PFS-3.31.2015-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2015
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from              to
Commission File Number: 001-31566
PROVIDENT FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
42-1547151
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
239 Washington Street, Jersey City, New Jersey
 
07302
(Address of Principal Executive Offices)
 
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the Registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
As of May 1, 2015 there were 83,209,293 shares issued and 65,623,167 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 404,243 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under U.S. generally accepted accounting principles.




PROVIDENT FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page Number
 
 
 
 
1.
 
 
 
 
 
Consolidated Statements of Financial Condition as of March 31, 2015 (unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 

2



PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 2015 (Unaudited) and December 31, 2014
(Dollars in Thousands)
 
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
89,760

 
$
102,484

Short-term investments
 
1,114

 
1,278

Total cash and cash equivalents
 
90,874

 
103,762

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

 
1,074,395

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

 
469,528

Federal Home Loan Bank stock
 
67,455

 
69,789

Loans
 
6,124,699

 
6,085,505

Less allowance for loan losses
 
61,110

 
61,734

Net loans
 
6,063,589

 
6,023,771

Foreclosed assets, net
 
5,924

 
5,098

Banking premises and equipment, net
 
92,498

 
92,990

Accrued interest receivable
 
24,542

 
25,228

Intangible assets
 
403,505

 
404,422

Bank-owned life insurance
 
179,060

 
177,712

Other assets
 
76,427

 
76,682

Total assets
 
$
8,525,137

 
$
8,523,377

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

 
$
3,971,487

Savings deposits
 
985,464

 
995,347

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

 
342,072

Other time deposits
 
463,416

 
483,617

Total deposits
 
5,823,051

 
5,792,523

Mortgage escrow deposits
 
23,653

 
21,649

Borrowed funds
 
1,468,404

 
1,509,851

Other liabilities
 
52,358

 
55,255

Total liabilities
 
7,367,466

 
7,379,278

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

 

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

 
832

Additional paid-in capital
 
996,382

 
995,053

Retained earnings
 
474,280

 
465,276

Accumulated other comprehensive income
 
3,735

 
29

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

 
7,113

Total stockholders’ equity
 
1,157,671

 
1,144,099

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

 
$
8,523,377

See accompanying notes to unaudited consolidated financial statements.

3



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

 
$
38,552

Commercial loans
 
13,439

 
10,547

Consumer loans
 
5,794

 
5,662

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

 
7,082

Investment securities held to maturity
 
3,396

 
2,670

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

 
10

Total interest income
 
72,231

 
64,523

Interest expense:
 
 
 
 
Deposits
 
3,588

 
3,738

Borrowed funds
 
6,715

 
5,584

Total interest expense
 
10,303

 
9,322

Net interest income
 
61,928

 
55,201

Provision for loan losses
 
600

 
400

Net interest income after provision for loan losses
 
61,328

 
54,801

Non-interest income:
 
 
 
 
Fees
 
6,054

 
4,802

Wealth management income
 
2,558

 
2,053

Bank-owned life insurance
 
1,348

 
1,302

Net gain (loss) on securities transactions
 
2

 
(350
)
Other income
 
341

 
309

Total non-interest income
 
10,303

 
8,116

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

 
21,393

Net occupancy expense
 
7,172

 
6,089

Data processing expense
 
3,027

 
2,797

FDIC insurance
 
1,218

 
1,136

Amortization of intangibles
 
927

 
283

Advertising and promotion expense
 
761

 
1,065

Other operating expenses
 
6,131

 
5,427

Total non-interest expense
 
43,437

 
38,190

Income before income tax expense
 
28,194

 
24,727

Income tax expense
 
8,392

 
7,698

Net income
 
$
19,802

 
$
17,029

Basic earnings per share
 
$
0.32

 
$
0.30

Weighted average basic shares outstanding
 
62,673,887

 
57,369,039

Diluted earnings per share
 
$
0.32

 
$
0.30

Weighted average diluted shares outstanding
 
62,840,951

 
57,528,419


See accompanying notes to unaudited consolidated financial statements.

4



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Net income
 
$
19,802

 
$
17,029

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

 
3,719

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

Total
 
3,710

 
3,926

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

 
3,878

Total comprehensive income
 
$
23,508

 
$
20,907

See accompanying notes to unaudited consolidated financial statements.


5



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Three months ended March 31, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
RETAINED
EARNINGS
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
TREASURY
STOCK
 
UNALLOCATED
ESOP
SHARES
 
COMMON
STOCK
ACQUIRED
BY DDFP
 
DEFERRED
COMPENSATION
DDFP
 
TOTAL
STOCKHOLDERS’
EQUITY
Balance at December 31, 2013
 
$
832

 
$
1,026,144

 
$
427,763

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

 
$
1,010,753

Net income
 

 

 
17,029

 

 

 

 

 

 
17,029

Other comprehensive income, net of tax
 

 

 

 
3,878

 

 

 

 

 
3,878

Cash dividends declared
 

 

 
(9,190
)
 

 

 

 

 

 
(9,190
)
Distributions from DDFP
 

 

 

 

 

 

 
23

 
(23
)
 

Purchases of treasury stock
 

 

 

 

 
(3,881
)
 

 

 

 
(3,881
)
Shares issued dividend reinvestment plan
 

 

 

 

 
334

 

 

 

 
334

Allocation of ESOP shares
 

 
42

 

 

 

 
714

 

 

 
756

Allocation of SAP shares
 

 
1,583

 

 

 

 

 

 

 
1,583

Transfer of treasury shares to SAP
 

 
(4,253
)
 

 

 
4,253

 

 

 

 

Allocation of stock options
 

 
79

 

 

 

 

 

 

 
79

Balance at March 31, 2014
 
$
832

 
$
1,023,595

 
$
435,602

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

 
$
1,021,341

See accompanying notes to unaudited consolidated financial statements.

6




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

 
$
995,053

 
$
465,276

 
$
29

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

 
$
1,144,099

Net income
 

 

 
19,802

 

 

 

 

 

 
19,802

Other comprehensive income, net of tax
 

 

 

 
3,706

 

 

 

 

 
3,706

Cash dividends declared
 

 

 
(10,798
)
 

 

 

 

 

 
(10,798
)
Distributions from DDFP
 

 

 

 

 

 

 
23

 
(23
)
 

Purchases of treasury stock
 

 

 

 

 
(1,882
)
 

 

 

 
(1,882
)
Shares issued dividend reinvestment plan
 

 
23

 

 

 
354

 

 

 

 
377

Stock option exercises
 

 
(17
)
 

 

 
412

 

 

 

 
395

Allocation of ESOP shares
 

 
38

 

 

 

 
649

 

 

 
687

Allocation of SAP shares
 

 
1,213

 

 

 

 

 

 

 
1,213

Allocation of stock options
 

 
72

 

 

 

 

 

 

 
72

Balance at March 31, 2015
 
$
832

 
$
996,382

 
$
474,280

 
$
3,735

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

 
$
1,157,671

See accompanying notes to unaudited consolidated financial statements.


7



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended March 31, 2015 and 2014 (Unaudited)
(Dollars in Thousands)
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
19,802

 
$
17,029

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

 
2,094

Provision for loan losses
 
600

 
400

Deferred tax expense
 
1,748

 
2,396

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

 
2,276

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

 
153

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

 
8,390

Proceeds from sales of foreclosed assets
 
288

 
1,374

ESOP expense
 
687

 
756

Allocation of stock award shares
 
852

 
1,306

Allocation of stock options
 
72

 
79

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

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

 
(110
)
Decrease in accrued interest receivable
 
686

 
1,216

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

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

 
23,315

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

 
19,388

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

 
6,085

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

 
44,462

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

 
1,905

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

 

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

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

 
1,852

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

 
334

Stock options exercised
 
395

 


8



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

 
181,991

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

 
101,224

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

 
$
81,658

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

 
$
9,176

Income taxes
 
$
8,057

 
$
1,502

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

 
$
2,481

See accompanying notes to unaudited consolidated financial statements

9



PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly owned subsidiary, The Provident Bank (the “Bank,” together with Provident Financial Services, Inc., the “Company”).
In preparing the interim unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates. The allowance for loan losses, the valuation of securities available for sale and the valuation of deferred tax assets are material estimates that are particularly susceptible to near-term change.
The interim unaudited consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results of operations that may be expected for all of 2015.
Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction with the December 31, 2014 Annual Report to Stockholders on Form 10-K.
B. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the three months ended March 31, 2015 and 2014 (dollars in thousands, except per share amounts):
 
 
Three months ended March 31,
 
 
 
2015
 
2014
 
 
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net
Income
 
Weighted
Average
Common
Shares
Outstanding
 
Per
Share
Amount
 
Net income
 
$
19,802

 
 
 
 
 
$
17,029

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

 
62,673,887

 
$
0.32

 
$
17,029

 
57,369,039

 
$
0.30

 
Dilutive shares
 
 
 
167,064

 
 
 
 
 
159,380

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

 
62,840,951

 
$
0.32

 
$
17,029

 
57,528,419

 
$
0.30

 
Anti-dilutive stock options and awards at March 31, 2015 and 2014, totaling 818,059 shares and 838,801 shares, respectively, were excluded from the earnings per share calculations.
Note 2. Business Combinations
On May 30, 2014, the Company completed its acquisition of Team Capital Bank ("Team Capital"), which after purchase accounting adjustments added $964.0 million to total assets, $631.2 million to loans, and $769.9 million to deposits. Total consideration paid for Team Capital was $115.1 million: $31.6 million in cash and 4.9 million shares of common stock valued at $83.5 million on the acquisition date. Team Capital was merged with and into the Company's subsidiary, The Provident Bank, as of the close of business on the date of acquisition.

10



The transaction was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition from Team Capital, net of cash consideration paid (in thousands):
 
 
At May 30, 2014
Assets acquired:
 
 
Cash and cash equivalents, net
 
$
68,650

Securities available for sale
 
157,635

Loans
 
631,209

Bank-owned life insurance
 
22,319

Banking premises and equipment
 
24,778

Accrued interest receivable
 
3,060

Goodwill
 
40,354

Other intangibles assets
 
9,868

Foreclosed assets, net
 
653

Other assets
 
5,448

Total assets acquired
 
963,974

 
 
 
Liabilities assumed:
 
 
Deposits
 
769,936

Borrowed Funds
 
112,835

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

Net assets acquired
 
$
83,517

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.
Fair Value Measurement of Assets and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the Team Capital acquisition were as follows:
Securities Available for Sale
The estimated fair values of the investment securities classified as available for sale were calculated utilizing Level 1 and Level 2 inputs. Management reviewed the data and assumptions used by its third party provider in pricing the securities to ensure the highest level of significant inputs is derived from observable market data. These prices were validated against other pricing sources and broker-dealer indications.
Loans
The acquired loan portfolio was valued based on current guidance which defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the portfolio and included the use of present value techniques employing cash flow estimates and the incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, Management utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.

11



To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.
The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses; and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the Company, the acquired bank and peer banks. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of familiarity with the originator's underwriting process.
To calculate the specific credit fair value adjustment, management reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting this definition were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount. The accretable yield amount will be recognized over the life of the loans on a level yield basis as an adjustment to yield.
Deposits and Core Deposit Premium
Core deposit premium represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources, and was valued utilizing Level 2 inputs.
Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits, and was valued utilizing Level 2 inputs.
Borrowed Funds
The fair value for borrowed funds was obtained from actual prepayment rates from the Federal Home Loan Bank ("FHLB") of Pittsburgh, a Level 2 input. These borrowings were redeemed after the acquisition date and the fair value adjustment was fully amortized in the quarter ended June 30, 2014.
Note 3. Investment Securities
At March 31, 2015, the Company had $1.05 billion and $473.7 million in available for sale and held to maturity investment securities, respectively. Many factors, including lack of liquidity in the secondary market for certain securities, variations in pricing information, regulatory actions, changes in the business environment or any changes in the competitive marketplace could have an adverse effect on the Company’s investment portfolio which could result in other-than-temporary impairment on certain investment securities in future periods. The total number of held to maturity and available for sale securities in an unrealized loss position as of March 31, 2015 totaled 131, compared with 206 at December 31, 2014. All securities with unrealized losses at March 31, 2015 were analyzed for other-than-temporary impairment. Based upon this analysis, the Company believes that as of March 31, 2015, such securities with unrealized loss positions do not represent impairments that are other-than-temporary.
Securities Available for Sale
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the fair value for securities available for sale at March 31, 2015 and December 31, 2014 (in thousands):
 

March 31, 2015
 

Amortized
cost

Gross
unrealized
gains

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

 
58

 

 
8,071

Agency obligations

94,719


442


(4
)
 
95,157

Mortgage-backed securities

913,848


19,120


(855
)
 
932,113

State and municipal obligations

5,934


149



 
6,083

Corporate obligations
 
5,517

 
87

 
(8
)
 
5,596

Equity securities

397


142



 
539

 

$
1,028,428


19,998


(867
)
 
1,047,559


12



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

 
3

 
(3
)
 
8,016

Agency obligations
 
94,871

 
268

 
(63
)
 
95,076

Mortgage-backed securities
 
944,796

 
15,610

 
(3,149
)
 
957,257

State and municipal obligations
 
6,855

 
147

 

 
7,002

Corporate obligations
 
6,526

 
9

 
(15
)
 
6,520

Equity securities
 
397

 
127

 

 
524

 
 
$
1,061,461

 
16,164

 
(3,230
)
 
1,074,395

The amortized cost and fair value of securities available for sale at March 31, 2015, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
 
 
March 31, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less
 
$
30,687

 
30,771

Due after one year through five years
 
77,505

 
77,984

Due after five years through ten years
 
3,017

 
3,102

Due after ten years
 
2,974

 
3,050

 
 
$
114,183

 
114,907

Mortgage-backed securities totaling $913.8 million at amortized cost and $932.1 million at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments. Also excluded from the table above are equity securities of $397,000 at amortized cost and $539,000 at fair value.
There were no sales of securities from the available for sale portfolio during the three months ended March 31, 2015. For the same period last year, proceeds from the sale of securities available for sale were $6,085,000, resulting in gross losses of $365,000 and no gross gains. Also, for the three months ended March 31, 2015, proceeds from calls on securities available for sale totaled $465,000, resulting in gross gains of $2,000 and no gross losses. For the three months ended March 31, 2014, proceeds from calls on securities available for sale totaled $740,000 resulting in gross gains of $2,000 and no gross losses.
The following table presents a roll-forward of the credit loss component of other-than-temporary impairment (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income. OTTI recognized in earnings for credit-impaired debt securities is presented in two components based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment), or whether the current period is not the first time a debt security was credit-impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows (in thousands):
 
 
Three months ended March 31,
 
 
2015
 
2014
Beginning credit loss amount

$

 
1,674

Add: Initial OTTI credit losses


 

Subsequent OTTI credit losses


 

Less: Realized losses for securities sold


 
1,540

Securities intended or required to be sold


 

Increases in expected cash flows on debt securities


 

Ending credit loss amount

$

 
134

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

13



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

March 31, 2015 Unrealized Losses
 

Less than 12 months
 
12 months or longer
 
Total
 

Fair value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
Agency obligations

8,092

 
(4
)
 

 

 
8,092

 
(4
)
Mortgage-backed securities

97,490

 
(350
)
 
54,204

 
(505
)
 
151,694

 
(855
)
Corporate obligations
 
995

 
(8
)
 

 

 
995

 
(8
)


$
106,577

 
(362
)
 
54,204

 
(505
)
 
160,781

 
(867
)
 

December 31, 2014 Unrealized Losses
 

Less than 12 months
 
12 months or longer
 
Total
 

Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
US Treasury obligations
 
$
5,937

 
(3
)
 

 

5,937,000

5,937

 
(3
)
Agency obligations

$
24,404

 
(40
)
 
5,010

 
(23
)
 
29,414

 
(63
)
Mortgage-backed securities

55,488

 
(221
)
 
206,669

 
(2,928
)
 
262,157

 
(3,149
)
Corporate obligations
 
3,466

 
(15
)
 

 

3,466,000

3,466

 
(15
)


$
89,295

 
(279
)
 
211,679

 
(2,951
)
 
300,974

 
(3,230
)
The temporary loss position associated with securities available for sale was the result of changes in market interest rates relative to the coupon of the individual security and changes in credit spreads. The Company does not have the intent to sell securities in a temporary loss position at March 31, 2015, nor is it more likely than not that the Company will be required to sell the securities before their prices recover.
The number of available for sale securities in an unrealized loss position at March 31, 2015 totaled 21, compared with 43 at December 31, 2014. At March 31, 2015, there were four private label mortgage-backed securities in an unrealized loss position, with an amortized cost of $3,003,000 and an unrealized loss of $21,000. These private label mortgage-backed securities were above investment grade at March 31, 2015.
The Company estimates the loss projections for each security by stressing the individual loans collateralizing the security and applying a range of expected default rates, loss severities, and prepayment speeds in conjunction with the underlying credit enhancement for each security. Based on specific assumptions about collateral and vintage, a range of possible cash flows was identified to determine whether other-than-temporary impairment existed during the three months ended March 31, 2015. The Company believes that no other-than-temporary impairment of the securities available for sale portfolio existed at March 31, 2015.
Investment Securities Held to Maturity
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and the estimated fair value for investment securities held to maturity at March 31, 2015 and December 31, 2014 (in thousands):

14



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

$
7,131

 
21

 
(9
)
 
7,143

Mortgage-backed securities

2,511

 
109

 

 
2,620

State and municipal obligations

453,339

 
14,715

 
(933
)
 
467,121

Corporate obligations

10,723

 
65

 
(1
)
 
10,787

 

$
473,704

 
14,910

 
(943
)
 
487,671

 
 
 
 
 
 
 
 
 
 

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

$
6,813

 
17

 
(20
)
 
6,810

Mortgage-backed securities

2,816

 
123

 

 
2,939

State and municipal obligations

449,410

 
13,814

 
(986
)
 
462,238

Corporate obligations

10,489

 
29

 
(32
)
 
10,486

 

$
469,528

 
13,983

 
(1,038
)
 
482,473

The Company generally purchases securities for long-term investment purposes, and differences between amortized cost and fair values may fluctuate during the investment period. For the three months ended March 31, 2015, proceeds from calls on securities available for sale totaled $4,073,000, with no gross gains or losses recognized. For the three months ended March 31, 2014, the Company recognized gains of $13,000 and no gross losses related to calls of certain securities in the held to maturity portfolio, with proceeds from the calls totaling $6,395,000. There were no sales of securities from the held to maturity portfolio for the three months ended March 31, 2015 and 2014.
The amortized cost and fair value of investment securities in the held to maturity portfolio at March 31, 2015 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer.
 
 
March 31, 2015
 
 
Amortized
cost
 
Fair
value
Due in one year or less

$
8,452

 
8,503

Due after one year through five years

59,079

 
60,587

Due after five years through ten years

186,690

 
194,565

Due after ten years

216,972

 
221,396

 

$
471,193

 
485,051

Mortgage-backed securities totaling $2.5 million at amortized cost and $2.6 million at fair value are excluded from the table above as their expected lives are likely to be shorter than the contractual maturity date due to principal prepayments.
The following tables represent the Company’s disclosure on investment securities held to maturity with temporary impairment at March 31, 2015 and December 31, 2014 (in thousands):
 
 
March 31, 2015 Unrealized Losses
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
Agency obligations

$
299

 
(1
)
 
1,972

 
(8
)
 
2,271

 
(9
)
State and municipal obligations

42,209

 
(470
)
 
16,422

 
(463
)
 
58,631

 
(933
)
Corporate obligations

250

 

 
501

 
(1
)
 
751

 
(1
)
 

$
42,758

 
(471
)
 
18,895

 
(472
)
 
61,653

 
(943
)

15



 
 
December 31, 2014 Unrealized Losses
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
Agency obligations
 
$
3,735

 
(20
)
 

 

 
3,735

 
(20
)
State and municipal obligations
 
27,679

 
(217
)
 
47,079

 
(769
)
 
74,758

 
(986
)
Corporate obligations
 
6,888

 
(32
)
 

 

 
6,888

 
(32
)
 
 
$
38,302

 
(269
)
 
47,079

 
(769
)
 
85,381

 
(1,038
)
Based upon the review of the held to maturity securities portfolio, the Company believes that as of March 31, 2015, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary. The review of the portfolio for other-than-temporary impairment considers the percentage and length of time the fair value of an investment is below book value, as well as general market conditions, changes in interest rates, credit risks, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company would be required to sell the securities before their prices recover.
The number of securities in an unrealized loss position at March 31, 2015 totaled 110, compared with 163 at December 31, 2014. The decrease in the number of securities in an unrealized loss position at March 31, 2015, was largely due to a reduction in market interest rates from December 31, 2014. All temporarily impaired investment securities were investment grade at March 31, 2015.

16



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

 
1,251,445

Commercial
 
1,688,083

 
1,694,359

Multi-family
 
1,070,294

 
1,041,582

Construction
 
274,001

 
221,102

Total mortgage loans
 
4,278,089

 
4,208,488

Commercial loans
 
1,242,565

 
1,262,422

Consumer loans
 
601,190

 
611,467

Total gross loans
 
6,121,844

 
6,082,377

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

 
4,510

Premiums on purchased loans
 
5,386

 
5,307

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

 
6,085,505

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
 
 
March 31, 2015
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Total Past
Due and
Non-accrual
 
Current
 
Total Loans
Receivable
 
Recorded
Investment
> 90 days
accruing
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
8,871

 
5,832

 
16,913

 
31,616

 
1,214,095

 
1,245,711

 

Commercial
 
1,485

 
292

 
18,203

 
19,980

 
1,668,103

 
1,688,083

 

Multi-family
 
526

 

 
322

 
848

 
1,069,446

 
1,070,294

 

Construction
 

 

 

 

 
274,001

 
274,001

 

Total mortgage loans
 
10,882

 
6,124

 
35,438

 
52,444

 
4,225,645

 
4,278,089

 

Commercial loans
 
3,352

 
18

 
12,035

 
15,405

 
1,227,160

 
1,242,565

 

Consumer loans
 
3,599

 
1,020

 
3,415

 
8,034

 
593,156

 
601,190

 

Total gross loans
 
$
17,833

 
7,162

 
50,888

 
75,883

 
6,045,961

 
6,121,844

 

 
 
December 31, 2014
 
 
30-59
Days
 
60-89
Days
 
Non-accrual
 
Total Past
Due and
Non-accrual
 
Current
 
Total Loans
Receivable
 
Recorded
Investment
> 90 days
accruing
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
10,121

 
4,331

 
17,222

 
31,674

 
1,219,771

 
1,251,445

 

Commercial
 
146

 
30

 
20,026

 
20,202

 
1,674,157

 
1,694,359

 

Multi-family
 

 

 
321

 
321

 
1,041,261

 
1,041,582

 

Construction
 

 

 

 

 
221,102

 
221,102

 

Total mortgage loans
 
10,267

 
4,361

 
37,569

 
52,197

 
4,156,291

 
4,208,488

 

Commercial loans
 
1,000

 
371

 
12,342

 
13,713

 
1,248,709

 
1,262,422

 

Consumer loans
 
2,398

 
2,509

 
3,944

 
8,851

 
602,616

 
611,467

 

Total gross loans
 
$
13,665

 
7,241

 
53,855

 
74,761

 
6,007,616

 
6,082,377

 


17



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

March 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
65,563

 
22,849

 
2,396

 
90,808

Collectively evaluated for impairment

4,212,526

 
1,219,716

 
598,794

 
6,031,036

Total

$
4,278,089

 
1,242,565

 
601,190

 
6,121,844

 

December 31, 2014
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments
Individually evaluated for impairment

$
66,548

 
16,463

 
2,384

 
85,395

Collectively evaluated for impairment

4,141,940

 
1,245,959

 
609,083

 
5,996,982

Total

$
4,208,488

 
1,262,422

 
611,467

 
6,082,377


18



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

March 31, 2015
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Unallocated

Total
Individually evaluated for impairment

$
4,896

 
1,648

 
109

 
6,653

 

 
6,653

Collectively evaluated for impairment

27,990

 
22,049

 
4,168

 
54,207

 
250

 
54,457

Total

$
32,886

 
23,697

 
4,277

 
60,860

 
250

 
61,110

 

December 31, 2014
 

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Unallocated

Total
Individually evaluated for impairment

$
4,696

 
2,318

 
113

 
7,127

 

 
7,127

Collectively evaluated for impairment

27,281

 
22,063

 
4,768

 
54,112

 
495

 
54,607



$
31,977

 
24,381

 
4,881

 
61,239

 
495

 
61,734

Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, the Company attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
The following tables present the number of loans modified as TDRs during the three months ended March 31, 2015 and 2014 along with their balances immediately prior to the modification date and post-modification as of March 31, 2015 and 2014:
 

For the three months ended
 

March 31, 2015

March 31, 2014
Troubled Debt Restructuring

Number  of
Loans

Pre-Modification
Outstanding
Recorded 
Investment

Post-Modification
Outstanding
Recorded  Investment

Number  of
Loans

Pre-Modification
Outstanding
Recorded  Investment

Post-Modification
Outstanding
Recorded  Investment
 

($ in thousands)
Mortgage loans:












Residential

2

 
$
322

 
$
321

 
4

 
$
875

 
$
835

Construction
 
1

 
2,600

 
347

 

 

 

Total mortgage loans

3

 
2,922

 
668

 
4

 
875

 
835

Commercial loans

4

 
6,659

 
6,898

 
1

 
116

 
28

Consumer loans

1

 
44

 
42

 

 

 

Total restructured loans

8

 
$
9,625

 
$
7,608

 
5

 
$
991

 
$
863

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

19



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

 
$

 
1

 
$
90

Total mortgage loans
 

 

 
1

 
90

Commercial loans
 

 

 
3

 
$
1,647

Total restructured loans
 
$

 
$

 
4

 
$
1,737

TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs.
PCI loans are loans acquired at a discount primarily due to deteriorated credit quality. As part of the Team Capital acquisition, $5.2 million of the loans purchased at May 30, 2014 were determined to be PCI loans. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.
The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired from Team Capital at May 30, 2014 (in thousands):
 
 
May 30, 2014
Contractually required principal and interest
 
$
12,505

Contractual cash flows not expected to be collected (non-accretable discount)
 
(6,475
)
Expected cash flows to be collected at acquisition
 
6,030

Interest component of expected cash flows (accretable yield)
 
(810
)
Fair value of acquired PCI loans
 
$
5,220

PCI loans declined $225,000 to $4.3 million at March 31, 2015, from $4.5 million at December 31, 2014, largely due to the full repayment and greater than projected cash flows on certain PCI loans. This resulted in a $76,000 increase in interest income for the three months ended March 31, 2015, due to the acceleration of accretable and non-accretable discount on these loans.
The following table summarizes the changes in the accretable yield for PCI loans during the three months ended March 31, 2015 (in thousands):
 
Three months ended March 31, 2015
Beginning balance
$
695

Acquisition

Accretion
(198
)
Reclassification from non-accretable discount
184

Ending balance
$
681


20



The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
Three months ended March 31,

Mortgage
loans

Commercial
loans

Consumer
loans

Total Portfolio
Segments

Unallocated

Total
2015












Balance at beginning of period

$
31,977

 
24,381

 
4,881

 
61,239

 
495

 
61,734

Provision charged to operations

1,038

 
(477
)
 
284

 
845

 
(245
)
 
600

Recoveries of loans previously charged-off

65

 
215

 
211

 
491

 

 
491

Loans charged-off

(194
)
 
(422
)
 
(1,099
)
 
(1,715
)
 

 
(1,715
)
Balance at end of period

$
32,886

 
23,697

 
4,277

 
60,860

 
250

 
61,110

 
 
 
 
 
 
 
 
 
 
 
 
 
2014












Balance at beginning of period

$
34,144

 
24,107

 
4,929

 
63,180

 
1,484

 
64,664

Provision charged to operations

(2,000
)
 
1,330

 
144

 
(526
)
 
926

 
400

Recoveries of loans previously charged-off

67

 
243

 
121

 
431

 

 
431

Loans charged-off

(741
)
 
(519
)
 
(815
)
 
(2,075
)
 

 
(2,075
)
Balance at end of period

$
31,470

 
25,161

 
4,379

 
61,010

 
2,410

 
63,420



21



The following table presents loans individually evaluated for impairment by portfolio segment and class, excluding PCI loans (in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Loans with no related allowance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
15,230

 
10,895

 

 
11,048

 
107

 
14,942

 
10,629

 

 
11,138

 
357

Commercial
 
2,613

 
2,574

 

 
2,574

 

 
4,971

 
4,708

 

 
4,713

 

Multi-family
 

 

 

 

 

 

 

 

 

 

Construction
 

 

 

 

 

 

 

 

 

 

Total
 
17,843

 
13,469

 

 
13,622

 
107

 
19,913

 
15,337

 

 
15,851

 
357

Commercial loans
 
8,925

 
8,387

 

 
8,501

 
60

 
2,718

 
2,179

 

 
1,823

 
4

Consumer loans
 
1,302

 
854

 

 
862

 
8

 
1,250

 
830

 

 
870

 
28

Total loans
 
$
28,070

 
22,710

 

 
22,985

 
175

 
23,881

 
18,346

 

 
18,544

 
389

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
15,444

 
14,824

 
2,382

 
14,864

 
386

 
15,523

 
14,906

 
2,367

 
15,106

 
555

Commercial
 
38,382

 
36,923

 
2,504

 
37,021

 
239

 
37,555

 
36,306

 
2,329

 
36,674

 
914

Multi-family
 

 

 

 

 

 

 

 

 

 

Construction
 
347

 
347

 
10

 
347

 
14

 

 

 

 

 

Total
 
54,173

 
52,094

 
4,896

 
52,232

 
639

 
53,078

 
51,212

 
4,696

 
51,780

 
1,469

Commercial loans
 
16,257

 
14,462

 
1,648

 
14,673

 
75

 
15,990

 
14,283

 
2,318

 
15,967

 
390

Consumer loans
 
1,552

 
1,542

 
109

 
1,548

 
19

 
1,565

 
1,554

 
113

 
1,578

 
80

Total loans
 
$
71,982

 
68,098

 
6,653

 
68,453

 
733

 
70,633

 
67,049

 
7,127

 
69,325

 
1,939

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total impaired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
30,674

 
25,719

 
2,382

 
25,912

 
493

 
30,465

 
25,535

 
2,367

 
26,244

 
912

Commercial
 
40,995

 
39,497

 
2,504

 
39,595

 
239

 
42,526

 
41,014

 
2,329

 
41,387

 
914

Multi-family
 

 

 

 

 

 

 

 

 

 

Construction
 
347

 
347

 
10

 
347

 
14

 

 

 

 

 

Total
 
72,016

 
65,563

 
4,896

 
65,854

 
746

 
72,991

 
66,549

 
4,696

 
67,631

 
1,826

Commercial loans
 
25,182

 
22,849

 
1,648

 
23,174

 
135

 
18,708

 
16,462

 
2,318

 
17,790

 
394

Consumer loans
 
2,854

 
2,396

 
109

 
2,410

 
27

 
2,815

 
2,384

 
113

 
2,448

 
108

Total loans
 
$
100,052

 
90,808

 
6,653

 
91,438

 
908

 
94,514

 
85,395

 
7,127

 
87,869

 
2,328

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $6,653,000 and $7,127,000 at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, impaired loans for which there was no related allowance for loan losses totaled $22,710,000 and $18,346,000, respectively. The average balance of impaired loans during the three months ended March 31, 2015 and December 31, 2014 was $91,438,000 and $87,869,000, respectively.
The Company utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse

22



classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in his or her portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Administration Department. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party. Reports by the independent third party are presented directly to the Audit Committee of the Board of Directors.
Loans receivable by credit quality risk rating indicator, excluding PCI loans, are as follows (in thousands):
 

At March 31, 2015
 

Residential

Commercial
mortgage

Multi-
family

Construction

Total
mortgages

Commercial

Consumer

Total loans
Special mention

$
5,832

 
43,749

 
1,105

 

 
50,686

 
57,403

 
1,020

 
109,109

Substandard

16,913

 
30,773

 
847

 
347

 
48,880

 
32,410

 
3,165

 
84,455

Doubtful


 
1,061

 

 

 
1,061

 
28

 

 
1,089

Loss


 

 

 

 

 

 

 

Total classified and criticized

22,745

 
75,583

 
1,952

 
347

 
100,627

 
89,841

 
4,185

 
194,653

Pass/Watch

1,222,966

 
1,612,500

 
1,068,342

 
273,654

 
4,177,462

 
1,152,724

 
597,005

 
5,927,191

Total

$
1,245,711

 
1,688,083

 
1,070,294

 
274,001

 
4,278,089

 
1,242,565

 
601,190

 
6,121,844

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At December 31, 2014
 

Residential

Commercial
mortgage

Multi-
family

Construction

Total
mortgages

Commercial

Consumer

Total loans
Special mention

$
4,331

 
18,414

 
851

 

 
23,596

 
45,599

 
2,509

 
71,704

Substandard

17,222

 
53,454

 
322

 
2,600

 
73,598

 
32,828

 
3,938

 
110,364

Doubtful


 
1,063

 

 

 
1,063

 
29

 

 
1,092

Loss


 

 

 

 

 

 

 

Total classified and criticized

21,553

 
72,931

 
1,173

 
2,600

 
98,257

 
78,456

 
6,447

 
183,160

Pass/Watch

1,229,892

 
1,621,428

 
1,040,409

 
218,502

 
4,110,231

 
1,183,966

 
605,020

 
5,899,217

Total

$
1,251,445

 
1,694,359

 
1,041,582

 
221,102

 
4,208,488

 
1,262,422

 
611,467

 
6,082,377

Note 5. Deposits
Deposits at March 31, 2015 and December 31, 2014 are summarized as follows (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Savings
 
$
985,464

 
995,347

Money market
 
1,501,964

 
1,496,466

NOW
 
1,454,504

 
1,425,424

Non-interest bearing
 
1,075,197

 
1,049,597

Certificates of deposit
 
805,922

 
825,689

Total
 
$
5,823,051

 
5,792,523

Note 6. Components of Net Periodic Benefit Cost
The Bank has a noncontributory defined benefit pension plan (the “Plan”) covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003, the date on which the Plan was frozen. All participants in the Plan are 100% vested. The Plan’s assets are invested in investment funds and group annuity contracts currently managed by the Principal Financial Group and Allmerica Financial. In an effort to lower and reduce the volatility of its future pension costs, the Company offered a lump sum pension distribution option to its vested terminated employees in the quarter ended June 30, 2014, and the Plan paid $4.3 million to those employees that elected to receive lump sum pension distributions and the Company realized an associated charge of $1.3 million. This charge was a pro rata share of the unrecognized losses recorded in other comprehensive income.

23



In addition to pension benefits, certain health care and life insurance benefits are currently made available to certain of the Bank’s retired employees. The costs of such benefits are accrued based on actuarial assumptions from the date of hire to the date the employee became fully eligible to receive the benefits. Effective January 1, 2003, eligibility for retiree health care benefits was frozen as to new entrants, and benefits were eliminated for employees with less than 10 years of service as of December 31, 2002. Effective January 1, 2007, eligibility for retiree life insurance benefits was frozen as to new entrants, and retiree life insurance benefits were eliminated for employees with less than 10 years of service as of December 31, 2006.
Net periodic benefit (increase) cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2015 and 2014 included the following components (in thousands):
 

Three months ended March 31,
 

Pension
benefits

Other post-
retirement
benefits
 

2015

2014

2015

2014
Service cost

$

 

 
42

 
42

Interest cost

284

 
352

 
281

 
272

Expected return on plan assets

(633
)
 
(894
)
 

 

Amortization of prior service cost


 

 

 
(1
)
Amortization of the net loss

194

 
93

 

 
(51
)
Net periodic benefit (increase) cost

$
(155
)
 
(449
)
 
323

 
262

The net periodic benefit (increase) cost for pension benefits and other post-retirement benefits for the three months ended March 31, 2015 was calculated using the actual January 1, 2015 pension valuation and the other post-retirement benefits valuations.
Note 7. Impact of Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14, “Receivables - Troubled Debt Restructurings by Creditors: Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this update affect creditors that hold government guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration and the U.S. Department of Veterans Affairs. The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure, (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company's adoption of this ASU did not have a significant impact on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period," which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a significant impact on the Company’s consolidated financial statements.
Also in June 2014, the FASB issued ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" which aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. This update is effective for the first interim or annual period beginning after December 15, 2014. In addition the disclosure of certain transactions accounted for as a sale is effective for the first interim or annual period

24



beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is prohibited. The Company's adoption of this ASU did not have a significant impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are in the scope of other standards. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016. The Company does not expect that the adoption of this guidance will have a significant impact on the Company’s consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” which clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual and interim periods beginning after December 15, 2014. The Company’s adoption of this ASU did not have a significant impact on its consolidated financial statements.
Note 8. Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, the Company utilizes various valuation techniques to estimate fair value.
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the financial instrument.
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted pric es in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:
Level 1:
  
Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
 
Level 2:
  
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and
 
 
Level 3:
  
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The valuation techniques described below were used to measure fair value of financial instruments in the table below on a recurring basis as of March 31, 2015 and December 31, 2014.

25


Securities Available for Sale
For securities available for sale, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark to comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also may hold equity securities and debt instruments issued by the U.S. government and U.S. government-sponsored agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs.
Derivatives
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships. The existing interest rate derivatives result from a service provided to certain qualifying borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings. The fair value of the Company's derivatives are determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 inputs.
Assets Measured at Fair Value on a Non-Recurring Basis
The valuation techniques described below were used to estimate fair value of financial instruments measured on a non-recurring basis as of March 31, 2015 and December 31, 2014.
For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case-by-case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell of up to 6%. The Company classifies these loans as Level 3 within the fair value hierarchy.
Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated selling costs of up to 6%. Fair value is generally based on independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraisers’ market knowledge and experience, and are classified as Level 3. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred.
There were no changes to the valuation techniques for fair value measurements as of March 31, 2015 and December 31, 2014.

26


The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair values as of March 31, 2015 and December 31, 2014, by level within the fair value hierarchy:
 

Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)

March 31, 2015

Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)

Significant Other
Observable  Inputs
(Level 2)

Significant
Unobservable
Inputs (Level 3)
Measured on a recurring basis:








Securities available for sale:

 
 
 
 
 
 
 
US Treasury obligations
 
$
8,071

 
8,071

 

 

Agency obligations

95,157

 
95,157

 

 

Mortgage-backed securities

932,113

 

 
932,113

 

State and municipal obligations

6,083

 

 
6,083

 

Corporate obligations
 
5,596

 

 
5,596

 

Equity securities

539

 
539

 

 

Total securities available for sale

1,047,559

 
103,767

 
943,792

 

Asset derivatives
 
3,216

 

 
3,216

 

 
 
$
1,050,775

 
103,767

 
947,008

 

 
 
 
 
 
 
 
 
 
Liability derivatives
 
$
3,285

 

 
3,285

 

 
 
 
 
 
 
 
 
 
Measured on a non-recurring basis:

 
 
 
 
 
 
 
Loans measured for impairment based on the fair value of the underlying collateral

$
23,010

 

 

 
23,010

Foreclosed assets

5,924

 

 

 
5,924



$
28,934

 

 

 
28,934

 

Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)

December 31, 2014

Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)

Significant Other
Observable  Inputs
(Level 2)

Significant
Unobservable
Inputs (Level 3)
Measured on a recurring basis:








Securities available for sale:








US Treasury obligations
 
$
8,016

 
8,016

 

 

Agency obligations

95,076

 
95,076

 

 

Mortgage-backed securities

957,257

 

 
957,257

 

State and municipal obligations

7,002

 

 
7,002

 

Equity securities

524

 
524

 

 



1,074,395

 
103,616

 
970,779

 

Asset derivatives
 
2,046

 

 
2,046

 
 
 
 
$
1,076,441

 
$
103,616

 
$
972,825

 
$

 
 
 
 
 
 
 
 
 
Liability derivatives
 
$
2,052

 
 
 
2,052

 
 
 
 
 
 
 
 
 
 
 
Measured on a non-recurring basis:

 
 
 
 
 
 
 
Loans measured for impairment based on the fair value of the underlying collateral

$
23,086

 

 

 
23,086

Foreclosed assets

5,098

 

 

 
5,098



$
28,184

 

 

 
28,184

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2015.

27


Other Fair Value Disclosures
The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities.
Cash and Cash Equivalents
For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value.
Investment Securities Held to Maturity
For investment securities held to maturity, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy.

FHLB-NY Stock
The carrying value of FHLB of New York (FHLB-NY) stock was its cost. The fair value of FHLB-NY stock is based on redemption at par value. The Company classifies the estimated fair value as Level 1 within the fair value hierarchy.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and into performing and non-performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash flow model that utilizes a discount rate that reflects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifies the estimated fair value of its loan portfolio as Level 3.
The fair value for significant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows and estimated selling costs. The Company classifies the estimated fair value of its non-performing loan portfolio as Level 3.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits and savings deposits, was equal to the amount payable on demand and classified as Level 1. The estimated fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifies the estimated fair value of its certificates of deposit portfolio as Level 2.
Borrowed Funds
The fair value of borrowed funds was estimated by discounting future cash flows using rates available for debt with similar terms and maturities and is classified by the Company as Level 2 within the fair value hierarchy.
Commitments to Extend Credit and Letters of Credit
The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value estimates of commitments to extend credit and letters of credit are deemed immaterial.

28


Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following tables present the Company’s financial instruments at their carrying and fair values as of March 31, 2015 and December 31, 2014. Fair values are presented by level within the fair value hierarchy.
 
 
 
 
Fair Value Measurements at March 31, 2015 Using:
(Dollars in thousands)
 
Carrying
value
 
Fair
value
 
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
 
Significant  Other
Observable  Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
90,874

 
90,874

 
90,874

 

 

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
US Treasury obligations
 
8,071

 
8,071

 
8,071

 

 

Agency obligations
 
95,157

 
95,157

 
95,157

 

 

Mortgage-backed securities
 
932,113

 
932,113

 

 
932,113

 

State and municipal obligations
 
6,083

 
6,083

 

 
6,083

 

Corporate obligations
 
5,596

 
5,596

 

 
5,596

 

Equity securities
 
539

 
539

 
539

 

 

Total securities available for sale
 
$
1,047,559

 
1,047,559

 
103,767

 
943,792

 

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
Agency obligations
 
7,131

 
7,143

 
7,143

 

 

Mortgage-backed securities
 
2,511

 
2,620

 

 
2,620

 

State and municipal obligations
 
453,339

 
467,121

 

 
467,121

 

Corporate obligations
 
10,723

 
10,787

 

 
10,787

 

Total securities held to maturity
 
$
473,704

 
487,671

 
7,143

 
480,528

 

FHLB-NY stock
 
67,455

 
67,455

 
67,455

 

 

Loans, net of allowance for loan losses
 
6,063,589

 
6,165,229

 

 

 
6,165,229

Asset derivative
 
3,216

 
3,216

 

 
3,216

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits other than certificates of deposits
 
$
5,017,129

 
5,017,129

 
5,017,129

 

 

Certificates of deposit
 
805,922

 
809,036

 

 
809,036

 

Total deposits
 
5,823,051

 
5,826,165

 
5,017,129

 
809,036

 

Borrowings
 
1,468,404

 
1,489,209

 

 
1,489,209

 

Liability derivative
 
3,285

 
3,285

 

 
3,285

845,000



29


 
 
 
 
Fair Value Measurements at December 31, 2014 Using:
(Dollars in thousands)
 
Carrying
value
 
Fair
value
 
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
 
Significant  Other
Observable  Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
103,762

 
103,762

 
103,762

 

 

Securities available for sale:
 
 
 
 
 
 
 
 
 
 
US Treasury obligations
 
8,016

 
8,016

 
8,016

 

 

Agency obligations
 
95,076

 
95,076

 
95,076

 

 

Mortgage-backed securities
 
957,257

 
957,257

 

 
957,257

 

State and municipal obligations
 
7,002

 
7,002

 

 
7,002

 

Corporate obligations
 
6,520

 
6,520

 

 
6,520

 

Equity securities
 
524

 
524

 
524

 

 

Total securities available for sale
 
$
1,074,395

 
1,074,395

 
103,616

 
970,779

 

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
Agency obligations
 
$
6,813

 
6,810

 
6,810

 

 

Mortgage-backed securities
 
2,816

 
2,939

 

 
2,939

 

State and municipal obligations
 
449,410

 
462,238

 

 
462,238

 

Corporate obligations
 
10,489

 
10,486

 

 
10,486

 

Total securities held to maturity
 
$
469,528

 
482,473

 
6,810

 
475,663

 

FHLB-NY stock
 
69,789

 
69,789

 
69,789

 

 

Loans, net of allowance for loan losses
 
6,023,771

 
6,104,558

 

 

 
6,104,558

Asset derivative
 
2,046

 
2,046

 
 
 
2,046

 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits other than certificates of deposits
 
$
4,966,834

 
4,966,834

 
4,966,834

 

 

Certificates of deposit
 
825,689

 
830,233

 

 
830,233

 

Total deposits
 
$
5,792,523

 
5,797,067

 
4,966,834

 
830,233

 

Borrowings
 
1,509,851

 
1,516,966

 

 
1,516,966

 

Liability derivative
 
2,052

 
2,052

 
 
 
2,052

 
 
Note 9. Other Comprehensive Income
The following table presents the components of other comprehensive income both gross and net of tax, for the three months ended March 31, 2015 and 2014 (in thousands):

30



 
 
Three months ended March 31,
 
 
2015
 
2014
 
 
Before
Tax
 
Tax
Effect
 
After
Tax
 
Before
Tax
 
Tax
Effect
 
After
Tax
Components of Other Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains and losses on securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Net gains arising during the period
 
$
6,202

 
(2,491
)
 
3,711

 
6,287

 
(2,568
)
 
3,719

Reclassification adjustment for (gains) losses included in net income
 
(2
)
 
1

 
(1
)
 
350

 
(143
)
 
207

Total
 
6,200

 
(2,490
)
 
3,710

 
6,637

 
(2,711
)
 
3,926

Amortization related to post-retirement obligations
 
(7
)
 
3

 
(4
)
 
(81
)
 
33

 
(48
)
Total other comprehensive income
 
$
6,193

 
(2,487
)
 
3,706

 
6,556

 
(2,678
)
 
3,878

The following tables present the changes in the components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2015 and 2014 (in thousands):
 
 
Changes in Accumulated Other Comprehensive Income by Component, net of tax
For the three months ended March 31,
 
 
2015
 
2014
 
 
Unrealized
Gains on Securities
Available for 
Sale
 
Post  Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income
 
Unrealized
Gains on Securities
Available for 
Sale
 
Post  Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income
Balance at December 31,
 
$
7,743

 
(7,714
)
 
29

 
(2,799
)
 
(2,052
)
 
(4,851
)
Current period change in other comprehensive income (loss)
 
3,710

 
(4
)
 
3,706

 
3,926

 
(48
)
 
3,878

Balance at March 31,
 
$
11,453

 
(7,718
)
 
3,735

 
1,127

 
(2,100
)
 
(973
)
The following tables summarize the reclassifications out of accumulated other comprehensive income to the consolidated statements of income for the three months ended March 31, 2015 and 2014 (in thousands):
 
 
Reclassifications Out of Accumulated Other Comprehensive
Income ("AOCI")
 
 
Amount reclassified from AOCI for the three months ended March 31,
 
Affected line item in the Consolidated
Statement of Income
 
 
2015
 
2014
 
Details of AOCI:
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
Realized net gains on the sale of securities available for sale
 
$
2

 
$
(350
)
 
Net gain on securities transactions
 
 
(1
)
 
143

 
Income tax expense
 
 
1

 
(207
)
 
Net of tax
 
 
 
 
 
 
 
Post retirement obligations:
 
 
 
 
 
 
Amortization of actuarial losses (gains)
 
194

 
42

 
Compensation and employee benefits (1)
 
 
(79
)
 
(17
)
 
Income tax expense
 
 
115

 
25

 
Net of tax
Total reclassifications
 
$
116

 
$
(182
)
 
Net of tax
(1)
This item is included in the computation of net periodic benefit cost. See Note 6. Components of Net Periodic Benefit Cost.

31




Note 10. Derivative and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. The Company’s existing interest rate derivatives result from a service provided to certain qualifying borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014 (in thousands):
 
 
As of March 31, 2015
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Consolidated Statements of Financial Condition
 
Fair
Value
 
Consolidated Statements of Financial Condition
 
Fair
Value
Derivatives not designated as a hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
Other assets
 
$
3,208

 
Other liabilities
 
$
3,285

Credit contracts
 
Other assets
 
8

 
 
 

Total derivatives not designated as hedging instruments
 
 
 
$
3,216

 
 
 
$
3,285

 
 
As of December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Consolidated Statements of Financial Condition
 
Fair
Value
 
Consolidated Statements of Financial Condition
 
Fair
Value
Derivatives not designated as a hedging instruments:
 
 
 
 
 
 
 
 
Interest rate products
 
Other assets
 
$
2,040

 
Other liabilities
 
$
2,052

Credit contracts
 
Other assets
 
6

 
 
 

Total derivatives not designated as hedging instruments
 
 
 
$
2,046

 
 
 
$
2,052

None of the Company’s derivatives are designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers, which the Company implemented during the third quarter of 2014. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At March 31, 2015, the Company had eleven interest rate swaps with an aggregate notional amount of $110.7 million, compared with nine interest rate swaps with an aggregate notional amount of $94.9 million at December 31, 2014.

32



The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the quarter ended March 31, 2015 (in thousands).
 
 
 
 
Gain (loss) recognized in Income on derivatives
 
 
Consolidated Statements of Income
 
Three months ended March 31, 2015
Derivatives not designated as a hedging instruments:
 
 
 
 
Interest rate products
 
Other income
 
$
(65
)
Credit contracts
 
Other income
 
1

Total
 
 
 
$
(64
)
The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision that if the Company fails to maintain its status as a well / adequate capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of March 31, 2015, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3,338,000. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $2,980,000 against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2015, it could have been required to settle its obligations under the agreements at the termination value. At March 31, 2015, there were no breaches of any provisions of the Company's derivative agreements with its counterparties.
Note 11. Subsequent Event
On April 1, 2015, Beacon Trust Company ("Beacon") completed its acquisition of certain assets and liabilities of The MDE Group, Inc. and the equity interests of Acertus Capital Management, LLC, both Morristown, New Jersey based registered investment advisers under common ownership. Beacon Trust Company is a wholly owned subsidiary of The Provident Bank which, in turn, is wholly owned by the Company.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Reference is made to the "Risk Factors" disclosure in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company also advises readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not have an obligation to update any such statements to reflect any subsequent events or circumstances after the date of this statement.
Acquisitions
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.

33



On May 30, 2014, the Company completed its acquisition of Team Capital Bank ("Team Capital"), which after the 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 acquisition added 12 full-service banking offices in Bucks, Northampton and Lehigh Counties in Pennsylvania and Essex, Somerset, Hunterdon and Warren Counties in New Jersey.
Critical Accounting Policies
The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies:
Adequacy of the allowance for loan losses
Goodwill valuation and analysis for impairment
Valuation of securities available for sale and impairment analysis
Valuation of deferred tax assets
The calculation of the allowance for loan losses is a critical accounting policy of the Company. The allowance for loan losses is a valuation account that reflects management’s evaluation of the probable losses in the loan portfolio. The Company maintains the allowance for loan losses through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses.
The Company’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on which the collectibility of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.
As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating.
When assigning a risk rating to a loan, management utilizes a nine point internal risk rating system. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial and construction loans are rated individually and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and the Credit Administration Department. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party, and periodically by the Credit Committee in the credit renewal or approval. In addition, the Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk rating
Management assigns general valuation allowance (“GVA”) percentages to each risk rating category for use in allocating the allowance for loan losses, giving consideration to historical loss experience by loan type and other qualitative or environmental factors such as trends and levels of delinquencies, impaired loans, charge-offs, recoveries, loan volume, as well as the national and local economic trends and conditions. The appropriateness of these percentages is evaluated by management at least annually and monitored on a quarterly basis, with changes made when they are required. In the second quarter of 2014, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, certain GVA percentages applied to residential mortgage, commercial, multi-family and commercial mortgage loans were reduced to reflect the decrease in the historical loss experience and improvements in qualitative factors. In addition, GVA percentages for marine loans were increased due to historical loss experience.
Management believes the primary risks inherent in the portfolio are a decline in the economy, generally a decline in real estate market values, rising unemployment or a protracted period of unemployment at current elevated levels, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one

34



or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio.
Although management believes that the Company has established and maintained the allowance for loan losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy generally have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.
Additional critical accounting policies relate to judgments about other asset impairments, including goodwill, investment securities and deferred tax assets. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates.
Management qualitatively determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing Step 1 of the goodwill impairment test. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to perform Step 1 of the assessment and then, if needed, Step 2 to determine whether goodwill is impaired. However, if it is more likely than not that the fair value of the reporting unit is more than its carrying amount, the entity does not need to apply the two-step impairment test. For this analysis, the Reporting Unit is defined as the Bank, which includes all core and retail banking operations of the Company but excludes the assets, liabilities, equity, earnings and operations held exclusively at the Company level. The guidance provides certain factors an entity should consider in its qualitative assessment in determining whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The factors include:
Macroeconomic conditions, such as deterioration in economic condition and limited access to capital.
Industry and market considerations, such as increased competition, regulatory developments and decline in market-dependent multiples.
Cost factors, such as increased labor costs, cost of materials and other operating costs.
Overall financial performance, such as declining cash flows and decline in revenue or earnings.
Other relevant entity-specific events, such as changes in management, strategy or customers, litigation and contemplation of bankruptcy.
Reporting unit events, such as selling or disposing a portion of a reporting unit and a change in composition of assets.
The Company completed its annual goodwill impairment test as of September 30, 2014. Based upon its qualitative assessment of goodwill, the Company concluded it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, goodwill was not impaired and no further quantitative analysis (Step 1) was warranted.
The Company may, based upon its qualitative assessment, or at its option, perform the two-step process to evaluate the potential impairment of goodwill. If, based upon Step 1, the fair value of the Reporting Unit exceeds its carrying amount, goodwill of the Reporting Unit is considered not impaired. However, if the carrying amount of the Reporting Unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the Reporting Unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.
The Company’s available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in Stockholders’ Equity. Estimated fair values are based on market quotations or matrix pricing as discussed in Note 7 to the consolidated financial statements. Securities which the Company

35



has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Management conducts a periodic review and evaluation of the securities portfolio to determine if any declines in the fair values of securities are other-than-temporary. In this evaluation, if such a decline were deemed other-than-temporary, Management would measure the total credit-related component of the unrealized loss, and recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed-rate securities decreases and as interest rates fall, the fair value of fixed-rate securities increases. The Company determines if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. If either exists, the decline in value is considered other-than-temporary. In this evaluation, the Company did not recognize an other-than-temporary impairment charge on securities for the three months ended March 31, 2015 or 2014.
The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities, utilization against carryback years and estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. At March 31, 2015, the Company maintained a valuation allowance of $242,000, related to unused capital loss carryforwards.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2015 AND DECEMBER 31, 2014
Total assets increased $1.8 million to $8.53 billion at March 31, 2015, from $8.52 billion at December 31, 2014, primarily due to a $39.2 million increase in total loans, partially offset by decreases of $25.0 million and $12.9 million in total investments and cash and cash equivalents, respectively.
Total loans increased $39.2 million, or 0.6%, to $6.12 billion at March 31, 2015, from $6.09 billion at December 31, 2014. Loan originations totaled $530.4 million and loan purchases totaled $23.7 million for the three months ended March 31, 2015. The loan portfolio had net increases of $52.9 million in construction loans and $28.7 million in multi-family mortgage loans, partially offset by net decreases of $19.8 million in commercial loans, $10.3 million in consumer loans, $6.5 million in commercial mortgage loans and $5.7 million in residential mortgage loans. Commercial real estate, commercial and construction loans represented 69.8% of the loan portfolio at March 31, 2015, compared to 69.4% at December 31, 2014.
The Company does not originate or purchase sub-prime or option ARM loans. Prior to September 30, 2008, the Company originated “Alt-A” mortgages in the form of stated income loans with a maximum loan-to-value ratio of 50% on a limited basis. The balance of these “Alt-A” loans at March 31, 2015 was $6.8 million. Of this total, 6 loans totaling $1.2 million were 90 days or more delinquent. General valuation reserves of 5.50%, or $65,000 were allocated to such loans at March 31, 2015.
The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNCs”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $79.1 million and $48.3 million, respectively, at March 31, 2015. No SNCs were 90 days or more delinquent at March 31, 2015.
The Company had outstanding junior lien mortgages totaling $260.2 million at March 31, 2015. Of this total, 25 loans totaling $1.8 million were 90 days or more delinquent. General valuation reserves of 10%, or $179,000, were allocated to such loans which were 90 days or more delinquent at March 31, 2015.
At March 31, 2015, the Company had outstanding indirect marine loans totaling $25.1 million. There was 1 loan totaling $29,471 that was 90 days or more delinquent at March 31, 2015. Marine loans are currently made only on a direct, limited accommodation basis to existing customers.

36



The following table sets forth information regarding the Company’s non-performing assets as of March 31, 2015 and December 31, 2014 (in thousands):


March 31, 2015

December 31, 2014
Mortgage loans:




Residential

$
16,913

 
17,222

Commercial

18,203

 
20,026

Multi-family

322

 
322

Total mortgage loans

35,438

 
37,570

Commercial loans

12,035

 
12,342

Consumer loans

3,415

 
3,944

Total non-performing loans

50,888

 
53,856

Foreclosed assets

5,924

 
5,098

Total non-performing assets

$
56,812

 
58,954

The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of March 31, 2015 and December 31, 2014 (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Mortgage loans:
 
 
 
 
Residential
 
$
5,832

 
4,331

Commercial
 
292

 
30

Total mortgage loans
 
6,124

 
4,361

Commercial loans
 
18

 
371

Consumer loans
 
1,020

 
2,509

Total 60-89 day delinquent loans
 
$
7,162

 
7,241

At March 31, 2015, the allowance for loan losses totaled $61.1 million, or 1.00% of total loans, compared with $61.7 million, or 1.01% of total loans at December 31, 2014. Total non-performing loans were $50.9 million, or 0.83% of total loans at March 31, 2015, compared to $53.9 million, or 0.88% of total loans at December 31, 2014. The $3.0 million decrease in non-performing loans at March 31, 2015 was due to a $1.8 million decrease in non-performing commercial mortgage loans, a $529,000 decrease in non-performing consumer loans, a $308,000 decrease in non-performing residential mortgages and a $307,000 decrease in non-performing commercial loans. Non-performing loans do not include purchased credit impaired ("PCI") loans acquired from Team Capital. At March 31, 2015, PCI loans totaled $4.3 million, compared to $4.5 million at December 31, 2014.
At March 31, 2015, the Company held $5.9 million of foreclosed assets, compared with $5.1 million at December 31, 2014. Foreclosed assets at March 31, 2015 consisted of $3.0 million of residential real estate, $2.9 million of commercial real estate and $44,000 of marine vessels. Total non-performing assets at March 31, 2015 declined $2.1 million, or 3.6%, to $56.8 million, or 0.67% of total assets, from $59.0 million, or 0.69% of total assets at December 31, 2014.
Total investments decreased $25.0 million, or 1.5%, to $1.59 billion at March 31, 2015, from $1.61 billion at December 31, 2014, largely due to principal repayments on mortgage-backed securities and maturities of municipal and agency bonds, partially offset by purchases of mortgage-backed and municipal securities.
Total deposits increased $30.5 million during the three months ended March 31, 2015, to $5.82 billion. Total core deposits, which consist of savings and demand deposit accounts, increased $50.3 million to $5.02 billion at March 31, 2015, while time deposits decreased $19.8 million to $805.9 million at March 31, 2015. The increase in core deposits was largely attributable to growth in both non-interest bearing and interest bearing demand deposits. Non-interest bearing demand deposits increased $25.6 million to $1.08 billion at March 31, 2015. Core deposits represented 86.2% of total deposits at March 31, 2015, compared to 85.7% at December 31, 2014.
Borrowed funds decreased $41.4 million, or 2.7%, during the three months ended March 31, 2015, to $1.47 billion, as shorter-term wholesale funding was replaced by the net inflow of deposits for the period. Borrowed funds represented 17.2% of total assets at March 31, 2015, a decrease from 17.7% at December 31, 2014.
Stockholders’ equity increased $13.6 million, or 1.2%, for the three months ended March 31, 2015, to $1.16 billion, due to net income earned for the period and an increase in unrealized gains on securities available for sale, partially offset by dividends paid

37



to stockholders. Common stock repurchases made in connection with withholding to cover income taxes on stock-based compensation for the three months ended March 31, 2015 totaled 102,943 shares at an average cost of $18.27 per share. At March 31, 2015, 3.3 million shares remained eligible for repurchase under the current authorization. Book value per share and tangible book value per share at March 31, 2015 were $17.76 and $11.57, respectively, compared with $17.63 and $11.40, respectively, at December 31, 2014.
Liquidity and Capital Resources. Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its depositors to fund loans and, securities purchases, deposit outflows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLB-NY and approved broker-dealers.
Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds. Changes in interest rates, local economic conditions and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows.
In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule became effective for the Bank on January 1, 2015. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopts a uniform minimum leverage capital ratio at 4%, increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The Company has chosen to exercise the option to exclude unrealized gains and losses from the calculation of regulatory capital. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.
As of March 31, 2015, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:
 

March 31, 2015
 

Required

Actual
 

Amount

Ratio

Amount

Ratio
 

(Dollars in thousands)
Bank:








Tier 1 leverage capital
 
$
324,476

 
4.00
%
 
$
690,510

 
8.51
%
Common equity Tier 1 risk-based capital
 
289,419

 
4.50
%
 
690,510

 
10.74
%
Tier 1 risk-based capital
 
385,892

 
6.00
%
 
690,510

 
10.74
%
Total risk-based capital
 
514,522

 
8.00
%
 
751,775

 
11.69
%
 
 
 
 
 
 
 
 
 
Company:

 
 
 
 
 
 
 
Tier 1 leverage capital
 
324,480

 
4.00

 
755,622

 
9.31
%
Common equity Tier 1 risk-based capital
 
289,425

 
4.50

 
755,622

 
11.75
%
Tier 1 risk-based capital
 
385,900

 
6.00

 
755,622

 
11.75
%
Total risk-based capital
 
514,533

 
8.00

 
816,887

 
12.70
%
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
General. The Company reported net income of $19.8 million, or $0.32 per basic and diluted share for the three months ended March 31, 2015, compared to net income of $17.0 million, or $0.30 per basic and diluted share for the three months ended March 31, 2014.
Results of operations for the first quarter of 2015 benefited from growth in average loans outstanding, an increase in average non-interest bearing demand deposits and continued improvement in asset quality, partially offset by a reduction in average loan yields.

38



The growth in average loans outstanding for the quarter ended March 31, 2015 reflected the May 30, 2014 acquisition of Team Capital Bank (“Team Capital”), together with organic loan originations.
Net Interest Income. Total net interest income increased $6.7 million to $61.9 million for the quarter ended March 31, 2015, from $55.2 million for the quarter ended March 31, 2014. Interest income for the first quarter of 2015 increased $7.7 million to $72.2 million, from $64.5 million for the same period in 2014. Interest expense increased $1.0 million, or 10.5%, to $10.3 million for the quarter ended March 31, 2015, from $9.3 million for the quarter ended March 31, 2014. The improvement in net interest income was due to growth in average loans outstanding from both loans acquired from Team Capital and organic originations, and an increase in average non-interest bearing demand deposits, partially offset by year-over-year compression in the net interest margin.
The net interest margin for the quarter ended March 31, 2015, decreased 4 basis points to 3.24%, compared with 3.28% for the quarter ended March 31, 2014. The weighted average yield on interest-earning assets decreased 6 basis points to 3.78% for the quarter ended March 31, 2015, compared with 3.84% for the quarter ended March 31, 2014, while the weighted average cost of interest bearing liabilities decreased one basis point to 0.67% for the quarter ended March 31, 2015, compared with 0.68% for the first quarter of 2014. The average cost of interest bearing deposits for the quarter ended March 31, 2015 was 0.31%, compared with 0.35% for the same period last year. Average non-interest bearing demand deposits totaled $1.05 billion for the quarter ended March 31, 2015, compared with $861.9 million for the quarter ended March 31, 2014. The average cost of borrowed funds for the quarter ended March 31, 2015 was 1.82%, compared with 1.87% for the same period last year.
Interest income on loans secured by real estate increased $4.7 million to $43.3 million for the three months ended March 31, 2015, from $38.6 million for the three months ended March 31, 2014. Commercial loan interest income increased $2.9 million, or 27.4%, to $13.4 million for the three months ended March 31, 2015, from $10.5 million for the three months ended March 31, 2014. Consumer loan interest income increased $132,000 to $5.8 million for the three months ended March 31, 2015, from $5.7 million for the three months ended March 31, 2014. For the three months ended March 31, 2015, the average balance of total loans increased $874.6 million to $6.03 billion, from $5.15 billion for the same period in 2014, due to loans added from the Team Capital acquisition and organic originations, partially offset by loan repayments. The average loan yield for the three months ended March 31, 2015, decreased 10 basis points to 4.16%, from 4.26% for the same period in 2014.
The average yield on total securities decreased to 2.38% for the three months ended March 31, 2015, compared with 2.46% for the same period in 2014. Interest income on investment securities held to maturity increased $726,000 to $3.4 million for the quarter ended March 31, 2015, compared to the same period last year. Average investment securities held to maturity increased $115.5 million to $473.4 million for the quarter ended March 31, 2015, from $357.9 million for the same period last year.
Interest income on securities available for sale and FHLB-NY stock decreased $781,000, or 11.0%, to $6.3 million for the quarter ended March 31, 2015, from $7.1 million for the quarter ended March 31, 2014. The average balance of securities available for sale and FHLB-NY stock decreased $69.8 million, or 5.8%, to $1.14 billion for the three months ended March 31, 2015, from $1.21 billion for the same period in 2014.
Interest paid on deposit accounts decreased $150,000, or 4.0%, to $3.6 million for the quarter ended March 31, 2015, from $3.7 million for the quarter ended March 31, 2014. The average cost of interest bearing deposits decreased to 0.31% for the three months ended March 31, 2015, from 0.35% for the three months ended March 31, 2014. For the three months ended March 31, 2015, average interest bearing core deposits increased $399.2 million, to $3.93 billion, from $3.53 billion for the same period in 2014. For the three months ended March 31, 2015, average time deposits increased $21.8 million, or 2.8%, to $809.3 million, from $787.5 million for the same period in 2014.
Interest paid on borrowed funds increased $1.1 million, or 20.3%, to $6.7 million for the quarter ended March 31, 2015, from $5.6 million for the quarter ended March 31, 2014. The average cost of borrowings decreased to 1.82% for the three months ended March 31, 2015, respectively, from 1.87% for the three months ended March 31, 2014. For the three months ended March 31, 2015, average borrowings increased $280.1 million, or 23.1%, to $1.49 billion, from $1.21 billion for the three months ended March 31, 2014.
Provision for Loan Losses. Provisions for loan losses are charged to operations in order to maintain the allowance for loan losses at a level management considers necessary to absorb probable credit losses inherent in the loan portfolio. In determining the level of the allowance for loan losses, management considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay the loan and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for loan losses on a quarterly basis and makes provisions for loan losses, if necessary, in order to maintain the adequacy of the allowance.

39



The Company recorded provisions for loan losses of $600,000 for the three months ended March 31, 2015, compared with $400,000 recorded for the three months ended March 31, 2014. For the three months ended March 31, 2015, the Company had net charge-offs of $1.2 million, compared with net charge-offs of $1.6 million for the same period in 2014. At March 31, 2015, the Company’s allowance for loan losses was $61.1 million, or 1.00% of total loans, compared with $61.7 million, or 1.01% of total loans at December 31, 2014.
Non-Interest Income. For the three months ended March 31, 2015, non-interest income totaled $10.3 million, an increase of $2.2 million, or 26.9%, compared to $8.1 million for the same period in 2014. Fee income increased $1.3 million, or 26.1%, to $6.1 million, from $4.8 million for the three months ended March 31, 2014, primarily due to a $1.1 million increase in commercial loan prepayment fee income. In addition, wealth management income increased $505,000, or 24.6%, to $2.6 million for the quarter ended March 31, 2015, due in part to revenue earned on assets under management from the Company’s October 31, 2014 acquisition of Suffolk Bancorp's wealth management business, and improved client pricing. Also, net gains on securities transactions increased $352,000 for the three months ended March 31, 2015, compared to the same period in 2014, mainly due to a $350,000 loss on the sale of an impaired non-agency mortgage-backed security recognized in the first quarter of 2014.
Non-Interest Expense. For the three months ended March 31, 2015, non-interest expense increased $5.2 million to $43.4 million, compared to the three months ended March 31, 2014. The quarter ended March 31, 2015 includes additional costs associated with operating in the acquired Team Capital markets. Compensation and employee benefits expense increased $2.8 million to $24.2 million for the three months ended March 31, 2015, compared to the three months ended March 31, 2014, largely due to a $1.3 million increase in salary expense associated with the addition of former Team Capital employees, higher salary expense resulting from annual merit increases and increased employee medical and retirement benefit costs, partially offset by lower stock-based compensation. Net occupancy costs increased $1.1 million, to $7.2 million for the quarter ended March 31, 2015, compared to the same quarter in 2014, predominately due to additional facilities costs related to Team Capital and increased equipment maintenance costs. In addition, other operating expenses increased $704,000 to $6.1 million for the three months ended March 31, 2015, compared to $5.4 million for the same period in 2014, due to increases in consultant and attorney fees, a portion of which were related to the Company's loan workout and asset recovery activities. The amortization of intangibles increased $644,000 for the three months ended March 31, 2015, compared with the same period in 2014, largely due to the increase in core deposit intangible amortization related to the Team Capital acquisition, while data processing expense increased $230,000 to $3.0 million for the three months ended March 31, 2015, compared to $2.8 million for the same period in 2014, principally due to increased software maintenance cost and telecommunication expense required to support the Team Capital locations. Partially offsetting these increases, advertising and promotional expenses decreased $304,000 to $761,000 for the quarter ended March 31, 2015, due to costs incurred in the first quarter of 2014 related to the introduction of the Company's new branding initiative, updated logo and the related marketing campaigns.
Income Tax Expense. For the three months ended March 31, 2015, the Company’s income tax expense was $8.4 million, compared with $7.7 million for the three months ended March 31, 2014. The increase in income tax expense was a function of growth in pre-tax income. The Company’s effective tax rates were 29.8% and 31.1% for the three months ended March 31, 2015 and 2014, respectively.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Analysis. Interest rate risk is the exposure of a bank’s current and future earnings and capital arising from adverse movements in interest rates. The guidelines of the Company’s interest rate risk policy seek to limit the exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. To minimize interest rate risk, the Company generally sells all 20- and 30-year fixed-rate mortgage loans at origination. Commercial real estate loans typically have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the Prime rate, the Federal Funds rate or LIBOR. Investment securities purchases generally have maturities of five years or less, and mortgage-backed securities have weighted average lives between three and five years.
The Asset/Liability Committee meets on at least a monthly basis to review the impact of interest rate changes on net interest income, net interest margin, net income and the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net income.
The Company’s strategy for liabilities has been to maintain a stable core-funding base by focusing on core deposit account acquisition and increasing products and services per household. The Company’s ability to retain maturing time deposit accounts is the result of its strategy to remain competitively priced within its marketplace. The Company’s pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLB-NY during periods of pricing dislocation.

40



Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation models. The analysis captures changes in net interest income using flat rates as a base, a most likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to policy limits for acceptable change. The Company periodically reviews historical deposit repricing activity and makes modifications to certain assumptions used in its income simulation model regarding the interest rate sensitivity of deposits without maturity dates. These modifications are made to more closely reflect the most likely results under the various interest rate change scenarios. Since it is inherently difficult to predict the sensitivity of interest bearing deposits to changes in interest rates, the changes in net interest income due to changes in interest rates cannot be precisely predicted. There are a variety of reasons that may cause actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes.
Specific assumptions used in the simulation model include:
Parallel yield curve shifts for market rates;
Current asset and liability spreads to market interest rates are fixed;
Traditional savings and interest-bearing demand accounts move at 10% of the rate ramp in either direction;
Retail Money Market and Business Money Market accounts move at 25% and 75% of the rate ramp in either direction respectively; and
Higher-balance demand deposit tiers and promotional demand accounts move at up 50% to 75% of the rate ramp in either direction
The following table sets forth the results of a twelve-month net interest income projection model as of March 31, 2015 (dollars in thousands):
Change in Interest Rates in
Basis Points (Rate Ramp)
 
Net Interest Income
Dollar
Amount
 
Dollar
Change
 
Percent
Change
-100
 
241,266

 
(4,061
)
 
(1.7
)%
Static
 
245,327

 

 

+100
 
242,424

 
(2,903
)
 
(1.2
)
+200
 
238,903

 
(6,424
)
 
(2.6
)
+300
 
236,327

 
(9,000
)
 
(3.7
)
The preceding table indicates that, as of March 31, 2015, in the event of a 300 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would decrease 3.7%, or $9.0 million. In the event of a 100 basis point decrease in interest rates,whereby rates ramp up evenly over a twelve-month period, net interest income is projected to decrease 1.7%, or $4.1 million over the same period.

Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained interest rate shocks. The following table illustrates the result of the economic value of equity model as of March 31, 2015 (dollars in thousands):
  
 
Present Value of Equity
 
Present Value of Equity
as Percent of Present
Value of Assets
Change in Interest
Rates (Basis Points)
 
Dollar
Amount
 
Dollar
Change
 
Percent
Change
 
Present
Value Ratio
 
Percent
Change
-100
 
1,330,535

 
43,995

 
3.4
 %
 
15.2
%
 
2.5
 %
Flat
 
1,286,540

 

 

 
14.8

 

+100
 
1,256,809

 
(29,731
)
 
(2.3
)
 
14.6

 
(1.5
)
+200
 
1,212,908

 
(73,632
)
 
(5.7
)
 
14.2

 
(4.0
)
+300
 
1,157,442

 
(129,098
)
 
(10.0
)
 
13.7

 
(7.4
)
The preceding table indicates that as of March 31, 2015, in the event of an immediate and sustained 300 basis point increase in interest rates, the present value of equity is projected to decrease 10.0%, or $129.1 million. If rates were to decrease 100 basis points, the model forecasts a 3.4%, or $44.0 million, increase in the present value of equity.

41



Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the use of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
Item 4.
CONTROLS AND PROCEDURES.
Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) were evaluated at the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

42



PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings
The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition.

Item 1A.
Risk Factors
There have been no material changes to the risk factors that were previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
(a) Total Number
of Shares
Purchased
 
(b) Average
Price Paid
per Share
 
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
 
(d) Maximum Number
of Shares that May Yet
Be Purchased under
the Plans or Programs (1)(2)
January 1, 2015 Through January 31, 2015
 

 

 

 
3,449,893

February 1, 2014 Through February 28, 2015
 
25,354

 
$
18.31

 
25,354

 
3,424,539

March 1, 2015 Through March 31, 2015
 
77,589

 
18.26

 
77,589

 
3,346,950

Total
 
102,943

 
$
18.27

 
102,943

 
 
(1)
On October 24, 2007, the Company’s Board of Directors approved the purchase of up to 3,107,077 shares of its common stock under a seventh general repurchase program which commenced upon completion of the previous repurchase program. The repurchase program has no expiration date.
(2)
On December 20, 2012, the Company’s Board of Directors approved the purchase of up to 3,017,770 shares of its common stock under an eighth general repurchase program which will commence upon completion of the previous repurchase program. The repurchase program has no expiration date.

43



Item 3.
Defaults Upon Senior Securities.
Not Applicable
 
Item 4.
Mine Safety Disclosures
Not Applicable
 
Item 5.
Other Information.
None
 
Item 6.
Exhibits.
The following exhibits are filed herewith:  
3.1
  
Certificate of Incorporation of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.)
 
 
3.2
  
Amended and Restated Bylaws of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
 
 
4.1
  
Form of Common Stock Certificate of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.)
 
 
10.1
  
Employment Agreement by and between Provident Financial Services, Inc and Christopher Martin dated September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2009/ File No. 001-31566.)
 
 
10.2
  
Form of Amended and Restated Two-Year Change in Control Agreement between Provident Financial Services, Inc. and certain executive officers. (Filed as an exhibit to the Company’s December 31, 2009 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010 /File No. 001-31566.)
 
 
10.3
  
Amended and Restated Employee Savings Incentive Plan, as amended. (Filed as an exhibit to the Company’s June 30, 2004 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission /File No. 001-31566.)
 
 
10.4
  
Employee Stock Ownership Plan (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241) and Amendment No. 1 to the Employee Stock Ownership Plan (Filed as an exhibit to the Company’s June 30, 2004 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission /File No. 001-31566).
 
 
10.5
  
Supplemental Executive Retirement Plan of The Provident Bank. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
10.6
  
Amended and Restated Supplemental Executive Savings Plan. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
10.7
  
Retirement Plan for the Board of Managers of The Provident Bank. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009 /File No. 001-31566.)
 
 
10.8
  
The Provident Bank Amended and Restated Voluntary Bonus Deferral Plan. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 

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10.9
  
Provident Financial Services, Inc. Board of Directors Voluntary Fee Deferral Plan. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.)
 
 
 
10.10
 
First Savings Bank Directors’ Deferred Fee Plan, as amended. (Filed as an exhibit to the Company’s September 30, 2004 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission /File No. 001-31566.)
 
 
 
10.11
 
The Provident Bank Non-Qualified Supplemental Defined Contribution Plan. (Filed as an exhibit to the Company’s May 27, 2010 Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2010/File No. 001-31566.)
 
 
 
10.12
 
Provident Financial Services, Inc. 2003 Stock Option Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on June 4, 2003/File No. 001-31566.)
 
 
10.13
 
Provident Financial Services, Inc. 2003 Stock Award Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on June 4, 2003/ File No. 001-31566.)
 
 
10.14
 
Provident Financial Services, Inc. 2008 Long-Term Equity Incentive Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 14, 2008/File No. 001-31566), as amended and restated. (Filed as an exhibit to the Company's Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 14, 2014/File No. 001-31566.)
 
 
10.15
 
Change in Control Agreement by and between Provident Financial Services, Inc. and Christopher Martin dated September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2009/File No. 001-31566.)
 
 
 
10.16
 
Omnibus Incentive Compensation Plan. (Filed as an exhibit to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
 
 
10.17
 
Written Description of Provident Financial Services, Inc.’s 2013 Cash Incentive Plan. (Filed as an exhibit to the Company’s December 31, 2012 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013/File No. 001-31566.)
 
 
10.18
 
Form of Three-Year Change in Control Agreement between Provident Financial Services, Inc. and each of Messrs. Blum, Kuntz, Lyons, Nesci and Raimonde dated as of February 21, 2013. (Filed as an exhibit to the Company’s December 31, 2012 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013/File No. 001-31566.)
 
 
 
10.19
 
Written Description of Provident Financial Services, Inc.’s 2014 Cash Incentive Plan. (Filed as an exhibit to the Company’s December 31, 2013 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 3, 2014/File No. 001-31566.)
 
 
 
10.20
 
Agreement and Plan of Merger by and among Provident Financial Services, Inc., The Provident Bank and Team Capital Bank, dated December 19, 2013. (Filed as an exhibit to the Company's December 19, 2013 Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2013/File No. 001-31566.)
 
 
 
10.21
 
Written Description of Provident Financial Services, Inc.’s 2015 Cash Incentive Plan. (Filed as an exhibit to the Company’s December 31, 2014 Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2015/File No. 001-31566.)

 
 
 
10.22
 
Provident Financial Services, Inc. Executive Annual Incentive Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 13, 2015/File No. 001-31566).
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 

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101
 
The following materials from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
 
 
101.INS 
 
XBRL Instance Document
 
 
101.SCH 
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL 
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF 
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB 
 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
101.PRE 
 
XBRL Taxonomy Extension Presentation Linkbase Document




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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
PROVIDENT FINANCIAL SERVICES, INC.
 
 
 
 
 
Date:
 
May 11, 2015
 
By:
 
/s/ Christopher Martin
 
 
 
 
 
 
Christopher Martin
 
 
 
 
 
 
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
Date:
 
May 11, 2015
 
By:
 
/s/ Thomas M. Lyons
 
 
 
 
 
 
Thomas M. Lyons
 
 
 
 
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
Date:
 
May 11, 2015
 
By:
 
/s/ Frank S. Muzio
 
 
 
 
 
 
Frank S. Muzio
 
 
 
 
 
 
Senior Vice President and Chief Accounting Officer


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