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, 2019
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)
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 2, 2019: 19,446,363
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
NASDAQ Global Select Market
PART 1 FINANCIAL INFORMATION
Item 1
Financial Statements
3
Consolidated Statements of Condition at March 31, 2019 and December 31, 2018
Consolidated Statements of Income for the three months ended March 31, 2019 and 2018
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018
5
Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and 2018
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
7
Notes to Consolidated Financial Statements
8
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3
Quantitative and Qualitative Disclosures about Market Risk
52
Item 4
Controls and Procedures
54
PART 2 OTHER INFORMATION
Legal Proceedings
55
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Other Information
Item 6
Exhibits
56
2
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except share and per share data)
(unaudited)
(audited)
March 31,
December 31,
2019
2018
ASSETS
Cash and due from banks
$
4,726
5,914
Federal funds sold
101
Interest-earning deposits
235,487
154,758
Total cash and cash equivalents
240,314
160,773
Securities available for sale
384,400
377,936
Equity security, at fair value
4,778
4,719
FHLB and FRB stock, at cost
18,460
18,533
Loans held for sale, at fair value
—
1,576
Loans held for sale, at lower of cost or fair value
3,931
3,542
Loans
3,897,416
3,927,931
Less: Allowance for loan and lease losses
38,653
38,504
Net loans
3,858,763
3,889,427
Premises and equipment
21,201
27,408
Accrued interest receivable
11,688
10,814
Bank owned life insurance
45,554
45,353
Goodwill
24,417
Other intangible assets
7,753
7,982
Finance lease right-of-use assets
5,639
Operating lease right-of-use assets
7,541
Other assets
27,867
45,378
TOTAL ASSETS
4,662,306
4,617,858
LIABILITIES
Deposits:
Noninterest-bearing demand deposits
476,013
463,926
Interest-bearing deposits:
Checking
1,268,823
1,247,305
Savings
114,865
114,674
Money market accounts
1,209,835
1,243,369
Certificates of deposit - retail
545,450
510,724
Certificates of deposit - listing service
68,055
79,195
Subtotal deposits
3,683,041
3,659,193
Interest-bearing demand - brokered
180,000
Certificates of deposit - brokered
56,165
56,147
Total deposits
3,919,206
3,895,340
Federal Home Loan Bank advances
105,000
108,000
Finance lease liabilities
8,175
8,362
Operating lease liabilities
7,683
Subordinated debt, net
83,249
83,193
Deferred tax liabilities, net
12,150
16,029
Accrued expenses and other liabilities
45,371
37,921
TOTAL LIABILITIES
4,180,834
4,148,845
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, 19,853,541 at March 31, 2019 and 19,745,840 at December 31, 2018; outstanding
shares, 19,445,363 at March 31, 2019 and 19,337,662 at December 31, 2018
16,549
16,459
Surplus
309,722
309,088
Treasury stock at cost, 408,178 shares at both March 31, 2019 and December 31, 2018
(8,988
)
Retained earnings
165,918
154,799
Accumulated other comprehensive loss, net of income tax
(1,729
(2,345
TOTAL SHAREHOLDERS’ EQUITY
481,472
469,013
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended
INTEREST INCOME
Interest and fees on loans
40,512
34,667
Interest on investments:
Taxable
2,684
1,925
Tax-exempt
93
109
Interest on loans held for sale
10
Interest on interest-earning deposits
1,270
357
Total interest income
44,563
37,068
INTEREST EXPENSE
Interest on savings and interest-bearing deposit accounts
8,061
3,719
Interest on certificates of deposit
3,234
2,149
Interest on borrowed funds
834
370
Interest on finance lease liability
99
107
Interest on subordinated debt
1,224
1,221
Subtotal - interest expense
13,452
7,566
Interest on interest-bearing demand - brokered
739
680
Interest on certificates of deposits - brokered
365
429
Total interest expense
14,556
8,675
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND
LEASE LOSSES
30,007
28,393
Provision for loan and lease losses
100
1,250
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND
29,907
27,143
OTHER INCOME
Wealth management fee income
9,174
8,367
Service charges and fees
816
831
338
336
Gains on loans held for sale at fair value (mortgage banking)
47
94
Fee income related to loan level, back-to-back swaps
270
252
Gain on sale of SBA loans
419
31
Other income
606
382
Securities gains/(losses), net
59
(78
Total other income
11,729
10,215
OPERATING EXPENSES
Compensation and employee benefits
17,156
14,579
3,388
3,270
FDIC insurance expense
277
580
Other operating expense
4,894
4,908
Total operating expenses
25,715
23,337
INCOME BEFORE INCOME TAX EXPENSE
15,921
14,021
Income tax expense
4,496
3,214
NET INCOME
11,425
10,807
EARNINGS PER SHARE
Basic
0.59
0.58
Diluted
0.57
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
19,350,452
18,608,309
19,658,006
18,908,692
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Comprehensive income:
Unrealized gains/(losses) on available for sale securities:
Unrealized holding gains/(losses) arising during the period
2,288
(2,934
Tax effect
(560
676
Net of tax
1,728
(2,258
Unrealized gains on cash flow hedges:
(1,547
741
Reclassification adjustment for amounts included in net
income
(31
(1,578
710
466
(209
(1,112
501
Total other comprehensive income/(loss)
616
(1,757
Total comprehensive income
12,041
9,050
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended March 31, 2019 and March 31, 2018
Accumulated
Other
(In thousands, except
Preferred
Common
Treasury
Retained
Comprehensive
per share data)
Stock
Earnings
Loss
Total
Balance at January 1, 2019 19,337,662
common shares outstanding
Comprehensive income
Cumulative adjustment for leases (ASC 842)
661
Restricted stock units issued 129,362 shares
108
(108
Restricted stock units/awards repurchased on
vesting to pay taxes, (35,335) shares
(30
(934
(964
Amortization of restricted stock awards/units
1,390
Cash dividends declared on common stock
($0.05 per share)
(967
Common stock options exercised, 300 shares
1
Exercise of warrants, 7,109 net of 4,218 shares
used to exercise, 2,891 shares
(2
Issuance of shares for Employee Stock
Purchase Plan, 10,176 shares
286
294
Issuance of common stock for acquisition 307
shares
(1
Balance at March 31, 2019 19,445,363
Balance at January 1, 2018 18,619,634
15,858
283,552
114,468
(1,212
403,678
Comprehensive loss
Cumulative adjustment for equity security
(ASU 2016-01)
(127
127
Restricted stock units issued 83,659 shares
70
(70
Restricted stock awards forfeitures (92,767) shares
(77
77
vesting to pay taxes, (38,512) shares
(32
(1,305
(1,337
976
(853
Common stock options exercised, 6,150, net of
1,541 used to exercise, 4,609 shares
Sales of shares (Dividend Reinvestment
Program), 317,302 shares
264
10,355
10,619
Purchase Plan, 6,363 shares
215
221
Issuance of common stock for acquisition
20,826 shares
17
(17
Balance at March 31, 2018 18,921,114
16,111
293,830
124,295
(2,842
422,406
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
799
Amortization of premium and accretion of discount on securities, net
251
368
Amortization of restricted stock
Amortization of intangible assets
229
180
Amortization of subordinated debt costs
Deferred tax (benefit)/expense
(4,105
391
Stock-based compensation and employee stock purchase plan expense
45
53
Fair value adjustment for equity security
(59
78
Loans originated for sale (1)
(10,030
(10,875
Proceeds from sales of loans held for sale (1)
9,298
8,752
Gain on loans held for sale (1)
(466
(125
Increase in cash surrender value of life insurance, net
(201
(193
(Increase)/decrease in accrued interest receivable
(874
2,146
Decrease in other assets
16,412
1,744
Increase/(decrease) in accrued expenses and other liabilities
7,674
(2,324
NET CASH PROVIDED BY OPERATING ACTIVITIES
31,886
14,082
INVESTING ACTIVITIES:
Principal repayments, maturities and calls of securities available for sale
49,056
15,817
Redemptions of FHLB & FRB stock
135
20,846
Purchase of securities available for sale
(53,483
(38,912
Purchase of FHLB & FRB stock
(62
(31,171
Net decrease/(increase) in loans, net of participations sold
32,949
(3,851
Purchase of premises and equipment
(173
(246
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES
28,422
(37,517
FINANCING ACTIVITIES:
Net increase/(decrease) in deposits
23,866
(146,198
Net increase in overnight borrowings
216,000
Repayments of Federal Home Loan Bank advances
(3,000
(15,000
Dividends paid on common stock
Exercise of Stock Options, net of stock swaps
Restricted stock repurchased on vesting to pay taxes
Sales of common shares (Dividend Reinvestment Program)
Issuance of shares for employee stock purchase plan
NET CASH PROVIDED BY IN FINANCING ACTIVITIES
19,233
63,504
Net increase in cash and cash equivalents
79,541
40,069
Cash and cash equivalents at beginning of period
113,447
Cash and cash equivalents at end of period
153,516
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest
12,993
6,917
Income tax, net
265
529
(1)
Includes mortgage loans originated with the intent to sell which are carried at fair value. In addition, this includes the guaranteed portion of SBA loans which are carried at the lower of cost or fair value.
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 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 period ended December 31, 2018 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 recurring accruals) necessary to present fairly the financial position as of March 31, 2019, the results of operations and comprehensive income for the three months ended March 31, 2019 and 2018, shareholders’ equity for the three months ended March 31, 2019 and 2018, and cash flow statements for the three months ended March 31, 2019 and 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected 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, PGB Trust & Investments of Delaware, Peapack Capital Corporation (“PCC”) (formed in the second quarter of 2017), Murphy Capital Management (“MCM”) (acquired in the third quarter of 2017), Quadrant Capital Management (“Quadrant”) (acquired in the fourth quarter of 2017), Lassus Wherley & Associates (“Lassus Wherley”) (acquired in the third quarter of 2018), Peapack-Gladstone Mortgage Group, Inc. and Peapack-Gladstone Mortgage Group’s wholly-owned subsidiary, PG Investment Company of Delaware, Inc. and its wholly-owned subsidiary, Peapack-Gladstone Realty, Inc., a New Jersey real estate investment company. While the following footnotes include the collective results of the Company and the Bank and their subsidiaries, these footnotes 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 U.S. generally accepted accounting principles. 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 that period. Actual results could differ from those estimates.
Segment Information: The Company’s business is conducted through two business segments: its banking subsidiary, which involves the delivery of loan and deposit products to customers, and the Private Wealth Management Division, which includes asset management services provided for individuals and institutions. Management uses certain methodologies to allocate income and expense to the business segments.
The Banking segment includes commercial (includes 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-Gladstone Bank’s Private Wealth Management Division includes: investment management services 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. This segment also includes the activity from the Delaware subsidiary, PGB Trust and Investments of Delaware, MCM, Quadrant and Lassus Wherley. 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 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 overnight borrowings.
Interest-Earning Deposits in Other Financial Institutions: Interest-earning deposits in other financial institutions mature within one year and are carried at cost.
Securities: All debt 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” (adopted January 1, 2018), unrealized holding gains and losses on equity securities are marked to market through the income statement.
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.
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be 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 is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which is recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
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 System and required to own a certain amount of FRB stock. FRB stock is carried at cost and classified as a restricted security. Both cash and stock 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 income statement, 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 $38.7 million and $35.1 million as of March 31, 2019 and December 31, 2018, respectively. SBA loans held for sale totaled $3.9 million and $1.2 million at March 31, 2019 and December 31, 2018, 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/cost, however, for the Company’s loan disclosures, accrued interest and deferred fees/cost was excluded as the impact was not material.
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 impaired 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 or more and collateral, if any, is insufficient to cover principal and interest. 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 after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Consumer loans are generally charged off after they become 120 days past due. Subsequent payments are credited to income only
9
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 and New York.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a valuation allowance for credit losses that is Management’s estimate of probable losses in the loan portfolio. The process to determine reserves 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 impairment 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 required using past loan loss experience, the size and composition of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans via a specific reserve, but the entire allowance is available for any loan that, in Management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component of the allowance relates to loans that are individually classified as impaired.
A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Loans are individually evaluated for impairment when they are classified as substandard by Management. If a loan is considered impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or if repayment is expected solely from the underlying collateral, the loan principal balance is compared to the fair value of collateral less estimated disposition costs to determine the need, if any, for a charge off.
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 loan and lease losses.
The general component of the allowance covers non-impaired loans and is based primarily on the Bank’s historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experience by the Company on a weighted average basis over the previous three years. This actual loss experience is adjusted by other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of 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; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. For loans that are graded as non-impaired, the Company allocates a higher general reserve percentage than pass-rated loans using a multiple that is calculated annually through a migration analysis. At both March 31, 2019 and December 31, 2018, the multiple was 2.25 times for non-impaired special mention loans and 3.5 times for non-impaired substandard loans.
In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on Federal call report codes, which are based on collateral or purpose. The following portfolio classes 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.
Home Equity Lines of Credit. The Bank provides revolving lines of credit against one to four family residences in the Tri-State area. Primary risk characteristics associated with 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. 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.
Junior Lien Loan on Residence. The Bank provides junior lien loans (“JLL”) against one to four family properties in the Tri-State area. JLLs can be either in the form of an amortizing home equity loan or a revolving home equity line of credit. These loans are subordinate to a first mortgage which may be from another lending institution. Primary risk characteristics associated with JLLs 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.
Multifamily and Commercial Real Estate Loans. The Bank provides mortgage loans for multifamily properties (i.e. buildings which have five or more residential units) and other commercial real estate that is either owner occupied or managed as an investment property (non-owner occupied) 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 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. 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. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans 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 operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. 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. Commercial and industrial loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain. To mitigate the risk characteristics of commercial and industrial loans, these loans often include commercial real estate as collateral to strengthen the Bank’s position and the Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance.
Leasing and Equipment 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 though 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 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 via higher costs and expenses related to the repossession, refurbishment, re-marketing and or re-leasing of assets.
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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.
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 in separate line items on the statement of condition. A 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.
As 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. The Company has two existing finance leases (previously classified as a capital lease and included in premises and equipment on our statement of condition at December 31, 2018) for the Company’s administration building and one branch location. Topic 842 did not materially impact the accounting for these capital leases.
The right-of-use-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 right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is 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 right-of-use-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 balance sheet 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,
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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.
Stock-Based Compensation: The Company’s 2006 Long-Term Stock Incentive Plan and 2012 Long-Term Stock Incentive Plan allow 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. The 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 during a period of up to five years after the date of grant. Some options granted to officers at or above the senior vice president level were immediately exercisable at 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.
For the Company’s stock option plans, changes in options outstanding during the three months ended March 31, 2019 were as follows:
Weighted
Average
Aggregate
Remaining
Intrinsic
Number of
Exercise
Contractual
Value
Options
Price
Term
(In thousands)
Balance, January 1, 2019
91,310
13.63
Exercised during 2019
(300
12.98
Expired during 2019
(630
22.57
Forfeited during 2019
Balance, March 31, 2019
90,380
13.57
2.47 years
1,143
Vested and expected to vest
Exercisable at March 31, 2019
The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of 2019 and the exercise price, multiplied by the number of in-the-money options). The Company’s closing stock price on March 31, 2019 was $26.22.
There were no stock options granted in the three months ended March 31, 2019.
The Company has previously granted performance-based and service-based restricted stock awards/units. Service-based awards/units vest ratably over a three or five-year period. There were 194,742 service-based restricted stock units granted in the first quarter of 2019 with a three-year vesting period.
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. The Company granted 47,770 performance-based restricted stock units in the first quarter of 2019.
Changes in non-vested shares dependent on performance criteria for the three months ended March 31, 2019 were as follows:
Grant Date
Shares
Fair Value
42,998
35.33
Granted during 2019
47,770
26.34
90,768
30.60
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Changes in service-based restricted stock awards/units for the three months ended March 31, 2019 were as follows:
366,541
30.64
194,742
26.38
Vested during 2019
(138,399
27.39
422,884
29.75
As of March 31, 2019, there was $62 thousand of total unrecognized compensation cost related to service-based awards. That cost is expected to be recognized over a weighted average period of 0.46 years. As of March 31, 2019, there was $13.2 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 1.34 years. Stock compensation expense recorded for the first quarters of 2019 and 2018 totaled $1.4 million and $1.1 million, respectively.
Employee Stock Purchase Plan (“ESPP”): In 2014, the shareholders of the Company approved the ESPP. The ESPP provides for the granting of rights to purchase up to 150,000 shares of Corporation common stock. Subject to certain eligibility requirements and restrictions, the ESPP allows employees to purchase shares during four three-month offering periods (“Offering Periods”). Each participant in the Offering Period is granted an option to purchase a number of shares and may contribute between 1% and 15% of their compensation. At the end of each Offering Period on the purchase date, 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% of the closing market price of a share of Company common stock on the purchase date. Participation in the ESPP is entirely voluntary and employees can cancel their purchases at any time during the Offering Period without penalty. The fair value of each purchase right is determined using the Black-Scholes option pricing model.
The Company recorded $45 thousand and $53 thousand of expense in salaries and employee benefits expense for the three months ended March 31, 2019 and 2018, respectively, related to the ESPP. Total shares issued under the ESPP during the first quarters of 2019 and 2018 were 10,176 and 6,363, 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 restricted stock, stock warrants or restricted stock units were to vest during the reporting period.
(Dollars in thousands, except per share data)
Net income available to common shareholders
Basic weighted-average shares outstanding
Plus: common stock equivalents
307,554
300,383
Diluted weighted-average shares outstanding
Net income per share
As of March 31, 2019, stock options and restricted stock units totaling 243,747 were not included in the computation of diluted earnings per share because they were antidilutive. As of March 31, 2018, all stock options and warrants were included in the computation of diluted earnings per share because they were all dilutive, meaning that the exercise price of the stock option was greater than the average market price for the period.
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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 2015 or by New Jersey tax authorities for years prior to 2014.
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: A large portion of cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Comprehensive Income: Comprehensive income 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. The Company has selected September 30 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 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 acquisition, are amortized on an accelerated basis over their estimated useful lives, which range from 5 to 15 years.
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2. INVESTMENT SECURITIES AVAILABLE FOR SALE
A summary of amortized cost and approximate fair value of investment securities available for sale included in the consolidated statements of condition as of March 31, 2019 and December 31, 2018 follows:
March 31, 2019
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
U.S. government-sponsored agencies
86,678
85
(411
86,352
Mortgage-backed securities – residential
275,641
936
(2,246
274,331
SBA pool securities
3,644
(43
3,601
State and political subdivisions
17,123
(63
17,097
Corporate bond
3,000
19
3,019
386,086
1,077
(2,763
December 31, 2018
102,915
82
(984
102,013
254,383
418
(3,439
251,362
3,883
(44
3,839
17,729
27
(146
17,610
112
3,112
381,910
639
(4,613
The following tables present the Company’s available for sale securities in a continuous unrealized loss position and the approximate fair value of these investments as of March 31, 2019 and December 31, 2018.
Duration of Unrealized Loss
Less Than 12 Months
12 Months or Longer
Approximate
38,571
Mortgage-backed securities-residential
24,456
(142
130,964
(2,104
155,420
5,108
178,244
(2,621
202,700
18,840
(103
33,600
(881
52,440
51,697
(303
136,130
(3,136
187,827
421
7,274
(145
7,695
70,958
(407
180,843
(4,206
251,801
Management believes that the unrealized losses on investment securities available for sale are temporary and are due to interest rate fluctuations and/or volatile market conditions rather than the credit worthiness of the issuers. As of March 31, 2019, the Company does not intend to sell these securities nor is it likely that it will be required to sell the securities before their anticipated recovery; therefore, none of the securities in an unrealized loss position were determined to be other-than-temporarily impaired.
16
During the first quarter of 2018, the Company adopted ASU 2016-01 “Financial Instruments” which resulted in the reclassification of the Company’s investment in the CRA investment fund from available for sale to an equity security. This security had a gain of $59 thousand for the three months ended March 31, 2019. This amount is included in securities gains/(losses) on the Consolidated Statements of Income.
3. LOANS AND LEASES
Loans outstanding, excluding those held for sale, by general ledger classification, as of March 31, 2019 and December 31, 2018, consisted of the following:
% of
Totals
Residential mortgage
569,304
14.61
%
571,570
14.55
Multifamily mortgage
1,104,406
28.34
1,135,805
28.92
Commercial mortgage
705,221
18.09
702,165
17.88
Commercial loans (including equipment financing)
1,406,215
36.08
1,397,057
35.57
Home equity lines of credit
57,639
1.48
62,191
1.58
Consumer loans, including fixed rate home equity loans
54,276
1.39
58,678
1.49
Other loans
355
0.01
465
Total loans
100.00
In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal Call Report codes. The following portfolio classes have been identified as of March 31, 2019 and December 31, 2018:
Primary residential mortgage
598,299
15.37
600,891
15.31
57,636
Junior lien loan on residence
7,429
0.19
7,418
Multifamily property
28.36
28.94
Owner-occupied commercial real estate
251,948
6.47
261,193
6.65
Investment commercial real estate
1,005,724
25.83
1,001,918
25.53
Commercial and industrial
633,590
16.27
616,838
15.72
Lease financing
175,517
4.51
172,643
4.40
Farmland/agricultural production
145
149
Commercial construction loans
86
Consumer and other loans
59,138
1.52
65,180
1.66
3,893,918
3,924,312
Net deferred costs
3,498
3,619
Total loans including net deferred costs
The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan and lease losses (ALLL) as of March 31, 2019 and December 31, 2018:
Ending ALLL
Attributable
Individually
To Loans
Collectively
Evaluated
For
Evaluated for
Ending
Impairment
ALLL
9,131
258
589,168
3,219
3,477
214
57,422
152
33
7,396
5,768
1,514
250,434
2,534
18,293
987,431
14,410
10,185
1,803
306
Total ALLL
29,185
3,864,733
38,395
9,518
262
591,373
3,244
3,506
255
61,936
164
36
7,382
1,262
1,134,543
5,959
1,574
259,619
2,614
18,655
983,263
14,248
9,839
1,772
384
31,300
3,893,012
38,242
Impaired loans include nonaccrual loans of $24.9 million at March 31, 2019 and $25.7 million at December 31, 2018. Impaired loans also include performing TDR loans of $4.3 million at both March 31, 2019 and December 31, 2018. At March 31, 2019, the allowance allocated to TDR loans totaled $258 thousand, of which $159 thousand was allocated to nonaccrual loans. At December 31, 2018, the allowance allocated to TDR loans totaled $262 thousand of which $161 thousand was allocated to nonaccrual loans. All accruing TDR loans were paying in accordance with restructured terms as of March 31, 2019. The Company has not committed to lend additional amounts as of March 31, 2019 to customers with outstanding loans that are classified as TDR loans.
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The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2019 and December 31, 2018 (The average impaired loans on the following tables represent year to date impaired loans.):
Unpaid
Principal
Recorded
Specific
Impaired
Balance
Investment
Reserves
With no related allowance recorded:
9,314
8,126
8,304
2,714
1,535
20,041
18,434
216
34
Total loans with no related allowance
32,385
28,180
28,521
With related allowance recorded:
1,005
1,052
Total loans with related allowance
Total loans individually evaluated for Impairment
33,390
29,573
9,789
8,502
8,042
2,741
2,025
20,179
13,999
257
123
102
105
34,330
30,284
24,339
1,016
1,144
Total loans individually evaluated for impairment
35,346
25,483
Interest income recognized on impaired loans for the quarters ended March 31, 2019 and 2018 was not material. The Company did not recognize any income on nonaccruing impaired loans for the three months ended March 31, 2019 and 2018.
The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2019 and December 31, 2018:
Loans Past Due
Over 90 Days
And Still
Nonaccrual
Accruing Interest
4,857
195
24,892
5,215
235
The following tables present the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018 by class of loans, excluding nonaccrual loans:
30-59
60-89
Greater Than
Days
90 Days
Past Due
656
205
861
1,191
354
2,287
2,492
491
1,097
608
1,099
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:
•
A majority of relationships or new lending to existing relationships greater than $1,000,000;
All criticized and classified rated borrowers with relationship exposure of more than $500,000;
A random sample of borrowers with relationships less than $1,000,000;
All leveraged loans;
At least two borrowing relationships managed by each commercial banker;
Any new Regulation “O” loan commitments over $1,000,000;
Any other credits requested by Bank senior management or a member of the Board of Directors and any borrower for which the reviewer determines a review is warranted based upon knowledge of the portfolio, local events, industry stresses, etc.
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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.
Loans that are considered to be impaired are individually evaluated for potential loss and allowance adequacy. Loans not deemed impaired are collectively evaluated for potential loss and allowance adequacy.
As of March 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Special
Pass
Mention
Substandard
Doubtful
588,077
1,033
9,189
1,102,458
1,599
349
245,404
1,257
5,287
956,874
20,603
28,247
617,523
8,311
7,756
58,907
231
3,809,723
32,889
51,306
As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
590,372
943
9,576
1,130,926
3,263
1,616
255,417
249
5,527
948,300
20,756
32,862
608,262
417
8,159
64,946
234
3,840,333
25,714
58,265
At March 31, 2019, $29.1 million of substandard loans were also considered impaired, compared to December 31, 2018, when $31.2 million of substandard loans were also impaired.
21
The activity in the allowance for loan and lease losses for the three months ended March 31, 2019 is summarized below:
January 1,
Beginning
Provision
Charge-offs
Recoveries
(Credit)
42
(71
(14
(11
(191
(80
162
342
(68
60
The activity in the allowance for loan and lease losses for the three months ended March 31, 2018 is summarized below:
4,085
395
4,403
192
(5
10,007
(867
9,140
2,385
66
(87
2,364
11,933
434
12,367
6,563
1,174
884
1,036
83
422
36,440
(88
37,696
Troubled Debt Restructurings:
The Company has allocated $258 thousand and $262 thousand of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of March 31, 2019 and December 31, 2018, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.
The terms of certain loans were modified as TDRs when one or a combination of the following occurred: a reduction of the stated interest rate of the loan; the maturity date was extended; or some other modification or extension occurred which would not be readily available in the market.
There were no loans modified as TDRs during the three-month periods ended March 31, 2019 and March 31, 2018.
The identification of the TDRs did not have a significant impact on the allowance for loan and lease 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 as March 31, 2019:
22
Contracts
14,841
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, 2018:
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 re-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. DEPOSITS
Certificates of deposit, excluding brokered certificates of deposit over $250,000, totaled $169.7 million and $160.3 million at March 31, 2019 and December 31, 2018, respectively.
The following table sets forth the details of total deposits as of March 31, 2019 and December 31, 2018:
12.15
11.91
Interest-bearing checking (1)
32.37
32.02
2.93
2.94
Money market
30.87
31.92
13.92
13.12
1.74
2.03
93.98
93.94
Interest-bearing demand - Brokered
4.59
4.62
Certificates of deposit - Brokered
1.43
1.44
23
Interest-bearing checking includes $427.8 million at March 31, 2019 and $434.5 million at December 31, 2018 of reciprocal balances in the Reich & Tang or Promontory Demand Deposit Marketplace program.
The scheduled maturities of certificates of deposit, including brokered certificates of deposit, as of March 31, 2019 are as follows:
354,133
2020
179,596
2021
46,728
2022
27,068
2023
11,823
Over 5 Years
50,322
669,670
5. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the FHLB totaled $105.0 million with a weighted average interest rate of 3.20 percent and $108.0 million with a weighted average interest rate of 3.17 percent at March 31, 2019 and December 31, 2018, respectively.
At March 31, 2019, advances totaling $105.0 million with a weighted average interest rate of 3.20 percent had fixed maturity dates. The fixed maturity date advances at December 31, 2018 totaled $108.0 million with a weighted average interest rate of 3.17 percent. The fixed rate advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $506.5 million, multifamily mortgages totaling $824.3 million and securities totaling $46.7 million at March 31, 2019, while at December 31, 2018, the fixed rate advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $496.1 million, multifamily mortgages totaling $1.0 billion and securities totaling $58.5 million.
The final maturity dates of the FHLB advances are scheduled as follows:
60,000
20,000
25,000
There were no overnight borrowings with the FHLB as of March 31, 2019 and December 31, 2018. At March 31, 2019, unused short-term overnight borrowing commitments totaled $1.3 billion from FHLB, $22.0 million from correspondent banks and $1.4 billion at the Federal Reserve Bank of New York.
6. BUSINESS SEGMENTS
The Corporation assesses its results among two operating segments, Banking and Peapack-Gladstone Bank’s Private Wealth Management Division. 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.
24
Private Wealth Management Division
Peapack-Gladstone Bank’s Private Wealth Management Division, including PGB Trust & Investments of Delaware, MCM, Quadrant and Lassus Wherley, 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.
The following tables present the statements of income and total assets for the Corporation’s reportable segments for the three months ended March 31, 2019 and 2018.
Three Months Ended March 31, 2019
Wealth
Management
Division
Net interest income
28,566
1,441
Noninterest income
2,279
9,450
Total income
30,845
10,891
41,736
Compensation and benefits
11,997
5,159
Premises and equipment expense
2,925
463
FDIC expense
Other noninterest expense
2,758
2,136
Total noninterest expense
18,057
7,758
25,815
Income before income tax expense
12,788
3,133
3,611
885
9,177
2,248
Total assets at period end
4,582,200
80,106
Three Months Ended March 31, 2018
26,848
1,545
1,627
8,588
28,475
10,133
38,608
10,331
4,248
2,839
431
FDIC Expense
2,807
2,101
17,807
6,780
24,587
10,668
3,353
2,445
769
8,223
2,584
4,278,010
58,484
4,336,494
7. 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:
25
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.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan and lease 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. 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 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, 2019.
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The following table summarizes, for the periods 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:
CRA investment fund
Derivatives:
Cash flow hedges
1,096
Loan level swaps
16,515
406,789
402,011
Liabilities:
(1,835
(16,515
(18,350
Securities available for sale:
1,657
9,689
395,577
390,858
(849
(9,689
(10,538
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 nor on nonaccrual as of March 31, 2019 and December 31, 2018.
The following tables present residential loans held for sale, at fair value for the periods indicated:
Residential loans contractual balance
1,552
Fair value adjustment
Total fair value of residential loans held for sale
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2019.
There were no loans measured for impairment using the fair value of collateral as of March 31, 2019 and December 31, 2018.
The carrying amounts and estimated fair values of financial instruments at March 31, 2019 are as follows:
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Fair Value Measurements at March 31, 2019 using
Carrying
Amount
Level 1
Level 2
Level 3
Financial assets
Cash and cash equivalents
FHLB and FRB stock
N/A
4,300
Loans, net of allowance for loan and lease losses
3,900,892
1,607
10,081
Financial liabilities
Deposits
3,249,536
668,534
3,918,070
Federal home loan bank advances
107,199
Subordinated debt
84,027
Accrued interest payable
4,274
358
2,695
1,835
Loan level swap
The carrying amounts and estimated fair values of financial instruments at December 31, 2018 are as follows:
Fair Value Measurements at December 31, 2018 using
3,654
3,852,004
1,875
8,939
Cash flow Hedges
3,249,274
640,997
3,890,271
108,950
82,207
2,868
331
2,482
849
29
8. REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized as noninterest income.
The following table presents the sources of noninterest income for the periods indicated:
For the Three Months Ended March 31,
Service charges on deposits
Overdraft fees
158
181
Interchange income
290
394
360
Wealth management fees (a)
Other (b)
1,739
1,017
Total noninterest other income
(a)
Includes investment brokerage fees.
(b)
All of the other category is outside the scope of ASC 606.
The following table presents the sources of noninterest income by operating segment for the periods indicated:
For the Three Months Ended
Revenue by Operating Segment
1,463
276
796
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 deposits customers for transaction-based, 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 by $32 thousand and $30 thousand for the first quarters of 2019 and 2018, respectively.
Wealth management fees (gross): The Company earns wealth management fees from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These 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 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).
30
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.
Gains/(losses) on sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.
Other: All of the other income items are outside the scope of ASC 606.
9. OTHER OPERATING EXPENSES
The following table presents the major components of other operating expenses for the periods indicated:
Professional and legal fees
1,124
1,114
Telephone
280
284
Advertising
359
311
Other operating expenses
2,902
Total other operating expenses
10. ACCUMULATED OTHER COMPREHENSIVE (LOSS)/INCOME
The following is a summary of the accumulated other comprehensive income/(loss) balances, net of tax, for the three months ended March 31, 2019 and 2018:
Reclassified
From
Income/(Loss)
Three Months
Balance at
Ended
January 1
Before
Reclassifications
Net unrealized holding loss on securities
available for sale, net of tax
(3,006
(1,278
Gain/(loss) on cash flow hedges
(1,090
(22
(451
Accumulated other comprehensive loss,
net of tax
638
Cumulative
Adjustment
for Equity
Security
Net unrealized holding loss on
securities available for sale, net of tax
(2,214
(4,345
Gain on cash flow hedges
1,002
525
(24
1,503
Accumulated other comprehensive
loss, net of tax
(1,733
The following represents the reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2019 and 2018:
Affected Line Item in Income Statement
Unrealized gains on cash flow hedge
derivatives:
Reclassification adjustment for amounts
included in net income
Interest expense
Total reclassifications, net of tax
11. 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 $230.0 million as of March 31, 2019 and December 31, 2018 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, 2019, 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.
The following table presents information about the interest rate swaps designated as cash flow hedges as of March 31, 2019 and December 31, 2018:
Notional amount
230,000
Weighted average pay rate
2.04
Weighted average receive rate
2.54
2.33
Weighted average maturity
2.40
years
2.65
Unrealized (loss)/gain, net
(739
808
Number of contracts
32
Net interest income/(expense) recorded on these swap transactions totaled $335 thousand and $20 thousand for the three months ended March 31, 2019 and 2018, respectively, and is reported as a component of interest expense.
Cash Flow Hedges
The following table presents the net gain recorded in accumulated other comprehensive (loss)/income and the consolidated financial statements relating to the cash flow derivative instruments for the three months ended March 31, 2019 and March 31, 2018:
Interest rate contracts
Amount of gain/(loss) recognized in OCI
Amount of loss reclassified from OCI to interest expense
During the first quarter of 2018, the Company recognized an unrealized after-tax gain of $220 thousand in accumulated other comprehensive income/(loss) related to the termination of two interest rate swaps designated as cash flow hedges. The gain is being amortized into earnings over the remaining life of the terminated swaps. The Company recognized pre-tax interest income of $31 thousand for the three months ended March 31, 2019 related to the amortization of the gain on the terminated interest rate swaps designated as cash flow hedges.
The following tables reflect the cash flow hedges included in Other Assets and Other Liabilities in the financial statements as of March 31, 2019 and December 31, 2018:
Notional
Interest rate swaps related to interest-bearing deposits
Total included in other assets
130,000
Total included in other liabilities
100,000
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 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.
Information about these swaps is as follows:
567,842
558,690
Fair value
Weighted average pay rates
4.44
Weighted average receive rates
4.37
4.24
7.0
7.1
69
67
12. SUBORDINATED DEBT
During June 2016, the Company issued $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2016 Notes”) to certain institutional investors. The 2016 Notes are non-callable for five years, have a stated maturity of June 30, 2026, and bear interest at a fixed rate of 6.0% per year until June 30, 2021. From June 30, 2021 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 485 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $1.3 million and are being amortized to maturity.
Approximately $40.0 million of the net proceeds from the sale of the 2016 Notes were contributed by the Company to the Bank in the second quarter of 2016. The remaining funds (approximately $10 million) were retained by the Company for operational purposes.
During 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 bear interest at a fixed rate of 4.75% per year 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 LIBOR rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $875 thousand and are being amortized to maturity.
Approximately $29.1 million of the net proceeds from the sale of the 2017 Notes were contributed by the Company to the Bank in the fourth quarter of 2017. The remaining funds of approximately $5 million, representing three years of interest payments, were retained by the Company for operational 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 2017 Notes, the Company obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA an assigned investment grade rating of BBB- for the Company’s subordinated debt.
13. LEASES
On January 1, 2019, the Company adopted FASB issued ASU No. 2016-02, “Leases” (Topic 842), which establishes a right of use model that requires a lessee to record a ROU asset and a lease liability for all leases with terms longer than 12 months. The Company adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted.
The Company maintains certain property and equipment under direct financing and operating leases. Upon adoption of the new lease guidance, on January 1, 2019, the Company recorded a ROU asset and corresponding lease liability of $7.9 million and $8.2 million, respectively, on the consolidated statement of condition. As of March 31, 2019, the Company's operating lease ROU asset and operating lease liability totaled $7.5 million and $7.7 million, respectively. A weighted average discount rate of 3.20% was used in the measurement of the ROU asset and lease liability as of March 31, 2019.
The Company's leases have remaining lease terms between one to seven years, with a weighted average lease term of 3.94 years at March 31, 2019. 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 $624 thousand and variable lease costs were $73 thousand for the three months ended March 31, 2019.
The following is a schedule of the Company's operating lease liabilities by contractual maturity as of March 31, 2019:
2,294
2,160
1,396
985
574
Thereafter
Total lease payments
7,838
Less: imputed interest
155
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 three months ended March 31, 2019:
Right-of-use asset obtained in exchange for lease obligation
7,862
Operating cash flows from operating leases
567
Operating cash flows from direct finance leases
Financing cash flows from direct finance leases
187
14. ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) Targeted Improvements” which allows entities adopting ASU No. 2016-02 to choose an additional transition method, under which an entity to initially applies the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendment in this update becomes effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company has elected the transition method permitted by ASU No. 2018-11 under which an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. Upon adoption of the new lease guidance on January 1, 2019, the Company recorded a lease liability of approximately $8.2 million, a right-of-use-asset of approximately $7.9 million and a cumulative effect adjustment to retained earnings of $661 thousand.
35
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU replaces the incurred loss model with an expected loss model, referred to as “current expected credit loss” (CECL) model. It will significantly change estimates for credit losses related to financial assets measured at amortized cost, including loans receivable, held-to-maturity (HTM) debt securities and certain other contracts. The largest impact will be on lenders and the allowance for loan and lease losses (ALLL). ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company has reviewed the potential impact to our securities portfolio, which primarily consists of U.S. government sponsored entities, mortgage-backed securities and municipal securities which have no history of credit loss and have strong credit ratings. The Company does not expect the standard to have a material impact on its financial statements as it relates to the Company’s securities portfolio. The Company is also currently evaluating the impact the CECL model will have on our accounting and allowance for loan and lease losses. The Company has evaluated and selected a third party firm to assist in the development of a CECL program and in the calculation of the allowance for loan and lease losses in preparation for the change to the expected loss model. The Company expects to recognize a one-time cumulative-effect adjustment to our allowance for loan and lease losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our consolidated financial condition or results of operations.
In May 2017, the FASB issued ASU 2017-09: “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1.) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2.) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3.) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update. The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The revised guidance is effective for all companies for fiscal years beginning after December 15, 2019, and interim periods within those years. Companies are permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The revised guidance is not expected to have a material impact on our consolidated financial condition or results of operations.
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 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, 2018, in addition to/which include the following:
our inability to successfully grow our business and implement our strategic plan, including an inability to generate revenues to offset the increased personnel and other costs related to the strategic plan;
the impact of anticipated higher operating expenses in 2019 and beyond;
our inability to successfully integrate wealth management firm acquisitions;
our inability to manage our growth;
our inability to successfully integrate our expanded employee base;
an unexpected decline in the economy, in particular in our New Jersey and New York market areas;
declines in our net interest margin caused by the interest rate environment and/or our highly competitive market;
declines in values in our investment portfolio;
higher than expected increases in our allowance for loan and lease losses;
higher than expected increases in loan and lease losses or in the level of nonperforming loans;
changes in interest rates;
decline in real estate values within our market areas;
legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and related regulations) that may result in increased compliance costs;
successful cyberattacks against our IT infrastructure and that of our IT and third-party providers;
higher than expected FDIC insurance premiums;
adverse weather conditions;
our inability to successfully generate new business in new geographic markets;
our inability to execute upon new business initiatives;
our lack of liquidity to fund our various cash obligations;
reduction in our lower-cost funding sources;
our inability to adapt to technological changes;
claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;
our ability to retain key employees
demands for loans and deposits in our market areas;
adverse changes in securities markets;
changes in accounting policies and practices;
effects related to a prolonged shutdown of the federal government which could impact SBA and other government lending programs; and
other unexpected material adverse changes in our operations or earnings.
Except as required by law, the Company assumes no responsibility to update such forward-looking statements in the future. 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 U.S. generally accepted accounting principles. 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, 2018 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 loan and lease 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.
The provision for loan and lease losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses the best information available, the level of the allowance for loan and lease 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 loan and lease losses. Such agencies may require the Company to make additional provisions for loan and lease 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 loan and lease losses and allowance for loan and lease 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 “Accounting Standards Codification (“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, 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.
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be 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 is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. No impairment charges were recognized in the three ended March 31, 2019 and 2018.
38
EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended March 31, 2019 and 2018.
Change
2019 (1)
2019 vs 2018
Results of Operations:
1,614
(1,150
Net interest income after provision for loan and lease losses
2,764
807
2,555
1,848
707
Operating expense
2,378
1,900
1,282
618
Total revenue (Net interest income plus wealth
management fee income and other income)
3,128
Diluted earnings per share
Diluted average shares outstanding
749,314
Return on average assets annualized (ROAA)
0.98
1.01
(0.03
)%
Return on average equity annualized (ROAE)
9.65
10.54
(0.89
The March 2019 quarter included results of operations of Lassus Wherley, acquired effective September 1, 2018.
Selected Balance Sheet Ratios:
Total capital (Tier I + II) to risk-weighted assets
15.49
15.03
0.46
Tier I leverage ratio
9.76
9.82
(0.06
Loans to deposits
99.44
100.84
(1.40
Allowance for loan and lease losses to total loans
0.99
Allowance for loan and lease losses to nonperforming loans
155.28
149.73
5.55
Nonperforming loans to total loans
0.64
0.65
(0.01
For the quarter ended March 31, 2019, the Company recorded net income of $11.4 million and diluted earnings per share of $0.58, compared to $10.8 million and $0.57 for the same three-month period last year.
The first quarter of 2019, when compared to the first quarter of 2018, reflected: increased net interest income (due to increased loan balances and higher yields on loans partially offset by increased interest expense on our cost of funds); greater wealth management fee income (partially due to the acquisition of Lassus Wherley in September 2018); and a reduced provision for loan and lease losses (due to low charge-off levels and a reduction in our loan portfolio during the 2019 quarter). These positive effects were partially offset by higher operating expenses in the 2019 first quarter which included three months of expense related to Lassus Wherley and an increase in salaries and benefits expense due to strategic hiring and normal salary increases.
CONTRACTUAL OBLIGATIONS: For a discussion of our contractual obligations, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations.”
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, 2018 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements.”
39
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 calculated as net interest income annualized as a percent of total interest earning assets. 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 tables summarize the Company’s net interest income and margin for the periods indicated:
March 31, 2018
NII
NIM
NII/NIM before the below items
29,575
2.66%
27,960
2.72%
Prepayment premiums received on multifamily loan paydowns
432
0.04%
433
NII/NIM as reported
2.70%
2.76%
Net interest income, on a fully tax-equivalent basis, increased $1.8 million, or 6 percent, for the first quarter of 2019 to $30.6 million from net interest income of $28.8 million for the same quarter in 2018. The net interest margin was 2.70 percent and 2.76 percent for the three months ended March 31, 2019 and 2018, respectively, a decrease of 6 basis points. The growth in net interest income was due to increases in the average balance and yield on the Company’s interest-earning assets, especially the average balance of C&I loans, which typically have higher yields. The interest income increase was partially offset by increases in interest-bearing liabilities and the Company’s cost of funds. The Company continues to be impacted by competitive pressures in attracting new loans and deposits, as well as retaining deposits.
The following table summarizes the Company’s loans closed for the periods indicated:
Residential mortgage loans originated for portfolio
10,839
11,642
Residential mortgage loans originated for sale
3,090
7,672
Total residential mortgage loans
13,929
19,314
Commercial real estate loans
21,025
34,385
Multifamily properties
21,122
21,000
Commercial and industrial (C&I) loans (A) (B)
141,128
118,425
Small business administration
4,270
Wealth Lines of Credit (A)
7,380
19,238
Total commercial loans
199,705
197,318
Installment loans
558
1,350
Home equity lines of credit (A)
2,497
Total loans closed
215,799
220,479
(A)
Includes loans and lines of credit that closed in the period but were not necessarily funded.
(B)
Includes equipment finance leases and loans.
40
The Company has managed its balance sheet such that multifamily and 1-4 family residential loans declined as a percentage of the overall loan portfolio and C&I loans became a larger percentage of the overall loan portfolio.
At March 31, 2019, December 31, 2018 and March 31, 2018, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance.
The following table presents such concentration levels at the following periods:
Multifamily mortgage loans as a percent of
total regulatory capital of the Bank
198
209
271
Non-owner occupied commercial real estate loans
as a percent of total regulatory capital of the Bank
185
175
Total CRE concentration
379
446
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.
41
The following tables reflect the components of the average balance sheet and of net interest income for the periods indicated:
Average Balance Sheet
Unaudited
Income/
Expense
Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (1)
387,566
2.77
339,556
2.27
Tax-exempt (1) (2)
17,345
210
4.84
24,304
3.26
Loans (2) (3):
Residential mortgages
571,637
4,895
3.43
574,400
4,731
3.29
Commercial mortgages
1,824,371
18,021
3.95
2,013,128
18,407
3.66
Commercial
1,379,585
16,750
4.86
969,496
10,487
4.33
Installment
55,215
577
4.18
81,762
670
3.28
Home equity
60,421
766
5.07
65,158
660
4.05
412
10.68
455
9.67
3,891,641
41,020
4.22
3,704,399
34,966
3.78
0.25
237,251
2.14
99,471
Total interest-earning assets
4,533,904
45,184
3.99
4,167,831
37,446
3.59
Noninterest-earning assets:
5,398
4,686
Allowance for loan and lease losses
(38,948
(37,076
21,467
29,256
122,102
99,541
Total noninterest-earning assets
110,019
96,407
Total assets
4,643,923
4,264,238
LIABILITIES:
1,284,611
3,710
1.16
1,143,152
1,757
0.61
Money markets
1,208,004
4,335
1,033,937
1,946
0.75
114,003
0.06
121,065
0.05
607,178
2.13
555,564
1.55
Subtotal interest-bearing deposits
3,213,796
11,295
1.41
2,853,718
5,868
0.82
1.64
1.51
56,154
2.60
72,601
2.36
Total interest-bearing deposits
3,449,950
12,399
3,106,319
6,977
0.90
FHLB advances and borrowings
105,900
3.15
86,458
1.71
8,244
4.80
8,963
4.78
83,213
5.88
83,043
Total interest-bearing liabilities
3,647,307
1.60
3,284,783
1.06
Noninterest-bearing liabilities:
Demand deposits
471,265
539,882
51,791
29,358
Total noninterest-bearing liabilities
523,056
569,240
Shareholders’ equity
473,560
410,215
Total liabilities and shareholders’ equity
Net interest income (tax-equivalent basis)
30,628
28,771
Net interest spread
2.39
2.53
Net interest margin (4)
2.70
2.76
Tax equivalent adjustment
(621
(378
Average balances for available for sale securities are based on amortized cost.
(2)
Interest income is presented on a tax-equivalent basis using a 21 percent federal tax rate.
(3)
Loans are stated net of unearned income and include nonaccrual loans.
(4)
Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.
The effect of volume and rate changes on net interest income (on a tax-equivalent basis) for the three months ended March 31, 2019 compared with the three months ended March 31, 2018 are shown below:
Difference due to
Change In
Change In:
(In Thousands):
Volume
Rate
Investments
242
771
2,699
3,355
6,054
237
913
3,617
4,121
7,738
Interest-bearing checking
343
1,610
1,953
581
1,808
2,389
218
867
1,085
(104
(64
Interest bearing demand brokered
Borrowed funds
361
103
464
Capital lease obligation
(8
1,393
4,488
5,881
2,224
(367
1,857
Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $45.2 million for the first quarter of 2019 compared to $37.4 million for the same quarter of 2018, reflecting an increase of $7.7 million, or 21 percent. Average interest-earning assets totaled $4.53 billion for the first quarter of 2019, an increase of $366.1 million, or 9 percent, from the same quarter of 2018. The average balance of the C&I loan portfolio increased $410.1 million, or 42 percent, from the first quarter of 2018, to $1.38 billion for the same quarter of 2019. The increase in this portfolio was attributed to: the addition of seasoned bankers including an equipment finance team in 2017; a continued focus on client service and value-added aspects of the lending process; and a continued focus on markets outside of the immediate branch service area, including markets around the Teaneck and Princeton, New Jersey private banking offices. This increase was partially offset by a decrease in the average balance of the commercial mortgage portfolio (which includes multifamily mortgage loans) of $188.8 million, or 9 percent, to $1.82 billion for the first three months of 2019 when compared to the same period in 2018. The Company continued to manage its balance sheet such that lower yielding, primarily fixed rate multifamily loans declined as a percentage of the overall loan portfolio and higher yielding, primarily floating rate or short duration C&I loans became a larger percentage of the overall loan portfolio. The average balance of investment securities totaled $404.9 million for the first quarter of 2019 compared to $363.9 million for the same quarter of 2018 reflecting an increase of $41.1 million, or 11 percent. Interest-earning deposits totaled $237.3 million for the first three months of 2019 when compared to $99.5 million for the same period in 2018 reflecting an increase of $137.8 million or 139 percent. The increase was primarily due to certain loan originations and fundings shifting from the end of the first quarter of 2019 into the second quarter.
For the quarters ended March 31, 2019 and 2018, the average rates earned on interest-earning assets were 3.99 percent and 3.59 percent, respectively, an increase of 40 basis points. The increase in average rates on loans was due to an increase in market rates and a shift from lower yielding commercial mortgages into higher yielding commercial loans (C&I and equipment financings) and a sale of $131.3 million of multi-family mortgage loans during the fourth quarter of 2018.
For the first quarter of 2019, the average balance of interest-bearing deposits was $3.45 billion, an increase of $343.6 million, or 11 percent, from the average balance for the same period of 2018. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) has come from an increase in retail deposits from our branch network; focus on providing high-touch client service; and a full array of treasury management products that support core deposit growth. The growth is offset by a decline of $64.3 million of listing service deposits as the Company has chosen not to participate in going forward, so maturing listing service deposits are not replaced with new listing service deposits.
43
Average rates paid on total interest-bearing deposits were 144 basis points and 90 basis points for the first quarters of 2019 and 2018, respectively, an increase of 54 basis points. The increase in the average rate paid on deposits was principally due to growth in higher costing certificates of deposit and money market accounts and competitive pressures in attracting new deposits.
The average balance of borrowings totaled $105.9 million for the quarter ended March 31, 2019, an increase of $19.4 million when compared to the same period of 2018. The increase was principally due to a decrease in overnight borrowings and increase in FHLB advances used to fund loans.
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 or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances are included in the Company’s interest-bearing checking balances. The average balance of reciprocal deposits was $433.7 million for the quarter ended March 31, 2019 compared to $372.3 million for the quarter ended March 31, 2018.
The average balance of brokered interest-bearing demand deposits was $180.0 million for the first quarters of both 2019 and 2018 are matched to the Company’s existing $180.0 million of interest rate swaps, transacted previously as part of the Company’s interest rate risk management program.
INVESTMENT SECURITIES AVAILABLE FOR SALE: 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. 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. Equity securities are carried at fair value with unrealized gains and losses recorded in non-interest income.
At March 31, 2019, the Company had investment securities available for sale with a fair value of $384.4 million compared with $377.9 million at December 31, 2018. Net unrealized losses (net of income tax) of $1.3 million and $3.0 million were included in shareholders’ equity at March 31, 2019 and December 31, 2018, respectively.
The Company has one equity security (a CRA investment security) with a fair value of $4.8 million at March 31, 2019 compared with $4.7 million at December 31, 2018. The Company recorded a $59 thousand unrealized gain on the Consolidated Statements of Income for the three months ended March 31, 2019 as compared to an unrealized loss of $78 thousand for the three months ended March 31, 2018. Such security has been owned for years for CRA purposes, but under Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments”, equity securities require a quarterly mark to market through the income statement effective January 1, 2018.
The carrying value of investment securities available for sale as of March 31, 2019 and December 31, 2018 are shown below:
U.S. treasury and U.S. government-sponsored agencies
Mortgage-backed securities-residential (principally
U.S. government-sponsored entities)
44
The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of March 31, 2019:
After 1
After 5
But
After
Within
1 Year
5 Years
10 Years
Years
34,892
51,460
2.31
3.13
2.80
Mortgage-backed securities-residential (1)
2,435
13,611
258,244
2.17
3.07
1.98
2.69
2.66
2.67
State and political subdivisions (2)
4,914
8,873
1,754
1,556
2.47
2.63
2.59
3.24
2.64
5.25
4,955
46,200
69,844
263,401
2.41
2.98
2.71
Shown using stated final maturity.
Yields presented on a fully tax-equivalent basis.
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, 2019 was $237.4 million compared to $103.2 million for the year ended December 31, 2018. The increase represented excess cash as deposit growth exceeded loan growth.
OTHER INCOME: The following table presents other income, excluding income from wealth management, which is summarized and discussed subsequently:
(15
Gain on sale of loans (mortgage banking)
(47
388
224
Securities gains/(losses)
137
For the quarter ended March 31, 2019, income from the sale of newly originated residential mortgage loans was $47 thousand compared to $94 thousand for the same period in 2018. Such income is a result of the volume of residential mortgage loans originated for sale in the respective periods.
The first quarter of 2019 included $270 thousand of loan level, back-to-back swap income compared to $252 thousand in the same quarter of 2018. The program provides a borrower with a degree of interest rate protection on a variable rate loan, while still providing an adjustable rate to the Company, thus helping to manage the Company’s interest rate risk, while contributing to income.
The first quarter of 2019 included $419 thousand of income related to the Company’s SBA lending and sale program compared to $31 thousand for the same quarter in 2018.
Income from the back-to-back swap and SBA programs are dependent on volume, and thus are not linear from quarter to quarter, as some quarters will be higher than others.
The Company recorded a $59 thousand mark to market gain and $78 thousand mark to market loss on its equity security investment in the three months ended March 31, 2019 and 2018, respectively, as a result of the adoption of ASU 2016-01, “Financial Instruments” on January 1, 2018.
Other income was $606 thousand for the quarter ended March 31, 2019 compared to $382 thousand for the same quarter in 2018. The increase in other income was primarily due to increased fees associated with loans, as well as income related to our corporate advisory program.
OPERATING EXPENSES: The following table presents the components of operating expenses for the periods indicated:
2,577
118
FDIC assessment
Other Operating Expenses:
(4
48
49
(117
Increased operating expenses in the three-month period ended March 31, 2019 were principally attributable to: an increase in compensation and employee benefits of $2.6 million to $17.2 million for the first quarter of 2019, which includes a full quarter of expense related to the Lassus Wherley acquisition completed on September 1, 2018; ongoing operating expenses including amortization of intangibles; hiring in line with the Company’s strategic plan; and normal salary increases. These increases were partially offset by a decrease in the Company’s FDIC expense.
PRIVATE WEALTH MANAGEMENT DIVISION: 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 the Private Wealth Management Division are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, at private banking locations in Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware in Greenville, Delaware, MCM, in Gladstone, New Jersey, Quadrant, in Fairfield, New Jersey and Lassus Wherley in New Providence, New Jersey and Bonita Springs, Florida.
46
The following table presents certain key aspects of the Bank’s Private Wealth Management Division performance for the quarters ended March 31, 2019 and 2018.
At or For
Total fee income
Compensation and benefits (included in Operating
Expenses above)
911
Other operating expense (included in Operating
2,599
2,532
Assets under management and/or administration
(market value in billions)
$6.3 billion
$5.6 billion
The market value of the assets under management and/or administration (“AUM”) of the Private Wealth Management Division was $6.3 billion at March 31, 2019, reflecting an increase of 13 percent from $5.6 billion at March 31, 2018. The increase in AUM was due to the acquisition of one registered investment advisory firm (“RIA”) and organic growth. Effective September 1, 2018, the Bank acquired Lassus Wherley, an RIA, based in New Providence, NJ, which contributed approximately $550 million of AUM at the time of acquisition. Organic growth, which includes equity market appreciation, contributed an additional $150 million in AUM.
In the March 2019 quarter, the Private Wealth Management Division generated $9.2 million in fee income compared to $8.4 million for the March 2018 quarter, reflecting a 10 percent increase. The growth in fee income was due to the acquisition noted above, as well as continued new business, partially offset by normal levels of disbursements and outflows.
The Company continues to incorporate wealth management into conversations it has with the Company’s clients across all business lines. The Company has expanded its wealth management team and intends to continue to grow organically and through acquisition.
Operating expenses relative to the Private Wealth Management Division reflected increases due to the Lassus Wherley acquisition, overall growth in the business, new hires and select third party expenditures. Remaining expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel. Generally, revenue and profitability related to the new personnel will lag expenses by several quarters.
The Private Wealth Management Division currently generates adequate revenue to support the salaries, benefits and other expenses of the Division. Management believes that the Bank generates adequate liquidity to support the expenses of the Private Wealth Management Division 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 on the dates indicated:
As of
September 30,
June 30,
Loans past due over 90 days and still accruing
Nonaccrual loans
10,722
12,025
13,314
Other real estate owned
96
1,608
2,090
Total nonperforming assets
10,818
13,633
15,404
Performing TDRs
4,303
19,334
18,665
7,888
Loans past due 30 through 89 days and still accruing
3,484
2,528
3,539
674
Classified loans
51,783
52,515
55,945
Impaired loans
31,345
30,711
21,223
Nonperforming loans as a % of total loans (1)
0.28
0.32
0.36
Nonperforming assets as a % of total assets (1)
0.53
0.56
0.24
Nonperforming assets as a % of total loans
plus other real estate owned (1)
0.37
0.41
Nonperforming loans/assets do not include performing TDRs.
PROVISION FOR LOAN AND LEASE LOSSES: The provision for loan and lease losses was $100 thousand and $1.3 million for the first quarters of 2019 and 2018, respectively. The reduced provision for loan and lease losses resulted from a reduced loan portfolio due to paydown activity in excess of origination activity, as well as recoveries in the quarter and improvements in the quarter regarding non-performing loans, classified loans and impaired loans. The amount of the loan loss provision and the level of the allowance for loan and lease losses are based upon several factors including Management’s evaluation of probable losses inherent in the portfolio, after consideration of appraised collateral values, financial condition and past credit history of the borrowers, as well as prevailing economic conditions. Commercial credits generally carry a higher risk profile compared to some of the other credits, which is reflected in Management’s determination of the adequacy of the allowance for loan and lease losses.
The allowance for loan and lease losses was $38.7 million as of March 31, 2019, compared to $38.5 million at December 31, 2018. As a percentage of loans, the allowance for loan and lease losses was 0.99 percent for March 31, 2019, and 0.98 percent for December 31, 2018. The specific reserves on impaired loans were $258 thousand at March 31, 2019 compared to $262 thousand as of December 31, 2018. Total impaired loans were $29.2 million and $31.3 million as of March 31, 2019 and December 31, 2018, respectively. The general component of the allowance increased from $38.2 million at December 31, 2018 to $38.4 million at March 31, 2019.
A summary of the allowance for loan and lease losses for the quarterly periods indicated follows:
Allowance for loan and lease losses:
Beginning of period
37,293
38,066
1,500
500
300
(Charge-offs)/recoveries, net
(289
(1,273
End of period
Allowance for loan and lease losses as a % of
total loans
0.991
0.979
0.981
1.021
1.016
General allowance for loan and lease losses as
a % of total loans
0.984
0.972
0.961
0.978
1.006
non-performing loans
347.82
316.56
283.13
INCOME TAXES: Income tax expense for the three months ended March 31, 2019 was $4.5 million as compared to $3.2 million for the same period in 2018. For the first quarters of 2019 and 2018, income tax expense as a percentage of pre-tax income was 28.2 percent and 22.9 percent, respectively. The increase in income tax expense and the effective rate in 2019 was primarily due to the New Jersey surtax and combined reporting rules.
On July 1, 2018, the 2019 New Jersey Budget (“Budget”) was passed which established a 2.5 percent surtax on businesses that have New Jersey allocated net income in excess of $1.0 million. The surtax is effective as of January 1, 2018 and will continue through 2019. The surtax will adjust to 1.5 percent for 2020 and 2021. In addition, effective for taxable years beginning on or after January 1, 2019, banks will be required to file combined reports of taxable income including their parent holding company, their real estate investment trust (“REIT”) subsidiary and all other subsidiaries including those that qualify as New Jersey Investment Companies, and Delaware Investment Holding Companies. The Bank made an adjustment to income tax expense and deferred tax assets/liabilities in the third quarter of 2018 to reflect the new state tax rate, which became effective on January 1, 2018. The Company’s effective tax rate increased by approximately 5% for the three months ended March 31, 2019 as a result of the New Jersey tax changes. The Company’s effective tax rate for the three months ended March 31, 2018 was also affected by the adoption of ASU 2016-09. The three months ended March 31, 2018 included a $362 thousand reduction in income taxes.
CAPITAL RESOURCES A solid capital base provides the Company with the ability to support future growth and financial strength 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 business, 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. Maintaining an adequate capital position supports the Company’s goal of providing shareholders an attractive and stable long-term return on investment.
Capital for the three months ended March 31, 2019 was benefitted by net income of $11.4 million.
Quantitative measures established by regulation to ensure capital adequacy require 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, 2019 and December 31, 2018, 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 recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (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 may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8 percent and not more than 10 percent. A financial institution can elect to be subject to this new definition. The Bank’s leverage ratio is 11.25 percent at March 31, 2019.
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, 2019:
Total capital
(to risk-weighted assets)
557,355
15.10
368,994
10.00
295,195
8.00
387,443
10.50
Tier I capital
518,702
14.06
221,396
6.00
313,645
8.50
Common equity tier I
518,700
239,846
6.50
166,047
4.50
258,296
7.00
(to average assets)
11.25
230,547
5.00
184,437
4.00
As of December 31, 2018:
543,008
14.59
372,186
297,749
367,533
9.88
504,504
13.56
223,311
293,096
7.88
504,502
241,921
167,484
237,268
6.38
11.32
222,912
178,330
See footnote on following table
50
The Company’s regulatory capital amounts and ratios are presented in the following table:
572,146
295,506
387,852
450,244
12.19
221,630
313,976
450,242
166,222
258,568
184,592
559,937
298,047
367,902
438,240
11.76
223,535
293,390
438,238
167,652
237,506
178,473
As fully phased in on January 1, 2019, the Basel Rules require the Company and the Bank to maintain a 2.5% “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019.
The Company’s regulatory total risk-based capital ratio was benefitted by the $48.7 million (net) subordinated debt issuance that closed in June 2016. At that time, the Company down-streamed approximately $40.0 million of proceeds to the Bank as capital, benefitting all the Bank’s regulatory capital ratios.
In addition, on December 12, 2017, the Company issued $35.0 million in aggregate principal amount of Fixed-to-Floating Subordinated Notes due December 15, 2027. The Company down-streamed approximately $29.1 million of those proceeds to the Bank as capital.
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 thousand per quarter to purchase additional shares of common stock, which up to January 30, 2019 were purchased at a 3 percent discount to market. On January 30, 2019, the Company filed a Registration Statement on Form S-3 eliminating the feature in our “Reinvestment Plan” under which participants could purchase shares of our common stock through the Plan at a 3 percent discount to market price. 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. During the three months ended March 31, 2019, 126 thousand shares purchased for the “Reinvestment Plan” were purchased in the open market.
51
On April 25, 2019, the Board of Directors declared a regular cash dividend of $0.05 per share payable on May 23, 2019 to shareholders of record on May 9, 2019.
Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient capital to support its planned balance sheet 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. Cash and cash equivalents, including federal funds sold and interest-earning deposits, totaled $240.3 million at March 31, 2019. In addition, the Company had $384.4 million in securities designated as available for sale at March 31, 2019. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. Securities available for sale with a fair value of $298.8 million as of March 31, 2019 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.
A further source of liquidity is secured borrowing capacity. At March 31, 2019, unused borrowing commitments totaled $1.3 billion from the FHLB and $1.4 billion from the Federal Reserve Bank of New York.
Customer deposits and capital increased by $23.9 million and $12.5 million, respectively, during the first quarter of 2019. These increases along with a $30.5 million decrease in loans funded the additional on-balance sheet liquidity of $629.5 million of cash, cash equivalents and investment securities at March 31, 2019 as compared to $543.4 million at December 31, 2018.
Brokered interest-bearing demand (“overnight”) deposits were $180.0 million at March 31, 2019. The interest rate paid on these deposits allows the Bank to fund 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, 2019, the Company had transacted pay fixed, receive floating interest rate swaps totaling $230.0 million in notional amount.
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.
Management believes the Company’s liquidity position and sources are adequate.
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 is generally authorized to manage interest rate risk through the management of capital, cash flows and 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 is authorized to engage 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:
Actively market C&I loans, which tend to have adjustable-rate features, and which generate customer relationships that can result in higher core deposit accounts;
Actively market equipment finance leases and loans, which tend to have shorter terms and higher interest rates than real estate lending;
Manage residential mortgage portfolio originations to adjustable-rate and/or shorter-term and/or “relationship” loans that result in core deposit and/or wealth management relationships;
Actively market core deposit relationships, which are generally longer duration liabilities;
Utilize medium to longer term certificates of deposit and/or wholesale borrowings to extend liability duration;
Utilize interest rate swaps to extend liability duration;
Utilize a loan level / back-to-back interest rate swap program, which converts a borrower’s fixed rate loan to adjustable rate for the Company;
Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;
Maintain adequate levels of capital; and
Utilize loan sales, especially longer-term residential sales, and/or loan participations.
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 all of these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $230.0 million as of March 31, 2019.
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, 2019, $567.8 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, 2019. 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, 2019.
In an immediate and sustained 200 basis point increase in market rates at March 31, 2019, net interest income for year 1 would increase approximately 6.4 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 12.0 percent, when compared to a flat interest rate scenario.
In an immediate and sustained 100 basis point decrease in market rates at March 31, 2019, net interest income would decline approximately 6.3 percent for year 1 and 9.2 percent for year 2, compared to a flat interest rate scenario.
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, 2019.
Estimated Increase/
EVPE as a Percentage of
Decrease in EVPE
Present Value of Assets (2)
Rates
Estimated
EVPE
Increase/(Decrease)
(Basis Points)
EVPE (1)
Percent
Ratio (3)
(basis points)
+200
641,071
29,130
4.76
14.32
110
+100
631,619
19,678
3.22
13.86
64
Flat interest rates
611,941
13.22
-100
577,527
(34,414
(5.62
12.31
(91
EVPE is the discounted present value of expected cash flows from assets and liabilities.
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
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, 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.
Model simulation results indicate the Company is slightly asset sensitive, which indicates the Company’s net interest income should improve slightly in a rising rate environment. Management believes the Company’s interest rate risk position is reasonable.
ITEM 4. Controls and Procedures
The Corporation’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Corporation’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 Corporation’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 Corporation’s Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Corporation’s internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonable likely to materially affect, the Corporation’s internal control over financial reporting.
The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures of our internal controls will prevent all errors 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; the benefits of controls must be considered relative to their costs. 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 Corporation 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, control 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.
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
There were no material changes in the Company’s risk factors during the three months ended March 31, 2019 from the risk factors disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
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 December 20, 2017 (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 Jeffrey J. Carfora, 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 Jeffrey J. Carfora, Chief Financial Officer of the Corporation.
Interactive Data File
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, 2019
By:
/s/ Douglas L. Kennedy
Douglas L. Kennedy
President and Chief Executive Officer
/s/ Jeffrey J. Carfora
Jeffrey J. Carfora
Senior Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
/s/ Francesco S. Rossi
Francesco S. Rossi, Chief Accounting Officer
(Principal Accounting Officer)
57