Document



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 June 30, 2016
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, 2016 there were 83,209,293 shares issued and 66,167,385 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 344,029 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, 2016 (unaudited) and December 31, 2015
 
 
 
 
Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (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, 2016 (Unaudited) and December 31, 2015
(Dollars in Thousands)
 
 
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Cash and due from banks
 
$
116,319

 
$
100,899

Short-term investments
 
1,208

 
1,327

Total cash and cash equivalents
 
117,527

 
102,226

Securities available for sale, at fair value
 
1,013,539

 
964,534

Investment securities held to maturity (fair value of $501,435 at June 30, 2016 (unaudited)
and $488,331 at December 31, 2015)
 
478,846

 
473,684

Federal Home Loan Bank stock
 
76,310

 
78,181

Loans
 
6,780,966

 
6,537,674

Less allowance for loan losses
 
60,933

 
61,424

Net loans
 
6,720,033

 
6,476,250

Foreclosed assets, net
 
10,508

 
10,546

Banking premises and equipment, net
 
86,574

 
88,987

Accrued interest receivable
 
26,055

 
25,766

Intangible assets
 
424,413

 
426,277

Bank-owned life insurance
 
185,758

 
183,057

Other assets
 
87,191

 
82,149

Total assets
 
$
9,226,754

 
$
8,911,657

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 
$
4,439,943

 
$
4,198,788

Savings deposits
 
1,055,503

 
985,478

Certificates of deposit of $100,000 or more
 
344,291

 
324,215

Other time deposits
 
390,149

 
415,506

Total deposits
 
6,229,886

 
5,923,987

Mortgage escrow deposits
 
28,238

 
23,345

Borrowed funds
 
1,665,277

 
1,707,632

Other liabilities
 
73,790

 
60,628

Total liabilities
 
7,997,191

 
7,715,592

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
65,813,618 shares outstanding at June 30, 2016 (unaudited) and 65,489,354 outstanding
at December 31, 2015
 
832

 
832

Additional paid-in capital
 
1,003,646

 
1,000,810

Retained earnings
 
526,820

 
507,713

Accumulated other comprehensive income (loss)
 
7,118

 
(2,546
)
Treasury stock
 
(268,467
)
 
(269,014
)
Unallocated common stock held by the Employee Stock Ownership Plan
 
(40,386
)
 
(41,730
)
Common stock acquired by the Directors’ Deferred Fee Plan
 
(6,182
)
 
(6,517
)
Deferred compensation – Directors’ Deferred Fee Plan
 
6,182

 
6,517

Total stockholders’ equity
 
1,229,563

 
1,196,065

Total liabilities and stockholders’ equity
 
$
9,226,754

 
$
8,911,657

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, 2016 and 2015 (Unaudited)
(Dollars in Thousands, except per share data)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
 
Real estate secured loans
 
$
44,916

 
$
43,594

 
$
89,149

 
$
86,883

Commercial loans
 
15,374

 
13,669

 
30,326

 
27,108

Consumer loans
 
5,394

 
5,794

 
11,030

 
11,588

Securities available for sale and Federal Home Loan Bank Stock
 
5,718

 
5,735

 
11,498

 
12,036

Investment securities held to maturity
 
3,331

 
3,386

 
6,662

 
6,782

Deposits, Federal funds sold and other short-term investments
 
72

 
10

 
114

 
22

Total interest income
 
74,805

 
72,188

 
148,779

 
144,419

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
4,135

 
3,624

 
7,956

 
7,212

Borrowed funds
 
6,760

 
6,890

 
13,844

 
13,605

Total interest expense
 
10,895

 
10,514

 
21,800

 
20,817

Net interest income
 
63,910

 
61,674

 
126,979

 
123,602

Provision for loan losses
 
1,700

 
1,100

 
3,200

 
1,700

Net interest income after provision for loan losses
 
62,210

 
60,574

 
123,779

 
121,902

Non-interest income:
 
 
 
 
 
 
 
 
Fees
 
6,711

 
7,181

 
13,172

 
13,235

Wealth management income
 
4,511

 
5,097

 
8,822

 
7,655

Bank-owned life insurance
 
1,369

 
1,317

 
2,701

 
2,665

Net gain on securities transactions
 
1

 
643

 
97

 
645

Other income
 
1,232

 
2,704

 
2,050

 
3,045

Total non-interest income
 
13,824

 
16,942

 
26,842

 
27,245

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
25,741

 
24,414

 
51,771

 
48,615

Net occupancy expense
 
6,068

 
6,577

 
12,502

 
13,749

Data processing expense
 
3,272

 
3,159

 
6,517

 
6,186

FDIC insurance
 
1,293

 
1,272

 
2,615

 
2,490

Amortization of intangibles
 
856

 
1,124

 
1,861

 
2,051

Advertising and promotion expense
 
901

 
1,381

 
1,780

 
2,142

Other operating expenses
 
7,766

 
8,192

 
13,729

 
14,323

Total non-interest expense
 
45,897

 
46,119

 
90,775

 
89,556

Income before income tax expense
 
30,137

 
31,397

 
59,846

 
59,591

Income tax expense
 
8,781

 
9,601

 
17,517

 
17,993

Net income
 
$
21,356

 
$
21,796

 
$
42,329

 
$
41,598

Basic earnings per share
 
$
0.34

 
$
0.35

 
$
0.67

 
$
0.66

Weighted average basic shares outstanding
 
63,553,694

 
62,894,213

 
63,452,393

 
62,784,655

Diluted earnings per share
 
$
0.34

 
$
0.35

 
$
0.67

 
$
0.66

Weighted average diluted shares outstanding
 
63,726,513

 
63,044,965

 
63,623,134

 
62,943,563


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, 2016 and 2015 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
21,356

 
$
21,796

 
$
42,329

 
$
41,598

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
 
2,979

 
(4,929
)
 
10,073

 
(1,218
)
Reclassification adjustment for gains included in net income
 

 
(385
)
 
(57
)
 
(386
)
Total
 
2,979

 
(5,314
)
 
10,016

 
(1,604
)
Unrealized losses on derivatives
 
(170
)
 

 
(591
)
 

Amortization related to post-retirement obligations
 
140

 
116

 
239

 
112

Total other comprehensive income (loss)
 
2,949

 
(5,198
)
 
9,664

 
(1,492
)
Total comprehensive income
 
$
24,305

 
$
16,598

 
$
51,993

 
$
40,106

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, 2016 and 2015 (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, 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 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.

6





PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Six months ended June 30, 2016 and 2015 (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, 2015
 
$
832

 
$
1,000,810

 
$
507,713

 
$
(2,546
)
 
$
(269,014
)
 
$
(41,730
)
 
$
(6,517
)
 
$
6,517

 
$
1,196,065

Net income
 

 

 
42,329

 

 

 

 

 

 
42,329

Other comprehensive income, net of tax
 

 

 

 
9,664

 

 

 

 

 
9,664

Cash dividends declared
 

 

 
(23,222
)
 

 

 

 

 

 
(23,222
)
Distributions from DDFP
 

 
59

 

 

 

 

 
335

 
(335
)
 
59

Purchases of treasury stock
 

 

 

 

 
(2,702
)
 

 

 

 
(2,702
)
Shares issued dividend reinvestment plan
 

 
95

 

 

 
656

 

 

 

 
751

Stock option exercises
 

 
37

 

 

 
2,593

 

 

 

 
2,630

Allocation of ESOP shares
 

 
186

 

 

 

 
1,344

 

 

 
1,530

Allocation of SAP shares
 

 
2,371

 

 

 

 

 

 

 
2,371

Allocation of stock options
 

 
88

 

 

 

 

 

 

 
88

Balance at June 30, 2016
 
$
832

 
$
1,003,646

 
$
526,820

 
$
7,118

 
$
(268,467
)
 
$
(40,386
)
 
$
(6,182
)
 
$
6,182

 
$
1,229,563

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, 2016 and 2015 (Unaudited)
(Dollars in Thousands)
 
 
 
Six months ended June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
42,329

 
$
41,598

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of intangibles
 
6,585

 
6,886

Provision for loan losses
 
3,200

 
1,700

Deferred tax expense
 
112

 
2,197

Increase in cash surrender value of Bank-owned life insurance
 
(2,701
)
 
(2,665
)
Net amortization of premiums and discounts on securities
 
5,037

 
5,397

Accretion of net deferred loan fees
 
(1,627
)
 
(1,905
)
Amortization of premiums on purchased loans, net
 
514

 
564

Net increase in loans originated for sale
 
(7,750
)
 
(4,713
)
Proceeds from sales of loans originated for sale
 
8,457

 
5,214

Proceeds from sales of foreclosed assets
 
2,501

 
2,277

ESOP expense
 
1,530

 
1,390

Allocation of stock award shares
 
1,495

 
2,452

Allocation of stock options
 
88

 
128

Net gain on sale of loans
 
(707
)
 
(501
)
Net gain on securities transactions
 
(97
)
 
(645
)
Net (gain) loss on sale of premises and equipment
 
(4
)
 
6

Net gain on sale of foreclosed assets
 
(235
)
 
(140
)
Decrease (increase) in accrued interest receivable
 
289

 
(400
)
Increase in other assets
 
(15,156
)
 
(11,052
)
Increase in other liabilities
 
13,162

 
4,270

Net cash provided by operating activities
 
57,022

 
52,058

Cash flows from investing activities:
 
 
 
 
Proceeds from maturities, calls and paydowns of investment securities held to maturity
 
17,336

 
16,581

Purchases of investment securities held to maturity
 
(23,930
)
 
(20,443
)
Proceeds from sales of securities
 
2,193

 
14,005

Proceeds from maturities, calls and paydowns of securities available for sale
 
92,819

 
96,155

Purchases of securities available for sale
 
(130,788
)
 
(73,120
)
Net decrease (increase) in Federal Home Loan Bank stock
 
1,871

 
(8,103
)
Net cash and cash equivalents paid in acquisition
 

 
(25,613
)
Purchases of loans
 
(28,590
)
 
(49,762
)
Net increase in loans
 
(216,119
)
 
(176,873
)
Proceeds from sales of premises and equipment
 
4

 

Purchases of premises and equipment
 
(2,411
)
 
(3,222
)
Net cash used in investing activities
 
(287,615
)
 
(230,395
)
Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
305,899

 
21,698

Increase in mortgage escrow deposits
 
4,893

 
4,321

Purchases of treasury stock
 
(2,702
)
 
(1,933
)
Cash dividends paid to stockholders
 
(23,222
)
 
(21,297
)
Shares issued through the dividend reinvestment plan
 
751

 
729


8



 
 
Six months ended June 30,
 
 
2016
 
2015
Stock options exercised
 
2,630

 
1,065

Proceeds from long-term borrowings
 
251,652

 
329,937

Payments on long-term borrowings
 
(295,336
)
 
(157,096
)
Net increase in short-term borrowings
 
1,329

 
1,883

Net cash provided by financing activities
 
245,894

 
179,307

Net increase in cash and cash equivalents
 
15,301

 
970

Cash and cash equivalents at beginning of period
 
102,226

 
103,762

Cash and cash equivalents at end of period
 
$
117,527

 
$
104,732

Cash paid during the period for:
 
 
 
 
Interest on deposits and borrowings
 
$
21,821

 
$
20,323

Income taxes
 
$
15,676

 
$
18,356

Non-cash investing activities:
 
 
 
 
Transfer of loans receivable to foreclosed assets
 
$
2,529

 
$
5,127

Acquisition:
 
 
 
 
Non-cash assets acquired:
 
 
 
 
Goodwill and other intangible assets, net
 
$

 
$
29,953

Other assets
 

 
112

Total non-cash assets acquired
 
$

 
$
30,065

Liabilities assumed:
 
 
 
 
Other Liabilities
 
$

 
$
366

Total liabilities assumed
 
$

 
$
366

 
 
 
 
 
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 consolidated statements of financial condition and the consolidated statements of income for the periods presented. Actual results could differ from these estimates. The allowance for 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, 2016 are not necessarily indicative of the results of operations that may be expected for all of 2016.
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, 2015 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, 2016 and 2015 (dollars in thousands, except per share amounts):
 
 
Three months ended June 30,
 
 
 
2016
 
2015
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
21,356

 
 
 
 
 
$
21,796

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
21,356

 
63,553,694

 
$
0.34

 
$
21,796

 
62,894,213

 
$
0.35

 
Dilutive shares
 
 
 
172,819

 
 
 
 
 
150,752

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
21,356

 
63,726,513

 
$
0.34

 
$
21,796

 
63,044,965

 
$
0.35

 

10



 
 
Six months ended June 30,
 
 
 
2016
 
2015
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
42,329

 
 
 
 
 
$
41,598

 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
42,329

 
63,452,393

 
$
0.67

 
$
41,598

 
62,784,655

 
$
0.66

 
Dilutive shares
 
 
 
170,741

 
 
 
 
 
158,908

 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
$
42,329

 
63,623,134

 
$
0.67

 
$
41,598

 
62,943,563

 
$
0.66

 
Anti-dilutive stock options and awards at June 30, 2016 and 2015, totaling 580,314 shares and 693,721 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 certain assets and liabilities 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. MDE was acquired with both cash and contingent consideration.
The Company recognized goodwill of $18.3 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 $338,000. 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. In accordance with the acquisition agreement and based upon the Company's projection of future revenue, no contingent consideration liability was required at June 30, 2016.
Note 3. Investment Securities
At June 30, 2016, the Company had $1.01 billion and $478.8 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 ("OTTI") 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, 2016 totaled 28, compared with 163 at December 31, 2015. All securities with unrealized losses at June 30, 2016 were analyzed for other-than-temporary impairment. Based upon this analysis, the Company believes that as of June 30, 2016, 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, 2016 and December 31, 2015 (in thousands):
 

June 30, 2016
 

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,000

 
54

 

 
8,054

Agency obligations

72,228


359



 
72,587

Mortgage-backed securities

901,392


22,498


(37
)
 
923,853

State and municipal obligations

4,173


214



 
4,387

Corporate obligations
 
4,015

 
124

 
(12
)
 
4,127

Equity securities

397


134



 
531

 

$
990,205


23,383


(49
)
 
1,013,539


11



 
 
December 31, 2015
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
US Treasury obligations
 
$
8,006

 

 
(2
)
 
8,004

Agency obligations
 
82,396

 
82

 
(148
)
 
82,330

Mortgage-backed securities
 
857,430

 
9,828

 
(3,397
)
 
863,861

State and municipal obligations
 
4,193

 
115

 

 
4,308

Corporate obligations
 
5,516

 
6

 
(10
)
 
5,512

Equity securities
 
397

 
122

 

 
519

 
 
$
957,938

 
10,153

 
(3,557
)
 
964,534

The amortized cost and fair value of securities available for sale at June 30, 2016, 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, 2016
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
32,517

 
32,579

Due after one year through five years
 
49,959

 
50,310

Due after five years through ten years
 
5,940

 
6,266

Due after ten years
 

 

 
 
$
88,416

 
89,155

Mortgage-backed securities totaling $901.4 million at amortized cost and $923.9 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. Also excluded from the table above are equity securities of $397,000 at amortized cost and $531,000 at fair value.
No securities were sold from the available for sale portfolio during the three months ended June 30, 2016. For the same period last year, proceeds from sales on securities available for sale were $14.0 million resulting in gross gains of $643,000 and no gross losses.
For the six months ended June 30, 2016, proceeds from the sale of securities available for sale were $2.2 million, resulting in gross gains of $95,000 and no gross losses. For the same period last year, proceeds from the sale of securities available for sale were $14.0 million, resulting in gross gains of $643,000 and no gross losses. For the six months ended June 30, 2016, there were no calls of securities in the available for sale portfolio. For the same period last year, proceeds from calls on securities available for sale totaled $465,000, resulting in gross gains of $2,000 and no gross losses.
The Company did not incur an OTTI charge on securities in the available for sale portfolio for the six months ended June 30, 2016 and 2015.
The following tables represent the Company’s disclosure regarding securities available for sale with temporary impairment at June 30, 2016 and December 31, 2015 (in thousands):
 

June 30, 2016 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
Mortgage-backed securities

$
3,221

 
(27
)
 
8,908

 
(10
)
 
12,129

 
(37
)
Corporate obligations
 

 

 
989

 
(12
)
 
989

 
(12
)


$
3,221

 
(27
)
 
9,897

 
(22
)
 
13,118

 
(49
)

12



 

December 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
U.S. Treasury obligations
 
$
8,004

 
(2
)
 

 

 
8,004

 
(2
)
Agency obligations
 
59,197

 
(148
)
 

 

 
59,197

 
(148
)
Mortgage-backed securities
 
327,263

 
(2,427
)
 
47,911

 
(970
)
 
375,174

 
(3,397
)
Corporate obligations
 
500

 

 
992

 
(10
)
 
1,492

 
(10
)


$
394,964

 
(2,577
)
 
48,903

 
(980
)
 
443,867

 
(3,557
)
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, 2016, 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, 2016 totaled 7, compared with 64 at December 31, 2015. At June 30, 2016, there were three private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $1.8 million and an unrealized loss of $26,000. One of these private label mortgage-backed securities was below investment grade at June 30, 2016.
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 six months ended June 30, 2016. 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, 2016.
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, 2016 and December 31, 2015 (in thousands):
 
 
June 30, 2016
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations

$
3,707

 
10

 

 
3,717

Mortgage-backed securities

1,192

 
49

 

 
1,241

State and municipal obligations

464,556

 
22,618

 
(137
)
 
487,037

Corporate obligations

9,391

 
52

 
(3
)
 
9,440

 

$
478,846

 
22,729

 
(140
)
 
501,435

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Agency obligations
 
$
4,096

 
9

 
(8
)
 
4,097

Mortgage-backed securities
 
1,597

 
61

 

 
1,658

State and municipal obligations
 
458,062

 
15,094

 
(495
)
 
472,661

Corporate obligations
 
9,929

 
11

 
(25
)
 
9,915

 
 
$
473,684

 
15,175

 
(528
)
 
488,331

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. There were no sales of securities from the held to maturity portfolio for the three and six months ended June 30, 2016 and 2015. For the three and six months ended June 30, 2016, proceeds from calls on certain securities in the held to maturity portfolio totaled $4.3 million and $14.9 million, respectively, with gross gains recognized of $1,000 and $2,000, respectively and no gross losses in either period. For the three and six months ended June 30, 2015, proceeds

13



from calls of certain securities in the held to maturity portfolio totaled $9.1 million and $13.2 million, respectively, with no gross gains and no gross losses recognized in either period.
The amortized cost and fair value of investment securities in the held to maturity portfolio at June 30, 2016 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, 2016
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
11,723

 
11,761

Due after one year through five years

52,755

 
53,903

Due after five years through ten years

229,855

 
242,268

Due after ten years

183,321

 
192,262



$
477,654

 
500,194

Mortgage-backed securities totaling $1.2 million at amortized cost and 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 June 30, 2016 and December 31, 2015 (in thousands):
 
 
June 30, 2016 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
State and municipal obligations

4,308

 
(19
)
 
6,876

 
(118
)
 
11,184

 
(137
)
Corporate obligations

501

 
(1
)
 
498

 
(2
)
 
999

 
(3
)
 

$
4,809

 
(20
)
 
7,374

 
(120
)
 
12,183

 
(140
)
 
 
December 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
 
$
1,244

 
(6
)
 
278

 
(2
)
 
1,522

 
(8
)
State and municipal obligations
 
24,266

 
(165
)
 
17,746

 
(330
)
 
42,012

 
(495
)
Corporate obligations
 
5,840

 
(18
)
 
744

 
(7
)
 
6,584

 
(25
)
 
 
$
31,350

 
(189
)
 
18,768

 
(339
)
 
50,118

 
(528
)
Based upon the review of the held to maturity securities portfolio, the Company believes that as of June 30, 2016, 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, 2016 totaled 21, compared with 99 at December 31, 2015. The decrease in the number of securities in an unrealized loss position at June 30, 2016, was largely due to a decrease in market interest rates from December 31, 2015. All temporarily impaired investment securities were investment grade at June 30, 2016.

14



Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable at June 30, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
 
June 30, 2016
 
December 31, 2015
Mortgage loans:
 
 
 
 
Residential
 
$
1,243,496

 
1,254,036

Commercial
 
1,796,487

 
1,714,923

Multi-family
 
1,381,814

 
1,233,792

Construction
 
298,974

 
331,649

Total mortgage loans
 
4,720,771

 
4,534,400

Commercial loans
 
1,508,616

 
1,433,447

Consumer loans
 
550,171

 
566,175

Total gross loans
 
6,779,558

 
6,534,022

Purchased credit-impaired loans
 
2,418

 
3,435

Premiums on purchased loans
 
5,729

 
5,740

Unearned discounts
 
(39
)
 
(41
)
Net deferred fees
 
(6,700
)
 
(5,482
)
Total loans
 
$
6,780,966

 
6,537,674

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
June 30, 2016
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Recorded
Investment
> 90 days
accruing
 
Total Past
Due
 
Current
 
Total Loans
Receivable
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
9,860

 
2,854

 
13,146

 

 
25,860

 
1,217,636

 
1,243,496

Commercial
 

 
1,166

 
4,280

 

 
5,446

 
1,791,041

 
1,796,487

Multi-family
 

 

 
1,889

 

 
1,889

 
1,379,925

 
1,381,814

Construction
 

 

 
2,517

 

 
2,517

 
296,457

 
298,974

Total mortgage loans
 
9,860

 
4,020

 
21,832

 

 
35,712

 
4,685,059

 
4,720,771

Commercial loans
 
5

 
4,564

 
17,974

 

 
22,543

 
1,486,073

 
1,508,616

Consumer loans
 
2,014

 
500

 
3,202

 

 
5,716

 
544,455

 
550,171

Total gross loans
 
$
11,879

 
9,084

 
43,008

 

 
63,971

 
6,715,587

 
6,779,558

 
 
December 31, 2015
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Recorded
Investment
> 90 days
accruing
 
Total Past
Due
 
Current
 
Total Loans
Receivable
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
8,983

 
5,434

 
12,031

 

 
26,448

 
1,227,588

 
1,254,036

Commercial
 
1,732

 
543

 
1,263

 

 
3,538

 
1,711,385

 
1,714,923

Multi-family
 
763

 
506

 
742

 

 
2,011

 
1,231,781

 
1,233,792

Construction
 

 

 
2,351

 

 
2,351

 
329,298

 
331,649

Total mortgage loans
 
11,478

 
6,483

 
16,387

 

 
34,348

 
4,500,052

 
4,534,400

Commercial loans
 
632

 
801

 
23,875

 
165

 
25,473

 
1,407,974

 
1,433,447

Consumer loans
 
3,603

 
1,194

 
4,109

 

 
8,906

 
557,269

 
566,175

Total gross loans
 
$
15,713

 
8,478

 
44,371

 
165

 
68,727

 
6,465,295

 
6,534,022



15



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 $43.0 million and $44.4 million at June 30, 2016 and December 31, 2015, respectively. Included in non-accrual loans were $4.8 million and $18.3 million of loans which were less than 90 days past due at June 30, 2016 and December 31, 2015, respectively. There were no loans 90 days or greater past due and still accruing interest at June 30, 2016. At December 31, 2015, there was one commercial loan for $165,000 which was ninety days or greater past due and still accruing interest. This loan was past due for maturity and well secured at December 31, 2015, and subsequent to the end of the year was renewed by the Company.
The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million for which it is probable, based on current information, all amounts due under the contractual terms of the loan agreement will not be collected. 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; (2) if a loan is collateral dependent, the fair value of collateral; or (3) the fair value 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 collateral dependent 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 June 30, 2016, there were 140 impaired loans totaling $45.3 million. Included in this total were 115 TDRs related to 114 borrowers totaling $21.3 million that were performing in accordance with their restructured terms and which continued to accrue interest at June 30, 2016. At December 31, 2015, there were 148 impaired loans totaling $50.9 million. Included in this total were 122 TDRs to 120 borrowers totaling $26.0 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2015.
The following table summarizes loans receivable by portfolio segment and impairment method, excluding PCI loans (in thousands):
 

June 30, 2016
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
29,236

 
13,798

 
2,283

 
45,317

Collectively evaluated for impairment

4,691,535

 
1,494,818

 
547,888

 
6,734,241

Total gross loans

$
4,720,771

 
1,508,616

 
550,171

 
6,779,558

 

December 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
26,743

 
21,756

 
2,368

 
50,867

Collectively evaluated for impairment

4,507,657

 
1,411,691

 
563,807

 
6,483,155

Total gross loans

$
4,534,400

 
1,433,447

 
566,175

 
6,534,022


16



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

June 30, 2016
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total
Individually evaluated for impairment

$
2,146

 
81

 
86

 
2,313

Collectively evaluated for impairment

29,488

 
26,218

 
2,914

 
58,620

Total gross loans

$
31,634

 
26,299

 
3,000

 
60,933