (decrease) in cash and cash equivalents
 
24,671

 
(12,419
)
Cash and cash equivalents at beginning of period
 
103,762

 
101,224

Cash and cash equivalents at end of period
 
$
128,433

 
$
88,805

Cash paid during the period for:
 
 
 
 
Interest on deposits and borrowings
 
$
31,283

 
$
29,910

Income taxes
 
$
30,189

 
$
19,742

Non-cash investing activities:
 
 
 
 
Transfer of loans receivable to foreclosed assets
 
$
8,143

 
$
4,535

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
 
27,087

 
50,584

Other assets
 
112

 
33,396

Total non-cash assets acquired
 
$
27,199

 
$
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 nine months ended September 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 nine months ended September 30, 2015 and 2014 (dollars in thousands, except per share amounts):
 
 
Three months ended September 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
 
$
20,609

 
 
 
 
 
$
19,032

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
20,609

 
63,034,185

 
$
0.33

 
$
19,032

 
62,440,310

 
$
0.30

 
Dilutive shares
 
 
 
164,114

 
 
 
 
 
118,897

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
20,609

 
63,198,299

 
$
0.33

 
$
19,032

 
62,559,207

 
$
0.30

 


10



 
 
Nine months ended September 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
 
$
62,207

 
 
 
 
 
$
52,412

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
62,207

 
62,868,745

 
$
0.99

 
$
52,412

 
59,670,773

 
$
0.88

Dilutive shares
 
 
 
160,644

 
 
 
 
 
133,432

 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
62,207

 
63,029,389

 
$
0.99

 
$
52,412

 
59,804,205

 
$
0.88

Anti-dilutive stock options and awards at September 30, 2015 and 2014, totaling 518,433 shares and 1,099,371 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 (together "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 $20.1 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 four years after the closing of the acquisition 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 Team Capital 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 is complete, 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 September 30, 2015, the Company had $994.8 million and $471.7 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 September 30, 2015 totaled 163, compared with 206 at December 31, 2014. All securities with unrealized losses at September 30, 2015 were analyzed for other-than-temporary impairment. Based upon this analysis, the Company believes that as of September 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 September 30, 2015 and December 31, 2014 (in thousands):
 

September 30, 2015
 

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,008

 
61

 

 
8,069

Agency obligations

87,488


386



 
87,874

Mortgage-backed securities

871,044


16,262


(497
)
 
886,809

State and municipal obligations

5,916


89



 
6,005

Corporate obligations
 
5,517

 
16

 
(17
)
 
5,516

Equity securities

397


101



 
498

 

$
978,370


16,915


(514
)
 
994,771


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 September 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.
 
 
September 30, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
20,680

 
20,695

Due after one year through five years
 
80,278

 
80,738

Due after five years through ten years
 
3,683

 
3,693

Due after ten years
 
2,288

 
2,338

 
 
$
106,929

 
107,464

Mortgage-backed securities totaling $871.0 million at amortized cost and $886.8 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 $498,000 at fair value.
During the three months ended September 30, 2015, there were no sales of securities from the securities available for sale. For the same period last year, proceeds from the sale of securities available for sale were $9,946,000 resulting in gross gains of $482,000 and no gross losses.
For the nine months ended September 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 $24,429,000, resulting in gross gains of $632,000 and gross losses of $404,000. Also, for the nine months ended September 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 nine months ended September 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 September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning credit loss amount

$

 

 

 
1,674

Add: Initial OTTI credit losses


 

 

 

Subsequent OTTI credit losses


 

 

 

Less: Realized losses for securities sold


 

 

 
1,674

Securities intended or required to be sold


 

 

 

Increases in expected cash flows on debt securities


 

 

 

Ending credit loss amount

$

 

 

 

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

14



previously impaired non-agency mortgage-backed securities, respectively. The Company previously incurred cumulative credit losses of $1.7 million on these securities.
The following tables represent the Company’s disclosure regarding securities available for sale with temporary impairment at September 30, 2015 and December 31, 2014 (in thousands):
 

September 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


 

 

 

 

 

Mortgage-backed securities

47,521

 
(162
)
 
50,441

 
(335
)
 
97,962

 
(497
)
State and municipal obligations


 

 

 

 

 

Corporate obligations
 
1,464

 
(7
)
 
993

 
(10
)
 
2,457

 
(17
)


$
48,985

 
(169
)
 
51,434

 
(345
)
 
100,419

 
(514
)
 

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 September 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 September 30, 2015 totaled 16, compared with 43 at December 31, 2014. At September 30, 2015, there were three private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $943,000 and an unrealized loss of $7,000. These private label mortgage-backed securities were investment grade at September 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 nine months ended September 30, 2015. The Company believes that no other-than-temporary impairment of the securities available for sale portfolio existed for the three and nine months ended September 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 September 30, 2015 and December 31, 2014 (in thousands):

15



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

$
5,195

 
15

 
(1
)
 
5,209

Mortgage-backed securities

1,821

 
78

 

 
1,899

State and municipal obligations

454,446

 
11,870

 
(1,213
)
 
465,103

Corporate obligations

10,261

 
32

 
(9
)
 
10,284

 

$
471,723

 
11,995

 
(1,223
)
 
482,495

 
 
 
 
 
 
 
 
 
 

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 nine months ended September 30, 2015, the Company recognized gross gains of $5,000 and no gross losses, respectively, related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $7,984,000 and $21,204,000 for the three and nine months ended September 30, 2015, respectively. There were no sales of securities from the held to maturity portfolio for the three and nine months ended September 30, 2015.
For the three and nine months ended September 30, 2014, the Company recognized gross gains of $5,000 and $20,000, and no gross losses, respectively, related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $3,566,000 and $12,376,000, respectively. In addition, for the three and nine months ended September 30, 2014, the Company recognized a gross loss of $3,000, and no gross gain, related to the sale of a security 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 September 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.
 
 
September 30, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
8,385

 
8,456

Due after one year through five years

53,201

 
54,296

Due after five years through ten years

214,416

 
221,661

Due after ten years

193,900

 
196,183



$
469,902

 
480,596

Mortgage-backed securities totaling $1.8 million at amortized cost and $1.9 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 September 30, 2015 and December 31, 2014 (in thousands):
 
 
September 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

$

 

 
280

 
(1
)
 
280

 
(1
)
State and municipal obligations

61,156

 
(690
)
 
19,244

 
(523
)
 
80,400

 
(1,213
)
Corporate obligations

1,711

 
(7
)
 
499

 
(2
)
 
2,210

 
(9
)
 

$
62,867

 
(697
)
 
20,023

 
(526
)
 
82,890

 
(1,223
)
 
 
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 September 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 September 30, 2015 totaled 147, compared with 163 at December 31, 2014. The decrease in the number of securities in an unrealized loss position at September 30, 2015, was largely due to a decrease in market interest rates from December 31, 2014. All temporarily impaired investment securities were investment grade at September 30, 2015.

17



Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable at September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
 
 
September 30, 2015
 
December 31, 2014
Mortgage loans:
 
 
 
 
Residential
 
$
1,256,893

 
1,251,445

Commercial
 
1,775,999

 
1,694,359

Multi-family
 
1,193,204

 
1,041,582

Construction
 
302,302

 
221,102

Total mortgage loans
 
4,528,398

 
4,208,488

Commercial loans
 
1,324,244

 
1,262,422

Consumer loans
 
575,714

 
611,467

Total gross loans
 
6,428,356

 
6,082,377

Purchased credit-impaired ("PCI") loans
 
3,671

 
4,510

Premiums on purchased loans
 
5,711

 
5,307

Unearned discounts
 
(44
)
 
(53
)
Net deferred fees
 
(6,750
)
 
(6,636
)
Total loans
 
$
6,430,944

 
6,085,505

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
September 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
 
$
5,755

 
7,330

 
11,876

 
24,961

 
1,231,932

 
1,256,893

 

Commercial
 
1,853

 
275

 
2,736

 
4,864

 
1,771,135

 
1,775,999

 

Multi-family
 
775

 

 
847

 
1,622

 
1,191,582

 
1,193,204

 

Construction
 

 

 
2,096

 
2,096

 
300,206

 
302,302

 

Total mortgage loans
 
8,383

 
7,605

 
17,555

 
33,543

 
4,494,855

 
4,528,398

 

Commercial loans
 
440

 
1,010

 
17,892

 
19,342

 
1,304,902

 
1,324,244

 

Consumer loans
 
2,224

 
1,080

 
4,187

 
7,491

 
568,223

 
575,714

 

Total gross loans
 
$
11,047

 
9,695

 
39,634

 
60,376

 
6,367,980

 
6,428,356

 

 
 
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