UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2023
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 No. 001-16197
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey
22-3537895
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
500 Hills Drive, Suite 300
Bedminster, New Jersey 07921-0700
(Address of principal executive offices, including zip code)
(908) 234-0700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
PGC
The NASDAQ Stock Market, LLC
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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of Common Stock outstanding as of May 1, 2023: 18,016,963
PART I FINANCIAL INFORMATION
Item 1
Financial Statements (Unaudited)
3
Consolidated Statements of Condition at March 31, 2023 and December 31, 2022
Consolidated Statements of Income for the three months ended March 31, 2023 and 2022
4
Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2023 and 2022
5
Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022
Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022
7
Notes to Consolidated Financial Statements
8
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3
Quantitative and Qualitative Disclosures About Market Risk
59
Item 4
Controls and Procedures
62
PART II OTHER INFORMATION
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
63
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Other Information
Item 6
Exhibits
64
2
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except per share data)
(unaudited)
(audited)
March 31,
December 31,
2023
2022
ASSETS
Cash and due from banks
$
6,514
5,937
Federal funds sold
—
Interest-earning deposits
244,779
184,138
Total cash and cash equivalents
251,293
190,075
Securities available for sale
556,266
554,648
Securities held to maturity (fair value $97,967 at March 31, 2023 and $87,187 at December 31, 2022)
111,609
102,291
CRA equity security, at fair value
13,194
12,985
FHLB and FRB stock, at cost (A)
30,338
30,672
Loans held for sale, at fair value
Loans held for sale, at lower of cost or fair value
13,800
15,626
Loans
5,365,729
5,285,246
Less: allowance for credit losses
62,250
60,829
Net loans
5,303,479
5,224,417
Premises and equipment
23,782
23,831
Other real estate owned
116
Accrued interest receivable
19,143
25,157
Bank owned life insurance
47,261
47,147
Goodwill
36,212
Other intangible assets
10,767
11,121
Finance lease right-of-use assets
2,648
2,835
Operating lease right-of-use assets
12,262
12,873
Other assets
47,848
63,587
TOTAL ASSETS
6,480,018
6,353,593
LIABILITIES
Deposits:
Noninterest-bearing demand deposits
1,096,549
1,246,066
Interest-bearing deposits:
Checking
2,797,493
2,143,611
Savings
132,523
157,338
Money market accounts
873,329
1,228,234
Certificates of deposit - retail
357,131
318,573
Certificates of deposit - listing service
15,922
25,358
Subtotal deposits
5,272,947
5,119,180
Interest-bearing demand - brokered
10,000
60,000
Certificates of deposit - brokered
25,895
25,984
Total deposits
5,308,842
5,205,164
Short-term borrowings
378,800
379,530
Finance lease liabilities
4,385
4,696
Operating lease liabilities
13,082
13,704
Subordinated debt, net
133,059
132,987
Deferred tax liabilities, net
12,112
15,432
Due to brokers
8,308
Accrued expenses and other liabilities
66,472
69,100
TOTAL LIABILITIES
5,925,060
5,820,613
SHAREHOLDERS’ EQUITY
Preferred stock (no par value; authorized 500,000 shares; liquidation preference of $1,000 per share)
Common stock (no par value; stated value $0.83 per share; authorized 42,000,000 shares; issued shares, 21,291,670 at March 31, 2023 and 21,007,350 at December 31, 2022; outstanding shares, 18,014,757 at March 31, 2023 and 17,813,451 at December 31, 2022)
17,750
17,513
Surplus
339,060
338,706
Treasury stock at cost (3,276,913 shares at March 31, 2023 and 3,193,899 shares at December 31, 2022)
(100,677
)
(97,826
Retained earnings
366,270
348,798
Accumulated other comprehensive loss, net of income tax
(67,445
(74,211
TOTAL SHAREHOLDERS’ EQUITY
554,958
532,980
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
INTEREST INCOME
Interest and fees on loans
64,472
40,472
Interest on investments:
Taxable
4,471
3,607
Tax-exempt
21
Interest on loans held for sale
11
Interest on interest-earning deposits
1,538
29
Total interest income
70,491
44,140
INTEREST EXPENSE
Interest on savings and interest-bearing deposit accounts
21,383
1,782
Interest on certificates of deposit
1,729
606
Interest on borrowed funds
1,296
Interest on finance lease liability
53
68
Interest on subordinated debt
1,639
1,364
Subtotal - interest expense
26,100
3,884
Interest on interest-bearing demand - brokered
208
373
Interest on certificates of deposits - brokered
205
261
Total interest expense
26,513
4,518
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
43,978
39,622
Provision for credit losses
1,513
2,375
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
42,465
37,247
OTHER INCOME
Wealth management fee income
13,762
14,834
Service charges and fees
1,258
952
297
313
Gain on loans held for sale at fair value (mortgage banking)
247
Gain on loans held for sale at lower of cost or fair value
Fee income related to loan level, back-to-back swaps
Gain on sale of SBA loans
865
2,844
Corporate advisory fee income
80
1,561
Other income
1,567
1,254
Loss on securities sale, net
(6,609
Fair value adjustment for CRA equity security
209
(682
Total other income
18,059
14,714
OPERATING EXPENSES
Compensation and employee benefits
24,586
22,449
4,374
4,647
FDIC insurance expense
711
471
Swap valuation allowance
673
Other operating expense
5,903
5,929
Total operating expenses
35,574
34,169
INCOME BEFORE INCOME TAX EXPENSE
24,950
17,792
Income tax expense
6,595
4,351
NET INCOME
18,355
13,441
EARNINGS PER SHARE
Basic
1.03
0.73
Diluted
1.01
0.71
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
17,841,203
18,339,013
18,263,310
18,946,683
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Dollars in thousands)
Net income
Comprehensive income/(loss):
Unrealized gains/(losses) on available for sale securities:
Unrealized holding gains/(losses) arising during the period
8,769
(46,799
Reclassification adjustment for amounts included in net income
6,609
(40,190
Tax effect
(48
9,616
Net of tax
8,721
(30,574
Unrealized gains/(losses) on cash flow hedges:
(2,732
2,796
(42
(2,774
819
(786
(1,955
2,010
Total other comprehensive income/(loss)
6,766
(28,564
Total comprehensive income/(loss)
25,121
(15,123
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Three Months Ended March 31, 2023 and March 31, 2022
Accumulated
Other
(In thousands, except share and
Preferred
Common
Treasury
Retained
Comprehensive
per share data)
Stock
Earnings
Loss
Total
Balance at January 1, 2023 17,813,451 common shares outstanding
Comprehensive income
Restricted stock units issued, 352,634 shares
294
(294
Restricted stock units repurchased on vesting to pay taxes, (76,147) shares
(63
(2,314
(2,377
Amortization of restricted stock units
2,666
Cash dividends declared on common stock ($0.05 per share)
(883
Share repurchase, (83,014) shares
(2,851
Common stock options exercised, 300 shares
Issuance of shares for Employee Stock Purchase Plan, 7,533 shares
6
292
298
Balance at March 31, 2023 18,014,757 common shares outstanding
Balance at January 1, 2022 18,393,888 common shares outstanding
17,220
332,358
(65,104
274,288
(12,374
546,388
Cumulative effect adjustment for adoption of ASU 2016-13
3,909
Balance at January 1, 2022, adjusted
278,197
550,297
Comprehensive loss
Restricted stock units issued, 306,684 shares
256
(256
Restricted stock units repurchased on vesting to pay taxes, (67,999) shares
(57
(2,447
(2,504
2,475
(920
Share repurchase, (299,878) shares
(11,174
Common stock options exercised, 9,260 shares
113
120
Exercise of warrants 49,860 net of 28,311 shares used to exercise, 21,549 shares
18
(18
Issuance of shares for Employee Stock Purchase Plan, 6,808 shares
249
255
Balance at March 31, 2022 18,370,312 common shares outstanding
17,450
332,474
(76,278
290,718
(40,938
523,426
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
879
839
Amortization of premium and accretion of discount on securities, net
169
947
Amortization of restricted stock
Amortization of intangible assets
354
431
Amortization of subordinated debt costs
72
71
Deferred tax benefit
(2,493
(3,575
Stock-based compensation and employee stock purchase plan expense
48
35
Fair value adjustment for equity security
(209
682
Loss on securities available for sale
Loans originated for sale (A)
(9,856
(34,779
Proceeds from sales of loans held for sale (A)
12,568
43,006
Gain on loans held for sale (A)
(886
(3,091
Loss on disposal of fixed assets
Increase in cash surrender value of life insurance, net
(114
(142
Decrease/(increase) in accrued interest receivable
6,014
(1,301
Decrease in other assets
5,735
2,810
Increase/(decrease) in accrued expenses and other liabilities
4,176
(587
NET CASH PROVIDED BY OPERATING ACTIVITIES
38,997
30,919
INVESTING ACTIVITIES:
Principal repayments, maturities and calls of securities available for sale
157,660
102,224
Principal repayments, maturities and calls of securities held to maturity
1,021
1,829
Redemptions of FHLB and FRB stock
27,887
16,771
Purchase of securities held to maturity
(2,051
Purchase of securities available for sale
(150,658
(74,590
Purchase of FHLB and FRB stock
(27,553
(22,391
Net increase in loans, net of participations sold
(80,575
(316,167
Purchase of premises and equipment
(643
(568
Disposal of premises and equipment
(6
NET CASH USED IN INVESTING ACTIVITIES
(74,918
(292,892
FINANCING ACTIVITIES:
Net increase in deposits
103,678
121,267
Net (decrease)/increase in short-term borrowings
(250,730
122,085
Proceeds from FHLB short term advances
250,000
Dividends paid on common stock
Exercise of stock options, net of stock swaps
Restricted stock repurchased on vesting to pay taxes
Issuance of shares for employee stock purchase plan
Shares repurchased
NET CASH PROVIDED BY FINANCING ACTIVITIES
97,139
229,129
Net increase/(decrease) in cash and cash equivalents
61,218
(32,844
Cash and cash equivalents at beginning of period
146,804
Cash and cash equivalents at end of period
113,960
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest
21,375
3,099
Income tax, net
199
Security purchases due from broker
Security sales due from broker
120,245
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures normally included in the audited consolidated 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 audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022 for Peapack-Gladstone Financial Corporation (the “Corporation” or the “Company”). In the opinion of the management of the Corporation, the accompanying unaudited consolidated interim financial statements contain all adjustments (consisting solely of normal and recurring accruals) necessary to present fairly the financial position as of March 31, 2023, and the results of operations, comprehensive income/(loss), changes in shareholders’ equity and cash flow statements for the three months ended March 31, 2023 and 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the full year or for any future period.
Principles of Consolidation and Organization: The consolidated financial statements of the Company are prepared on the accrual basis and include the accounts of the Company and its wholly-owned subsidiary, Peapack-Gladstone Bank (the “Bank”). The consolidated financial statements also include the Bank’s wholly-owned subsidiaries:
While the following notes to the consolidated financial statements include the consolidated results of the Company, the Bank and their subsidiaries, these notes primarily reflect the Bank’s and its subsidiaries’ activities. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in accordance with GAAP. In preparing the financial statements, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statement of condition and revenues and expenses for the periods presented. Actual results could differ from those estimates.
Adoption of New Accounting Standards: On January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities Management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet commitments. Results for reporting periods beginning after January 1, 2022, are presented under ASC 326 while prior period amounts continue to be reported in accordance with the incurred loss model previously applicable under GAAP. The Company recorded a net increase to retained earnings of $3.9 million as of January 1, 2022, for the cumulative effect of adopting ASC 326. The transition adjustment includes a $5.5 million reduction to our allowance for credit losses. The lower allowance was in part attributed to historically low charge-offs combined with the shorter duration of the loan portfolio employed in our CECL analysis. Further, the incurred loss method required significant qualitative factors, including factors related to COVID-19, and the
use of a multiplier for potential losses on criticized and classified loans, neither of which are included within the CECL methodology. The CECL methodology utilizes significantly less qualitative factors as it uses economic factors and historical losses over a full economic cycle and calculates losses based on discounted cash flows on an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology.
The following table illustrates the impact to our financial statements as of January 1, 2022 upon adoption of ASC 326:
January 1, 2022
(In thousands)
Impact to Consolidated Statement of Condition from ASC-326 Adoption
Tax Effect
Impact to Retained Earnings from ASC-326 Adoption
Allowance for credit losses on loans
5,536
(1,490
4,046
Allowance for credit losses on off-balance sheet commitments
(188
51
(137
Total impact from ASC 326 adoption
5,348
(1,439
Segment Information: The Company’s business is conducted through two business segments: (1) its banking segment (“Banking”), which involves the delivery of loan and deposit products to customers, and (2) Peapack Private Wealth Management Division ("Peapack Private"), which includes investment management services to individuals and institutions. Management uses certain methodologies to allocate income and expense to the business segments.
The Banking segment includes: commercial (including commercial and industrial (“C&I”) and equipment financing), commercial real estate, multifamily, residential and consumer lending activities; treasury management services; C&I advisory services; escrow management; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support services.
Peapack Private includes: investment management services for individuals and institutions; personal trust services, including services as executor, trustee, administrator and custodian; and other financial planning and advisory services. This segment also includes the activity from the Delaware subsidiary, PGB Trust & Investments of Delaware. Wealth management fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management and/or administration (“AUM”) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (i.e. trade date).
Cash and Cash Equivalents: For purposes of the statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits and federal funds sold. Generally, federal funds are sold for one-day periods. Cash equivalents are of original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with original maturities of 90 days or less.
Interest-Earning Deposits in Other Financial Institutions: Interest-earning deposits in other financial institutions mature within one year and are carried at cost.
9
Securities: Prior to January 1, 2022, Management evaluated securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warranted. For securities in an unrealized loss position, Management considered the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assessed whether it intended to sell, or it was more likely than not that it was required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell was met, the entire difference between amortized cost and fair value was recognized as impairment through earnings. For debt securities that did not meet the aforementioned criteria, the amount of impairment was split into two components as follows: (1) other-than-temporary impairment related to credit loss, which was recognized through the income statement and (2) other-than-temporary impairment related to other factors, which was recognized in other comprehensive income.
Effective January 1, 2022, upon the adoption of ASU 2016-13, debt securities available-for-sale are measured at fair value and subject to impairment testing. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses ("ACL") by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.
Debt securities are classified as held to maturity and carried at amortized cost when Management has the positive intent and ability to hold them to maturity. Under ASU 2016-13, held-to-maturity securities in a loss position are evaluated to determine if the decline in fair value has resulted from a credit-related loss or other factors and then, recognize an ACL through a charge to earnings for the decline in fair value. The Company also has an investment in a Community Reinvestment Act (“CRA”) investment fund, which is classified as an equity security.
Interest income includes amortization of purchase premiums and discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated, and premiums on callable debt securities, which are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock, based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
The Bank is also a member of the Federal Reserve Bank of New York and required to own a certain amount of FRB stock. FRB stock is carried at cost and classified as a restricted security. Dividends are reported as income.
Loans Held for Sale: Mortgage loans originated with the intent to sell in the secondary market are carried at fair value, as determined by outstanding commitments from investors.
Mortgage loans held for sale are generally sold with servicing rights released; therefore, no servicing rights are recorded. Gains and losses on sales of mortgage loans, shown as gain on sale of loans on the Statement of Income, are based on the difference between the selling price and the carrying value of the related loan sold.
SBA loans originated with the intent to sell in the secondary market are carried at the lower of cost or fair value. SBA loans are generally sold with the servicing rights retained. Gains and losses on the sale of SBA loans are based on the difference between the selling price and the carrying value of the related loan sold. Total SBA loans serviced totaled $158.6 million and $152.2 million as of March 31, 2023 and December 31, 2022, respectively. SBA loans held for sale totaled $15.1 million and $17.2 million at March 31, 2023 and December 31, 2022, respectively.
Loans originated with the intent to hold and subsequently transferred to loans held for sale are carried at the lower of cost or fair value. These are loans that the Company no longer has the intent to hold for the foreseeable future.
Loans: Loans that Management has the intent and ability to hold for the foreseeable future or until maturity are stated at the principal amount outstanding. Interest on loans is recognized based upon the principal amount outstanding. Loans are stated at face value, less purchased premium and discounts and net deferred fees. Loan origination fees and certain direct loan origination costs are deferred and recognized on a level-yield method over the life of the loan as an adjustment to the loan’s yield. The definition of recorded investment in loans includes accrued interest receivable and deferred fees/costs, however, for the Company’s loan disclosures, accrued interest and deferred fees/costs were excluded as the impact was not material.
10
Loans are considered past due when they are not paid within 30 days in accordance with contractual terms. The accrual of income on loans, including individually evaluated loans, is discontinued if, in the opinion of Management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days unless the asset is both well secured and in the process of collection. All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Payments received on nonaccrual loans are recorded as principal payments. A nonaccrual loan is returned to accrual status only when interest and principal payments are brought current and future payments are reasonably assured, generally when the Bank receives contractual payments for a minimum of six consecutive months. Commercial loans are generally charged off, in whole or in part, after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Consumer closed-end loans are generally charged off after they become 120 days past due and open-end loans after 180 days. Subsequent payments are credited to income only if collection of principal is not in doubt. If principal and interest payments are brought contractually current and future collectability is reasonably assured, loans may be returned to accrual status. Nonaccrual mortgage loans are generally charged off to the extent that the value of the underlying collateral does not cover the outstanding principal balance. The majority of the Company’s loans are secured by real estate in New Jersey, New York and Pennsylvania.
Allowance for Credit Losses: On January 1, 2022, the Company adopted ASU 2016-13, Topic 326 which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances.
The allowance for credit losses (“ACL”) on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "other liabilities" on the Consolidated Statements of Condition. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates. The amortized cost basis of loans does not include accrued interest receivable, which is included in "accrued interest receivable" on the Consolidated Statements of Condition. The "Provision for credit losses" on the Consolidated Statements of Income is a combination of the provision for credit losses and the provision for unfunded loan commitments.
ACL in accordance with CECL methodology
With respect to pools of similar loans that are collectively evaluated, an appropriate level of general allowance is determined by portfolio segment using a non-linear discounted cash flow (“DCF”) model. The DCF model captures losses over the historical charge-off and prepayment cycle and applies those losses at a loan level over the remaining maturity of the loan. The model then calculates a historical loss rate using the average losses over the reporting period, which is then applied to each segment utilizing a standard reversion rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, including but not limited to unemployment rates, national consumer price and confidence indices. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the ACL are qualitative factors based on the risks present for each portfolio segment. These qualitative factors include the following: levels of and trends in delinquencies and impaired loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staffing and experience; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. The ACL results in two forms of allocations, specific and general. These two components represent the total ACL deemed adequate to cover current expected credit losses in the loan portfolio.
When management identifies loans that do not share common risk characteristics (i.e., are not similar to other loans within a pool) they are evaluated on an individual basis. These loans are not included in the collective evaluation. For loans identified as having a likelihood of foreclosure or that the borrower is experiencing financial difficulty, a collateral dependent approach is used. These are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient method to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Several of the steps in the methodology involve judgment and are subjective in nature including, among other things: segmenting the loan portfolio; determining the amount of loss history to consider; selecting predictive econometric regression models that use appropriate macroeconomic variables; determining the methodology to forecast prepayments; selecting the most
appropriate economic forecast scenario; determining the length of the reasonable and supportable forecast and reversion periods; estimating expected utilization rates on unfunded loan commitments; and assessing relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts, which are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered appropriate, there can be no assurance that it will be sufficient to absorb future losses.
In determining an appropriate amount for the allowance, the Bank segments and aggregates the loan portfolio based on common characteristics. The following segments have been identified:
Primary Residential Mortgages. The Bank originates one to four family residential mortgage loans in the Tri-State area (New York, New Jersey and Connecticut), Pennsylvania and Florida. Loans are secured by first liens on the primary residence or investment property. Primary risk characteristics associated with residential mortgage loans typically involve: major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Junior Lien Loan on Residence (which include home equity lines of credit). The Bank provides junior lien loans (“JLL”) and revolving home equity lines of credit against one to four family properties in the Tri-State area. These loans are subordinate to a first mortgage, which may be from another lending institution. Primary risk characteristics associated with JLLs and home equity lines of credit typically involve: major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank. In addition, home equity lines of credit typically are made with variable or floating interest rates, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Multifamily. The Bank provides mortgage loans for multifamily properties (i.e., buildings which have five or more residential units). Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and its ability to repay the loan.
Owner-Occupied Commercial Real Estate Loans. The Bank provides mortgage loans for owner-occupied commercial real estate properties in the Tri-State area and Pennsylvania. Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Some properties are mixed use. Commercial real estate loans are generally considered to have a higher degree of credit risk as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.
Investment Commercial Real Estate Loans. The Bank provides mortgage loans for properties managed as an investment property (non-owner-occupied) in the Tri-State area and Pennsylvania. Non-owner-occupied properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Some properties are considered “mixed use” as they are a combination of building types, such as a building with retail space on the ground floor and either residential apartments or office suites on the upper floors. Commercial real estate loans are generally considered to have a higher degree of credit risk as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.
Commercial and Industrial Loans. The Bank provides lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment as well as the stock of a company, if privately held. Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower’s business operations. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flows. Factors that may influence a business’ profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. To mitigate the risk characteristics of commercial and industrial loans, these loans often include
12
commercial real estate as collateral and the Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance. However, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain.
Leasing Finance. PCC offers a range of finance solutions nationally. PCC provides term loans and leases secured by assets financed for U.S. based mid-size and large companies. Facilities tend to be fully drawn under fixed rate terms. PCC serves a broad range of industries including transportation, manufacturing, heavy construction and utilities.
Asset risk in PCC’s portfolio is generally recognized through changes to loan income, or through changes to lease related income streams due to fluctuations in lease rates. Changes to lease income can occur when the existing lease contract expires, the asset comes off lease or the business seeks to enter a new lease agreement. Asset risk may also change through depreciation, resulting from changes in the residual value of the operating lease asset or through impairment of the asset carrying value, which can occur at any time during the life of the asset.
Credit risk in PCC’s portfolio generally results from the potential default of borrowers or lessees, which may be driven by customer specific or broader industry related conditions. Credit losses can impact multiple parts of the income statement including loss of interest/lease/rental income and/or higher costs and expenses related to the repossession, refurbishment, re-marketing and or re-leasing of assets.
Construction. The Bank provides commercial construction loans for properties located in the Tri-state area. Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.
Consumer and Other. These are loans to individuals for household, family and other personal expenditures as well as obligations of states and political subdivisions in the U.S. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.
A troubled debt restructuring (“TDR”) is a modified loan with concessions made by the lender to a borrower who is experiencing financial difficulty. TDRs are impaired and are generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral, less estimated disposition costs. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for credit losses.
On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2022-02, which replaced the accounting and recognition of TDRs. ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.
Leases: At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding right-of-use (“ROU”) asset and operating lease liability are recorded as separate line items on the statement of condition. An ROU asset represents the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made.
If the rate implicit in the lease is not readily determinable, the incremental collateralized borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s statement of condition, but rather, lease expense is recognized over the lease term on a straight-line basis. The Company’s lease agreements may include options to extend or terminate the lease. The Company’s decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. The Company maintains certain property and equipment under direct financing and operating leases. Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space and are classified as operating leases.
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The ROU asset is measured at the amount of the lease liability adjusted for lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the ROU asset. Operating lease expense consists of a single lease cost allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the ROU asset.
There are no terms or conditions related to residual value guarantees and no restrictions or covenants that would impact the Company’s ability to pay dividends or to incur additional financial obligations.
Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”); (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); or (3) an instrument with no hedging designation. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For cash flow hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value in the statement of condition, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific firm commitments or forecasted transactions. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminated, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
The Company also offers facility specific / loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution / swap counterparty (loan level / back-to-back swap program). The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting (“standalone derivatives”). The notional amount of the swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual contracts. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions. The Company is exposed to losses if a customer counterparty fails to make its payments under a contract in which the Company is in a net receiving position. At this time, the Company anticipates that its counterparties will be able to fully satisfy their obligations under the agreements. All of the contracts to which the Company is a party settle monthly. Further, the Company has netting agreements with the dealers with which it does business.
Stock-Based Compensation: The Company’s 2021 Long-Term Stock Incentive Plan allows the granting of shares of the Company’s common stock as incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors, officers and employees of the Company and its subsidiaries. There are no shares remaining for issuance with respect to the stock option plans approved in 2002, 2006 and 2012; however, options granted under these plans are still included in the amounts below.
Options granted under these plans are, in general, exercisable not earlier than one year after the date of grant, at a price equal to the fair value of common stock on the date of grant and expire not more than ten years after the date of grant. Stock options may vest
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during a period of up to five years after the date of grant. The Company has a policy of using authorized but unissued shares to satisfy option exercises.
Upon adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures.
Changes in options outstanding during the three months ended March 31, 2023 were as follows:
Weighted
Average
Aggregate
Remaining
Intrinsic
Number of
Exercise
Contractual
Value
Options
Price
Term
Balance, January 1, 2023
6,800
16.53
Exercised during 2023
(300
14.60
Expired during 2023
(2,300
14.86
Forfeited during 2023
Balance, March 31, 2023
4,200
17.58
0.57 years
Vested and expected to vest
Exercisable at March 31, 2023
The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the first quarter of 2023 and the exercise price, multiplied by the number of in-the-money options. The Company’s closing stock price on March 31, 2023 was $29.62.
There were no stock options granted during the three months ended March 31, 2023.
As of March 31, 2023, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock incentive plans.
The Company issued performance-based and service-based restricted stock units in 2023 and 2022. Service-based units vest ratably over a three- or five-year period. There were 269,570 service-based restricted stock units granted during the first quarter of 2023.
The performance-based awards are dependent upon the Company meeting certain performance criteria and, to the extent the performance criteria are met, will cliff vest at the end of the performance period, which is generally three years. There were 123,137 performance-based restricted stock units granted in the first quarter of 2023.
Changes in non-vested shares dependent on performance criteria for the three months ended March 31, 2023 were as follows:
Grant Date
Shares
Fair Value
233,556
23.77
Granted during 2023
123,137
26.60
Vested during 2023
(145,176
13.44
211,517
32.51
Changes in service-based restricted stock awards/units for the three months ended March 31, 2023 were as follows:
621,170
27.50
269,570
30.96
(207,705
26.49
(2,187
24.98
680,848
29.19
15
As of March 31, 2023, there was $23.0 million of total unrecognized compensation cost related to service-based and performance-based units. That cost is expected to be recognized over a weighted average period of 1.44 years. Stock compensation expense recorded for the first quarters of 2023 and 2022 totaled $2.7 million and $1.9 million, respectively.
Employee Stock Purchase Plan (“ESPP”): The ESPP provides for the granting of rights to purchase up to 150,000 shares of Peapack-Gladstone Financial Corporation common stock. In May 2020, shareholders approved an increase of 200,000 shares of Peapack-Gladstone Financial Corporation common stock to be issued under the ESPP.
The ESPP allows for the purchase of shares during four three-month Offering Periods of each calendar year. The Offering Periods end on February 16, May 16, August 16 and November 16 of each calendar year.
Each participant in the Offering Period is granted an option to purchase a number of shares and may contribute between one percent and 15 percent of their compensation. At the end of each Offering Period, the number of shares to be purchased by the employee is determined by dividing the employee’s contributions accumulated during the Offering Period by the applicable purchase price. The purchase price is an amount equal to 85 percent of the closing market price of a share of common stock on the purchase date. Participation in the ESPP is entirely voluntary and employees can cancel their purchases at any time during the period without penalty. The fair value of each share purchase right is determined using the Black-Scholes option pricing model.
The Company recorded $48,000 and $35,000 of expense in salaries and employee benefits expense for the three months ended March 31, 2023 and 2022, respectively related to the ESPP. Total shares issued under the ESPP during the first quarter of 2023 and 2022 were 7,533 and 6,808, respectively.
Earnings per share – Basic and Diluted: The following is a reconciliation of the calculation of basic and diluted earnings per share. Basic net income per share is calculated by dividing net income available to shareholders by the weighted average shares outstanding during the reporting period. Diluted net income per share is computed similarly to that of basic net income per share, except that the denominator is increased to include the number of additional shares that would have been outstanding utilizing the Treasury Stock Method if all shares underlying potentially dilutive stock options were issued and all shares of restricted stock, stock warrants or restricted stock units were to vest during the reporting period.
Net income available to common shareholders
Basic weighted average shares outstanding
Plus: common stock equivalents
422,107
607,670
Diluted weighted average shares outstanding
Net income per share
For the three months ended March 31, 2023 and 2022, restricted stock units totaling 362,052 and 299,433, respectively, were not included in the computation of diluted earnings per share because they were anti-dilutive. Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the average market value for the periods presented.
Income Taxes: The Company files a consolidated Federal income tax return. Separate state income tax returns are filed for each subsidiary based on current laws and regulations.
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on the enacted tax rates. Such tax assets and liabilities are adjusted for the effect of a change in tax rates in the period of enactment.
The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company is no longer subject to examination by the U.S. Federal tax authorities for years prior to 2019 or by New Jersey tax authorities for years prior to 2017.
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The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of New York was required to meet regulatory reserve and clearing requirements.
Comprehensive Income/(Loss): Comprehensive income/(loss) consists of net income and the change during the period in the Company’s net unrealized gains or losses on securities available for sale and unrealized gains and losses on cash flow hedge, net of tax, less adjustments for realized gains and losses.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Goodwill and Other Intangible Assets: Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree (if any), over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Goodwill was primarily attributable to the Bank’s wealth acquisitions. Management monitors the impact of changes in the financial markets and includes these assessments in our impairment process. Management has concluded that there was no goodwill impairment as of March 31, 2023.
The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill, which includes assembled workforce has an indefinite life on our statement of financial condition. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill and assembled workforce are the intangible assets with an indefinite life on our balance sheet.
Other intangible assets, which primarily consist of customer relationship intangible assets arising from acquisitions, are amortized on an accelerated basis over their estimated useful lives, which range from 5 to 15 years.
2. INVESTMENT SECURITIES
A summary of amortized cost and approximate fair value of investment securities available for sale and held to maturity included in the Consolidated Statements of Condition as of March 31, 2023 and December 31, 2022 follows:
March 31, 2023
Gross
Allowance
Amortized
Unrealized
for
Fair
Cost
Gains
Losses
Credit Losses
Securities Available for Sale:
U.S government-sponsored agencies
(49,992
194,787
Mortgage-backed securities–residential
366,852
61
(42,726
324,187
SBA pool securities
30,403
(3,951
26,452
State and political subdivisions
1,860
(8
1,852
Corporate bond
(1,012
8,988
Total securities available for sale
653,894
(97,689
Securities Held to Maturity:
U.S. government-sponsored agencies
40,000
(4,001
35,999
71,609
(9,641
61,968
Total securities held to maturity
(13,642
97,967
17
December 31, 2022
244,774
(54,232
190,542
372,471
27
(46,760
325,738
31,934
1
(4,508
27,427
1,866
(17
1,849
(908
9,092
661,045
28
(106,425
(4,563
35,437
62,291
(10,541
51,750
(15,104
87,187
The following table presents a summary of the gross gains, gross losses and net tax benefit related to proceeds on sales of securities available for sale for the three months ended March 31, 2023 and 2022:
March 31, 2022
Proceeds from sales
118,972
Gross gains
Gross losses
(6,612
Net tax benefit
1,581
The following tables present the Company’s available for sale and held to maturity securities with continuous unrealized losses and the approximate fair value of these investments as of March 31, 2023 and December 31, 2022.
Duration of Unrealized Loss
Less Than 12 Months
12 Months or Longer
Approximate
194,788
Mortgage-backed securities residential
42,964
(593
214,736
(42,133
257,700
136
25,614
25,750
1,582
6,840
(660
2,148
(352
49,940
(1,253
438,868
(96,436
488,808
2,019
(31
51,640
(9,610
53,659
87,639
(13,611
89,658
Total securities
51,959
(1,284
526,507
(110,047
578,466
(111,331
82,907
(4,082
174,557
(42,678
257,464
3,377
(332
23,256
(4,176
26,633
1,579
96,955
(5,339
388,355
(101,086
485,310
13,174
(1,826
22,263
(2,737
15,635
(3,585
36,115
(6,956
28,809
(5,411
58,378
(9,693
125,764
(10,750
446,733
(110,779
572,497
(121,529
Available for sale and held to maturity securities are evaluated to determine if a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. An impairment related to credit factors would be recorded through an allowance for credit losses. The allowance is limited to the amount by which the security’s amortized cost basis exceeds the fair value. An impairment that has not been recorded through an allowance for credit losses shall be recorded through other comprehensive income, net of applicable taxes. Investment securities will be written down to fair value through the Consolidated Statements of Income when management intends to sell, or may be required to sell, the securities before they recover in value. The issuers of securities currently in a continuous loss position continue to make timely principal and interest payments and none of these securities were past due or were placed in nonaccrual status at March 31, 2023. Substantially all of the investment securities are backed by loans guaranteed by either U.S. government agencies or U.S government-sponsored entities, and management believes that default is highly unlikely given the lack of historical credit losses and governmental backing. Management believes that the unrealized losses on these securities are a function of changes in market interest rates and credit spreads, not changes in credit quality. Therefore, no allowance for credit losses was recorded at March 31, 2023.
The Company has an investment in a CRA investment fund with a fair value of $13.2 million at March 31, 2023. This investment is classified as an equity security in our Consolidated Statements of Condition. This security had a gain of $209,000 for the three months ended March 31, 2023, respectively. This amount is included in the fair value adjustment for CRA equity security on the Consolidated Statements of Income.
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3. LOANS AND LEASES
Loans outstanding, excluding those held for sale, by general ledger classification, as of March 31, 2023 and December 31, 2022, consisted of the following:
% of
Totals
Residential mortgage
544,655
10.15
%
525,756
9.95
Multifamily mortgage
1,871,387
34.88
1,863,915
35.27
Commercial mortgage
613,911
11.44
624,625
11.82
Commercial loans (including equipment financing)
2,246,899
41.87
2,194,094
41.51
Commercial construction
6,138
0.12
4,042
0.07
Home equity lines of credit
33,294
0.62
34,496
0.65
Consumer loans, including fixed rate home equity loans
49,002
0.91
38,014
0.72
Other loans
443
0.01
304
Total loans
100.00
In determining an appropriate amount for the allowance, the Bank segments and aggregated the loan portfolio based on common characteristics. The following pool segments identified as of March 31, 2023 and December 31, 2022 are based on the CECL methodology:
Primary residential mortgage
546,133
10.18
527,784
9.99
Junior lien loan on residence
36,986
0.69
38,265
Multifamily property
34.90
35.29
Owner-occupied commercial real estate
274,923
5.13
272,009
5.15
Investment commercial real estate
1,016,725
18.96
1,044,125
19.77
Commercial and industrial
1,268,350
23.65
1,194,662
22.62
Lease financing
282,906
5.28
288,566
5.46
Construction
12,593
0.23
9,936
0.19
Consumer and other
52,249
0.98
42,319
0.80
5,362,252
5,281,581
Net deferred costs
3,477
3,665
Total loans including net deferred costs
The following tables present the recorded investment in nonaccrual and loans past due 90 days or over still on accrual by class of loans as of March 31, 2023 and December 31, 2022:
Loans Past Due
90 Days or Over
And Still
Nonaccrual
Accruing Interest
1,227
11,235
11,166
3,539
1,492
28,659
20
2,339
11,208
3,662
1,765
18,974
The following tables present the aging of the recorded investment in past due loans as of March 31, 2023 and December 31, 2022 by class of loans, excluding nonaccrual loans:
30-59
60-89
90 Days or
Days
Greater
Past Due
411
876
1,475
2,762
1,145
882
4,884
681
5,565
6,911
7,592
Credit Quality Indicators:
The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.
In addition, the Bank has engaged an independent loan review firm to validate risk ratings and to ensure compliance with our policies and procedures. This review of the following types of loans is performed quarterly:
The review excludes borrowers with commitments of less than $500,000.
The Company uses the following regulatory definitions for criticized and classified risk ratings:
Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.
With the adoption of CECL, loans that are in the process of or expected to be in foreclosure are deemed to be collateral dependent with respect to measuring potential loss and allowance adequacy and are individually evaluated by Management. Loans that do not share common risk characteristics are also evaluated on an individual basis. All other loans are evaluated using a non-linear discounted cashflow methodology for measuring potential loss and allowance adequacy.
The following is a summary of the credit risk profile of loans by internally assigned grade as of March 31, 2023 and December 31, 2022 based on originations for the periods indicated; the years represent the year of origination for non-revolving loans:
Grade as of March 31, 2023 for Loans Originated During
2018
Revolving-
2021
2020
2019
and Prior
Revolving
Primary residential mortgage:
Pass
30,590
117,702
84,130
61,330
36,638
212,680
688
543,758
Special mention
Substandard
546
1,008
821
Doubtful
Total primary residential mortgages
61,876
37,646
213,501
Current period gross charge-offs
Junior lien loan on residence:
128
1,632
167
38
614
1,113
33,231
36,923
Total junior lien loan on residence
Multifamily property:
20,408
483,221
665,340
117,591
222,731
335,842
748
2,126
1,848,007
1,685
1,565
9,671
2,832
7,627
21,695
Total multifamily property
484,786
675,011
225,563
345,154
22
Owner-occupied commercial real estate:
859
24,037
43,474
20,518
12,110
146,130
324
26,275
273,727
1,065
131
1,196
Total owner-occupied commercial real estate
25,102
455
Investment commercial real estate:
30,893
176,245
153,109
58,969
155,031
348,474
11,874
26,984
961,579
12,902
13,203
14,426
40,531
3,449
14,615
Total investment commercial real estate
187,411
171,382
361,677
41,410
Commercial and industrial:
93,226
396,905
215,264
67,721
65,802
27,924
366,019
16,445
1,249,306
825
192
257
1,274
1,441
1,858
1,972
3,516
285
8,698
17,770
Total commercial and industrial
398,346
217,122
70,518
69,318
28,401
374,974
Lease financing:
10,218
70,676
69,305
54,747
44,848
29,740
279,534
1,880
Total lease financing
72,556
46,340
Construction:
1,420
2,107
9,066
Total commercial construction loans
Consumer and other loans:
356
182
5,186
31,121
15,404
Total consumer and other loans
46
23
Total:
186,322
1,270,418
1,231,145
381,096
539,194
1,107,089
445,424
96,988
5,257,676
2,945
15,080
388
46,566
14,172
11,529
2,518
12,297
8,733
8,761
58,010
Total Loans
1,287,535
1,242,674
384,439
564,393
1,130,902
454,573
111,414
Total Current Period Gross Charge-offs
24
Grade as of December 31, 2022 for Loans Originated During
2017
118,864
87,312
62,540
37,902
27,209
190,834
691
525,352
547
1,044
141
700
2,432
63,087
38,946
27,350
191,534
1,631
177
42
639
326
953
33,996
37,764
501
34,497
488,657
678,507
118,220
224,129
33,884
305,628
1,246
1,425
1,851,696
1,696
2,846
7,677
10,523
226,975
315,001
25,315
43,916
20,679
12,244
22,422
126,237
608
20,588
189,829
154,715
59,444
155,995
93,330
305,219
6,590
23,487
988,609
13,015
13,309
14,507
40,831
14,685
201,037
172,487
318,528
37,994
421,072
217,887
76,307
80,359
26,792
5,559
303,526
29,750
1,161,252
14,405
826
193
258
15,682
1,553
1,892
3,894
277
7,893
17,728
437,030
219,779
79,281
84,253
27,262
5,630
311,677
73,155
71,925
58,262
48,942
24,408
8,125
284,817
1,984
75,139
50,707
25
1,439
4,064
4,433
381
194
5,753
31,287
4,704
1,318,523
1,254,820
395,688
561,649
228,371
948,308
381,317
85,078
5,173,754
16,389
15,005
60,193
12,761
2,695
13,026
418
8,448
8,394
47,634
1,347,673
1,256,712
399,209
587,690
228,982
971,761
389,969
99,585
At March 31, 2023, $27.6 million of substandard loans were also considered individually evaluated, compared to $14.7 million at December 31, 2022.
Loan Modifications:
On January 1, 2023, the Company adopted Accounting Standards Update 2022-02, which replaced the accounting and recognition of TDRs. The Company will provide modifications, which may include other than insignificant delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of the modification for the three months ended March 31, 2023 did not have a material impact on the ACL. The following table provides information related to the modification during the three months ended March 31, 2023 by pool segment and type of concession granted:
Interest Only Period Extension
Three Months Ended March 31, 2023
% of Total
Class of
Cost Basis
Financing
at Period End
Receivable
248
0.02
The following table depicts the payment status of the loan that was modified to a borrower experiencing financial difficulties on or after January 1, 2023, the date we adopted ASU 2022-02, through March 31, 2023:
Payment Status at March 31, 2023
30-89 Days
90+ Days
Current
26
There were no loans that failed to comply with their modified terms in the twelve months following modification and resulted in a payment default at March 31, 2023.
Troubled Debt Restructurings:
Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company classified certain loans as troubled debt restructuring (“TDR”) loans when credit terms to a borrower in financial difficulty were modified, in accordance with ASC 310-40. With the adoption of ASU 2022-02 as of January 1, 2023, the Company has ceased to recognize or measure new TDRs but those existing at December 31, 2022 will remain until settled.
The Company has allocated $1.2 million of specific reserves on TDRs as of December 31, 2022. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.
The following table presents loans by class modified as TDRs during the three-month period ended March 31, 2022:
Pre-Modification
Post-Modification
Outstanding
Recorded
Investment
12,500
The identification of the TDRs did not have a material impact on the allowance for credit losses.
The following table presents loans by class modified as TDRs that failed to comply with the modified terms in the twelve months following modification and resulted in a payment default at March 31, 2022:
215
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans may include one or more of the following: (1) a reduction of the stated interest rate of the loan to a rate that is lower than the current market rate for new debt with similar risk; (2) an extension of an interest only period for a predetermined period of time; (3) an extension of the maturity date; or (4) an extension of the amortization period over which future payments will be computed. At the time a loan is restructured, the Bank performs a full underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the TDR. At a minimum, six consecutive months of contractual payments would need to be made on a restructured loan before returning it to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status if it meets the requirements of ASC 310-40-50-2.
4. ALLOWANCE FOR CREDIT LOSSES
On January 1, 2022, the Company adopted ASU 2016-13, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. See Note 1, Summary of Significant Accounting Policies for additional information on Topic 326.
The Company does not estimate expected credit losses on accrued interest receivable (“AIR”) on loans, as AIR is reversed or written off when the full collection of the AIR related to a loan becomes doubtful. AIR on loans totaled $16.9 million at March 31, 2023 and $22.8 million at December 31, 2022.
The following tables present the loan balances by segment, and the corresponding balances in the allowance as of March 31, 2023 and December 31, 2022. The allowance was based on the CECL methodology.
Ending ACL
Attributable
To
Individually
To Loans
Evaluated
Collectively
Ending
ACL
574
545,559
2,959
146
11,236
1,104
1,860,151
8,719
9,823
4,952
1,221
1,005,559
13,317
14,538
3,268
296
1,265,082
26,573
26,869
281,414
1,989
Consumer and other loans
661
Total ACL
27,736
2,621
5,334,516
59,629
374
527,410
2,894
154
8,849
4,835
1,208
1,032,917
14,272
15,480
3,385
299
1,191,277
25,231
25,530
286,801
2,314
236
537
16,732
1,507
5,264,849
59,322
Individually evaluated loans include nonaccrual loans of $26.6 million at March 31, 2023 and $15.8 million at December 31, 2022. Individually evaluated loans did not include any performing modified loans at March 31, 2023. No allowance was allocated to modified loans at March 31, 2023. All accruing modified loans were paying in accordance with their modified terms as of March 31, 2023. The Company has not committed to lend additional amounts as of March 31, 2023 to customers with outstanding loans that are classified as modified loans.
The allowance for credit losses was $62.3 million as of March 31, 2023, compared to $60.8 million at December 31, 2022. The increase in the allowance for credit losses (“ACL”) was primarily due to specific reserves of $1.1 million related to one multifamily relationship of $9.7 million. The allowance for credit losses as a percentage of loans was 1.16 percent and 1.15 percent at March 31, 2023 and December 31, 2022, respectively.
Under Topic 326, the Company's methodology for determining the ACL on loans is based upon key assumptions, including historic net charge-offs, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.
The following tables present collateral dependent loans individually evaluated by segment as of March 31, 2023 and December 31, 2022:
Unpaid
Principal
Related
Balance
With no related allowance recorded:
724
507
3,775
1,743
1,810
1,537
1,674
Total loans with no related allowance
6,036
3,809
3,991
With related allowance recorded:
11,267
3,745
11,183
1,546
1,525
1,217
Total loans with related allowance
25,313
23,927
16,145
Total loans individually evaluated
31,349
20,136
415
3,868
1,836
539
1,792
444
6,075
3,975
1,232
12,402
1,555
1,549
174
14,055
12,757
12,576
Total loans individually evaluated for impairment
20,130
13,808
Interest income recognized on individually evaluated loans for the three months ended March 31, 2023 and 2022 was not material. The Company did not recognize any income on non-accruing impaired loans for the three months ended March 31, 2023 and 2022.
The activity in the allowance for credit losses for the three months ended March 31, 2023 and March 31, 2022 is summarized below:
January 1,
Beginning
Provision
Charge-offs
Recoveries
(Credit) (A)
65
974
117
(942
1,339
(325
77
(46
1,464
Prior to
Adoption
Impact of
of
Adopting
Topic 326
1,510
717
1,318
3,545
88
83
242
9,806
4,072
1,602
1,998
2,902
4,903
27,083
(13,589
(250
(2,275
10,969
17,509
(657
1,797
18,653
3,440
156
(242
3,354
361
123
532
419
(20
92
708
61,697
(5,536
(270
2,489
58,386
30
Allowance for Credit Losses on Off Balance Sheet Commitments
The following table presets the activity in the ACL for off-balance sheet commitments for the three months ended March 31, 2023 and 2022:
(Credit)
Off balance sheet commitments
752
49
801
Prior to adoption
of Topic 326
adopting Topic 326
302
188
5. DEPOSITS
Certificates of deposit that met or exceeded $250,000 totaled $81.0 million and $91.1 million at March 31, 2023 and December 31, 2022, respectively. These totals excluded brokered certificates of deposit.
The following table sets forth the details of total deposits as of March 31, 2023 and December 31, 2022:
20.65
23.94
Interest-bearing checking (A)
52.69
41.18
2.50
3.02
Money market
16.45
23.60
6.73
6.12
0.30
0.49
99.32
98.35
Interest-bearing demand - Brokered
1.15
Certificates of deposit - Brokered
0.50
The scheduled maturities of certificates of deposit, including brokered certificates of deposit, as of March 31, 2023, are as follows:
171,431
2024
185,171
2025
33,907
2026
5,393
2027
2,957
2028 and later
89
398,948
6. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
At March 31, 2023, the Company had total borrowings with the FHLB of $378.8 million, which consisted of $128.8 million of overnight borrowings at a rate of 4.99 percent and a $250.0 million one-month advance at a rate of 5.20 percent with an April 13, 2023 maturity date. As of December 31, 2022, the Company had $379.5 million of overnight borrowings at the FHLB at a rate of 4.61 percent. At March 31, 2023, unused short-term overnight borrowing commitments totaled $1.5 billion from the FHLB, $22.0 million from correspondent banks and $1.8 billion at the Federal Reserve Bank of New York.
31
7. BUSINESS SEGMENTS
The Company assesses its results among two operating segments, Banking and Peapack Private. Management uses certain methodologies to allocate income and expense to the business segments. A funds transfer pricing methodology is used to assign interest income and interest expense. Certain indirect expenses are allocated to segments. These include support unit expenses such as technology and operations and other support functions. Taxes are allocated to each segment based on the effective rate for the period shown.
Banking
The Banking segment includes: commercial (includes C&I and equipment finance), commercial real estate, multifamily, residential and consumer lending activities; treasury management services; C&I advisory services; escrow management; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support and sales.
Peapack Private
Peapack Private which includes the operations of PGB Trust & Investments of Delaware, consists of: investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; and other financial planning, tax preparation and advisory services.
The following tables present the statements of income and total assets for the Company’s reportable segments for the three months ended March 31, 2023 and 2022.
Peapack
Private
Net interest income
42,090
1,888
Noninterest income
3,835
14,224
Total income
45,925
16,112
62,037
18,169
6,417
Premises and equipment expense
3,613
761
3,274
2,629
Total operating expense
27,280
9,807
37,087
Income before income tax expense
18,645
6,305
4,930
1,665
13,715
4,640
Total assets at period end
6,366,729
113,289
Three Months Ended March 31, 2022
37,999
1,623
(429
15,143
37,570
16,766
54,336
Provision for loan and lease losses
16,403
6,046
3,931
716
4,166
2,436
6,602
27,346
9,198
36,544
10,224
7,568
2,300
2,051
7,924
5,517
6,155,011
100,653
6,255,664
32
8. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value:
Investment Securities: The fair values for investment securities are determined by quoted market prices (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Loans Held for Sale, at Fair Value: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Individually Evaluated Loans: The fair value of collateral dependent loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Individually evaluated loans may, in some cases, also be measured by the discounted cash flow methodology where payments are anticipated. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO") are measured at fair value, less estimated costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Management. Once received, a third party conducts a review of the appraisal for compliance with the Uniform Standards of Professional Appraisal Practice and appropriate analysis methods for the type of property. Subsequently, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals on collateral dependent impaired loans and other real estate owned (consistent for all loan types) are obtained on an annual basis, unless a significant change in the market or other factors warrants a more frequent appraisal. On an annual basis, Management compares the actual selling price of any collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for other properties. The most recent analysis performed indicated that a discount up to 15 percent should be applied to appraisals on properties. The discount is determined based on the nature of the underlying properties, aging of appraisals and other factors. For each collateral-dependent impaired loan, we consider other factors, such as certain indices or other market information, as well as property specific circumstances to determine if an adjustment to the
33
appraised value is needed. In situations where there is evidence of change in value, the Bank will determine if there is a need for an adjustment to the specific reserve on the collateral dependent impaired loans. When the Bank applies an interim adjustment, it generally shows the adjustment as an incremental specific reserve against the loan until it has received the full updated appraisal. All collateral-dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old or in the process of obtaining an appraisal as of March 31, 2023.
The following tables summarize, at the dates indicated, assets measured at fair value on a recurring basis, including financial assets for which the Corporation has elected the fair value option:
Assets Measured on a Recurring Basis
Fair Value Measurements Using
Quoted
Prices in
Active
Significant
Markets For
Identical
Observable
Unobservable
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Assets:
Available for sale:
Mortgage-backed securities-residential
CRA investment fund
Derivatives:
Cash flow hedges
6,671
Loan level swaps
28,827
604,958
591,764
Liabilities:
28,983
34
Securities available for sale:
9,289
615,187
602,202
The Company has elected the fair value option for certain loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual as of March 31, 2023 and December 31, 2022.
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2023.
The following tables summarize, at the dates indicated, assets measured at fair value on a non-recurring basis:
Individually evaluated loans:
10,132
9,945
743
The carrying amounts and estimated fair values of financial instruments at March 31, 2023 are as follows:
Fair Value Measurements at March 31, 2023 using
Carrying
Amount
Level 1
Level 2
Level 3
Financial assets
Cash and cash equivalents
Securities held to maturity
FHLB and FRB stock
N/A
15,056
Loans, net of allowance for credit losses
5,295,280
2,257
16,886
Accrued interest receivable loan level swaps (A)
798
Financial liabilities
Deposits
4,909,894
390,365
5,300,259
378,846
Subordinated debt
117,404
Accrued interest payable
5,717
3,411
1,305
1,001
Accrued interest payable loan level swaps (B)
Loan level swap
The carrying amounts and estimated fair values of financial instruments at December 31, 2022 are as follows:
Fair Value Measurements at December 31, 2022 using
17,176
Loans, net of allowance for loan and lease losses
5,141,201
2,393
22,764
1,092
4,835,249
356,975
5,192,224
119,865
2,997
2,509
413
75
36
9. REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income.
The following tables present the sources of noninterest income for the periods indicated:
For the Three Months Ended March 31,
Service charges on deposits
Overdraft fees
133
Interchange income
311
342
814
497
Wealth management fees (A)
Other (B)
(2,633
Total noninterest other income
The following table presents the sources of noninterest income by operating segment for the periods indicated:
Wealth
Revenue by Operating Segment
Management
2,497
462
(2,942
309
Total noninterest income
A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service charges on deposit accounts: The Company earns fees from its deposit customers for certain transaction account maintenance, and overdraft fees. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Interchange income: The Company earns interchange fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented gross of cardholder rewards. Cardholder rewards are included in other expenses in the statement of income. Cardholder rewards reduced interchange income for the first quarter of 2023 by $2,000 compared to $30,000 for the same quarter in 2022.
Wealth management fees (gross): The Company earns wealth management fees from its contracts with wealth management clients to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company charges its clients on a monthly or quarterly basis in accordance with its investment advisory agreements. Fees are generally assessed based on a tiered scale of the market value of AUM at month end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (i.e. trade date).
37
Investment brokerage fees (net): The Company earns fees from investment brokerage services provided to its customers by a third-party service provider. The Company receives commissions from the third-party service provider twice a month based upon customer activity for the month. The fees are recognized monthly, and a receivable is recorded until commissions are generally paid by the 15th of the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers, investment brokerage fees are presented net of related costs.
Corporate advisory fee income: The Company provides our clients with financial advisory and underwriting services. Investment banking revenues, which includes mergers and acquisition advisory fees and private placement fees, are recorded when the performance obligation for the transaction is satisfied under the terms of each engagement. Reimbursed expenses are reported in other revenue on the statement of operations. Expenses related to investment banking are recognized as non-compensation expenses on the statement of operations. Amounts received and unearned are included on the statement of financial condition. Expenses related to investment banking deals not completed are recognized in non-compensation expenses on the statement of operations.
The Company’s mergers and acquisition advisory fees generally consist of a nonrefundable up-front fee and success fee. The nonrefundable fee is recorded as deferred revenue upon receipt and recognized at a point in time when the performance obligation is satisfied, or when the transaction is deemed by management to be terminated. Management’s judgement is required in determining when a transaction is considered to be terminated.
Other: All of the other income items are outside the scope of ASC 606.
10. OTHER OPERATING EXPENSES
The following table presents the major components of other operating expenses for the periods indicated:
Professional and legal fees
1,345
1,138
Telephone
369
334
Advertising
396
290
Branch/office restructure
175
372
Other operating expenses
3,264
3,364
Total other operating expenses
11. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The following is a summary of the accumulated other comprehensive income/(loss) balances, net of tax, for the three months ended March 31, 2023 and 2022:
Reclassified
From
Income/(Loss)
Three Months
Balance at
Ended
Before
Reclassifications
Net unrealized holding gain/(loss) on securities available for sale, net of tax
(80,972
(72,251
Gain/(loss) on cash flow hedges
6,761
(1,925
(30
4,806
Accumulated other comprehensive gain/(loss), net of tax
6,796
(9,873
(35,602
5,028
(40,447
(2,501
(491
(33,592
The following represents the reclassifications out of accumulated other comprehensive income/(loss) for the three months ended March 31, 2023 and 2022:
Affected Line Item in Income Statement
Unrealized gains/(losses) on securities available for sale:
Securities losses, net
(1,581
Total reclassifications, net of tax
Unrealized gains/(losses) on cash flow hedge derivatives:
Interest Expense
12. DERIVATIVES
The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with a notional amount of $210.0 million as of March 30, 2023 and $290.0 million as of December 31, 2022 were designated as cash flow hedges of certain interest-bearing deposits. On a quarterly basis, the Company performs a qualitative hedge effectiveness assessment. This assessment takes into consideration any adverse developments related to the counterparty’s risk of default and any negative events or circumstances that affect the factors that originally enabled the Company to assess that it could reasonably support, qualitatively, an expectation that the hedging relationship was and will continue to be highly effective. As of March 31, 2023, there were no events or market conditions that would result in hedge ineffectiveness. The aggregate fair value of the swaps is recorded in other assets/liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.
In March 2022, the Company entered into four forward starting interest rate swaps with a total notional amount of $100.0 million. These swaps will effectively extend the interest rate protection of existing swaps for an additional two to five years. As such, they are designated as cash flow hedges of certain interest-bearing deposits. The Company will receive variable amounts and pay fixed amounts. The weighted-average fixed pay rate on these forward swaps was 3.12 percent as of March 31, 2023. As of March 31, 2023, an unrealized gain of $2.0 million was recorded in accumulated other comprehensive income related to these forward starting swaps. The tables below do not include the impact of these forward swaps.
39
The following table presents information about the interest rate swaps designated as cash flow hedges as of March 31, 2023 and December 31, 2022:
March 31,2023
December 31,2022
Notional amount
210,000
290,000
Weighted average pay rate
1.64
1.71
Weighted average receive rate
2.84
2.78
Weighted average maturity
3.69 years
2.01 years
Unrealized gain/(loss), net
4,500
3,290
Number of contracts
Notional
Interest rate swaps related to interest-bearing deposits
Total included in other assets
Total included in other liabilities
Cash Flow Hedges
The following table presents the net gains/(losses) recorded in accumulated other comprehensive income/(loss) and the consolidated financial statements relating to the cash flow derivative instruments for the three months ended March 31, 2023 and 2022:
Interest rate contracts
Gain/(loss) recognized in other comprehensive income (effective portion)
Gain/(loss) reclassified from other comprehensive income to interest expense
Gain/(loss) recognized in other noninterest income
During the third quarter of 2022, the Company recognized an unrealized after-tax gain of $167,000 in accumulated other comprehensive income/(loss) related to the termination of two interest rate swaps designated as cash flow hedges that were deemed ineffective. The gain is being amortized into earnings over the remaining life of the terminated swaps.
Net interest income/expense recorded on these swap transactions totaled $947,000 of income and $999,000 of expense for the three months ended March 31, 2023 and March 31, 2022, respectively, and is reported as a component of interest expense.
Derivatives Not Designated as Accounting Hedges
The Company offers facility specific/loan level swaps to its customers and offsets its exposure from such contracts by entering mirror image swaps with a financial institution/swap counterparty (loan level / back-to-back swap program). The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting (“standalone derivatives”). The notional amount of the swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual contracts. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions.
40
The accrued interest receivable and payable related to these swaps of $798,000 and $1.1 million at March 31, 2023 and December 31, 2022, respectively, is recorded in other assets and other liabilities.
Information about these swaps is as follows:
607,365
612,211
Fair value
(28,402
(37,173
Weighted average pay rates
3.99
Weighted average receive rates
6.60
6.14
4.44 years
4.68 years
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13. SUBORDINATED DEBT
In December 2017, the Company issued $35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2017 Notes”) to certain institutional investors. The 2017 Notes are non-callable for five years, have a stated maturity of December 15, 2027, and had a fixed interest rate of 4.75 percent until December 15, 2022. From December 16, 2022 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month London Interbank Offered Rate (“LIBOR”) rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $875,000 and are being amortized to maturity.
In December 2020, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2020 Notes”) to certain institutional investors. The 2020 Notes are non-callable for five years, have a stated maturity of December 22, 2030, and bear interest at a fixed rate of 3.50 percent until December 22, 2025. From December 23, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 326 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $1.9 million and are being amortized to maturity.
The Company used the proceeds from the issuance of the 2020 Notes to refinance then-outstanding debt, for stock repurchases, acquisitions of wealth management firms, as well as other general corporate purposes.
Subordinated debt is presented net of issuance costs on the Consolidated Statements of Condition. The subordinated debt issuances are included in the Company’s regulatory total capital amount and ratio.
In connection with the issuance of the 2020 Notes, the Company obtained ratings from Kroll Bond Rating Agency (“KBRA”) and Moody’s Investors Services (“Moody’s). KBRA assigned an investment grade rating of BBB- and Moody’s assigned an investment grade rating of Baa3 for the 2020 Notes at the time of issuance.
14. LEASES
The Company maintains certain property and equipment under direct financing and operating leases. As of March 31, 2023, the Company's operating lease ROU asset and operating lease liability totaled $12.3 million and $13.1 million, respectively. As of December 31, 2022, the Company's operating lease ROU asset and operating lease liability totaled $12.9 million and $13.7 million, respectively. A weighted average discount rate of 2.63 percent was used in the measurement of the ROU asset and lease liability for both March 31, 2023 and December 31, 2022.
The Company's leases have remaining lease terms between one month to 14 years, with a weighted average lease term of 7.38 years at March 31, 2023. The Company's leases had remaining lease terms between three months to 14 years, with a weighted average lease term of 7.48 years at December 31, 2022. The Company’s lease agreements may include options to extend or terminate the lease. The Company’s decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal.
Total operating lease costs were $805,000 and $868,000 for the three months ended March 31, 2023 and 2022, respectively. The variable lease costs were $72,000 and $77,000 for the three months ended March 31, 2023 and 2022, respectively.
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The following is a schedule of the Company's operating lease liabilities by contractual maturity as of March 31, 2023:
2,851
2,377
1,922
1,471
1,068
Thereafter
4,828
Total lease payments
14,517
Less: imputed interest
1,435
Total present value of lease payments
The following table shows the supplemental cash flow information related to the Company’s direct finance and operating leases for the periods indicated:
Right-of-use asset obtained in exchange for lease obligation
110
5,446
Operating cash flows from operating leases
732
665
Operating cash flows from direct finance leases
Financing cash flows from direct finance leases
187
15. ACCOUNTING PRONOUNCEMENTS
In March 2022, FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815) (“ASU 2022-01”), which clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the “portfolio layer” method. ASU 2022-01 became effective January 1, 2023 and did not have a material impact on the Company’s consolidated financial statements.
In March 2022, FASB issued ASU 2022-02, Financial Instruments–Credit Losses (Topic 326); Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in this update became effective for the Company on January 1, 2023 for all interim and annual periods. The adoption of the provisions in this update are applied prospectively and resulted in additional disclosures concerning modifications of loans to borrowers experiencing financial difficulty, as well as disaggregated disclosure of charge-offs on loans. Please also see Note 4 – Loans and Leases for disclosure concerning modifications of loans to borrowers experiencing financial difficulty.
In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842), Common Control Arrangements. The amendments in this update clarify the accounting for leasehold improvements associated with common control leases. This update has been issued in order to address current diversity in practice associated with the accounting for leasehold improvements associated with a lease between entities under common control. The amendments in this update apply to all lessees that are a party to a lease between entities under common control in which there are leasehold improvements. The amendments in this update are effective for interim and annual periods beginning after December 15, 2023. The Company is currently evaluating the provisions of this update but does not anticipate the adoption will have a material impact on the Company’s consolidated financial statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management’s confidence and strategies and Management’s expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2022, in addition to/which include the following:
Moreover, our operations depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could hinder our ability to operate our business or execute our business strategy.
Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking statements to conform the statement to actual results or change in the Company’s expectations. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2022 contains a summary of the Company’s significant accounting policies.
Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for credit losses involves a higher degree of complexity and requires Management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.
On January 1, 2022, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for Management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and Management judgement and is reviewed on a quarterly basis. When Management is reasonably certain that a loan balance is not fully collectable, an analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of Management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in Management’s judgment, should be charged off.
Although Management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in New Jersey and, to a lesser extent, New York City. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
The Company accounts for its debt securities in accordance with ASC 320, “Investments - Debt Securities” and its equity security in accordance with ASC 321, “Investments – Equity Securities”. All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income/(loss), net of tax, with the exception of the Company’s investment in a CRA investment fund which is classified as an equity security. In accordance with ASU 2016-01, “Financial Instruments” unrealized holding gains and losses are marked to market through the income statement.
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EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended March 31, 2023 and 2022.
Change
2023 vs 2022
Results of Operations:
Interest income
26,351
Interest expense
21,995
4,356
(862
Net interest income after provision for credit losses
5,218
(1,072
Other income (A)
4,297
(120
4,417
Operating expense (B)
1,405
7,158
2,244
4,914
Total revenue (C)
7,701
Diluted average shares outstanding
(683,373
Diluted earnings per share
Return on average assets annualized ("ROAA")
1.16
0.87
0.29
Return on average equity annualized ("ROAE")
13.50
9.88
3.62
Selected Balance Sheet Ratios:
Total capital (Tier I + II) to risk-weighted assets
15.15
14.73
0.42
Tier I leverage ratio
9.02
8.90
Loans to deposits
101.07
101.54
(0.47
Allowance for credit losses to total loans
Allowance for credit losses to nonperforming loans
217.21
320.59
(103.38
Nonperforming loans to total loans
0.53
0.36
0.17
For the three months ended March 31, 2023, the Company recorded total revenue of $62.04 million, pretax income of $24.95 million, net income of $18.36 million and diluted earnings per share of $1.01, compared to revenue of $54.34 million, pretax income of $17.79 million, net income of $13.44 million and diluted earnings per share of $0.71 for the same period last year. The first quarter of 2023 included increased net interest income driven by net interest margin expansion, which benefitted by an increase in the target Federal Funds rate of 475 basis points, and loan growth, partially offset by a decline in wealth management income and income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income), and increased operating expenses. Other income included fair value adjustments on an equity security held for CRA investment purposes, reflecting a gain of $209,000 for the quarter ended March 31, 2023 and a loss of $682,000 for the quarter ended March 31, 2022. The three months ended March 31, 2022 included a $6.6 million loss on sale of securities as a result of the Company's balance sheet repositioning completed in March 2022.
Operating expenses increased primarily due to increased corporate and health insurance costs; hiring in line with the Company’s strategic plan, which included an increase in full time equivalent employees from 478 at March 31, 2022 to 512 at March 31, 2023; normal salary increases, and increased FDIC insurance expense. Additionally, the three months ended March 31, 2023 included
45
operating expenses of $300,000 associated with the acceleration of restricted stock related to one executive retiring, $175,000 of expense associated with three retail branch closures and additional restricted stock expense associated with additional shares being granted to executives due to performance measures exceeding peers. Operating expense for the first quarter of 2022 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank.
RECENT DEVELOPMENTS: During the first quarter of 2023, the banking industry experienced volatility with several high-profile bank failures and industry- wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company's liquidity position and balance sheet remain strong as on-balance sheet liquidity (investments available for sale, interest-earning deposits and cash) grew to $851 million as of March 31, 2023 driven by an increase in cash balances of $61 million during the first quarter.
The Company maintains additional liquidity resources of approximately $3.3 billion through secured available funding with the Federal Home Loan Bank ($1.5 billion) and secured funding from the Federal Reserve Discount Window ($1.8 billion). The available funding from the Federal Home Loan Bank and the Federal Reserve are secured by the Company’s loan and investment portfolios. In addition, the Company also has access to the Bank Term Funding Program offered by the Federal Reserve Bank for the next twelve months if needed.
The Company experienced an increase in deposits of $104 million, or 2.0 percent for the quarter ended March 31, 2023. Furthermore, the Company's capital at March 31, 2023 remains above well capitalized levels with common equity tier 1 capital ("CET1") and total risk-based capital ratios of 11.39 percent and 15.15 percent, respectively, for the Company and 13.93 percent and 15.18 percent for the Bank, respectively.
OFF-BALANCE SHEET ARRANGEMENTS: For a discussion of our off-balance sheet arrangements, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”
EARNINGS ANALYSIS
NET INTEREST INCOME (“NII”) / NET INTEREST MARGIN (“NIM”) / AVERAGE BALANCE SHEET:
The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank advances, subordinated debt and other borrowings. Net interest income is determined by the difference between the average yields earned on earning assets and the average cost of interest-bearing liabilities (“net interest spread”) and the relative amounts of earning assets and interest-bearing liabilities. Net interest margin is net interest income as a percent of total interest earning assets on an annualized basis. The Company’s net interest income, spread and margin are affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets.
The following table summarizes the loans that the Company closed during the periods indicated:
For the Three Months Ended
Residential mortgage loans originated for portfolio
30,303
41,547
Residential mortgage loans originated for sale
1,477
15,669
Total residential mortgage loans
31,780
57,216
Commercial real estate loans
18,990
25,575
Multifamily
30,150
265,650
C&I loans (A) (B)
207,814
143,029
Small business administration
9,950
26,093
Wealth lines of credit (A)
23,225
9,400
Total commercial loans
290,129
469,747
Installment loans
12,086
Home equity lines of credit (A)
2,921
1,341
Total loans closed
336,916
528,435
At March 31, 2023, December 31, 2022 and March 31, 2022, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance as follows:
Multifamily real estate loans as a percent of total regulatory capital of the Bank
245
251
268
Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank
Total CRE concentration
378
392
424
The Bank believes it addresses the key elements in the risk management framework laid out by its regulators for the effective management of CRE concentration risks.
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The following table reflects the components of the average balance sheet and of net interest income for the periods indicated:
Average Balance Sheet
Unaudited
Income/
Annualized
Expense
Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (A)
791,125
2.26
928,828
3,606
1.55
Tax-exempt (A) (B)
1,864
4.08
4,701
Loans (B) (C):
Residential mortgages
529,570
4,283
3.24
508,408
3,656
2.88
Commercial mortgages
2,478,645
25,917
4.18
2,353,032
18,175
3.09
Commercial
2,201,801
33,369
6.06
2,008,464
18,203
3.63
4,296
8.19
18,087
160
3.54
Installment
39,945
609
6.10
34,475
254
2.95
Home equity
33,839
591
6.99
40,245
3.22
276
10.14
283
8.48
5,288,372
64,864
4.91
4,962,994
40,778
3.29
163,225
3.77
127,121
0.09
Total interest-earning assets
6,244,586
70,892
4.54
6,023,644
44,461
Noninterest-earning assets:
10,449
7,455
Allowance for credit losses
(61,567
(61,001
23,022
84,800
168,239
Total noninterest-earning assets
57,609
137,715
Total assets
6,302,195
6,161,359
LIABILITIES:
2,567,426
16,481
2.57
2,330,340
1,238
0.21
Money markets
1,124,047
4,874
1.73
1,294,100
141,285
0.08
156,554
357,953
1.93
426,166
0.57
Subtotal interest-bearing deposits
4,190,711
23,112
2.21
4,207,160
2,388
26,111
3.19
85,000
1.76
25,961
3.16
33,823
Total interest-bearing deposits
4,242,783
23,525
2.22
4,325,983
3,022
0.28
FHLB advances and borrowings
104,915
4.94
55,513
0.46
4,493
4.72
5,662
4.80
133,017
4.93
132,731
4.11
Total interest-bearing liabilities
4,485,208
2.36
4,519,889
0.40
Noninterest-bearing liabilities:
Demand deposits
1,176,495
978,288
96,631
119,003
Total noninterest-bearing liabilities
1,273,126
1,097,291
Shareholders’ equity
543,861
544,179
Total liabilities and shareholders’ equity
Net interest income (tax-equivalent basis)
44,379
39,943
Net interest spread
2.18
2.55
Net interest margin (D)
2.69
Tax equivalent adjustment
(401
(321
The effect of volume and rate changes on net interest income (on a tax-equivalent basis) for the periods indicated are shown below:
For the Three Months Ended March 31, 2023
Difference due to
Change In
Change In:
(In Thousands):
Volume
Rate
Investments
(550
1,386
836
3,031
21,055
24,086
1,499
1,509
2,491
23,940
26,431
Interest-bearing checking
(136
15,379
15,243
(14
4,349
4,335
(3
(111
1,234
1,123
(62
(56
Interest bearing demand brokered
(469
(165
Borrowed funds
651
581
Capital lease obligation
(15
272
275
(156
22,151
2,647
1,789
4,436
Net interest income, on a fully tax-equivalent basis, grew $4.4 million, or 11 percent, for the first quarter of 2023 to $44.4 million from $39.9 million in the same 2022 period. The net interest margin ("NIM") was 2.88 percent and 2.69 percent for the three months ended March 31, 2023 and 2022, respectively, an increase of 19 basis points quarter over quarter. The growth in net interest income and NIM for the quarter ended March 31, 2023, when compared to 2022 was due to an increase in the yield on the average balance of interest-earning assets due to the current interest rate environment and an increase in the average balance of interest-earning assets, offset by an increase in the cost of interest-bearing liabilities of 196 basis points.
During the first quarter of 2022, the Company executed a balance sheet reposition to benefit future NIM, in which $250.0 million of multifamily loans were purchased, funded by the sale of $125.0 million of lower-yielding, like-duration securities, and deposit growth. To manage a neutral overall duration effect on the balance sheet, thereby protecting the balance sheet against the impact of rising rates, we executed $100.0 million of forward starting five-year pay fixed swaps. The repositioning resulted in an earn-back period of less than three years on the loss on sale of securities, with future net interest margin improving by four basis points, with no impact to tangible capital or tangible book value per share.
The increase in the average balance of interest-earning assets was driven by growth of $325.4 million in loans to $5.29 billion for the first quarter of 2023 from $4.96 billion in the same 2022 period, partially offset by a decrease in investments of $140.5 million as part of the balance sheet reposition strategy described above.
When comparing the first quarter of 2023 to the same period of 2022, the growth in loans was driven by growth in commercial loans of $193.3 million or 10 percent, for the quarter ended March 31, 2023 to $2.20 billion from $2.01 billion for the quarter ended March 31, 2022. Additionally commercial mortgages grew $125.6 million, or 5 percent, to $2.48 billion for the quarter ended March 31, 2023 from $2.35 billion for the same 2022 period as part of the Company's balance sheet reposition strategy described above.
The average balance of investments decreased $140.5 million to $793.0 million for the quarter ended March 31, 2023 compared to $933.5 million from the same 2022 period. The decrease was primarily a result of the balance sheet reposition strategy executed in the first quarter of 2022 described above.
For the quarter ended March 31, 2023 and 2022 periods, the average yields earned on interest-earning assets were 4.54 percent and 2.95 percent, respectively, an increase of 159 basis points. The increase in yields on interest-earning assets was primarily due to the increase in the target Federal Funds rate of 475 basis points. This resulted in increases on the yield on loans of 162 basis points to 4.91 percent, the yield on interest-earning deposits of 368 basis points to 3.77 percent and the yield on investments of 69 basis points to 2.26 percent, when comparing the three months ended March 31, 2023 to the same 2022 period.
The average yield on total loans increased 162 basis points to 4.91 percent for quarter ended March 31, 2023 when compared to 3.29 percent for the same 2022 period. This increase was driven by an increase in the yield on commercial loans of 243 basis points to 6.06 percent for 2023, due to an increase in target Federal Funds rate of 475 basis points since rates started increasing given these loans are typically floating rates with short repricing periods. The yield on commercial mortgages was 4.18 percent, which reflected an increase of 109 basis points when comparing the first quarter of 2023 to the same 2022 period, which is primarily driven by the originations of loans with higher yields in the higher interest rate environment. In addition, 21 percent of our loans reprice within one month; 34 percent within three months and 45 percent within one year.
During the first quarter of 2023 and 2022, the Company recorded a yield on investments of 2.26 percent and 1.57 percent, respectively. The increase in yield was due to the Company purchasing higher-yielding investments during 2022 and during the first quarter of 2023.
For the quarter ended March 31, 2023, the average balance of interest-bearing liabilities totaled $4.49 billion representing a decrease of $34.7 million or 1 percent from $4.52 billion for the same 2022 period. The decrease in interest-bearing liabilities reflected a decline of interest-bearing deposits of $83.2 million to $4.24 billion for the three months ended March 31, 2023 from $4.33 billion during the same 2022 period; offset by increases in the average balance of borrowings of $49.4 million from $55.5 million in the first quarter of 2022 to $104.9 million in the same 2023 period.
The decrease in the average balance of interest-bearing deposits was primarily due to a decline in the average balance of brokered deposits of $66.8 million to $52.1 million for the first quarter of 2023 when compared to the first quarter of 2022. The Company actively tries to reduce our reliance on brokered deposits. Additionally, interest-bearing deposits were affected by a decline in the average balance of money market deposits of $170.1 million. The decline in money market and brokered deposits was partially offset by an increase in the average balance of interest-bearing checking accounts of $237.1 million during the first quarter of 2023. The increase in interest-bearing checking was partially due to maturing CDS that shifted into these accounts combined with stronger consumer demand for higher-yielding accounts.
The Company is a participant in the Reich & Tang demand Deposit Marketplace ("DDM") program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts issued by other participating banks. Customer funds are placed at one of more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances were $628.3 million and $713.8 million for three months ended March 31, 2023 and 2022, respectively.
At March 31, 2023, uninsured deposits were approximately $1.6 billion, or 30 percent of total deposits. This amount was adjusted to exclude $296 million of public fund deposit balances, which are fully-collateralized and protected.
There was an increase in the average balance of borrowings to $104.9 million for the quarter ended March 31, 2023 from $55.5 million for the quarter ended March 31, 2022. The increase in borrowings of $49.4 million was principally due to the Company initiating a short-term borrowing position in response to the March 2023 financial service industry headwinds.
In December 2020, the Company issued $100.0 million of subordinated debt ($98.2 million net of issuance costs) bearing interest at an annual rate of 3.50 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2030 or earlier redemption. The December 2020 issuance has re-priced to 7.31 percent commencing in December 2022 through March 2023. In December 2017, the Company issued $35.0 million of subordinated debt ($34.1 million net of issuance costs) bearing interest at an annual rate of 4.75 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2027 or earlier redemption.
For the quarters ended March 31, 2023 and 2022, the cost of interest-bearing liabilities was 2.36 percent and 0.40 percent, respectively, reflecting an increase of 196 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 194 basis points to 2.22 percent for the first quarter of 2023 when compared to the same 2022 period. The Federal Reserve raised target Federal Funds rate 475 basis points, which has caused competitive pressure on deposit rates. Additionally, the cost of borrowings increased 448 basis points to 4.94 percent for the three months ended March 31, 2023 when compared to the first quarter of 2022.
INVESTMENT SECURITIES: Investment securities available for sale are purchased, sold and/or maintained as a part of the Company’s overall balance sheet, liquidity and interest rate risk management strategies, and in response to changes in interest rates, liquidity needs, prepayment speeds and/or other factors. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders’ equity, net of income taxes. Realized gains and losses are recognized in income at the time the securities are sold. Investment securities held to maturity are those securities that the Company
50
has both the ability and intent to hold to maturity. These securities are carried at amortized cost. Equity securities are carried at fair value with unrealized gains and losses recorded in noninterest income.
At March 31, 2023, the Company had investment securities available for sale with a fair value of $556.3 million compared with $554.6 million at December 31, 2022. A net unrealized loss (net of income tax) of $72.3 million and of $81.0 million were included in shareholders’ equity at March 31, 2023 and December 31, 2022, respectively.
At March 31, 2023, the Company had investment securities held to maturity with a carrying cost of $111.6 million and an estimated fair value of $98.0 million compared with a carrying cost of $102.3 million and an estimated fair value of $87.2 million at December 31, 2022.
The Company has one equity security (a CRA investment security) with a fair value of $13.2 million at March 31, 2023 compared with a fair value of $13.0 million at December 31, 2022, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded an unrealized gain of $209,000 for the three months ended March 31, 2023, as compared to an unrealized loss of $682,000 for the same period in 2022.
The carrying value of investment securities available for sale as of March 31, 2023 and December 31, 2022 are shown below:
Estimated
Investment securities - available for sale:
Mortgage-backed securities-residential (principally U.S. government-sponsored entities)
Total investment securities - available for sale
Investment securities - held to maturity:
Total investment securities - held to maturity
765,503
654,233
763,336
641,835
The following table presents the contractual maturities and yields of debt securities available for sale and held to maturity as of March 31, 2023. The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities:
After 1
After 5
But
After
Within
1 Year
5 Years
10 Years
Years
115,459
79,328
1.39
1.79
1.56
Mortgage-backed securities-residential (A)
50,183
8,775
19,214
246,015
5.49
2.83
1.91
2.45
10,383
16,069
1.90
1.40
1.59
State and political subdivisions (B)
2.19
4.81
Total investments - available for sale
52,035
154,044
341,412
5.37
1.67
2.23
2.33
30,000
1.47
1.74
1.54
2.25
Total investments - held to maturity
2.00
38,775
164,044
413,021
667,875
1.78
1.68
2.28
Federal funds sold and interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during the three months ended March 31, 2023 was $163.2 million compared to $127.1 million for the quarter ended March 31, 2022.
OTHER INCOME: The following table presents other income, excluding income from wealth management, which is summarized and discussed subsequently:
306
(16
Gain on sale of loans (mortgage banking)
(226
(1,979
(1,481
891
Total other income (excluding wealth management income)
The Company recorded total other income, excluding wealth management fee income, of $4.3 million for the first quarter of 2023 compared to $6.5 million for the same quarter of 2022 (when excluding the $6.6 million loss on sale of securities executed in the three months ended March 31, 2022), reflecting a decrease of $2.2 million.
The Company provides loans that are partially guaranteed by the SBA, to provide working capital and/or finance the purchase of equipment, inventory or commercial real estate that could be used for start-up businesses. All SBA loans are underwritten and documented as prescribed by the SBA. The Company generally sells the guaranteed portion of the SBA loans in the secondary
52
market, with the non-guaranteed portion of SBA loans held in the loan portfolio. The first quarter of 2023 included $865,000 of gains on sales of SBA loans, which represents a decrease of $2.0 million, or 70 percent, compared to $2.8 million for the same quarter in 2022. The first quarter of 2023 has been impacted by both market volatility and the higher interest rate environment resulting in lower sale premiums and origination volumes.
The Company recorded corporate advisory fee income for the first quarter of 2023 of $80,000 compared to $1.6 million for the same three-month period ended March 31, 2022. The first quarter of 2022 included $1.5 million related to one major corporate advisory/investment banking acquisition transaction.
Income from the back-to-back swap, SBA programs, and corporate advisory fee income are dependent on volume, and thus are not consistent from quarter to quarter.
For the three months ended March 31, 2023, income from the sale of newly originated residential mortgage loans was $21,000 compared to $247,000 for the same quarter in 2022. The decrease for the three months ended March 31, 2023, was the result of the lower volume of residential mortgage loans originated for sale due to a slowdown in refinancing and home purchase activity in the higher interest rate environment.
Other income for the quarter ended March 31, 2023 and 2022 included unused commercial line fees of $852,000 and $122,000, respectively. Additionally, the Company recorded income by the Equipment Finance Division related to equipment transfers to lessees of $145,000 and $426,000, respectively, for the three months ended March 31, 2023 and 2022.
During the first quarter of 2023, the Company recorded a $209,000 gain on the fair value adjustment for CRA equity securities compared to a loss of $682,000 for the same 2022 period.
Other income for the three months ended March 31, 2022, included a $6.6 million loss on securities due to the Company’s balance sheet repositioning, by selling lower-yielding securities and replacing them with higher-yielding like duration multifamily loans. The Company's repositioning has improved the NIM with no impact to tangible capital or tangible book value per share.
OPERATING EXPENSES: The following table presents the components of operating expenses for the periods indicated:
2,137
(273
FDIC assessment
240
Other Operating Expenses:
207
106
(77
(673
(197
(100
Operating expenses totaled $35.6 million for the three months ended March 31, 2023, compared to $34.2 million for the same 2022 period, reflecting an increase of $1.4 million, or 4 percent. The increased operating expenses for the three months ended March 31, 2023 were principally attributable to: increased corporate and health insurance costs; hiring in line with the Company’s strategic plan, which included an increase in full-time equivalent employees from 478 at March 31, 2022 to 512 at March 31, 2023; normal salary increases, and increased FDIC assessment expense. The three months ended March 31, 2023 included $175,000 of expenses associated with the closure of three retail branch locations compared to $372,000 of expenses associated with the consolidation of private banking offices in the same quarter of 2022. The quarter ended March 31, 2023 included increased restricted stock expense associated with additional shares being granted to executives due to performance measures exceeding peers, as well as $300,000 of expense related to restricted stock expense associated with a retiring executive. The quarter ended March 31, 2022 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank and $673,000 of expense attributable to a swap valuation allowance.
PEAPACK PRIVATE: This division includes: investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; and other financial planning, tax preparation and advisory services. Officers from Peapack Private are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, New Jersey and at private banking locations in Morristown, Princeton, Red Bank, Summit and Teaneck, New Jersey and at the Bank’s subsidiary, PGB Trust & Investments of Delaware, in Greenville, Delaware.
The market value of the assets under management and/or administration (“AUM/AUA”) of Peapack Private was $10.4 billion at March 31, 2023, reflecting a 5 percent increase from $9.9 billion at December 31, 2022 and a decrease of 3 percent from $10.7 billion at March 31, 2022. The equity market generally improved during Q1 2023, growing 7 percent, but is still down almost 10 percent compared to a year ago.
In the March 2023 quarter, Peapack Private generated $13.8 million in fee income compared to $14.8 million for the March 2022 quarter, reflecting a 7 percent decrease. The decrease in fee income for the three months ended March 31, 2023 was largely due to the equity and bond market decline in 2022.
Operating expenses relative to Peapack Private reflected increases due to overall growth in the business and new hires when comparing the three months ended March 31, 2023 to the same period for 2022. Expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel.
Peapack Private currently generates adequate revenue to support the salaries, benefits and other expenses of the wealth division and Management believes it will continue to do so as the Company grows organically and/or by acquisition. Management believes that the Bank generates adequate liquidity to support the expenses of Peapack Private should it be necessary.
NONPERFORMING ASSETS: OREO, loans past due in excess of 90 days and still accruing, and nonaccrual loans are considered nonperforming assets.
The following table sets forth asset quality data as of the dates indicated:
As of
September 30,
June 30,
Loans past due 90 days or more and still accruing
Nonaccrual loans
15,724
15,078
15,884
Total nonperforming assets
28,775
19,090
15,840
15,194
Performing modifications (A)
Performing TDRs (B)(C)
965
2,761
2,272
Loans past due 30 through 89 days and still accruing (D)
7,248
3,126
Loans subject to special mention
64,842
82,107
98,787
110,252
Classified loans
42,985
27,507
27,167
47,386
Individually evaluated loans
13,047
13,227
16,147
Nonperforming loans as a % of total loans (E)
0.31
Nonperforming assets as a % of total assets (E)
0.44
0.26
0.25
Nonperforming assets as a % of total loans plus other real estate owned (E)
0.54
54
PROVISION FOR CREDIT LOSSES: The provision for credit losses was $1.5 million and $2.4 million for the first quarters of 2023 and 2022, respectively. The decreased provision for credit losses for the three months ended March 31, 2023, when compared to the three months ended March 31, 2022, was due principally to weaker loan growth in the first quarter of 2023.
The allowance for credit losses was $62.3 million as of March 31, 2023, compared to $60.8 million at December 31, 2022. The increase in the allowance for credit losses (“ACL”) was primarily due to the provision for credit losses of $1.5 million. The allowance for credit losses as a percentage of loans was 1.16 percent and 1.15 percent at March 31, 2023 and December 31, 2022, respectively. The specific reserves recorded on individually evaluated loans were $2.6 million at March 31, 2023 compared to $1.5 million as of December 31, 2022. Total individually evaluated loans were $27.7 million and $16.7 million as of March 31, 2023 and December 31, 2022, respectively. The increase in specific reserves and balance of individually evaluated loans was primarily due to one multifamily relationship of $9.7 million that transferred to nonaccrual status during the first quarter of 2023. The general component of the allowance increased from $59.3 million at December 31, 2022 to $59.6 million at March 31, 2023.
On January 1, 2022, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for Management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and Management judgment and is reviewed on a quarterly basis. When Management is reasonably certain that a loan balance is not fully collectable, an analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of management and the effect of external factors such as competition, legal and regulatory requirements, amount others. The allowance is available for any loan that, in Management’s judgment, should be charged off.
The adoption of CECL resulted in a day one reduction of $5.5 million on January 1, 2022. The lower allowance was in part attributed to historically low charge-offs combined with the shorter duration of the loan portfolio employed in our CECL analysis. Further, the incurred loss method required significant qualitative factors, including factors related to COVID-19, and the use of a multiplier for potential losses on criticized and classified loans, neither of which are included within the CECL methodology. The CECL methodology utilizes significantly less qualitative factors as it uses economic factors and historical losses over a full economic cycle and calculates losses based on DCF on an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology.
A summary of the allowance for credit losses for the quarterly periods indicated follows:
Allowance for credit losses:
Beginning of period
59,683
59,022
Day one CECL adjustment
Provision for credit losses (A)
2,103
646
(Charge-offs)/recoveries, net
(43
(957
(4
(10
(264
End of period
Allowance for credit losses as a % of total loans
1.14
1.13
General allowance for credit losses as a % of total loans
1.11
1.12
1.10
1.09
Allowance for credit losses as a % of non-performing loans
379.57
391.44
367.58
55
INCOME TAXES: Income tax expense for the quarter ended March 31, 2023 was $6.6 million as compared to $4.4 million for the same period in 2022.
The effective tax rate for the three months ended March 31, 2023 was 26.43 percent compared to 24.45 percent for the same quarter in 2022. The March 31, 2023 and 2022 quarters both benefitted from the vesting of restricted stock at prices higher than grant prices. The March 2023 quarter when compared to the same 2022 quarter included additional expense associated with recent legislation that changed the nexus standard for New York City business tax.
CAPITAL RESOURCES: A solid capital base provides the Company with financial strength and the ability to support future growth and is essential to executing the Company’s Strategic Plan – “Expanding Our Reach.” The Company’s capital strategy is intended to provide stability to expand its businesses, even in stressed environments. Quarterly stress testing is integral to the Company’s capital management process.
The Company strives to maintain capital levels in excess of internal “triggers” and in excess of those considered to be well capitalized under regulatory guidelines applicable to banks and bank holding companies. Maintaining an adequate capital position supports the Company’s goal of providing shareholders an attractive and stable long-term return on investment.
Capital was benefitted by net income of $18.4 million for the three months ended March 31, 2023 and a net gain in accumulated other comprehensive income of $6.8 million ($8.7 million gain related to the available for sale portfolio partially offset by a $1.9 million loss on cash flow hedges), which was partially offset by the purchase of shares through the Company’s stock repurchase program. The Company repurchased 83,014 shares, at an average price of $34.35, for a total cost of $2.9 million during the three months ended March 31, 2023.
The Company employs quarterly capital stress testing - adverse case and severely adverse case. In the most recent completed stress test based on December 31, 2022 financial information, under the severely adverse case, and no growth scenarios, the Bank remains well capitalized over a two-year stress period. With a pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At March 31, 2023 and December 31, 2022, all of the Bank’s capital ratios remain above the levels required to be considered “well capitalized” and the Company’s capital ratios remain above regulatory requirements.
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I and Tier I leverage ratios as set forth in the table.
As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” ("CBLR") (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies set the minimum capital for the CBLR at 9 percent. The Bank did not opt into the CBLR and will continue to comply with the requirements under Basel III. The Bank’s leverage ratio was 11.03 percent at March 31, 2023.
56
The Bank’s regulatory capital amounts and ratios are presented in the following table:
To Be Well
For Capital
Capitalized Under
Adequacy Purposes
Prompt Corrective
Adequacy
Including Capital
Actual
Action Provisions
Purposes
Conservation Buffer (A)
Ratio
As of March 31, 2023:
Total capital(to risk-weighted assets)
763,732
15.18
502,971
10.00
402,377
8.00
528,119
10.50
Tier I capital(to risk-weighted assets)
700,858
13.93
301,782
6.00
427,525
8.50
Common equity tier I(to risk-weighted assets)
700,840
326,931
6.50
226,337
4.50
352,079
7.00
Tier I capital(to average assets)
11.03
317,818
5.00
254,254
4.00
As of December 31, 2022:
741,719
14.67
505,760
404,608
531,048
680,137
13.45
303,456
429,896
680,119
328,744
227,592
354,032
10.85
313,328
250,662
57
The Company’s regulatory capital amounts and ratios are presented in the following table:
As of March 31, 2022:
762,095
402,427
528,186
573,154
11.39
301,820
427,579
573,136
226,365
352,124
254,264
754,197
404,830
531,340
557,627
11.02
303,623
430,132
557,609
227,717
354,227
250,746
The Dividend Reinvestment Plan of Peapack-Gladstone Financial Corporation, or the “Reinvestment Plan,” allows shareholders of the Company to purchase additional shares of common stock using cash dividends without payment of any brokerage commissions or other charges. Shareholders may also make voluntary cash payments of up to $200,000 per quarter to purchase additional shares of common stock. Voluntary share purchases in the “Reinvestment Plan” can be filled from the Company’s authorized but unissued shares and/or in the open market, at the discretion of the Company. All shares purchased during the quarter ended March 31, 2023 were purchased in the open market.
On April 24, 2023, the Board of Directors declared a regular cash dividend of $0.05 per share payable on May 22, 2023 to shareholders of record on May 8, 2023.
Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient common equity to support its planned growth for the immediate future. The Company continually assesses other potential sources of capital to support future growth.
LIQUIDITY: Liquidity refers to an institution’s ability to meet short-term requirements including funding of loans, deposit withdrawals and maturing obligations, as well as long-term obligations, including potential capital expenditures. The Company’s liquidity risk management is intended to ensure the Company has adequate funding and liquidity to support its assets across a range of market environments and conditions, including stressed conditions. Principal sources of liquidity include cash, temporary investments, securities available for sale, customer deposit inflows, loan repayments and secured borrowings. Other liquidity sources include loan sales and loan participations.
Management actively monitors and manages the Company’s liquidity position and believes it is sufficient to meet future needs. During the first quarter of 2023, the Company experienced positive trends in its liquidity position. Cash and cash equivalents
58
increased by $61.2 million. Deposit balances grew by $103.6 million, or 8 percent on an annualized basis. The ratio of cash and cash equivalents and available for sale securities to total assets increased to 13.13 percent. Cash and cash equivalents, including interest-earning deposits, totaled $251.3 million at March 31, 2023. In addition, the Company had $556.3 million in securities designated as available for sale at March 31, 2023. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. Available for sale and held to maturity securities with a carrying value of $454.9 million and $101.3 million as of March 31, 2023, respectively, were pledged to secure public funds and for other purposes required or permitted by law. In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities.
As of March 31, 2023, the Company had approximately $1.5 billion of secured funding available from the Federal Home Loan Bank. Additionally, the Company had $1.8 billion of secured funding available from the Federal Reserve Discount Window, none of which was drawn.
Brokered interest-bearing demand (“overnight”) deposits were $10.0 million at March 31, 2023. The interest rate paid on these deposits allows the Bank to fund asset growth at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of March 31, 2023, the Company had transacted pay fixed, receive floating interest rate swaps totaling $310.0 million in notional amount, which includes $100.0 million of forward-starting swaps.
The Company has a Board-approved Contingency Funding Plan in place. This plan provides a framework for managing adverse liquidity stress and contingent sources of liquidity. The Company conducts liquidity stress testing on a regular basis to ensure sufficient liquidity in a stressed environment. The Company believes it has sufficient liquidity given the current environment.
Management believes the Company’s liquidity position and sources were adequate at March 31, 2023.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
ASSET/LIABILITY MANAGEMENT: The Company’s Asset/Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset/liability management strategies and advising the Board of Directors on such strategies, as well as the related level of interest rate risk. In this regard, interest rate risk simulation models are prepared on a quarterly basis. These models demonstrate balance sheet gaps and predict changes to net interest income and economic/market value of portfolio equity under various interest rate scenarios. In addition, these models, as well as ALCO processes and reporting, are subject to annual independent third-party review.
ALCO generally manages interest rate risk through the management of capital, cash flows and the duration of assets and liabilities, including sales and purchases of assets, as well as additions of wholesale borrowings and other sources of medium/longer-term funding. ALCO engages in interest rate swaps as a means of extending the duration of shorter-term liabilities.
The following strategies are among those used to manage interest rate risk:
The interest rate swap program is administered by ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. In these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $310.0 million as of March 31, 2023. The Company’s interest rate swaps include $100.0 million of forward starting swaps that extend swaps set to mature in 2023 for an additional two to five years.
In addition, the Company initiated a loan level / back-to-back swap program in support of its commercial lending business. Pursuant to this program, the Company extends a floating rate loan and executes a floating to fixed swap with the borrower. At the same time, the Company executes a third-party swap, the terms of which fully offset the fixed exposure and, result in a final floating rate exposure for the Company. As of March 31, 2023, $607.4 million of notional value in swaps were executed and outstanding with borrowers under this program.
As noted above, ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The models are based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The models incorporate certain prepayment and interest rate assumptions, which management believes to be reasonable as of March 31, 2023. The models assume changes in interest rates without any proactive change in the balance sheet by management. In the models, the forecasted shape of the yield curve remained static as of March 31, 2023.
In an immediate and sustained 100 basis point increase in market rates at March 31, 2023, net interest income would increase approximately 0.1 percent for year 1 and 3.2 percent for year 2, compared to a flat interest rate scenario. In an immediate and sustained 100 basis point decrease in market rates at March 31, 2023, net interest income would decrease approximately 0.9 percent for year 1 and 4.1 percent for year 2, compared to a flat interest rate scenario.
In an immediate and sustained 200 basis point increase in market rates at March 31, 2023, net interest income for year 1 would increase approximately 0.9 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 6.5 percent, when compared to a flat interest rate scenario.
In an immediate and sustained 200 basis point decrease in market rates at March 31, 2023, net interest income for year 1 would decrease approximately 3.2 percent, when compared to a flat interest rate scenario. In year 2 net interest income would decrease 9.9 percent, when compared to a flat interest rate scenario.
The Company's interest rate sensitivity models indicate the Company is asset sensitive as of March 31, 2023 and that net interest income would improve in a rising rate environment, but decline in a falling rate environment.
The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at March 31, 2023.
Estimated Increase/
EVPE as a Percentage of
Decrease in EVPE
Present Value of Assets (B)
Rates
EVPE
Increase/(Decrease)
(Basis Points)
EVPE (A)
Percent
Ratio (C)
(basis points)
+200
691,976
(71,042
(9.31
)%
11.54
(61
+100
725,994
(37,024
(4.85
11.84
Flat interest rates
763,018
12.15
-100
820,966
57,948
7.59
12.72
-200
823,551
60,533
7.93
12.52
(A) EVPE is the discounted present value of expected cash flows from assets and liabilities.
(B) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(C) EVPE ratio represents EVPE divided by the present value of assets.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk. Simulation modeling requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the modeling assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly,
60
although the information provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the forms and rules of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
The Company’s Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by Management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In the normal course of its business, lawsuits and claims may be brought against the Company and its subsidiaries. There is no currently pending or threatened litigation or proceedings against the Company or its subsidiaries, which if adversely decided, we believe would have a material adverse effect on the Company.
ITEM 1A. Risk Factors
Other than described below, there have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Recent bank industry events involving financial institution failures may adversely affect our business and the market price of our common stock.
Recent developments and events in the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank and the voluntary liquidation of Silvergate Bank, have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely
impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.
Lawmakers’ failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.
As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investments will not occur. At March 31, 2023, we had approximately $230.8 million and $386.1 million invested in U.S. government agency securities and residential mortgage-backed securities issued or guaranteed by government-sponsored enterprises, respectively, and no investments in U.S. treasury securities. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
TotalNumber of SharesPurchasedAs Part ofPublicly AnnouncedPlans or Programs
TotalNumber of SharesWithheld (A)
Average Price PaidPer Share
Maximum Number ofShares That MayYet Be PurchasedUnder the PlansOr Programs (B)
January 1, 2023 -
January 31, 2023
933,014
February 1, 2023 -
February 28, 2023
3,197
37.15
March 1, 2023 -
83,014
72,950
32.66
850,000
76,147
34.91
(A) Represents shares withheld to satisfy tax withholding obligations upon the exercise of stock options and/or the vesting of restricted stock awards/units. Such shares are repurchased pursuant to the applicable plan and are not under the Company's share repurchase program.
(B) On January 27, 2022, the Company's Board of Directors approved a plan to repurchase up to 920,000 shares, which was approximately 5 percent of the outstanding shares as of that date, through March 31, 2023. On January 26, 2023, the Company’s Board of Directors approved a plan to repurchase up to 890,000 shares, which was approximately 5 percent of the outstanding shares as of that date, through March 31, 2024. The timing and amount of shares repurchased will depend on certain factors, including but not limited to, market conditions and prices, the Company’s liquidity and capital requirements and alternative uses of capital.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
ITEM 6. Exhibits
Articles of Incorporation and By-Laws:
A. Certificate of Incorporation of the Registrant, as amended, incorporated herein by reference to Exhibit 3 of the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2009 (File No. 001-16197).
B. By-Laws of the Registrant, incorporated herein by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on March 23, 2023 (File No. 001-16197).
10.1
Retirement Transition Agreement for Robert Plante (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 28, 2023 (File No. 001-16197).
31.1
Certification of Douglas L. Kennedy, Chief Executive Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
31.2
Certification of Frank A. Cavallaro, Chief Financial Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Douglas L. Kennedy, Chief Executive Officer of the Corporation and Frank A. Cavallaro, Chief Financial Officer of the Corporation.
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because iXBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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.
(Registrant)
DATE: May 9, 2023
By:
/s/ Douglas L. Kennedy
Douglas L. Kennedy
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Frank A. Cavallaro
Frank A. Cavallaro
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Francesco S. Rossi
Francesco S. Rossi
Chief Accounting Officer
(Principal Accounting Officer)