UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2016 |
OR
o |
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 x No o .
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 or 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 and post such files).
Yes
x
No
o
.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o | Accelerated filer x |
Non-accelerated filer (do not check if a smaller reporting company) o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares of Common Stock outstanding as of October 31, 2016:
16,947,538
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
PART 2 OTHER INFORMATION
Item 1 | Legal Proceedings | Page 68 | |
Item 1A | Risk Factors | Page 68 | |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | Page 69 | |
Item 3 | Defaults Upon Senior Securities | Page 69 | |
Item 4 | Mine Safety Disclosures | Page 69 | |
Item 5 | Other Information | Page 69 | |
Item 6 | Exhibits | Page 69 |
2
Item 1. Financial Statements (Unaudited)
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except share data)
(unaudited) | (audited) | |||||||
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 17,861 | $ | 11,550 | ||||
Federal funds sold | 101 | 101 | ||||||
Interest-earning deposits | 141,593 | 58,509 | ||||||
Total cash and cash equivalents | 159,555 | 70,160 | ||||||
Securities available for sale | 249,616 | 195,630 | ||||||
FHLB and FRB stock, at cost | 14,093 | 13,984 | ||||||
Residential mortgage loans held for sale, at fair value | 3,013 | 1,558 | ||||||
Multifamily mortgage loans held for sale, at lower of cost or fair value | 30,000 | 82,200 | ||||||
Loans | 3,232,887 | 2,913,242 | ||||||
Less: Allowance for loan losses | 30,616 | 25,856 | ||||||
Net loans | 3,202,271 | 2,887,386 | ||||||
Premises and equipment | 30,223 | 30,246 | ||||||
Other real estate owned | 534 | 563 | ||||||
Accrued interest receivable | 6,383 | 6,820 | ||||||
Bank owned life insurance | 43,541 | 42,885 | ||||||
Deferred tax assets, net | 14,765 | 15,582 | ||||||
Goodwill | 1,573 | 1,573 | ||||||
Other intangible assets | 1,615 | 1,708 | ||||||
Other assets | 17,201 | 14,364 | ||||||
TOTAL ASSETS | $ | 3,774,383 | $ | 3,364,659 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing demand deposits | $ | 494,204 | $ | 419,887 | ||||
Interest-bearing deposits: | ||||||||
Interest-bearing deposits checking | 928,941 | 861,697 | ||||||
Savings | 119,650 | 115,007 | ||||||
Money market accounts | 997,572 | 810,709 | ||||||
Certificates of deposit - Retail | 466,003 | 434,450 | ||||||
Subtotal deposits | 3,006,370 | 2,641,750 | ||||||
Interest-bearing demand – Brokered | 200,000 | 200,000 | ||||||
Certificates of deposit - Brokered | 93,690 | 93,720 | ||||||
Total deposits | 3,300,060 | 2,935,470 | ||||||
Overnight borrowings with Federal Home Loan Bank | — | 40,700 | ||||||
Federal Home Loan Bank advances | 71,795 | 83,692 | ||||||
Capital lease obligation | 9,828 | 10,222 | ||||||
Subordinated debt, net | 48,731 | — | ||||||
Accrued expenses and other liabilities | 27,934 | 18,899 | ||||||
Due to brokers, securities settlements | 7,003 | — | ||||||
TOTAL LIABILITIES | 3,465,351 | 3,088,983 | ||||||
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 | ||||||||
21,000,000 shares; issued shares, 17,352,916 at September 30, 2016 and | ||||||||
16,476,297 at December 31, 2015; outstanding shares, 16,944,738 at | ||||||||
September 30, 2016 and 16,068,119 at December 31, 2015 | 14,451 | 13,717 | ||||||
Surplus | 230,506 | 213,203 | ||||||
Treasury stock at cost, 408,178 shares at September 30, 2016 and | ||||||||
December 31, 2015 | (8,988 | ) | (8,988 | ) | ||||
Retained earnings | 74,840 | 58,123 | ||||||
Accumulated other comprehensive loss, net of income tax | (1,777 | ) | (379 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 309,032 | 275,676 | ||||||
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY | $ | 3,774,383 | $ | 3,364,659 |
See accompanying notes to consolidated financial statements
3
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans | $ | 28,225 | $ | 24,663 | $ | 82,713 | $ | 68,274 | ||||||||
Interest on securities available for sale: | ||||||||||||||||
Taxable | 976 | 959 | 2,816 | 3,178 | ||||||||||||
Tax-exempt | 128 | 128 | 377 | 395 | ||||||||||||
Interest on loans held for sale | 384 | 10 | 577 | 44 | ||||||||||||
Interest on interest-earning deposits | 131 | 46 | 294 | 128 | ||||||||||||
Total interest income | 29,844 | 25,806 | 86,777 | 72,019 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on savings and interest-bearing deposit | ||||||||||||||||
accounts | 1,399 | 919 | 3,785 | 2,546 | ||||||||||||
Interest on certificates of deposit | 1,615 | 1,296 | 4,649 | 3,010 | ||||||||||||
Interest on borrowed funds | 380 | 399 | 1,432 | 1,219 | ||||||||||||
Interest on capital lease obligation | 119 | 125 | 361 | 379 | ||||||||||||
Interest on subordinated debt | 799 | — | 938 | — | ||||||||||||
Subtotal - interest expense | 4,312 | 2,739 | 11,165 | 7,154 | ||||||||||||
Interest on interest-bearing demand – brokered | 762 | 857 | 2,263 | 1,700 | ||||||||||||
Interest on certificates of deposits – brokered | 501 | 504 | 1,494 | 1,532 | ||||||||||||
Total Interest expense | 5,575 | 4,100 | 14,922 | 10,386 | ||||||||||||
NET INTEREST INCOME BEFORE | ||||||||||||||||
PROVISION FOR LOAN LOSSES | 24,269 | 21,706 | 71,855 | 61,633 | ||||||||||||
Provision for loan losses | 2,100 | 1,600 | 6,000 | 5,150 | ||||||||||||
NET INTEREST INCOME AFTER | ||||||||||||||||
PROVISION FOR LOAN LOSSES | 22,169 | 20,106 | 65,855 | 56,483 | ||||||||||||
OTHER INCOME | ||||||||||||||||
Wealth management fee income | 4,436 | 4,169 | 13,630 | 12,732 | ||||||||||||
Service charges and fees | 812 | 832 | 2,437 | 2,474 | ||||||||||||
Bank owned life insurance | 340 | 260 | 1,027 | 1,045 | ||||||||||||
Gains on loans held for sale at fair value (mortgage banking) | 383 | 102 | 813 | 411 | ||||||||||||
Gains on multifamily loans held for sale at lower of cost or fair value | 256 | — | 880 | — | ||||||||||||
Fee income related to loan level, back-to-back swaps | 670 | — | 764 | 373 | ||||||||||||
Gain on sale of SBA loans | 243 | — | 502 | — | ||||||||||||
Other income | 395 | 164 | 1,074 | 429 | ||||||||||||
Securities gains, net | — | 83 | 119 | 527 | ||||||||||||
Total other income | 7,535 | 5,610 | 21,246 | 17,991 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Salaries and employee benefits | 11,515 | 10,322 | 33,523 | 29,619 | ||||||||||||
Premises and equipment | 2,736 | 2,785 | 8,342 | 8,179 | ||||||||||||
FDIC insurance expense | 814 | 416 | 3,954 | 1,329 | ||||||||||||
Other operating expense | 3,101 | 3,376 | 10,328 | 9,806 | ||||||||||||
Total operating expenses | 18,166 | 16,899 | 56,147 | 48,933 | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 11,538 | 8,817 | 30,954 | 25,541 | ||||||||||||
Income tax expense | 4,422 | 3,434 | 11,785 | 9,912 | ||||||||||||
NET INCOME | $ | 7,116 | $ | 5,383 | $ | 19,169 | $ | 15,629 | ||||||||
EARNINGS PER SHARE | ||||||||||||||||
Basic | $ | 0.43 | $ | 0.35 | $ | 1.19 | $ | 1.04 | ||||||||
Diluted | $ | 0.43 | $ | 0.35 | $ | 1.17 | $ | 1.02 | ||||||||
WEIGHTED AVERAGE NUMBER OF | ||||||||||||||||
SHARES OUTSTANDING | ||||||||||||||||
Basic | 16,467,654 | 15,253,009 | 16,167,153 | 15,083,006 | ||||||||||||
Diluted | 16,673,596 | 15,435,939 | 16,347,255 | 15,293,747 |
See accompanying notes to consolidated financial statements
4
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 7,116 | $ | 5,383 | $ | 19,169 | $ | 15,629 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gains/(loss) on available for sale | ||||||||||||||||
securities: | ||||||||||||||||
Unrealized holding (loss)/gains arising | ||||||||||||||||
during the period | (350 | ) | 751 | 1,081 | 849 | |||||||||||
Less: Reclassification adjustment for net gains | ||||||||||||||||
included in net income | — | 83 | 119 | 527 | ||||||||||||
(350 | ) | 668 | 962 | 322 | ||||||||||||
Tax effect | 135 | (252 | ) | (361 | ) | (111 | ) | |||||||||
Net of tax | (215 | ) | 416 | 601 | 211 | |||||||||||
Unrealized gains/(loss) on cash flow hedges: | ||||||||||||||||
Unrealized holding gains/(loss) | 1,591 | (2,849 | ) | (3,380 | ) | (3,210 | ) | |||||||||
1,591 | (2,849 | ) | (3,380 | ) | (3,210 | ) | ||||||||||
Tax effect | (650 | ) | 1,163 | 1,381 | 1,311 | |||||||||||
Net of tax | 941 | (1,686 | ) | (1,999 | ) | (1,899 | ) | |||||||||
Total other comprehensive income/(loss) | 726 | (1,270 | ) | (1,398 | ) | (1,688 | ) | |||||||||
Total comprehensive income | $ | 7,842 | $ | 4,113 | $ | 17,771 | $ | 13,941 |
See accompanying notes to consolidated financial statements
5
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, 2016
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
(In thousands, except | Common | Treasury | Retained | Comprehensive | ||||||||||||||||||||
per share data) | Stock | Surplus | Stock | Earnings | Loss | Total | ||||||||||||||||||
Balance at January 1, 2016 | ||||||||||||||||||||||||
16,068,119 common shares | ||||||||||||||||||||||||
outstanding | $ | 13,717 | $ | 213,203 | $ | (8,988 | ) | $ | 58,123 | $ | (379 | ) | $ | 275,676 | ||||||||||
Net income | — | 19,169 | 19,169 | |||||||||||||||||||||
Net change in accumulated | ||||||||||||||||||||||||
other comprehensive loss | — | (1,398 | ) | (1,398 | ) | |||||||||||||||||||
Issuance of restricted stock, net | ||||||||||||||||||||||||
of forfeitures, (10,860) shares | (9 | ) | 9 | — | ||||||||||||||||||||
Restricted stock repurchased on | ||||||||||||||||||||||||
vesting to pay taxes, | ||||||||||||||||||||||||
(24,093) shares | (20 | ) | (476 | ) | (496 | ) | ||||||||||||||||||
Amortization of restricted awards/units | — | 2,154 | 2,154 | |||||||||||||||||||||
Cash dividends declared on | ||||||||||||||||||||||||
common stock | ||||||||||||||||||||||||
($0.15 per share) | — | — | (2,452 | ) | (2,452 | ) | ||||||||||||||||||
Common stock option expense | — | 45 | 45 | |||||||||||||||||||||
Common stock options exercised, | ||||||||||||||||||||||||
19,958 net of 1,317 used to | ||||||||||||||||||||||||
exercise and related tax benefits, | ||||||||||||||||||||||||
18,641 shares | 16 | 230 | 246 | |||||||||||||||||||||
Sales of shares (Dividend | ||||||||||||||||||||||||
Reinvestment Program), | ||||||||||||||||||||||||
866,018 shares | 722 | 14,810 | 15,532 | |||||||||||||||||||||
Issuance of shares for | ||||||||||||||||||||||||
Employee Stock Purchase | ||||||||||||||||||||||||
Plan, 26,913 shares | 25 | 531 | 556 | |||||||||||||||||||||
Balance at September 30, 2016 | ||||||||||||||||||||||||
16,944,738 common shares | ||||||||||||||||||||||||
outstanding | $ | 14,451 | $ | 230,506 | $ | (8,988 | ) | $ | 74,840 | $ | (1,777 | ) | $ | 309,032 |
See accompanying notes to consolidated financial statements
6
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 19,169 | $ | 15,629 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 2,280 | 2,408 | ||||||
Amortization of premium and accretion of discount on securities, net | 1,090 | 1,337 | ||||||
Amortization of restricted stock | 2,154 | 1,734 | ||||||
Amortization of intangible | 93 | — | ||||||
Amortization of subordinated debt costs | 38 | — | ||||||
Provision of loan losses | 6,000 | 5,150 | ||||||
Provision of OREO losses | — | 250 | ||||||
Provision/(benefit) for deferred taxes | 1,837 | (2,922 | ) | |||||
Stock-based compensation, including ESPP | 128 | 252 | ||||||
Gains on securities, available for sale | (119 | ) | (527 | ) | ||||
Loans originated for sale at fair value | (53,412 | ) | (26,495 | ) | ||||
Proceeds from sales of loans at fair value | 52,770 | 27,244 | ||||||
Gains on loans held for sale at fair value | (813 | ) | (411 | ) | ||||
Net gains on loans held for sale at lower of cost or fair value | (880 | ) | — | |||||
Gain on sale of other real estate owned | (5 | ) | — | |||||
Losses on disposal of fixed assets | — | 15 | ||||||
Gain on death benefit | — | (285 | ) | |||||
Increase in cash surrender value of life insurance, net | (656 | ) | (485 | ) | ||||
Decrease/(increase) in accrued interest receivable | 437 | (1,468 | ) | |||||
(Increase)/decrease in other assets | (391 | ) | 1,466 | |||||
Increase in accrued expenses, capital lease obligations | ||||||||
and other liabilities | 2,732 | 2,043 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 32,452 | 24,935 | ||||||
INVESTING ACTIVITIES: | ||||||||
Maturities of securities available for sale | 43,997 | 58,098 | ||||||
Redemptions for FHLB & FRB stock | 61,155 | 44,568 | ||||||
Call of securities available for sale | 10,035 | 14,880 | ||||||
Sales of securities available for sale | 5,499 | 46,254 | ||||||
Purchase of securities available for sale | (106,524 | ) | (6,474 | ) | ||||
Purchase of FHLB & FRB stock | (61,264 | ) | (44,712 | ) | ||||
Proceeds from sales of loans held for sale at lower of cost or fair value | 182,763 | — | ||||||
Net increase in loans | (451,101 | ) | (632,239 | ) | ||||
Sales of other real estate owned | 568 | 744 | ||||||
Purchase of premises and equipment | (2,257 | ) | (1,475 | ) | ||||
Acquisition of wealth management company | — | (800 | ) | |||||
Proceeds from death benefit | — | 677 | ||||||
NET CASH USED IN INVESTING ACTIVITIES | (317,129 | ) | (520,479 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Net increase in deposits | 364,590 | 588,852 | ||||||
Net decrease in overnight borrowings
se in overnight borrowings |
(40,700 | ) | (54,600 | ) | ||||
Repayments of Federal Home Loan Bank advances | (11,897 | ) | — | |||||
Cash dividends paid on common stock | (2,452 | ) | (2,310 | ) | ||||
Exercise of Stock Options, net of stock swap | 246 | 29 | ||||||
Restricted stock tax expense | (496 | ) | (54 | ) | ||||
Subordinated debt | 48,693 | — | ||||||
Sales of shares (DRIP Program) | 15,532 | 8,124 | ||||||
Purchase of shares for Profit Sharing Plan | — | 494 | ||||||
Issuance of shares for employee stock purchase plan | 556 | — | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 374,072 | 540,535 | ||||||
Net increase in cash and cash equivalents | 89,395 | 44,991 | ||||||
Cash and cash equivalents at beginning of period | 70,160 | 31,207 | ||||||
Cash and cash equivalents at end of period | $ | 159,555 | $ | 76,198 | ||||
7
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 13,492 | $ | 9,627 | ||||
Taxes | 10,880 | 10,822 | ||||||
Transfer of loans to loans held for sale | 159,804 | — | ||||||
Transfer of loans held for sale to loans | 30,121 | — | ||||||
Transfer of loans to other real estate owned | 534 | — | ||||||
Security purchases settled in subsequent period | 7,003 | — |
See accompanying notes to consolidated financial statements
8
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Unaudited)
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 consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the period ended December 31, 2015 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 of normal recurring accruals necessary to present fairly the financial position as of September 30, 2016 and the results of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015, and shareholders’ equity and cash flow statements for the nine months ended September 30, 2016 and 2015.
Principles of Consolidation and Organization: The consolidated financial statements of the Corporation are prepared on the accrual basis and include the accounts of the Corporation and its wholly-owned subsidiary, Peapack-Gladstone Bank (the “Bank”). The consolidated statements also include the Bank’s wholly-owned subsidiaries, PGB Trust & Investments of Delaware and 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. 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 its banking subsidiary and involves the delivery of loan and deposit products and wealth management services to customers. Management uses certain methodologies to allocate income and expense to the business segments.
The Banking segment includes commercial, commercial real estate, multifamily, residential and consumer lending activities; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support sales.
Peapack-Gladstone Bank’s Private Wealth Management Division includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services including services as trustee for pension and profit sharing plans; and other financial planning and advisory services. This segment also includes the activity from the Delaware subsidiary, PGB Trust & Investments of Delaware. Income is recognized as earned.
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.
9
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 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.
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. 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 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. For equity securities, the entire amount of impairment is recognized through earnings.
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. Cash dividends are reported as income.
The Bank is also a member of the Federal Reserve Bank and required to own a certain amount of FRB stock. FRB stock is carried at cost and classified as a restricted security. Cash dividends are reported as income.
Loans Held for Sale: Mortgage loans originated with the intent to sell in the secondary market are carried at fair value, as determined by outstanding commitments from investors.
Mortgage loans held for sale are generally sold with servicing rights released; therefore, no servicing rights are recorded. Gains and losses on sales of mortgage loans, shown as gain on sale of loans on the Statement of Income, are based on the difference between the selling price and the carrying value of the related loan sold.
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.
10
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 over the life of the loan as an adjustment, on a level-yield method, to the loan’s yield. The definition of recorded investment in loans includes accrued interest receivable, however, for the Company’s loan disclosures, accrued interest was excluded as the impact was not material.
Loans are considered past due when they are not paid in accordance with contractual terms. The accrual of income on 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 is 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 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 if collection of principal is not in doubt. If principal and interest payments are brought contractually current and future collectability is reasonably assured, loans are returned to accrual status. Nonaccrual mortgage loans are generally charged off when 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 the States of New Jersey and New York.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for expected credit losses that are deemed to be probable. When Management is reasonably certain that a loan balance is not fully collectable an analysis is completed and either 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 nature and volume 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, 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 Company 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 is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral less estimated disposition costs if repayment is expected solely from the collateral. If a residential mortgage is placed on nonaccrual status and is in the process of collection, such as through a foreclosure action, then it is evaluated for impairment on an individual basis and the loan is reported, net, at the fair value of the collateral less estimated disposition costs.
11
A troubled debt restructuring is a modified loan with concessions made by the lender to a borrower who is experiencing financial difficulty. Troubled debt restructurings are impaired and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring 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 troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan 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 economic 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 staff; 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. The multiple was 5.0 times for non-impaired substandard loans and 2.5 times for non-impaired special mention 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. 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 value could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential 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, such as the Prime Rate, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate value could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.
12
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 value could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential 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 flow 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 all 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. In addition, these loans often include commercial real estate as collateral to strengthen the Bank’s position and further mitigate risk. Commercial and industrial loans are typically repaid first by the cash flow 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’s 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, the Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance.
Agricultural Production . These are loans to finance agricultural production and other loans to farmers. The Bank does not actively engage in this type of lending.
Commercial Construction . The Bank has discontinued its commercial construction activity. Dollar amounts within this segment are immaterial.
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.
13
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 (“stand-alone derivative”). 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 both types of 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.
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 terminates, 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 new shares to satisfy option exercises.
For the three months ended September 30, 2016 and 2015, the Company recorded total compensation cost for stock options of $11 thousand and $54 thousand respectively, with a recognized tax benefit of $1 thousand and $7 thousand for the quarters ended September 30, 2016 and 2015, respectively. The Company recorded total compensation cost for stock options for the nine months ended September 30, 2016 and 2015, of $45 thousand and $175 thousand, respectively, with a recognized tax benefit of $4 thousand for the nine months ended September 30, 2016 and $19 thousand for the nine months ended September 30, 2015. There was approximately $16 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock incentive plans at September 30, 2016. That cost is expected to be recognized over a weighted average period of 0.43 years.
14
For the Company’s stock option plans, changes in options outstanding during the nine months ended September 30, 2016 were as follows:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value | |||||||||||||
Options | Price | Term | (In thousands) | |||||||||||||
Balance, January 1, 2016 | 267,289 | $ | 17.28 | |||||||||||||
Granted during 2016 | — | — | ||||||||||||||
Exercised during 2016 | (19,958 | ) | 13.55 | |||||||||||||
Expired during 2016 | (15,314 | ) | 21.38 | |||||||||||||
Forfeited during 2016 | (842 | ) | 13.55 | |||||||||||||
Balance, September 30, 2016 | 231,175 | $ | 17.35 | 3.63 years | $ | 1,171 | ||||||||||
Vested and expected to vest (1) | 230,665 | $ | 17.39 | 3.63 years | $ | 1,159 | ||||||||||
Exercisable at September 30, 2016 | 222,678 | $ | 17.50 | 3.54 years | $ | 1,094 |
(1) | Does not include shares which are not expected to vest as a result of anticipated forfeitures. |
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 third quarter of 2016 and the exercise price, multiplied by the number of in-the-money options). The Company’s closing stock price on September 30, 2016 was $22.41.
There were no stock options granted in the three and nine months ended September 30, 2016.
The Company has previously granted performance based and service based restricted stock awards. Service based units vest ratably over a one, three or five year period. There were no restricted stock awards/units granted in the third quarter of 2016.
The performance based awards that were granted in previous periods, are dependent upon the Company meeting certain performance criteria and cliff vest at the end of the performance period. During the fourth quarter of 2015, the Company concluded that the performance targets would not be met and therefore, reversed approximately $592 thousand of previously recorded expense for the performance awards. Total unrecognized compensation expense for performance based awards is $1.7 million as of September 30, 2016.
Changes in nonvested shares dependent on performance criteria for the nine months ended September 30, 2016 were as follows:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Balance, January 1, 2016 | 92,767 | $ | 18.12 | |||||
Granted during 2016 | — | — | ||||||
Vested during 2016 | — | — | ||||||
Forfeited during 2016 | — | — | ||||||
Balance, September 30, 2016 | 92,767 | $ | 18.12 |
15
Changes in service based restricted stock awards/units for the nine months ended September 30, 2016 were as follows:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Balance, January 1, 2016 | 321,421 | $ | 19.44 | |||||
Granted during 2016 | 188,397 | 16.99 | ||||||
Vested during 2016 | (99,937 | ) | 18.37 | |||||
Forfeited during 2016 | (20,515 | ) | 18.65 | |||||
Balance, September 30, 2016 | 389,366 | $ | 18.57 |
As of September 30, 2016, there was $5.3 million of total unrecognized compensation cost related to service based awards/units. That cost is expected to be recognized over a weighted average period of 1.52 years. Stock compensation expense recorded for the third quarters of 2016 and 2015 totaled $725 thousand and $636 thousand, respectively. For the nine months ended September 30, 2016 and 2015, the Company recorded total compensation cost for stock awards/units of $2.2 million and $1.7 million respectively.
Employee Stock Purchase Plan: On April 22, 2014, the shareholders of the Company approved the 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP provides for the granting of purchase rights of up to 150,000 shares of Peapack-Gladstone Financial 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 share purchase right is determined using the Black-Scholes option pricing model.
The Company recorded $19 thousand and $26 thousand of expense in salaries and employee benefits expense for the three months ended September 30, 2016 and 2015, respectively related to the ESPP. Total shares issued under the ESPP during the third quarters of 2016 and 2015 were 7,155 and 8,799, respectively.
The Company recorded $83 thousand and $77 thousand of expense in salaries and employee benefits expense for the nine months ended September 30, 2016 and 2015, respectively, related to the ESPP. Total shares issued under the ESPP for the nine months ended September 30, 2016 and 2015 were 26,913 and 24,258, 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 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 utilizing the Treasury stock method.
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income to shareholders | $ | 7,116 | $ | 5,383 | $ | 19,169 | $ | 15,629 | ||||||||
Basic weighted-average shares outstanding | 16,467,654 | 15,253,009 | 16,167,153 | 15,083,006 | ||||||||||||
Plus: common stock equivalents | 205,942 | 182,930 | 180,102 | 210,741 | ||||||||||||
Diluted weighted-average shares outstanding | 16,673,596 | 15,435,939 | 16,347,255 | 15,293,747 | ||||||||||||
Net income per share | ||||||||||||||||
Basic | $ | 0.43 | $ | 0.35 | $ | 1.19 | $ | 1.04 | ||||||||
Diluted | 0.43 | 0.35 | 1.17 | 1.02 |
Stock options and warrants totaling 218,079 and 85,083 shares were not included in the computation of diluted earnings per share in the third quarters of 2016 and 2015, respectively, because they were considered antidilutive. Stock options and warrants totaling 223,832 and 174,662 shares were not included in the computation of diluted earnings per share in the nine months ended September 30, 2016 and 2015, respectively, because they were considered antidilutive.
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 2013 or by New Jersey tax authorities for years prior to 2012.
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 reasonable estimated. Management does not believe there are any such matters that will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank 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.
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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 acquired company (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 December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill and assembly workforce are the intangible assets with an indefinite life on our balance sheet.
Other intangible assets primarily consist of customer relationship intangible assets arising from acquisition are amortized on an accelerated method over their estimated useful lives, which range up to 15 years.
2. INVESTMENT SECURITIES AVAILABLE FOR SALE
A summary of amortized cost and approximate fair value of securities available for sale included in the consolidated statements of condition as of September 30, 2016 and December 31, 2015 follows:
September 30, 2016 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(In thousands) | Cost | Gains | Losses | Value | ||||||||||||
U.S. government-sponsored entities | $ | 11,991 | $ | 2 | $ | (23 | ) | $ | 11,970 | |||||||
Mortgage-backed securities – residential | 189,724 | 1,897 | (100 | ) | 191,521 | |||||||||||
SBA pool securities | 7,147 | — | (79 | ) | 7,068 | |||||||||||
State and political subdivisions | 31,122 | 363 | (10 | ) | 31,475 | |||||||||||
Single-issuer trust preferred security | 2,999 | — | (397 | ) | 2,602 | |||||||||||
CRA investment | 5,000 | — | (20 | ) | 4,980 | |||||||||||
Total | $ | 247,983 | $ | 2,262 | $ | (629 | ) | $ | 249,616 |
December 31, 2015 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(In thousands) | Cost | Gains | Losses | Value | ||||||||||||
Mortgage-backed securities – residential | $ | 159,747 | $ | 1,293 | $ | (433 | ) | $ | 160,607 | |||||||
SBA pool securities | 7,601 | — | (81 | ) | 7,520 | |||||||||||
State and political subdivisions | 21,612 | 417 | — | 22,029 | ||||||||||||
Single-issuer trust preferred security | 2,999 | — | (464 | ) | 2,535 | |||||||||||
CRA investment | 3,000 | — | (61 | ) | 2,939 | |||||||||||
Total | $ | 194,959 | $ | 1,710 | $ | (1,039 | ) | $ | 195,630 |
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The following tables present the Corporation’s available for sale securities with continuous unrealized losses and the approximate fair value of these investments as of September 30, 2016 and December 31, 2015.
September 30, 2016 | ||||||||||||||||||||||||
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Approximate | Approximate | Approximate | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U.S. government- | ||||||||||||||||||||||||
sponsored agencies | $ | 4,972 | $ | (23 | ) | $ | — | $ | — | $ | 4,972 | $ | (23 | ) | ||||||||||
Mortgage-backed | ||||||||||||||||||||||||
securities-residential | 40,568 | (76 | ) | 4,475 | (24 | ) | 45,043 | (100 | ) | |||||||||||||||
SBA pool securities | — | — | 7,068 | (79 | ) | 7,068 | (79 | ) | ||||||||||||||||
State and political | ||||||||||||||||||||||||
subdivisions | 1,917 | (10 | ) | — | — | 1,917 | (10 | ) | ||||||||||||||||
Single-issuer trust | ||||||||||||||||||||||||
preferred security | — | — | 2,602 | (397 | ) | 2,602 | (397 | ) | ||||||||||||||||
CRA investment fund | 1,992 | (8 | ) | 2,988 | (12 | ) | 4,980 | (20 | ) | |||||||||||||||
Total | $ | 49,449 | $ | (117 | ) | $ | 17,133 | $ | (512 | ) | $ | 66,582 | $ | (629 | ) |
December 31, 2015 | ||||||||||||||||||||||||
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Approximate | Approximate | Approximate | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Mortgage-backed | ||||||||||||||||||||||||
securities-residential | $ | 89,717 | $ | (345 | ) | $ | 8,913 | $ | (88 | ) | $ | 98,630 | $ | (433 | ) | |||||||||
SBA pool securities | — | — | 7,520 | (81 | ) | 7,520 | (81 | ) | ||||||||||||||||
Single-issuer trust | ||||||||||||||||||||||||
Preferred security | — | — | 2,535 | (464 | ) | 2,535 | (464 | ) | ||||||||||||||||
CRA investment fund | — | — | 2,939 | (61 | ) | 2,939 | (61 | ) | ||||||||||||||||
Total | $ | 89,717 | $ | (345 | ) | $ | 21,907 | $ | (694 | ) | $ | 111,624 | $ | (1,039 | ) |
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 creditworthiness of the issuers. As of September 30, 2016, 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 unrealized loss position were determined to be other-than-temporarily impaired.
At September 30, 2016, the unrealized loss on the single-issuer trust preferred security of $397 thousand was related to a debt security issued by a large bank holding. The security was downgraded to below investment grade by Moody’s and is currently rated Ba1. Management monitors the performance of the issuer on a quarterly basis to determine if there are any credit events that could result in deferral or default of the security. Management believes the depressed valuation is a result of the nature of the security, a trust preferred bond, and the bond’s very low yield. As Management does not intend to sell this security nor is it likely that it will be required to sell the security before its anticipated recovery, the security is not considered other-than-temporarily impaired at September 30, 2016.
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3. LOANS
Loans outstanding, excluding those held for sale, by general ledger classification, as of September 30, 2016 and December 31, 2015, consisted of the following:
% of | % of | |||||||||||||||
September 30, | Totals | December 31, | Total | |||||||||||||
(In thousands) | 2016 | Loans | 2015 | Loans | ||||||||||||
Residential mortgage | $ | 496,735 | 15.37 | % | $ | 470,869 | 16.16 | % | ||||||||
Multifamily mortgage | 1,507,834 | 46.64 | 1,416,775 | 48.63 | ||||||||||||
Commercial mortgage | 497,267 | 15.38 | 413,118 | 14.18 | ||||||||||||
Commercial loans | 598,078 | 18.50 | 512,886 | 17.60 | ||||||||||||
Construction loans | 430 | 0.01 | 1,401 | 0.05 | ||||||||||||
Home equity lines of credit | 69,222 | 2.14 | 52,649 | 1.81 | ||||||||||||
Consumer loans, including fixed | ||||||||||||||||
rate home equity loans | 62,872 | 1.94 | 45,044 | 1.55 | ||||||||||||
Other loans | 449 | 0.02 | 500 | 0.02 | ||||||||||||
Total loans | $ | 3,232,887 | 100.00 | % | $ | 2,913,242 | 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 September 30, 2016 and December 31, 2015:
% of | % of | |||||||||||||||
September 30, | Totals | December 31, | Total | |||||||||||||
(In thousands) | 2016 | Loans | 2015 | Loans | ||||||||||||
Primary residential mortgage | $ | 527,012 | 16.31 | % | $ | 483,085 | 16.59 | % | ||||||||
Home equity lines of credit | 62,870 | 1.94 | 52,804 | 1.81 | ||||||||||||
Junior lien loan on residence | 10,046 | 0.31 | 11,503 | 0.39 | ||||||||||||
Multifamily property | 1,507,834 | 46.67 | 1,416,775 | 48.66 | ||||||||||||
Owner-occupied commercial real estate | 179,285 | 5.55 | 176,276 | 6.05 | ||||||||||||
Investment commercial real estate | 676,468 | 20.94 | 568,849 | 19.54 | ||||||||||||
Commercial and industrial | 192,539 | 5.96 | 154,295 | 5.30 | ||||||||||||
Secured by farmland/agricultural | ||||||||||||||||
production | 172 | 0.01 | 179 | 0.01 | ||||||||||||
Commercial construction loans | 523 | 0.02 | 151 | 0.01 | ||||||||||||
Consumer and other loans | 74,141 | 2.29 | 47,635 | 1.64 | ||||||||||||
Total loans | $ | 3,230,890 | 100.00 | % | $ | 2,911,552 | 100.00 | % | ||||||||
Net deferred costs | 1,997 | 1,690 | ||||||||||||||
Total loans including net deferred costs | $ | 3,232,887 | $ | 2,913,242 |
20
The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan losses (ALLL) as of September 30, 2016 and December 31, 2015:
September 30, 2016 | ||||||||||||||||||||||||
Total | Ending ALLL | Total | Ending ALLL | |||||||||||||||||||||
Loans | Attributable | Loans | Attributable | |||||||||||||||||||||
Individually | To Loans | Collectively | To Loans | |||||||||||||||||||||
Evaluated | Individually | Evaluated | Collectively | Total | ||||||||||||||||||||
For | Evaluated for | For | Evaluated for | Total | Ending | |||||||||||||||||||
(In thousands) | Impairment | Impairment | Impairment | Impairment | Loans | ALL | ||||||||||||||||||
Primary residential | ||||||||||||||||||||||||
mortgage | $ | 15,297 | $ | 334 | $ | 511,715 | $ | 2,696 | $ | 527,012 | $ | 3,030 | ||||||||||||
Home equity lines | ||||||||||||||||||||||||
of credit | 54 | — | 62,816 | 224 | 62,870 | 224 | ||||||||||||||||||
Junior lien loan | ||||||||||||||||||||||||
on residence | 228 | — | 9,818 | 18 | 10,046 | 18 | ||||||||||||||||||
Multifamily | ||||||||||||||||||||||||
property | — | — | 1,507,834 | 11,843 | 1,507,834 | 11,843 | ||||||||||||||||||
Owner-occupied | ||||||||||||||||||||||||
commercial | ||||||||||||||||||||||||
real estate | 1,787 | — | 177,498 | 1,823 | 179,285 | 1,823 | ||||||||||||||||||
Investment | ||||||||||||||||||||||||
commercial | ||||||||||||||||||||||||
real estate | 11,445 | 216 | 665,023 | 9,638 | 676,468 | 9,854 | ||||||||||||||||||
Commercial and | ||||||||||||||||||||||||
industrial | 140 | 140 | 192,399 | 3,428 | 192,539 | 3,568 | ||||||||||||||||||
Secured by | ||||||||||||||||||||||||
farmland and | ||||||||||||||||||||||||
agricultural | ||||||||||||||||||||||||
production | — | — | 172 | 2 | 172 | 2 | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
construction | — | — | 523 | 4 | 523 | 4 | ||||||||||||||||||
Consumer and | ||||||||||||||||||||||||
Other | — | — | 74,141 | 250 | 74,141 | 250 | ||||||||||||||||||
Total ALLL | $ | 28,951 | $ | 690 | $ | 3,201,939 | $ | 29,926 | $ | 3,230,890 | $ | 30,616 |
December 31, 2015 | ||||||||||||||||||||||||
Total | Ending ALLL | Total | Ending ALLL | |||||||||||||||||||||
Loans | Attributable | Loans | Attributable | |||||||||||||||||||||
Individually | To Loans | Collectively | To Loans | |||||||||||||||||||||
Evaluated | Individually | Evaluated | Collectively | Total | ||||||||||||||||||||
For | Evaluated for | For | Evaluated for | Total | Ending | |||||||||||||||||||
(In thousands) | Impairment | Impairment | Impairment | Impairment | Loans | ALLL | ||||||||||||||||||
Primary residential | ||||||||||||||||||||||||
mortgage | $ | 9,752 | $ | 291 | $ | 473,333 | $ | 2,006 | $ | 483,085 | $ | 2,297 | ||||||||||||
Home equity lines | ||||||||||||||||||||||||
of credit | 254 | — | 52,550 | 86 | 52,804 | 86 | ||||||||||||||||||
Junior lien loan | ||||||||||||||||||||||||
on residence | 176 | — | 11,327 | 66 | 11,503 | 66 | ||||||||||||||||||
Multifamily | ||||||||||||||||||||||||
Property | — | — | 1,416,775 | 11,813 | 1,416,775 | 11,813 | ||||||||||||||||||
Owner-occupied | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
real estate | 1,272 | — | 175,004 | 1,679 | 176,276 | 1,679 | ||||||||||||||||||
Investment | ||||||||||||||||||||||||
commercial | ||||||||||||||||||||||||
real estate | 11,482 | 61 | 557,367 | 7,529 | 568,849 | 7,590 | ||||||||||||||||||
Commercial and | ||||||||||||||||||||||||
Industrial | 171 | 138 | 154,124 | 2,071 | 154,295 | 2,209 | ||||||||||||||||||
Secured by | ||||||||||||||||||||||||
farmland and | ||||||||||||||||||||||||
agricultural production | ||||||||||||||||||||||||
production | — | — | 179 | 2 | 179 | 2 | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
construction | — | — | 151 | 2 | 151 | 2 | ||||||||||||||||||
Consumer and | ||||||||||||||||||||||||
Other | — | — | 47,635 | 112 | 47,635 | 112 | ||||||||||||||||||
Total ALLL | $ | 23,107 | $ | 490 | $ | 2,888,445 | $ | 25,366 | $ | 2,911,552 | $ | 25,856 |
21
Impaired loans include nonaccrual loans of $10.8 million at September 30, 2016 and $6.7 million at December 31, 2015. Impaired loans also include performing TDR loans of $18.1 million at September 30, 2016 and $16.2 million at December 31, 2015. At September 30, 2016, the allowance allocated to TDR loans totaled $403 thousand, of which $154 thousand was allocated to nonaccrual loans. At December 31, 2015, the allowance allocated to TDR loans totaled $441 thousand of which $162 thousand was allocated to nonaccrual loans. All but one accruing TDR loan was paying in accordance with restructured terms as of September 30, 2016. The Company has not committed to lend additional amounts as of September 30, 2016 to customers with outstanding loans that are classified as loan restructurings.
The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2016 and December 31, 2015 (The average impaired loans on the following tables represent year to date impaired loans.):
September 30, 2016 | ||||||||||||||||
Unpaid | Average | |||||||||||||||
Principal | Recorded | Specific | Impaired | |||||||||||||
(In thousands) | Balance | Investment | Reserves | Loans | ||||||||||||
With no related allowance recorded: | ||||||||||||||||
Primary residential mortgage | $ | 15,415 | $ | 13,548 | $ | — | $ | 8,899 | ||||||||
Owner-occupied commercial real estate | 2,017 | 1,787 | — | 1,319 | ||||||||||||
Investment commercial real estate | 9,812 | 9,812 | — | 9,814 | ||||||||||||
Commercial and industrial | — | — | — | 14 | ||||||||||||
Home equity lines of credit | 56 | 54 | — | 173 | ||||||||||||
Junior lien loan on residence | 277 | 228 | — | 328 | ||||||||||||
Total loans with no related allowance | $ | 27,577 | $ | 25,429 | $ | — | $ | 20,547 | ||||||||
With related allowance recorded: | ||||||||||||||||
Primary residential mortgage | $ | 1,810 | $ | 1,749 | $ | 334 | $ | 1,656 | ||||||||
Investment commercial real estate | 1,649 | 1,633 | 216 | 1,646 | ||||||||||||
Commercial and industrial | 188 | 140 | 140 | 135 | ||||||||||||
Total loans with related allowance | $ | 3,647 | $ | 3,522 | $ | 690 | $ | 3,437 | ||||||||
Total loans individually evaluated for | ||||||||||||||||
impairment | $ | 31,224 | $ | 28,951 | $ | 690 | $ | 23,984 |
December 31, 2015 | ||||||||||||||||
Unpaid | Average | |||||||||||||||
Principal | Recorded | Specific | Impaired | |||||||||||||
(In thousands) | Balance | Investment | Reserves | Loans | ||||||||||||
With no related allowance recorded: | ||||||||||||||||
Primary residential mortgage | $ | 8,998 | $ | 7,782 | $ | — | $ | 5,683 | ||||||||
Owner-occupied commercial real estate | 1,460 | 1,272 | — | 1,379 | ||||||||||||
Investment commercial real estate | 11,099 | 10,233 | — | 10,330 | ||||||||||||
Commercial and industrial | 63 | 33 | — | 112 | ||||||||||||
Home equity lines of credit | 258 | 254 | — | 229 | ||||||||||||
Junior lien loan on residence | 219 | 176 | — | 166 | ||||||||||||
Consumer and other | — | — | — | 1 | ||||||||||||
Total loans with no related allowance | $ | 22,097 | $ | 19,750 | $ | — | $ | 17,900 | ||||||||
With related allowance recorded: | ||||||||||||||||
Primary residential mortgage | $ | 2,090 | $ | 1,970 | $ | 291 | $ | 1,894 | ||||||||
Investment commercial real estate | 1,249 | 1,249 | 61 | 1,266 | ||||||||||||
Commercial and industrial | 179 | 138 | 138 | 144 | ||||||||||||
Total loans with related allowance | $ | 3,518 | $ | 3,357 | $ | 490 | $ | 3,304 | ||||||||
Total loans individually evaluated for | ||||||||||||||||
impairment | $ | 25,615 | $ | 23,107 | $ | 490 | $ | 21,204 |
Interest income recognized on impaired loans for the three and nine months ended September 30, 2016 and 2015, was not material. The Company did not recognize any income on nonaccruing impaired loans for the three and nine months ended September 30, 2016 and 2015.
22
Loans held for sale, at lower of cost or fair value at September 30, 2016, represents loans that the Company has the intent to sell. The Company expects sale price to approximate recorded investment. During the three months ending September 30, 2016, proceeds for sale of loans held for sale, at lower of cost or fair value totaled approximately $44 million. During the nine months ending September 30, 2016, proceeds for sale of loans held for sale, at lower of cost or fair value totaled approximately $183 million. The sale included whole loans and participations. The Company recorded gains on sale of whole loans of $256 thousand and $880 thousand for the three and nine months ended September 30, 2016. No loans were sold at a loss during the three and nine months ended September 30, 2016. The sale of these loans were part of the Company’s balance sheet management strategy. Loans transferred from held for sale back into the loan portfolio for the nine months ended September 30, 2016 amounted to $30.1 million. These loans were transferred at their lower of cost or fair value.
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 September 30, 2016 and December 31, 2015:
September 30, 2016 | ||||||||
Loans Past Due | ||||||||
Over 90 Days | ||||||||
And Still | ||||||||
(In thousands) | Nonaccrual | Accruing Interest | ||||||
Primary residential mortgage | $ | 8,377 | $ | — | ||||
Home equity lines of credit | 31 | — | ||||||
Junior lien loan on residence | 106 | — | ||||||
Owner-occupied commercial real estate | 1,787 | — | ||||||
Investment commercial real estate | 408 | — | ||||||
Commercial and industrial | 131 | — | ||||||
Total | $ | 10,840 | $ | — | ||||
December 31, 2015 | ||||||||
Loans Past Due | ||||||||
Over 90 Days | ||||||||
And Still | ||||||||
(In thousands) | Nonaccrual | Accruing Interest | ||||||
Primary residential mortgage | $ | 4,549 | $ | — | ||||
Home equity lines of credit | 229 | — | ||||||
Junior lien loan on residence | 118 | — | ||||||
Owner-occupied commercial real estate | 1,272 | — | ||||||
Investment commercial real estate | 408 | — | ||||||
Commercial and industrial | 171 | — | ||||||
Consumer and other | — | — | ||||||
Total | $ | 6,747 | $ | — |
23
The following tables present the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans, excluding nonaccrual loans:
September 30, 2016 | ||||||||||||||||
30-59 | 60-89 | Greater Than | ||||||||||||||
Days | Days | 90 Days | Total | |||||||||||||
(In thousands) | Past Due | Past Due | Past Due | Past Due | ||||||||||||
Primary residential mortgage | $ | 1,127 | $ | — | $ | — | $ | 1,127 | ||||||||
Junior lien loan on residence | — | 50 | — | 50 | ||||||||||||
Investment commercial real estate | 6,937 | 96 | — | 7,033 | ||||||||||||
Commercial and industrial | — | 28 | — | 28 | ||||||||||||
Total | $ | 8,064 | $ | 174 | $ | — | $ | 8,238 |
December 31, 2015 | ||||||||||||||||
30-59 | 60-89 | Greater Than | ||||||||||||||
Days | Days | 90 Days | Total | |||||||||||||
(In thousands) | Past Due | Past Due | Past Due | Past Due | ||||||||||||
Primary residential mortgage | $ | 1,214 | $ | 157 | $ | — | $ | 1,371 | ||||||||
Investment commercial real estate | 772 | — | — | 772 | ||||||||||||
Total | $ | 1,986 | $ | 157 | $ | — | $ | 2,143 | ||||||||
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 is subsequently re-evaluated annually, as follows:
· | By credit underwriters for all loans $1,000,000 and over; |
· | Through a limited review by credit underwriters with the Chief Credit Officer for loans between $250,000 and $1,000,000; |
· | By an external independent loan review firm for all new loans over $500,000 and for existing loans of $3,500,000 and over; |
· | On a proportional basis by an external independent loan review firm for loans from $500,000 up to $3,499,999; |
· | By an external independent loan review firm for all loans with a risk rating of criticized and classified; |
· | On a random sampling basis by an external independent loan review firm for loans under $500,000; |
· | Whenever Management otherwise identifies a positive or negative trend or issue relating to a borrower. |
The Company uses the following definitions for risk ratings:
Special Mention: Loans subject to special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these 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: Loans classified as substandard 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.
24
Doubtful: Loans classified as doubtful have all the weakness inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
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 September 30, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Special | ||||||||||||||||
(In thousands) | Pass | Mention | Substandard | Doubtful | ||||||||||||
Primary residential mortgage | $ | 510,910 | $ | 667 | $ | 15,435 | $ | — | ||||||||
Home equity lines of credit | 62,816 | — | 54 | — | ||||||||||||
Junior lien loan on residence | 9,818 | — | 228 | — | ||||||||||||
Multifamily property | 1,505,493 | 1,937 | 404 | — | ||||||||||||
Owner-occupied commercial real estate | 173,698 | 895 | 4,692 | — | ||||||||||||
Investment commercial real estate | 642,599 | 5,196 | 28,673 | — | ||||||||||||
Commercial and industrial | 186,554 | 5,845 | 140 | — | ||||||||||||
Farmland | 172 | — | — | — | ||||||||||||
Commercial construction | 425 | 98 | — | — | ||||||||||||
Consumer and other loans | 74,141 | — | — | — | ||||||||||||
Total | $ | 3,166,626 | $ | 14,638 | $ | 49,626 | $ | — |
As of December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Special | ||||||||||||||||
(In thousands) | Pass | Mention | Substandard | Doubtful | ||||||||||||
Primary residential mortgage | $ | 471,859 | $ | 1,332 | $ | 9,894 | $ | — | ||||||||
Home equity lines of credit | 52,550 | — | 254 | — | ||||||||||||
Junior lien loan on residence | 11,327 | — | 176 | — | ||||||||||||
Multifamily property | 1,407,856 | 7,718 | 1,201 | — | ||||||||||||
Owner-occupied commercial real estate | 170,420 | 928 | 4,928 | — | ||||||||||||
Investment commercial real estate | 536,479 | 6,217 | 26,153 | — | ||||||||||||
Commercial and industrial | 148,940 | 5,184 | 171 | — | ||||||||||||
Farmland | 179 | — | — | — | ||||||||||||
Agricultural production | — | — | — | — | ||||||||||||
Commercial construction | — | 151 | — | — | ||||||||||||
Consumer and other loans | 47,635 | — | — | — | ||||||||||||
Total | $ | 2,847,245 | $ | 21,530 | $ | 42,777 | $ | — |
25
At September 30, 2016, $27.7 million of substandard loans were also considered impaired compared to December 31, 2015, when $21.8 million were also impaired.
The activity in the allowance for loan losses for the three months ended September 30, 2016 is summarized below:
July 1, | September 30, | |||||||||||||||||||
2016 | 2016 | |||||||||||||||||||
Beginning | Provision | Ending | ||||||||||||||||||
(In thousands) | ALLL | Charge-offs | Recoveries | (Credit) | ALLL | |||||||||||||||
Primary residential mortgage | $ | 2,783 | $ | (729 | ) | $ | 4 | $ | 972 | $ | 3,030 | |||||||||
Home equity lines of credit | 223 | — | 3 | (2 | ) | 224 | ||||||||||||||
Junior lien loan on residence | 19 | — | 2 | (3 | ) | 18 | ||||||||||||||
Multifamily property | 11,639 | — | — | 204 | 11,843 | |||||||||||||||
Owner-occupied commercial real estate | 1,733 | — | — | 90 | 1,823 | |||||||||||||||
Investment commercial real estate | 9,621 | — | 2 | 231 | 9,854 | |||||||||||||||
Commercial and industrial | 2,951 | (4 | ) | 8 | 613 | 3,568 | ||||||||||||||
Secured by farmland and agricultural production | 2 | — | — | — | 2 | |||||||||||||||
Commercial construction | 1 | — | — | 3 | 4 | |||||||||||||||
Consumer and other loans | 247 | — | 11 | (8 | ) | 250 | ||||||||||||||
Total ALLL | $ | 29,219 | $ | (733 | ) | $ | 30 | $ | 2,100 | $ | 30,616 |
The activity in the allowance for loan losses for the nine months ended September 30, 2016 is summarized below:
January 1, | September 30, | |||||||||||||||||||
2016 | 2016 | |||||||||||||||||||
Beginning | Provision | Ending | ||||||||||||||||||
(In thousands) | ALLL | Charge-offs | Recoveries | (Credit) | ALLL | |||||||||||||||
Primary residential mortgage | $ | 2,297 | $ | (1,027 | ) | $ | 25 | $ | 1,735 | $ | 3,030 | |||||||||
Home equity lines of credit | 86 | (91 | ) | 11 | 218 | 224 | ||||||||||||||
Junior lien loan on residence | 66 | — | 72 | (120 | ) | 18 | ||||||||||||||
Multifamily property | 11,813 | — | — | 30 | 11,843 | |||||||||||||||
Owner-occupied commercial real estate | 1,679 | — | — | 144 | 1,823 | |||||||||||||||
Investment commercial real estate | 7,590 | (258 | ) | 8 | 2,514 | 9,854 | ||||||||||||||
Commercial and industrial | 2,209 | (7 | ) | 20 | 1,346 | 3,568 | ||||||||||||||
Secured by farmland and agricultural production | 2 | — | — | — | 2 | |||||||||||||||
Commercial construction | 2 | — | — | 2 | 4 | |||||||||||||||
Consumer and other loans | 112 | (5 | ) | 12 | 131 | 250 | ||||||||||||||
Total ALLL | $ | 25,856 | $ | (1,388 | ) | $ | 148 | $ | 6,000 | $ | 30,616 |
The activity in the allowance for loan losses for the three months ended September 30, 2015 is summarized below:
July 1, | September 30, | |||||||||||||||||||
2015 | 2015 | |||||||||||||||||||
Beginning | Provision | Ending | ||||||||||||||||||
(In thousands) | ALLL | Charge-offs | Recoveries | (Credit) | ALLL | |||||||||||||||
Primary residential mortgage | $ | 2,409 | $ | (218 | ) | $ | 4 | $ | 239 | $ | 2,434 | |||||||||
Home equity lines of credit | 113 | — | — | 44 | 157 | |||||||||||||||
Junior lien loan on residence | 73 | — | 10 | (12 | ) | 71 | ||||||||||||||
Multifamily property | 8,623 | — | — | 544 | 9,167 | |||||||||||||||
Owner-occupied commercial real estate | 2,286 | — | — | 357 | 2,643 | |||||||||||||||
Investment commercial real estate | 7,779 | (16 | ) | 4 | 405 | 8,172 | ||||||||||||||
Commercial and industrial | 1,589 | — | 22 | 16 | 1,627 | |||||||||||||||
Secured by farmland and agricultural production | 2 | — | — | — | 2 | |||||||||||||||
Commercial construction | 2 | — | — | — | 2 | |||||||||||||||
Consumer and other loans | 93 | (1 | ) | — | 7 | 99 | ||||||||||||||
Total ALLL | $ | 22,969 | $ | (235 | ) | $ | 40 | $ | 1,600 | $ | 24,374 |
26
The activity in the allowance for loan losses for the nine months ended September 30, 2015 is summarized below:
January 1, | September 30, | |||||||||||||||||||
2015 | 2015 | |||||||||||||||||||
Beginning | Provision | Ending | ||||||||||||||||||
(In thousands) | ALLL | Charge-offs | Recoveries | (Credit) | ALLL | |||||||||||||||
Primary residential mortgage | $ | 2,923 | $ | (329 | ) | $ | 74 | $ | (234 | ) | $ | 2,434 | ||||||||
Home equity lines of credit | 156 | (110 | ) | 1 | 110 | 157 | ||||||||||||||
Junior lien loan on residence | 109 | — | 48 | (86 | ) | 71 | ||||||||||||||
Multifamily property | 8,983 | — | — | 184 | 9,167 | |||||||||||||||
Owner-occupied commercial real estate | 1,547 | — | 11 | 1,085 | 2,643 | |||||||||||||||
Investment commercial real estate | 4,751 | (16 | ) | 14 | 3,423 | 8,172 | ||||||||||||||
Commercial and industrial | 880 | (7 | ) | 68 | 686 | 1,627 | ||||||||||||||
Secured by farmland and agricultural production | 4 | — | — | (2 | ) | 2 | ||||||||||||||
Commercial construction | 31 | — | — | (29 | ) | 2 | ||||||||||||||
Consumer and other loans | 96 | (22 | ) | 12 | 13 | 99 | ||||||||||||||
Total ALLL | $ | 19,480 | $ | (484 | ) | $ | 228 | $ | 5,150 | $ | 24,374 |
Troubled Debt Restructurings:
The Company has allocated $403 thousand and $441 thousand of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of September 30, 2016 and December 31, 2015, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.
During the three and nine month periods ended September 30, 2016, the terms of certain loans were modified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; a deferral of scheduled payments with an extension of the maturity date; or some other modification or extension which would not be readily available in the market.
The following table presents loans by class modified as TDRs during the three month period ended September 30, 2016:
Pre-Modification | Post-Modification | |||||||||
Outstanding | Outstanding | |||||||||
Number of | Recorded | Recorded | ||||||||
(Dollars in thousands) | Contracts | Investment | Investment | |||||||
Primary residential mortgage | 1 | $ | 368 | $ | 368 | |||||
Total | 1 | $ | 368 | $ | 368 |
The following table presents loans by class modified as TDRs during the nine month period ended September 30, 2016:
Pre-Modification | Post-Modification | |||||||||
Outstanding | Outstanding | |||||||||
Number of | Recorded | Recorded | ||||||||
(Dollars in thousands) | Contracts | Investment | Investment | |||||||
Primary residential mortgage | 7 | $ | 4,924 | $ | 4,924 | |||||
Junior lien on residence | 1 | 66 | 66 | |||||||
Investment commercial real estate | 1 | 79 | 79 | |||||||
Total | 9 | $ | 5,069 | $ | 5,069 |
The identification of the troubled debt restructurings did not have a significant impact on the allowance for loan losses.
27
The following table presents loans by class modified as TDRs during the three month period ended September 30, 2015:
Pre-Modification | Post-Modification | |||||||||
Outstanding | Outstanding | |||||||||
Number of | Recorded | Recorded | ||||||||
(Dollars in thousands) | Contracts | Investment | Investment | |||||||
Primary residential mortgage | 5 | $ | 1,645 | $ | 1,645 | |||||
Home equity line of credit | 1 | 98 | 98 | |||||||
Junior lien loan on residence | 1 | 60 | 60 | |||||||
Total | 7 | $ | 1,803 | $ | 1,803 |
The following table presents loans by class modified as TDRs during the nine month period ended September 30, 2015:
Pre-Modification | Post-Modification | |||||||||
Outstanding | Outstanding | |||||||||
Number of | Recorded | Recorded | ||||||||
(Dollars in thousands) | Contracts | Investment | Investment | |||||||
Primary residential mortgage | 7 | $ | 1,870 | $ | 1,870 | |||||
Home equity line of credit | 1 | 98 | 98 | |||||||
Junior lien loan on residence | 1 | 60 | 60 | |||||||
Owner-occupied commercial real estate | 1 | 767 | 767 | |||||||
Total | 10 | $ | 2,795 | $ | 2,795 |
There were no loans that were modified as TDRs for which there was a payment default, within twelve months of modification, during the three and nine months ended September 30, 2016.
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default, within twelve months of modification, during the three month period ended September 30, 2015:
Number of | Recorded | |||||||
(Dollars in thousands) | Contracts | Investment | ||||||
Primary residential mortgage | 1 | $ | 133 | |||||
Total | 1 | $ | 133 |
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default, within twelve months of modification, during the nine month period ended September 30, 2015:
Number of | Recorded | |||||||
(Dollars in thousands) | Contracts | Investment | ||||||
Primary residential mortgage | 2 | $ | 530 | |||||
Total | 2 | $ | 530 |
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. 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, if applicable, and an updated independent appraisal of any 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 months of contractual payments would need to be made on a restructured loan before a loan may be considered for return to accrual status.
28
4. DEPOSITS
Certificates of deposit, excluding brokered certificates of deposit over $250,000 totaled $122.6 million and $115.6 million at September 30, 2016 and December 31, 2015, respectively.
The following table sets forth the details of total deposits as of September 30, 2016 and December 31, 2015:
September 30, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
(In thousands) | $ | % | $ | % | ||||||||||||
Noninterest-bearing demand deposits | $ | 494,204 | 14.98 | % | $ | 419,887 | 14.30 | % | ||||||||
Interest-bearing checking (1) | 928,941 | 28.15 | 861,697 | 29.36 | ||||||||||||
Savings | 119,650 | 3.62 | 115,007 | 3.92 | ||||||||||||
Money market | 997,572 | 30.23 | 810,709 | 27.62 | ||||||||||||
Certificates of deposit | 466,003 | 14.12 | 434,450 | 14.80 | ||||||||||||
Subtotal deposits | 3,006,370 | 91.10 | 2,641,750 | 90.00 | ||||||||||||
Interest-bearing demand - Brokered | 200,000 | 6.06 | 200,000 | 6.81 | ||||||||||||
Certificates of deposit - Brokered | 93,690 | 2.84 | 93,720 | 3.19 | ||||||||||||
Total deposits | $ | 3,300,060 | 100.00 | % | $ | 2,935,470 | 100.00 | % |
(1) | Interest-bearing checking includes $417.0 million at September 30, 2016 and $398.7 million at December 31, 2015 of reciprocal balances in the Reich & Tang Demand Deposit Marketplace program, as described in the Net Interest Income/Average Balance Sheet section of the MD&A. |
The scheduled maturities of certificates of deposit, including brokered certificates of deposit, as of September 30, 2016 are as follows:
(In thousands) | ||||
2016 | $ | 33,504 | ||
2017 | 138,016 | |||
2018 | 198,500 | |||
2019 | 69,127 | |||
2020 | 34,583 | |||
Over 5 Years | 85,963 | |||
Total | $ | 559,693 |
5. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (“FHLB”) totaled $71.8 million with a weighted average interest rate of 1.89% and $83.7 million with a weighted average interest rate of 1.78 percent at September 30, 2016 and December 31, 2015, respectively.
At September 30, 2016, advances totaling $59.8 million with a weighted average interest rate of 1.67 percent had fixed maturity dates. The fixed maturity date advances at December 31, 2015 totaled $71.7 million with a weighted average interest rate of 1.57 percent. The fixed rate advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $396.2 million and multifamily mortgages totaling $1.0 billion at September 30, 2016, while at December 31, 2015 the fixed rate advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $428.2 million and multifamily mortgages totaling $1.1 billion.
29
Also at September 30, 2016 and at December 31, 2015, the Company had $12.0 million in variable rate advances, with a weighted average interest rate of 3.01 percent, that are noncallable for two or three years and then callable quarterly with final maturities of ten years from the original date of the advance. All of these advances are beyond their initial noncallable periods. These advances are secured by pledges of investment securities totaling $15.6 million at September 30, 2016.
The final maturity dates of the FHLB advances are scheduled as follows:
(In thousands) | ||||
2016 | $ | 10,000 | ||
2017 | 23,897 | |||
2018 | 34,898 | |||
2019 | 3,000 | |||
2020 | — | |||
Over 5 years | — | |||
Total | $ | 71,795 |
There were no overnight borrowings as of September 30, 2016. Overnight borrowings with the Federal Home Loan Bank totaled $40.7 million with a weighted average rate of 0.52 percent at December 31, 2015.
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 lending and depository products and services, as well as various electronic banking services.
Private Wealth Management Division
Peapack-Gladstone Bank’s Private Wealth Management Division includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services including services as trustee for pension and profit sharing plans; and other financial planning and advisory services.
30
The following tables present the statements of income and total assets for the Corporation’s reportable segments for the three and nine months ended September 30, 2016 and 2015.
Three Months Ended September 30, 2016 | ||||||||||||
Wealth | ||||||||||||
Management | ||||||||||||
(In thousands) | Banking | Division | Total | |||||||||
Net interest income | $ | 23,194 | $ | 1,075 | $ | 24,269 | ||||||
Noninterest income | 2,974 | 4,561 | 7,535 | |||||||||
Total income | 26,168 | 5,636 | 31,804 | |||||||||
Provision for loan losses | 2,100 | — | 2,100 | |||||||||
Salaries and benefits | 9,351 | 2,164 | 11,515 | |||||||||
Premises and equipment expense | 2,506 | 230 | 2,736 | |||||||||
Other noninterest expense | 2,738 | 1,177 | 3,915 | |||||||||
Total noninterest expense | 16,695 | 3,571 | 20,266 | |||||||||
Income before income tax expense | 9,473 | 2,065 | 11,538 | |||||||||
Income tax expense | 3,619 | 803 | 4,422 | |||||||||
Net income | $ | 5,854 | $ | 1,262 | $ | 7,116 | ||||||
Three Months Ended September 30, 2015 | ||||||||||||
Wealth | ||||||||||||
Management | ||||||||||||
(In thousands) | Banking | Division | Total | |||||||||
Net interest income | $ | 20,697 | $ | 1,009 | $ | 21,706 | ||||||
Noninterest income | 1,399 | 4,211 | 5,610 | |||||||||
Total income | 22,096 | 5,220 | 27,316 | |||||||||
Provision for loan losses | 1,600 | — | 1,600 | |||||||||
Salaries and benefits | 7,935 | 2,387 | 10,322 | |||||||||
Premises and equipment expense | 2,549 | 236 | 2,785 | |||||||||
Other noninterest expense | 2,699 | 1,093 | 3,792 | |||||||||
Total noninterest expense | 14,783 | 3,716 | 18,499 | |||||||||
Income before income tax expense | 7,313 | 1,504 | 8,817 | |||||||||
Income tax expense | 2,849 | 585 | 3,434 | |||||||||
Net income | $ | 4,464 | $ | 919 | $ | 5,383 |
Nine Months Ended September 30, 2016 | ||||||||||||
Wealth | ||||||||||||
Management | ||||||||||||
(In thousands) | Banking | Division | Total | |||||||||
Net interest income | $ | 67,962 | $ | 3,893 | $ | 71,855 | ||||||
Noninterest income | 7,286 | 13,960 | 21,246 | |||||||||
Total income | 75,248 | 17,853 | 93,101 | |||||||||
Provision for loan losses | 6,000 | — | 6,000 | |||||||||
Salaries and benefits | 27,196 | 6,327 | 33,523 | |||||||||
Premises and equipment expense | 7,650 | 692 | 8,342 | |||||||||
Other noninterest expense | 10,184 | 4,098 | 14,282 | |||||||||
Total noninterest expense | 51,030 | 11,117 | 62,147 | |||||||||
Income before income tax expense | 24,218 | 6,736 | 30,954 | |||||||||
Income tax expense | 9,165 | 2,620 | 11,785 | |||||||||
Net income | $ | 15,053 | $ | 4,116 | $ | 19,169 | ||||||
Total assets for period end | $ | 3,729,004 | $ | 45,379 | $ | 3,774,383 | ||||||
31
Nine Months Ended September 30, 2015 | ||||||||||||
Wealth | ||||||||||||
Management | ||||||||||||
(In thousands) | Banking | Division | Total | |||||||||
Net interest income | $ | 58,618 | $ | 3,015 | $ | 61,633 | ||||||
Noninterest income | 5,072 | 12,919 | 17,991 | |||||||||
Total income | 63,690 | 15,934 | 79,624 | |||||||||
Provision for loan losses | 5,150 | — | 5,150 | |||||||||
Salaries and benefits | 23,305 | 6,314 | 29,619 | |||||||||
Premises and equipment expense | 7,483 | 696 | 8,179 | |||||||||
Other noninterest expense | 7,654 | 3,481 | 11,135 | |||||||||
Total noninterest expense | 43,592 | 10,491 | 54,083 | |||||||||
Income before income tax expense | 20,098 | 5,443 | 25,541 | |||||||||
Income tax expense | 7,794 | 2,118 | 9,912 | |||||||||
Net income | $ | 12,304 | $ | 3,325 | $ | 15,629 | ||||||
Total assets for period end | $ | 3,233,455 | $ | 35,508 | $ | 3,268,963 |
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:
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 as 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.
32
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan 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 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 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. As of September 30, 2016, all collateral-dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old.
33
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 | ||||||||||||||||
Markets | Significant | |||||||||||||||
For | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
September 30, | Assets | Inputs | Inputs | |||||||||||||
(In thousands) | 2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Available for sale: | ||||||||||||||||
U.S. government-sponsored | ||||||||||||||||
entities | $ | 11,970 | $ | — | $ | 11,970 | $ | — | ||||||||
Mortgage-backed securities- | ||||||||||||||||
residential | 191,521 | — | 191,521 | — | ||||||||||||
SBA pool securities | 7,068 | — | 7,068 | — | ||||||||||||
State and political subdivisions | 31,475 | — | 31,475 | — | ||||||||||||
Single-Issuer Trust Preferred | 2,602 | — | 2,602 | — | ||||||||||||
CRA investment fund | 4,980 | 4,980 | — | — | ||||||||||||
Loans held for sale, at fair value | 3,013 | — | 3,013 | — | ||||||||||||
Derivatives: | ||||||||||||||||
Loan level swaps | 3,656 | — | 3,656 | — | ||||||||||||
Total | $ | 256,285 | $ | 4,980 | $ | 251,305 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives: | ||||||||||||||||
Cash flow hedges | $ | (4,710 | ) | $ | — | $ | (4,710 | ) | $ | — | ||||||
Loan level swaps | (3,656 | ) | — | (3,656 | ) | — | ||||||||||
Total | $ | (8,366 | ) | $ | — | $ | (8,366 | ) | $ | — |
34
Assets Measured on a Recurring Basis
Fair Value Measurements Using | ||||||||||||||||
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets | Significant | |||||||||||||||
For | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
December 31, | Assets | Inputs | Inputs | |||||||||||||
(In thousands) | 2015 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Available for sale: | ||||||||||||||||
Mortgage-backed securities- | ||||||||||||||||
residential | $ | 160,607 | $ | — | $ | 160,607 | $ | — | ||||||||
SBA pool securities | 7,520 | — | 7,520 | — | ||||||||||||
State and political subdivisions | 22,029 | — | 22,029 | — | ||||||||||||
Single-Issuer Trust Preferred | 2,535 | — | 2,535 | — | ||||||||||||
CRA investment fund | 2,939 | 2,939 | — | — | ||||||||||||
Loans held for sale, at fair value | 1,558 | — | 1,558 | — | ||||||||||||
Derivatives: | ||||||||||||||||
Cash flow hedges | 104 | — | 104 | — | ||||||||||||
Loan level swaps | 1,106 | — | 1,106 | — | ||||||||||||
Total | $ | 198,398 | $ | 2,939 | $ | 195,459 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives: | ||||||||||||||||
Cash flow hedges | $ | (1,434 | ) | $ | — | $ | (1,434 | ) | $ | — | ||||||
Loan level swaps | (1,106 | ) | — | (1,106 | ) | — | ||||||||||
Total | $ | (2,540 | ) | $ | — | $ | (2,540 | ) | $ | — |
The Corporation has elected the fair value option for certain loans held for sale. These loans are intended for sale and the Corporation 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 Corporation’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of September 30, 2016 and December 31, 2015.
The following tables present residential loans held for sale, at fair value for the periods indicated:
(In thousands) | September 30, 2016 | December 31, 2015 | ||||||
Residential loans contractual balance | $ | 2,969 | $ | 1,536 | ||||
Fair value adjustment | 44 | 22 | ||||||
Total fair value of residential loans held for sale | $ | 3,013 | $ | 1,558 |
There were no transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2016.
35
The following table summarizes, for the periods indicated, assets measured at fair value on a non-recurring basis (Quantitative disclosures for non-recurring Level 3 assets have been omitted due to immateriality):
Assets Measured on a Non-Recurring Basis
Fair Value Measurements Using | ||||||||||||||||
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets | Significant | |||||||||||||||
For | Other | Significant observable | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
September 30, | Assets | Inputs | Inputs | |||||||||||||
(In thousands) | 2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Impaired loans: | ||||||||||||||||
Investment commercial real estate | $ | 245 | $ | — | $ | — | $ | 245 | ||||||||
December 31, | ||||||||||||||||
(In thousands) | 2015 | |||||||||||||||
Assets: | ||||||||||||||||
Impaired loans: | ||||||||||||||||
Primary residential mortgage | $ | 251 | $ | — | $ | — | $ | 251 | ||||||||
OREO | 330 | — | — | 330 | ||||||||||||
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a recorded investment of $408 thousand, with a valuation allowance of $163 thousand at September 30, 2016 and $299 thousand, with a valuation allowance of $48 thousand, at December 31, 2015.
At December 31, 2015, OREO at fair value represents one commercial property. The Company did not record a valuation allowance during either of the three months or nine months ended September 30, 2016. The Company recorded a valuation allowance of $250 thousand during the nine months ended September 30, 2015
The carrying amounts and estimated fair values of financial instruments at September 30, 2016 are as follows:
Fair Value Measurements at September 30, 2016 using | ||||||||||||||||||||
Carrying | ||||||||||||||||||||
(In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 159,555 | $ | 159,555 | $ | — | $ | — | $ | 159,555 | ||||||||||
Securities available for sale | 249,616 | 4,980 | 244,636 | — | 249,616 | |||||||||||||||
FHLB and FRB stock | 14,093 | — | — | — | N/A | |||||||||||||||
Loans held for sale, at fair value | 3,013 | — | 3,013 | — | 3,013 | |||||||||||||||
Loans held for sale, at lower of cost | ||||||||||||||||||||
or fair value | 30,000 | — | 30,000 | — | 30,000 | |||||||||||||||
Loans, net of allowance for loan losses | 3,202,271 | — | — | 3,205,692 | 3,205,692 | |||||||||||||||
Accrued interest receivable | 6,383 | — | 729 | 5,654 | 6,383 | |||||||||||||||
Loan level swap derivatives | 3,656 | — | 3,656 | — | 3,656 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | $ | 3,300,060 | $ | 2,740,367 | $ | 566,740 | $ | — | $ | 3,307,107 | ||||||||||
Federal home loan bank advances | 71,795 | — | 72,667 | — | 72,667 | |||||||||||||||
Subordinated debt | 48,731 | — | — | 48,721 | 48,721 | |||||||||||||||
Accrued interest payable | 2,025 | 151 | 974 | 900 | 2,025 | |||||||||||||||
Cash flow hedge derivatives | 4,710 | — | 4,710 | — | 4,710 | |||||||||||||||
Loan level swap derivatives | 3,656 | — | 3,656 | — | 3,656 |
36
The carrying amounts and estimated fair values of financial instruments at December 31, 2015 are as follows:
Fair Value Measurements at December 31, 2015 using | ||||||||||||||||||||
Carrying | ||||||||||||||||||||
(In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 70,160 | $ | 70,160 | $ | — | $ | — | $ | 70,160 | ||||||||||
Securities available for sale | 195,630 | 2,939 | 192,691 | — | 195,630 | |||||||||||||||
FHLB and FRB stock | 13,984 | — | — | — | N/A | |||||||||||||||
Loans held for sale, at fair value | 1,558 | — | 1,558 | — | 1,558 | |||||||||||||||
Loans held for sale, at lower of cost | ||||||||||||||||||||
or fair value | 82,200 | — | 82,200 | — | 82,200 | |||||||||||||||
Loans, net of allowance for loan losses | 2,887,386 | — | — | 2,865,601 | 2,865,601 | |||||||||||||||
Accrued interest receivable | 6,820 | — | 562 | 6,258 | 6,820 | |||||||||||||||
Cash flow Hedges | 104 | — | 104 | — | 104 | |||||||||||||||
Loan level swaps | 1,106 | — | 1,106 | — | 1,106 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | $ | 2,935,470 | $ | 2,407,300 | $ | 526,226 | $ | — | $ | 2,933,526 | ||||||||||
Overnight borrowings | 40,700 | — | 40,700 | — | 40,700 | |||||||||||||||
Federal home loan bank advances | 83,692 | — | 84,409 | — | 84,409 | |||||||||||||||
Accrued interest payable | 957 | 128 | 829 | — | 957 | |||||||||||||||
Cash flow hedges | 1,434 | — | 1,434 | — | 1,434 | |||||||||||||||
Loan level swaps | 1,106 | — | 1,106 | — | 1,106 |
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Cash and due from banks is classified as Level 1. Certificates of deposit are classified as Level 2.
FHLB and FRB stock: The fair value of FHLB or FRB stock is their cost basis due to restrictions placed on its transferability.
Loans held for sale, at lower of cost or 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. Loans held for sale are classified as Level 2.
Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposits: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date, (i.e., the carrying amount) resulting in a Level 1 classification. The carrying amounts of certificates of deposit approximate the fair values at the reporting date resulting in Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Overnight borrowings: The carrying amounts of overnight borrowings approximate fair values and are classified as Level 2.
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Federal Home Loan Bank advances: The fair values of the Corporation’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Subordinated debentures: The fair values of the Corporation’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
Accrued interest receivable/payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification. Accrued interest on deposits and securities are included in Level 2. Accrued interest on loans is included in Level 3.
Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
8. OTHER OPERATING EXPENSES
The following table presents the major components of other operating expenses for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Wealth management division | ||||||||||||||||
other expense | $ | 490 | $ | 469 | $ | 1,593 | $ | 1,602 | ||||||||
Professional and legal fees | 801 | 678 | 2,544 | 2,029 | ||||||||||||
Loan expense | 141 | 90 | 374 | 279 | ||||||||||||
Provision for ORE losses | — | 250 | — | 250 | ||||||||||||
Other operating expenses | 1,669 | 1,889 | 5,817 | 5,646 | ||||||||||||
Total other operating expenses | $ | 3,101 | $ | 3,376 | $ | 10,328 | $ | 9,806 |
9. ACCUMULATED OTHER COMPREHENSIVE (LOSS)/INCOME
The following is a summary of the accumulated other comprehensive (loss)/income balances, net of tax, for the three months ended September 30, 2016 and 2015:
Amount | Other | |||||||||||||||||||
Reclassified | Comprehensive | |||||||||||||||||||
Other | From | Income/(Loss) | ||||||||||||||||||
Comprehensive | Accumulated | Three Months | ||||||||||||||||||
Balance at | Income/(Loss) | Other | Ended | Balance at | ||||||||||||||||
July 1, | Before | Comprehensive | September 30, | September 30, | ||||||||||||||||
(In thousands) | 2016 | Reclassifications | (Income) | 2016 | 2016 | |||||||||||||||
Net unrealized holding gain | ||||||||||||||||||||
on securities available for sale, | ||||||||||||||||||||
net of tax | $ | 1,224 | $ | (215 | ) | $ | — | $ | (215 | ) | $ | 1,009 | ||||||||
Losses on cash flow hedges | (3,727 | ) | 941 | — | 941 | (2,786 | ) | |||||||||||||
Accumulated other | ||||||||||||||||||||
comprehensive (loss)/income, | ||||||||||||||||||||
net of tax | $ | (2,503 | ) | $ | 726 | $ | — | $ | 726 | $ | (1,777 | ) |
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Amount | Other | |||||||||||||||||||
Reclassified | Comprehensive | |||||||||||||||||||
Other | From | Income/(Loss) | ||||||||||||||||||
Comprehensive | Accumulated | Three Months | ||||||||||||||||||
Balance at | Income/(Loss) | Other | Ended | Balance at | ||||||||||||||||
July 1, | Before | Comprehensive | September 30, | September 30, | ||||||||||||||||
(In thousands) | 2015 | Reclassifications | (Income) | 2015 | 2015 | |||||||||||||||
Net unrealized holding gain | ||||||||||||||||||||
on securities available for sale, | ||||||||||||||||||||
net of tax | $ | 1,116 | $ | 466 | $ | (50 | ) | $ | 416 | $ | 1,532 | |||||||||
Losses on cash flow hedges | (313 | ) | (1,686 | ) | — | (1,686 | ) | (1,999 | ) | |||||||||||
Accumulated other | ||||||||||||||||||||
comprehensive income, | ||||||||||||||||||||
net of tax | $ | 803 | $ | (1,220 | ) | $ | (50 | ) | $ | (1,270 | ) | $ | (467 | ) |
The following represents the reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2016 and 2015:
Three Months Ended | ||||||||||
September 30, | ||||||||||
(In thousands) | 2016 | 2015 | Affected Line Item in Income | |||||||
Unrealized gains on | ||||||||||
securities available for sale: | ||||||||||
Realized net gain on securities sales | $ | — | $ | 83 | Securities gains, net | |||||
Income tax expense | — | (33 | ) | Income tax expense | ||||||
Total reclassifications, net of tax | $ | — | $ | 50 |
The following is a summary of the accumulated other comprehensive (loss)/income balances, net of tax, for the nine months ended September 30, 2016 and 2015:
Amount | Other | |||||||||||||||||||
Reclassified | Comprehensive | |||||||||||||||||||
Other | From | Income/(Loss) | ||||||||||||||||||
Comprehensive | Accumulated | Nine Months | ||||||||||||||||||
Balance at | Income/(Loss) | Other | Ended | Balance at | ||||||||||||||||
January 1, | Before | Comprehensive | September 30, | September 30, | ||||||||||||||||
(In thousands) | 2016 | Reclassifications | (Income) | 2016 | 2016 | |||||||||||||||
Net unrealized holding gain | ||||||||||||||||||||
on securities available for sale, | ||||||||||||||||||||
net of tax | $ | 408 | $ | 676 | $ | (75 | ) | $ | 601 | $ | 1,009 | |||||||||
Losses on cash flow hedges | (787 | ) | (1,999 | ) | — | (1,999 | ) | (2,786 | ) | |||||||||||
Accumulated other | ||||||||||||||||||||
comprehensive income/(loss), | ||||||||||||||||||||
net of tax | $ | (379 | ) | $ | (1,323 | ) | $ | (75 | ) | $ | (1,398 | ) | $ | (1,777 | ) |
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Amount | Other | |||||||||||||||||||
Reclassified | Comprehensive | |||||||||||||||||||
Other | From | Income/(Loss) | ||||||||||||||||||
Comprehensive | Accumulated | Nine Months | ||||||||||||||||||
Balance at | Income/(Loss) | Other | Ended | Balance at | ||||||||||||||||
January 1, | Before | Comprehensive | September 30, | September 30, | ||||||||||||||||
(In thousands) | 2015 | Reclassifications | (Income) | 2015 | 2015 | |||||||||||||||
Net unrealized holding gain | ||||||||||||||||||||
on securities available for sale, | ||||||||||||||||||||
net of tax | $ | 1,321 | $ | 523 | $ | (312 | ) | $ | 211 | $ | 1,532 | |||||||||
Losses on cash flow hedges | (100 | ) | (1,899 | ) | — | (1,899 | ) | (1,999 | ) | |||||||||||
Accumulated other | ||||||||||||||||||||
comprehensive income, | ||||||||||||||||||||
net of tax | $ | 1,221 | $ | (1,376 | ) | $ | (312 | ) | $ | (1,688 | ) | $ | (467 | ) |
The following represents the reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015:
Nine Months Ended | ||||||||||
September 30, | ||||||||||
(In thousands) | 2016 | 2015 | Affected Line Item in Income | |||||||
Unrealized gains on | ||||||||||
securities available for sale: | ||||||||||
Realized net gain on securities sales | $ | 119 | $ | 527 | Securities gains, net | |||||
Income tax expense | (44 | ) | (215 | ) | Income tax expense | |||||
Total reclassifications, net of tax | $ | 75 | $ | 312 |
10. 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 $180 million as of September 30, 2016 and December 31, 2015, were designated as cash flow hedges of certain interest-bearing demand brokered deposits and were determined to be fully effective during the three and nine months ended September 30, 2016. As such, no amount of ineffectiveness has been included in net income during the three and nine month periods ended September 30, 2016 and 2015. Therefore, 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.
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The following information about the interest rate swaps designated as cash flow hedges as of September 30, 2016 and December 31, 2015 is presented in the following table:
(Dollars in thousands) | September 30, 2016 | December 31, 2015 | ||||||
Notional amount | $ | 180,000 | $ | 180,000 | ||||
Weighted average pay rate | 1.64 | % | 1.64 | % | ||||
Weighted average receive rate | 0.54 | % | 0.29 | % | ||||
Weighted average maturity | 3.50 | years | 4.25 | years | ||||
Unrealized loss | $ | (4,710 | ) | $ | (1,330 | ) | ||
Number of contracts | 9 | 9 |
Net interest expense recorded on these swap transactions totaled $494 thousand and $1.5 million for the three and nine months ended September 30, 2016 and is reported as a component of interest expense. Net interest expense recorded on these swap transactions totaled $554 thousand and $997 thousand for the three and nine months ended September 30, 2015 and is reported as a component of interest expense.
Cash Flow Hedges
The following table presents the net gains recorded in accumulated other comprehensive (loss)/income and the consolidated financial statements relating to the cash flow derivative instruments for the three months ended September 30, 2016 (after tax):
Amount of | ||||||||||||
Amount of | Amount of | Gain/(Loss) | ||||||||||
Gain/(Loss) | Gain/(Loss) | Recognized in | ||||||||||
Recognized | Reclassified | Other Non-Interest | ||||||||||
In OCI | From OCI to | Expense | ||||||||||
(In thousands) | (Effective Portion) | Interest Expense | (Ineffective Portion) | |||||||||
Interest rate contracts | $ | 941 | $ | — | $ | — |
The following table presents the net losses recorded in accumulated other comprehensive (loss)/income and the consolidated financial statements relating to the cash flow derivative instruments for the three months ended September 30, 2015:
Amount of | ||||||||||||
Amount of | Amount of | Gain/(Loss) | ||||||||||
Gain/(Loss) | Gain/(Loss) | Recognized in | ||||||||||
Recognized | Reclassified | Other Non-Interest | ||||||||||
In OCI | From OCI to | Expense | ||||||||||
(In thousands) | (Effective Portion) | Interest Expense | (Ineffective Portion) | |||||||||
Interest rate contracts | $ | (1,686 | ) | $ | — | $ | — |
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The following table presents the net losses recorded in accumulated other comprehensive (loss)/income and the consolidated financial statements relating to the cash flow derivative instruments for the nine months ended September 30, 2016 (after tax):
Amount of | ||||||||||||
Amount of | Amount of | Gain/(Loss) | ||||||||||
Gain/(Loss) | Gain/(Loss) | Recognized in | ||||||||||
Recognized | Reclassified | Other Non-Interest | ||||||||||
In OCI | From OCI to | Expense | ||||||||||
(In thousands) | (Effective Portion) | Interest Expense | (Ineffective Portion) | |||||||||
Interest rate contracts | $ | (1,999 | ) | $ | — | $ | — |
The following table presents the net losses recorded in accumulated other comprehensive (loss)/income and the consolidated financial statements relating to the cash flow derivative instruments for the nine months ended September 30, 2015:
Amount of | ||||||||||||
Amount of | Amount of | Gain/(Loss) | ||||||||||
Gain/(Loss) | Gain/(Loss) | Recognized in | ||||||||||
Recognized | Reclassified | Other Non-Interest | ||||||||||
In OCI | From OCI to | Expense | ||||||||||
(In thousands) | (Effective Portion) | Interest Expense | (Ineffective Portion) | |||||||||
Interest rate contracts | $ | (1,899 | ) | $ | — | $ | — |
The following tables reflect the cash flow hedges included in the financial statements as of September 30, 2016 and December 31, 2015:
September 30, 2016 | ||||||||
Notional | Fair | |||||||
(In thousands) | Amount | Value | ||||||
Interest rate swaps related to interest-bearing | ||||||||
demand brokered deposits | $ | 180,000 | $ | (4,710 | ) | |||
Total included in other assets | $ | — | $ | — | ||||
Total included in other liabilities | $ | 180,000 | $ | (4,710 | ) |
December 31, 2015 | ||||||||
Notional | Fair | |||||||
(In thousands) | Amount | Value | ||||||
Interest rate swaps related to interest-bearing | ||||||||
demand brokered deposits | $ | 180,000 | $ | (1,330 | ) | |||
Total included in other assets | $ | 15,000 | $ | 104 | ||||
Total included in other liabilities | $ | 165,000 | $ | (1,434 | ) |
Derivatives Not Designated as Accounting Hedges: Beginning in 2015, the Company offered 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.
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Information about these swaps is as follows:
(Dollars in thousands) | September 30, 2016 | December 31, 2015 | ||||||
Notional amount | $ | 70,815 | $ | 27,259 | ||||
Fair value | $ | 3,656 | $ | 1,106 | ||||
Weighted average pay rates | 3.44 | % | 3.06 | % | ||||
Weighted average receive rates | 2.27 | % | 1.44 | % | ||||
Weighted average maturity | 11.4 | years | 15.8 | years | ||||
Number of contracts | 6 | 2 |
11. SUBORDINATED DEBT
During June 2016, the Company issued $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “Notes”) to certain institutional investors. The 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. Subordinated debt is presented net of issuance cost on the Consolidated Statements of Condition.
Approximately $40.0 million of the net proceeds from the sale of the Notes were used by the Company to contribute capital to the Bank in the second quarter of 2016. Remaining funds will be used for general corporate purposes.
In connection with the issuance of the Notes, the Company obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade rating of BBB- for the Company’s subordinated debt.
12. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (is) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, FASB deferred the effective date of the ASU by one year which means ASU 2014-09 will be effective for the Company on January 1, 2018. In March 2016, FASB issued ASU 2016-08 which amended illustrative examples to clarify how to apply the implementation guidance on principal versus agent considerations. The Company does not expect the guidance will have a material impact on its consolidated financial statements.
In January 2016, the FASB amended existing guidance to improve accounting standards for financial instruments including clarification and simplification of accounting and disclosure requirements and the requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is evaluating the impact of these amendments on its consolidated financial statements.
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In February 2016, the FASB amended existing guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company is evaluating the impact of these amendments on its consolidated financial statements.
In March 2016, the FASB amended existing guidance to simplify aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company is evaluating the impact of these amendments on its consolidated financial statements.
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” (the ASU). 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). This ASU will be effective for public business entities (PBEs) in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of this ASU on its consolidated financial statements.
On August 26, 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments)”. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This amendment is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There is no material impact on our statement of cash flows as a result of this ASU.
On October 24, 2016, the FASB issued ASU No. 2016-16, “Income Taxes – (Topic 740): Intra-Equity Transfers of Assets other than Inventory”. These amendments require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities in the first interim period if an entity issues interim financial statements. The Company is evaluating the impact of these amendments on its consolidated financial statements.
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Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL: This Quarterly Report on Form 10-Q, both in the following discussion and analysis and elsewhere contains 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 view of future interest income and net loans, Management’s confidence and strategies and Management’s expectations about new and existing programs and products, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, “will”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual 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, 2015, in addition to/which include the following:
· | 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 particular, higher FDIC insurance premiums, in 2016 and beyond; |
· | inability to manage our growth; |
· | inability to successfully integrate our expanded employee base; |
· | a continued or 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 low interest rate environment and highly competitive market; |
· | declines in value in our investment portfolio; |
· | higher than expected increases in our allowance for loan losses; |
· | higher than expected increases in loan losses or in the level of nonperforming loans; |
· | unexpected changes in interest rates; |
· | a continued or unexpected 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) subject us to additional regulatory oversight which may result in increased compliance costs; |
· | successful cyberattacks against our IT infrastructure and that of our IT providers; |
· | adverse weather conditions; |
· | inability to successfully generate new business in new geographic markets; |
· | inability to execute upon new business initiatives; |
· | lack of liquidity to fund our various cash obligations; |
· | reduction in our lower-cost funding sources; |
· | our inability to adapt to technological changes; |
· | current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, increases in unemployment rates and potential reductions of economic growth, which may adversely affect our lending and other businesses and our financial results and conditions; |
· | the effect of a decline in stock market prices on our trust advisory income from our wealth management business; |
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· | claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters; and |
· | other unexpected material adverse changes in our operations or earnings. |
The Company assumes no responsibility to update such forward-looking statements in the future even if experience shows that the indicated results or events will not be realized. 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, 2015, 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 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 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 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 losses. Such agencies may require the Company to make additional provisions for loan 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 the State of 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 losses and allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
The Company accounts for its securities in accordance with “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into Accounting Standards Codification (“ASC”) 320. 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.
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 or nine months ended September 30, 2016 and 2015. For equity securities, the entire amount of impairment is recognized through earnings.
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EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended September 30, 2016 and 2015.
Three Months Ended September 30, | Change | |||||||||||
(Dollars in thousands, except per share data) | 2016 | 2015 | 2016 vs 2015 | |||||||||
Results of Operations: | ||||||||||||
Net interest income | $ | 24,269 | $ | 21,706 | $ | 2,563 | ||||||
Provision for loan losses | 2,100 | 1,600 | 500 | |||||||||
Net interest income after provision | ||||||||||||
for loan losses | 22,169 | 20,106 | 2,063 | |||||||||
Wealth management fee income | 4,436 | 4,169 | 267 | |||||||||
Other income | 3,099 | 1,441 | 1,658 | |||||||||
Operating expense | 18,166 | 16,899 | 1,267 | |||||||||
Income before income tax expense | 11,538 | 8,817 | 2,721 | |||||||||
Income tax expense | 4,422 | 3,434 | 988 | |||||||||
Net income | $ | 7,116 | $ | 5,383 | $ | 1,733 | ||||||
Total revenue (Net interest income | ||||||||||||
plus other income) | $ | 31,804 | $ | 27,316 | $ | 4,488 | ||||||
Diluted earnings per share | $ | 0.43 | $ | 0.35 | $ | 0.08 | ||||||
Diluted average shares outstanding | 16,673,596 | 15,435,939 | 1,237,657 | |||||||||
Return on average assets annualized (ROAA) | 0.77 | % | 0.66 | % | 0.11 | % | ||||||
Return on average equity | ||||||||||||
annualized (ROAE) | 9.44 | 8.19 | 1.25 |
The following table presents certain key aspects of our performance for the nine months ended September 30, 2016 and 2015.
Nine Months Ended September 30, | Change | |||||||||||
(Dollars in thousands, except per share data) | 2016 | 2015 | 2016 vs 2015 | |||||||||
Results of Operations: | ||||||||||||
Net interest income | $ | 71,855 | $ | 61,633 | $ | 10,222 | ||||||
Provision for loan losses | 6,000 | 5,150 | 850 | |||||||||
Net interest income after provision | ||||||||||||
for loan losses | 65,855 | 56,483 | 9,372 | |||||||||
Wealth management fee income | 13,630 | 12,732 | 898 | |||||||||
Other income | 7,616 | 5,259 | 2,357 | |||||||||
Operating expense | 56,147 | 48,933 | 7,214 | |||||||||
Income before income tax expense | 30,954 | 25,541 | 5,413 | |||||||||
Income tax expense | 11,785 | 9,912 | 1,873 | |||||||||
Net income | $ | 19,169 | $ | 15,629 | $ | 3,540 | ||||||
Total revenue (Net interest income | ||||||||||||
plus other income) | $ | 93,101 | $ | 79,624 | $ | 13,477 | ||||||
Diluted earnings per share | $ | 1.17 | $ | 1.02 | $ | 0.15 | ||||||
Diluted average shares outstanding | 16,347,255 | 15,293,747 | 1,053,508 | |||||||||
Return on average assets annualized (ROAA) | 0.71 | % | 0.69 | % | 0.02 | % | ||||||
Return on average equity | ||||||||||||
annualized (ROAE) | 8.79 | 8.19 | 0.60 | |||||||||
47
September 30, | December 31, | Change | ||||||||||
2016 | 2015 | 2016 vs 2015 | ||||||||||
Selected Balance Sheet Ratios: | ||||||||||||
Total capital (Tier I + II) to risk-weighted assets | 13.17 | % | 11.40 | % | 1.77 | % | ||||||
Tier I leverage ratio | 8.39 | 8.10 | 0.29 | |||||||||
Loans to deposits | 97.96 | 99.24 | (1.28 | ) | ||||||||
Allowance for loan losses to total | ||||||||||||
loans | 0.95 | 0.89 | 0.06 | |||||||||
Allowance for loan losses to | ||||||||||||
nonperforming loans | 282.44 | 383.22 | (100.78 | ) | ||||||||
Nonperforming loans to total loans | 0.34 | 0.23 | 0.11 |
For the third quarter of 2016, the Company recorded net income of $7.1 million compared to $5.4 million for the same quarter of 2015. For the three months ended September 30, 2016 and 2015, diluted earnings per share were $0.43 and $0.35, respectively. Annualized return on average assets was 0.77 percent and annualized return on average equity was 9.44 percent for the third quarter of 2016, compared to 0.66 percent and 8.19 percent, respectively, for the same quarter of 2015.
For the nine months ended September 30, 2016, the Company recorded net income of $19.2 million compared to $15.6 million for the same period of 2015. Diluted earnings per common share were $1.17 and $1.02 for the first nine months of 2016 and 2015, respectively. Annualized return on average assets was 0.71 percent and annualized return on average common equity was 8.79 percent for the first nine months of 2016, compared to 0.69 percent and 8.19 percent, respectively, for the nine months ending September 30, 2015.
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, 2015 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” which is incorporated herein by reference.
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, 2015 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements” which is incorporated herein by reference.
EARNINGS ANALYSIS
NET INTEREST INCOME/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 to individuals and businesses, 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 yields earned on earning assets and the rates paid on interest-bearing liabilities (“Net Interest Spread”) and the relative amounts of earning assets and interest-bearing liabilities. The Company’s Net Interest Spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets.
48
The following table summarizes the Company’s net interest income and related spread and margin, on a fully tax-equivalent basis, for the periods indicated:
Three Months Ended September 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Net interest income | $ | 24,510 | $ | 21,886 | ||||
Interest rate spread | 2.59 | % | 2.63 | % | ||||
Net interest margin | 2.74 | 2.75 |
Nine Months Ended September 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Net interest income | $ | 72,534 | $ | 62,038 | ||||
Interest rate spread | 2.64 | % | 2.69 | % | ||||
Net interest margin | 2.78 | 2.81 |
Net interest income, on a fully tax-equivalent basis, for the three months ended September 30, 2016, grew $2.6 million, or 12 percent, from the three months ended September 30, 2015. Net interest income for the nine months ended September 30, 2016 increased $10.5 million or 17 percent when compared to the same period in 2015. This growth is due to increased earning assets, principally loans. Net interest spread and margin for the three and nine months ending September 30, 2016 declined when compared to the same 2015 periods due to the effect of the subordinated debt issuance in June 2016, as well as the continuing effect of low market yields, as well as competitive pressures in attracting new loans and deposits. Net interest income for the three and nine months ended September 30, 2016 was benefitted by loan growth during the latter part of 2015 and in 2016. The Company expects continued loan growth in this lower market rate and competitive environment.
The following table summarizes the Company’s loans closed for the periods indicated:
For the Three Months Ended | ||||||||
September 30, | September 30, | |||||||
(In thousands) | 2016 | 2015 | ||||||
Residential mortgage loans originated for portfolio | $ | 43,284 | $ | 20,623 | ||||
Residential mortgage loans originated for sale | 25,128 | 6,078 | ||||||
Total residential mortgage loans | 68,412 | 26,701 | ||||||
Commercial real estate loans | 56,799 | 47,450 | ||||||
Multifamily properties | 74,450 | 149,763 | ||||||
Commercial loans (A) | 59,698 | 37,361 | ||||||
SBA | 3,025 | — | ||||||
Wealth Lines of Credit (A) | 1,200 | 24,000 | ||||||
Total commercial loans | 195,172 | 258,574 | ||||||
Installment loans | 1,591 | 933 | ||||||
Home equity lines of credit (A) | 7,064 | 3,775 | ||||||
Total loans closed | $ | 272,239 | $ | 289,983 |
(A) | Includes loans and lines of credit that closed in the period, but not necessarily funded. |
49
For the Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
(In thousands) | 2016 | 2015 | ||||||
Residential mortgage loans originated for portfolio | $ | 93,543 | $ | 60,726 | ||||
Residential mortgage loans originated for sale | 53,412 | 25,994 | ||||||
Total residential mortgage loans | 146,955 | 86,720 | ||||||
Commercial real estate loans | 102,692 | 134,798 | ||||||
Multifamily properties | 333,194 | 565,600 | ||||||
Commercial loans (A) | 188,495 | 214,540 | ||||||
SBA | 6,365 | — | ||||||
Wealth Lines of Credit (A) | 3,785 | 40,410 | ||||||
Total commercial loans | 634,531 | 955,348 | ||||||
Installment loans | 3,154 | 2,405 | ||||||
Home equity lines of credit (A) | 25,103 | 10,377 | ||||||
Total loans closed | $ | 809,743 | $ | 1,054,850 |
(A) | Includes loans and lines of credit that closed in the period, but not necessarily funded. |
As the Company has previously explained, anticipated multifamily loan originations (and growth) would be less in 2016, as the Company managed its balance sheet such that multifamily loans decline as a percentage of the overall loan portfolio and commercial loans become a larger percentage of the overall loan portfolio. The Company anticipates that this balance sheet management, however, may not be linear each quarter, and would rather be apparent over periods of time.
50
The following table reflects the components of the average balance sheet and of net interest income for the periods indicated:
Average Balance Sheet
Unaudited
Three Months Ended
September 30, 2016 | September 30, 2015 | |||||||||||||||||||||||
Average | Income/ | Average | Income/ | |||||||||||||||||||||
(Dollars in thousands) | Balance | Expense | Yield | Balance | Expense | Yield | ||||||||||||||||||
ASSETS: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||
Taxable (1) | $ | 193,902 | $ | 976 | 2.01 | % | $ | 214,967 | $ | 959 | 1.78 | % | ||||||||||||
Tax-exempt (1) (2) | 27,516 | 212 | 3.08 | 30,682 | 211 | 2.76 | ||||||||||||||||||
Loans (2) (3): | ||||||||||||||||||||||||
Mortgages | 486,909 | 3,983 | 3.27 | 466,384 | 3,806 | 3.26 | ||||||||||||||||||
Commercial mortgages | 2,048,877 | 17,977 | 3.51 | 1,839,606 | 16,119 | 3.50 | ||||||||||||||||||
Commercial | 573,211 | 5,826 | 4.07 | 454,239 | 4,132 | 3.64 | ||||||||||||||||||
Commercial construction | 454 | 5 | 4.41 | 1,742 | 18 | 4.13 | ||||||||||||||||||
Installment | 67,175 | 443 | 2.64 | 31,361 | 268 | 3.42 | ||||||||||||||||||
Home equity | 62,560 | 519 | 3.32 | 51,012 | 415 | 3.25 | ||||||||||||||||||
Other | 465 | 13 | 11.18 | 510 | 12 | 9.41 | ||||||||||||||||||
Total loans | 3,239,651 | 28,766 | 3.55 | 2,844,854 | 24,770 | 3.48 | ||||||||||||||||||
Federal funds sold | 101 | — | 0.25 | 101 | — | 0.10 | ||||||||||||||||||
Interest-earning deposits | 111,204 | 131 | 0.47 | 96,308 | 46 | 0.19 | ||||||||||||||||||
Total interest-earning assets | 3,572,374 | 30,085 | 3.37 | % | 3,186,912 | 25,986 | 3.26 | % | ||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 17,292 | 7,434 | ||||||||||||||||||||||
Allowance for loan losses | (30,022 | ) | (23,726 | ) | ||||||||||||||||||||
Premises and equipment | 29,460 | 31,574 | ||||||||||||||||||||||
Other assets | 88,721 | 68,067 | ||||||||||||||||||||||
Total noninterest-earning assets | 105,451 | 83,349 | ||||||||||||||||||||||
Total assets | $ | 3,677,825 | $ | 3,270,261 | ||||||||||||||||||||
LIABILITIES: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Checking | $ | 924,970 | $ | 645 | 0.28 | % | $ | 810,106 | $ | 356 | 0.18 | % | ||||||||||||
Money markets | 915,139 | 737 | 0.32 | 757,135 | 546 | 0.29 | ||||||||||||||||||
Savings | 119,986 | 17 | 0.06 | 118,329 | 17 | 0.06 | ||||||||||||||||||
Certificates of deposit - retail | 466,967 | 1,615 | 1.38 | 403,593 | 1,296 | 1.28 | ||||||||||||||||||
Subtotal interest-bearing deposits | 2,427,062 | 3,014 | 0.50 | 2,089,163 | 2,215 | 0.42 | ||||||||||||||||||
Interest-bearing demand - brokered | 200,000 | 762 | 1.52 | 292,456 | 857 | 1.17 | ||||||||||||||||||
Certificates of deposit - brokered | 93,674 | 501 | 2.14 | 93,907 | 504 | 2.15 | ||||||||||||||||||
Total interest-bearing deposits | 2,720,736 | 4,277 | 0.63 | 2,475,526 | 3,576 | 0.58 | ||||||||||||||||||
FHLB advances and borrowings | 87,258 | 380 | 1.74 | 107,770 | 399 | 1.48 | ||||||||||||||||||
Capital lease obligation | 9,874 | 119 | 4.82 | 10,394 | 125 | 4.81 | ||||||||||||||||||
Subordinated debt | 48,711 | 799 | 6.56 | — | — | N/A | ||||||||||||||||||
Total interest-bearing liabilities | 2,866,579 | 5,575 | 0.78 | % | 2,593,690 | 4,100 | 0.63 | % | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 479,659 | 398,181 | ||||||||||||||||||||||
Accrued expenses and | ||||||||||||||||||||||||
other liabilities | 30,070 | 15,619 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 509,729 | 413,800 | ||||||||||||||||||||||
Shareholders’ equity | 301,517 | 262,771 | ||||||||||||||||||||||
Total liabilities and | ||||||||||||||||||||||||
shareholders’ equity | $ | 3,677,825 | $ | 3,270,261 | ||||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
(tax-equivalent basis) | 24,510 | 21,886 | ||||||||||||||||||||||
Net interest spread | 2.59 | % | 2.63 | % | ||||||||||||||||||||
Net interest margin (4) | 2.74 | % | 2.75 | % | ||||||||||||||||||||
Tax equivalent adjustment | (241 | ) | (180 | ) | ||||||||||||||||||||
Net interest income | $ | 24,269 | $ | 21,706 | ||||||||||||||||||||
(1) | Average balances for available for sale securities are based on amortized cost. | |
(2) | Interest income is presented on a tax-equivalent basis using a 35 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. |
51
Average Balance Sheet
Unaudited
Nine Months Ended
September 30, 2016 | September 30, 2015 | |||||||||||||||||||||||
Average | Income/ | Average | Income/ | |||||||||||||||||||||
(Dollars in thousands) | Balance | Expense | Yield | Balance | Expense | Yield | ||||||||||||||||||
ASSETS: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||
Taxable (1) | $ | 198,080 | $ | 2,816 | 1.90 | % | $ | 244,117 | $ | 3,178 | 1.74 | % | ||||||||||||
Tax-exempt (1) (2) | 26,234 | 623 | 3.17 | 33,059 | 652 | 2.63 | ||||||||||||||||||
Loans (2) (3): | ||||||||||||||||||||||||
Mortgages | 475,607 | 11,728 | 3.29 | 466,987 | 11,424 | 3.26 | ||||||||||||||||||
Commercial mortgages | 2,018,820 | 52,977 | 3.50 | 1,655,600 | 44,475 | 3.58 | ||||||||||||||||||
Commercial | 550,770 | 16,319 | 3.95 | 377,461 | 10,376 | 3.67 | ||||||||||||||||||
Commercial construction | 1,045 | 32 | 4.08 | 4,446 | 141 | 4.23 | ||||||||||||||||||
Installment | 58,445 | 1,198 | 2.73 | 29,454 | 776 | 3.51 | ||||||||||||||||||
Home equity | 57,938 | 1,434 | 3.30 | 51,129 | 1,237 | 3.23 | ||||||||||||||||||
Other | 471 | 35 | 9.91 | 522 | 37 | 9.45 | ||||||||||||||||||
Total loans | 3,163,096 | 83,723 | 3.53 | 2,585,599 | 68,466 | 3.53 | ||||||||||||||||||
Federal funds sold | 101 | — | 0.24 | 101 | — | 0.10 | ||||||||||||||||||
Interest-earning deposits | 89,536 | 294 | 0.44 | 85,932 | 128 | 0.20 | ||||||||||||||||||
Total interest-earning assets | 3,477,047 | 87,456 | 3.35 | % | 2,948,808 | 72,424 | 3.27 | % | ||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 16,342 | 6,877 | ||||||||||||||||||||||
Allowance for loan losses | (28,227 | ) | (21,772 | ) | ||||||||||||||||||||
Premises and equipment | 29,637 | 31,935 | ||||||||||||||||||||||
Other assets | 86,960 | 66,038 | ||||||||||||||||||||||
Total noninterest-earning assets | 104,712 | 83,078 | ||||||||||||||||||||||
Total assets | $ | 3,581,759 | $ | 3,031,886 | ||||||||||||||||||||
LIABILITIES: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Checking | $ | 904,767 | $ | 1,823 | 0.27 | % | $ | 704,558 | $ | 1,028 | 0.19 | % | ||||||||||||
Money markets | 851,370 | 1,912 | 0.30 | 723,824 | 1,470 | 0.27 | ||||||||||||||||||
Savings | 118,884 | 50 | 0.06 | 116,410 | 48 | 0.05 | ||||||||||||||||||
Certificates of deposit - retail | 453,451 | 4,649 | 1.37 | 332,315 | 3,010 | 1.21 | ||||||||||||||||||
Subtotal interest-bearing deposits | 2,328,472 | 8,434 | 0.48 | 1,877,107 | 5,556 | 0.39 | ||||||||||||||||||
Interest-bearing demand - brokered | 200,000 | 2,263 | 1.51 | 266,443 | 1,700 | 0.85 | ||||||||||||||||||
Certificates of deposit - brokered | 93,663 | 1,494 | 2.13 | 106,048 | 1,532 | 1.93 | ||||||||||||||||||
Total interest-bearing deposits | 2,622,135 | 12,191 | 0.62 | 2,249,598 | 8,788 | 0.52 | ||||||||||||||||||
FHLB advances and borrowings | 154,819 | 1,432 | 1.23 | 121,277 | 1,219 | 1.34 | ||||||||||||||||||
Capital lease obligation | 10,007 | 361 | 4.81 | 10,514 | 379 | 4.81 | ||||||||||||||||||
Subordinated debt | 19,270 | 938 | 6.49 | — | — | N/A | ||||||||||||||||||
Total interest-bearing liabilities | 2,806,231 | 14,922 | 0.71 | % | 2,381,389 | 10,386 | 0.58 | % | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 459,907 | 383,161 | ||||||||||||||||||||||
Accrued expenses and | ||||||||||||||||||||||||
other liabilities | 24,958 | 12,852 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 484,865 | 396,013 | ||||||||||||||||||||||
Shareholders’ equity | 290,663 | 254,484 | ||||||||||||||||||||||
Total liabilities and | ||||||||||||||||||||||||
shareholders’ equity | $ | 3,581,759 | $ | 3,031,886 | ||||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
(tax-equivalent basis) | 72,534 | 62,038 | ||||||||||||||||||||||
Net interest spread | 2.64 | % | 2.69 | % | ||||||||||||||||||||
Net interest margin (4) | 2.78 | % | 2.81 | % | ||||||||||||||||||||
Tax equivalent adjustment | (679 | ) | (405 | ) | ||||||||||||||||||||
Net interest income | $ | 71,855 | $ | 61,633 | ||||||||||||||||||||
(1) | Average balances for available for sale securities are based on amortized cost. | |
(2) | Interest income is presented on a tax-equivalent basis using a 35 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. |
52
The effect of volume and rate changes on net interest income (on a tax-equivalent basis) for the periods indicated are shown below:
Three Months | Three Months Ended | |||||||||||
Ended September 30, 2016 | September 30, 2015 | |||||||||||
Difference due to | Change In | |||||||||||
Change In: | Income/ | |||||||||||
(In Thousands): | Volume | Rate | Expense | |||||||||
ASSETS: | ||||||||||||
Investments | $ | (89 | ) | $ | 107 | $ | 18 | |||||
Loans | 3,280 | 716 | 3,996 | |||||||||
Federal funds sold | — | — | — | |||||||||
Interest-earning deposits | 8 | 77 | 85 | |||||||||
Total interest income | $ | 3,199 | $ | 900 | $ | 4,099 | ||||||
LIABILITIES: | ||||||||||||
Interest-bearing checking | $ | 49 | $ | 240 | $ | 289 | ||||||
Money market | 140 | 51 | 191 | |||||||||
Certificates of deposit - retail | 221 | 98 | 319 | |||||||||
Certificates of deposit - brokered | (1 | ) | (2 | ) | (3 | ) | ||||||
Interest bearing demand brokered | (270 | ) | 175 | (95 | ) | |||||||
Borrowed funds | (37 | ) | 18 | (19 | ) | |||||||
Capital lease obligation | (6 | ) | — | (6 | ) | |||||||
Subordinated debt | 799 | — | 799 | |||||||||
Total interest expense | $ | 895 | $ | 580 | $ | 1,475 | ||||||
Net interest income | $ | 2,304 | $ | 320 | $ | 2,624 | ||||||
Nine Months | Nine Months Ended | |||||||||||
Ended September 30, 2016 | September 30, 2015 | |||||||||||
Difference due to | Change In | |||||||||||
Change In: | Income/ | |||||||||||
(In Thousands): | Volume | Rate | Expense | |||||||||
ASSETS: | ||||||||||||
Investments | $ | (636 | ) | $ | 245 | $ | (391 | ) | ||||
Loans | 15,289 | (32 | ) | 15,257 | ||||||||
Federal funds sold | — | — | — | |||||||||
Interest-earning deposits | 5 | 161 | 166 | |||||||||
Total interest income | $ | 14,658 | $ | 374 | $ | 15,032 | ||||||
LIABILITIES: | ||||||||||||
Interest-bearing checking | $ | 496 | $ | 299 | $ | 795 | ||||||
Money market | 336 | 106 | 442 | |||||||||
Savings | (7 | ) | 9 | 2 | ||||||||
Certificates of deposit - retail | 1,202 | 437 | 1,639 | |||||||||
Certificates of deposit - brokered | (190 | ) | 152 | (38 | ) | |||||||
Interest bearing demand brokered | (755 | ) | 1,318 | 563 | ||||||||
Borrowed funds | 142 | 71 | 213 | |||||||||
Capital lease obligation | (19 | ) | 1 | (18 | ) | |||||||
Subordinated debt | 938 | — | 938 | |||||||||
Total interest expense | $ | 2,143 | $ | 2,393 | $ | 4,536 | ||||||
Net interest income | $ | 12,515 | $ | (2,020 | ) | $ | 10,496 | |||||
Interest income on earning assets, on a fully tax-equivalent basis, totaled $30.1 million for the third quarter of 2016 compared to $26.0 million for the same quarter of 2015, reflecting an increase of $4.1 million or 16 percent, from the third quarter in 2015. Average earning assets totaled $3.57 billion for the third quarter of 2016, an increase of $385.5 million or 12 percent, from the same period of 2015. The average commercial loan portfolio increased $119.0 million or 26 percent, from the third quarter of 2015, averaging $573.2 million for the third quarter of 2016. The average commercial mortgage portfolio (which includes multifamily mortgage loans) increased $209.3 million to $2.05 billion for the third quarter of 2016 when compared to the same period in 2015. The increase in both portfolios was attributable to the addition of seasoned banking professionals over the course of 2015 and 2016; a more concerted focus on the client service and value added aspects of the lending process; and more of a focus on markets outside of the immediate branch service area, including markets around the Teaneck and Princeton private banking offices, as well as the New York City market. The increase was also due to demand from borrowers looking to refinance multifamily mortgages held by other institutions.
53
For the quarters ended September 30, 2016 and 2015, the average rates earned on earning assets was 3.37 percent and 3.26 percent, respectively, an increase of 11 basis points. The increased overall yield was due to growth in commercial loans at higher rates, as well as certain cash flows from the investment portfolio being invested in higher yielding loans .
For the third quarter of 2016, total interest-bearing deposits averaged $2.72 billion, increasing $245.2 million or 10 percent from the average balance for the same period of 2015. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand, but including reciprocal funds discussed below) has come from the addition of seasoned banking professionals over the course of 2015 and into 2016; an intense focus on providing high-touch client service; and a full array of treasury management products that support core deposit growth.
Average rates paid on total interest-bearing deposits were 63 basis points and 58 basis points for the third quarters of 2016 and 2015, respectively, an increase of 5 basis points. The increase in the average rate paid on deposits was principally due to growth in higher costing certificates of deposit in part to help manage the Company’s interest rate risk position, as well as to address competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth.
For the third quarters of 2016 and 2015, average borrowings totaled $87.3 million and $107.8 million, respectively, decreasing $20.5 million in the third quarter of 2016 when compared to the same period of 2015. The decrease was principally due to scheduled maturities of FHLB advances.
The Company is a participant in the Reich & Tang Demand Deposit Marketplace (“DDM”) 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. The DDM program is considered to be a source of brokered deposits for bank regulatory purposes. However, the Company considers these reciprocal deposit balances to be in-market customer deposits as distinguished from traditional out-of-market brokered deposits. Such reciprocal deposit balances are included in the Company’s interest-bearing checking balances. Reciprocal balances averaged $411.9 million for the September 30, 2016 quarter and $366.5 million for the September 30, 2015 quarter.
In June 2016, the Company issued $50.0 million of subordinated debt ($48.7 million net of issuance costs) bearing interest at an annual rate of 6 percent for the first five years, and thereafter at an adjustable rate and until maturity in June 2026 or earlier redemption. For the third quarter of 2016, the subordinated debt balance averaged $48.7 million.
Interest income on earning assets, on a fully tax-equivalent basis increased by $15.0 million or 21 percent for the first nine months of 2016 compared to the same period in 2015. For the nine months ended September 30, 2016 average earning assets increased $528.2 million from $2.95 billion for the same period in 2015. For the nine months ended September 30, 2016 the average commercial portfolio increased $173.3 million, or 46 percent, from the same period in 2015. For the nine months ended September 30, 2016 the average commercial mortgage portfolio (which includes multifamily mortgage loans) increased $363.2 million from $1.66 billion in the same period in 2015. The increase in both portfolios was attributable to the addition of seasoned banking professionals over the course of 2015 and 2016; a more concerted focus on the client service and value added aspects of the lending process; more of a focus on markets outside of the immediate branch service area, including markets around the Teaneck and Princeton private banking offices, as well as the New York City market. The increase was also due to demand from borrowers looking to refinance multifamily mortgages held by other institutions.
54
For the nine months ended September 30, 2016 and 2015, the average rates earned on earning assets was 3.35 percent and 3.27 percent, respectively, an increase of 8 basis points. The increased overall yield on earning assets was due to growth in commercial loans which produce a higher yield, as well as certain cash flows from the investment portfolio being invested in higher yielding loans.
For the nine months ended September 30, 2016 total interest-bearing deposits averaged $2.62 billion, increasing $372.5 million or 17 percent from the average balance for the same 2015 period. The increase in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds) of $451.4 million in the first nine months of 2016 when compared to the same period in 2015 has come from the addition of seasoned banking professionals over the course of 2015 and continuing into the first nine months of 2016; an intense focus on providing high-touch client service; and a new full array of treasury management products that support core deposit growth.
Average rates paid on interest-bearing deposits for the nine months ended September 30, 2016 were 62 basis points compared to 52 basis points for the same period in 2015, reflecting an increase of 10 basis points. The increase in the average rate paid on deposits was principally due to growth in higher costing certificates of deposit partially to help manage the Company’s interest rate risk position, as well as to address competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth.
Average borrowings increased by $33.5 million to $154.8 million for the nine months ended September 30, 2016 when compared to the same 2015 period. The increase was due to periodic increased short-term borrowings to fund loan growth ahead of deposit growth.
Average subordinated debt increased by $19.3 million for the nine months ended September 30, 2016. The Company issued $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes in the second quarter of 2016.
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 management including liquidity and interest rate risk management strategies, and in response to changes in interest rates, liquidity needs, prepayment speeds and/or other factors. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders’ equity, net of income taxes. Realized gains and losses are recognized in income at the time the securities are sold.
At September 30, 2016, the Company had investment securities available for sale with a fair value of $249.6 million compared with $195.6 million at December 31, 2015. Net unrealized gains (net of income tax) of $1.0 million and $408 thousand were included in shareholders’ equity at September 30, 2016 and December 31, 2015, respectively.
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The carrying value of investment securities available for sale as of September 30, 2016 and December 31, 2015 are shown below:
September 30, | December 31, | |||||||
(In thousands) | 2016 | 2015 | ||||||
U.S. treasury and U.S. government- | ||||||||
Sponsored entity bonds | $ | 11,970 | $ | — | ||||
Mortgage-backed securities-residential | ||||||||
(principally U.S. government-sponsored | ||||||||
entities) | 191,521 | 160,607 | ||||||
SBA pool securities | 7,068 | 7,520 | ||||||
State and political subdivision | 31,475 | 22,029 | ||||||
Single-issuer trust preferred security | 2,602 | 2,535 | ||||||
CRA investment fund | 4,980 | 2,939 | ||||||
Total | $ | 249,616 | $ | 195,630 |
The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of September 30, 2016:
After 1 | After 5 | |||||||||||||||||||
But | But | After | ||||||||||||||||||
Within | Within | Within | 10 | |||||||||||||||||
(Dollars in thousands) | 1 Year | 5 Years | 10 Years | Years | Total | |||||||||||||||
U.S. treasury and U.S. government- | $ | — | $ | — | $ | 11,970 | $ | — | $ | 11,970 | ||||||||||
Sponsored entity bonds | — | % | — | % | 1.81 | % | — | % | 1.81 | % | ||||||||||
Mortgage-backed securities- | $ | 16 | $ | 15,423 | $ | 38,408 | $ | 137,674 | $ | 191,521 | ||||||||||
residential (1) | 4.42 | % | 2.68 | % | 1.66 | % | 1.68 | % | 1.76 | % | ||||||||||
SBA pool securities | $ | — | $ | — | $ | — | $ | 7,068 | $ | 7,068 | ||||||||||
— | % | — | % | — | % | 0.73 | % | 0.73 | % | |||||||||||
State and political subdivisions (2) | $ | 9,891 | $ | 10,923 | $ | 5,702 | $ | 4,959 | $ | 31,475 | ||||||||||
1.39 | % | 3.35 | % | 2.93 | % | 3.02 | % | 2.60 | % | |||||||||||
Single-issuer trust preferred security (1) | $ | — | $ | — | $ | — | $ | 2,602 | $ | 2,602 | ||||||||||
— | % | — | % | — | % | 1.56 | % | 1.56 | % | |||||||||||
Total | $ | 9,907 | $ | 26,346 | $ | 56,080 | $ | 152,303 | $ | 244,636 | ||||||||||
1.40 | % | 2.96 | % | 1.82 | % | 1.68 | % | 1.84 | % |
(1) | Shown using stated final maturity. |
(2) | Yields presented on a fully tax-equivalent basis. |
OTHER INCOME : The following table presents the major components of other income, excluding income from wealth management, which is summarized and discussed subsequently:
Three Months Ended September 30, | Change | |||||||||||
(In thousands) | 2016 | 2015 | 2016 vs 2015 | |||||||||
Service charges and fees | $ | 812 | $ | 832 | $ | (20 | ) | |||||
Gain on sale of loans (mortgage banking) | 383 | 102 | 281 | |||||||||
Gain on sale of loans, at lower of | ||||||||||||
cost or fair value (Multifamily Loans) | 256 | — | 256 | |||||||||
Bank owned life insurance | 340 | 260 | 80 | |||||||||
Fee income related to loan level, | ||||||||||||
Back-to-back swaps | 670 | — | 670 | |||||||||
Gain on sale of SBA loans | 243 | — | 243 | |||||||||
Securities gains | — | 83 | (83 | ) | ||||||||
Other income | 395 | 164 | 231 | |||||||||
Total other income | $ | 3,099 | $ | 1,441 | $ | 1,658 | ||||||
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Nine Months Ended September 30, | Change | |||||||||||
(In thousands) | 2016 | 2015 | 2016 vs 2015 | |||||||||
Service charges and fees | $ | 2,437 | $ | 2,474 | $ | (37 | ) | |||||
Gain on sale of loans (mortgage banking) | 813 | 411 | 402 | |||||||||
Gain on sale of loans, at lower of | ||||||||||||
cost or fair value (Multifamily Loans) | 880 | — | 880 | |||||||||
Bank owned life insurance | 1,027 | 1,045 | (18 | ) | ||||||||
Fee income related to loan level, | ||||||||||||
Back-to-back swaps | 764 | 373 | 391 | |||||||||
Gain on sale of SBA loans | 502 | — | 502 | |||||||||
Securities gains | 119 | 527 | (408 | ) | ||||||||
Other income | 1,074 | 429 | 645 | |||||||||
Total other income | $ | 7,616 | $ | 5,259 | $ | 2,357 | ||||||
Service charges and fees for the three and nine months ended September 30, 2016 were generally flat compared to the same periods last year. Increases in income from debit card usage, as well as account analysis fees, were offset by declines in overdraft/NSF fees.
For the three months ended September 30, 2016, income from the sale of newly originated residential mortgage loans was $383 thousand compared to $102 thousand for the same prior year period. For the nine months ended September 30, 2016 compared to the same period in 2015, income from the sale of newly originated residential mortgages loans increased from $411 thousand to $813 thousand. The increases were a result of a higher volume of loans originated for sale in the 2016 periods when compared to the same periods in 2015.
For the three and nine months ended September 30, 2016, the Company recorded $340 thousand and $1.0 million, respectively, of bank owned life insurance (BOLI) income as compared to $260 thousand and $1.0 million for the same periods in 2015. The nine months ended September 30, 2015 included $285 thousand additional income related to a net life insurance death benefit under the Company’s BOLI policies. BOLI income in the nine months ended September 30, 2016 benefitted from the increase of the BOLI policy by $10 million which occurred in the fourth quarter of 2015.
There were no securities gains for the September 2016 quarter compared to $83 thousand for the same 2015 quarter. For the nine months ended September 30, 2016 securities gains were $119 thousand compared to $527 thousand for the same 2015 period. Sales of securities have been generally employed to benefit interest rate risk, prepayment risk, and/or liquidity risk. Given the shorter duration of our investment portfolio and the interest rate environment, such sales will continue to be a very small component of the Company’s operations.
Gains on the sale of multifamily loans held for sale at the lower of cost or fair value was $256 thousand for the quarter ending September 30, 2016 and $880 thousand for the nine months ending September 30, 2016. During the first quarter of 2016, the Company began selling whole multifamily loans in addition to multifamily loan participations. The Company intends to continue to employ loan sales and loan participations to manage the Company’s balance sheet. As the Company explained over the last several quarters, the Company anticipated multifamily loan originations (and growth) would be less than past quarters, as it manages its balance sheet such that multifamily loans decline as a percentage of the overall loan portfolio and commercial loans become a larger percentage of the overall loan portfolio. The Company anticipates that this balance sheet management, however, will likely not be linear each quarter, but will rather be apparent over periods of time.
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The third quarter of 2016 included $243 thousand of income related to the Company’s SBA lending and sale program. The SBA program was fully implemented in the March 2016 quarter. For the nine months ended September 30, 2016, there was $502 thousand of income related to the Company’s SBA lending and sale program.
The third quarter of 2016 included $670 thousand of loan level, back-to-back swap income. For the nine months ended September 30, 2016, there was $764 thousand of loan level, back-to-back swap income compared to $373 thousand in the nine months ended September 30, 2015. The program utilizes mirror interest rate swaps, one directly with the commercial loan customer and one directly with a well-established counterparty. This enables a commercial loan customer to benefit from a fixed rate loan, while the Company records a floating rate loan. The program provides enhanced interest rate risk management, as well as the potential for fee income for the Company. While the Company cannot predict the amount of fee income that may be recognized each period, this program is a part of ongoing operations.
Other income was $395 thousand for the September 2016 quarter compared to $164 thousand for the September 2015 quarter. Other income was $1.1 million for the nine months ending September 30, 2016 compared to $429 thousand for the same period in 2015. Increases were seen in loan servicing fees due to continued multifamily loan participations and higher unused line of credit fees associated with the Commercial lending business.
OPERATING EXPENSES: The following table presents the components of operating expenses for the periods indicated:
Three Months Ended September 30, | Change | |||||||||||
(In thousands) | 2016 | 2015 | 2016 vs 2015 | |||||||||
Salaries and employee benefits | $ | 11,515 | $ | 10,322 | $ | 1,193 | ||||||
Premises and equipment | 2,736 | 2,785 | (49 | ) | ||||||||
FDIC assessment | 814 | 416 | 398 | |||||||||
Other Operating Expenses: | ||||||||||||
Wealth management division | ||||||||||||
other expense | 490 | 469 | 21 | |||||||||
Professional and legal fees | 801 | 678 | 123 | |||||||||
Loan expense | 141 | 90 | 51 | |||||||||
Telephone | 231 | 228 | 3 | |||||||||
Advertising | 141 | 154 | (13 | ) | ||||||||
Postage | 77 | 94 | (17 | ) | ||||||||
Other | 1,220 | 1,663 | (443 | ) | ||||||||
Total operating expenses | $ | 18,166 | $ | 16,899 | $ | 1,267 |
Nine Months Ended September 30, | Change | |||||||||||
(In thousands) | 2016 | 2015 | 2016 vs 2015 | |||||||||
Salaries and employee benefits | $ | 33,523 | $ | 29,619 | $ | 3,904 | ||||||
Premises and equipment | 8,342 | 8,179 | 163 | |||||||||
FDIC assessment | 3,954 | 1,329 | 2,625 | |||||||||
Other Operating Expenses: | ||||||||||||
Wealth management division | ||||||||||||
other expense | 1,593 | 1,602 | (9 | ) | ||||||||
Professional and legal fees | 2,544 | 2,029 | 515 | |||||||||
Loan expense | 374 | 279 | 95 | |||||||||
Telephone | 704 | 682 | 22 | |||||||||
Advertising | 511 | 618 | (107 | ) | ||||||||
Postage | 246 | 286 | (40 | ) | ||||||||
Other | 4,356 | 4,310 | 46 | |||||||||
Total operating expenses | $ | 56,147 | $ | 48,933 | $ | 7,214 |
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The Company’s total operating expenses were $18.2 million for the quarter ended September 30, 2016 compared to $16.9 million in the same 2015 quarter, reflecting a net increase of $1.3 million or 7 percent. Total operating expenses grew by $7.2 million to $56.1 million for the nine months ending September 30, 2016 when compared to the same period in 2015, reflecting an increase of 15 percent.
Salary and benefits expenses increased to $11.5 million in the third quarter of 2016 from $10.3 million in the same period in 2015, an increase of $1.2 million or 12 percent. Strategic hiring that was in line with the Company’s Plan, including staff associated with credit and risk management, normal salary increases and increased bonus/incentive accruals associated with the Company’s growth, all contributed to the increase from the September 2015 quarter to the September 2016 quarter. The nine months ended September 30, 2016 had salary and benefits expenses increasing to $33.5 million from $29.6 million for the same period in 2015. This increase is due to the same reasons noted previously, as well as the acquisition of Wealth Management Consultants in May 2015.
Premises and equipment expenses totaled $2.7 million for the quarter ended September 30, 2016, which was relatively flat to the same 2015 period. Premises and equipment expenses for the nine months ended September 30, 2016 increased by $163 thousand to $8.3 million when compared to the nine months ended September 30, 2015. The increases were consistent with the Company’s continued growth, as well as certain investment in risk management related analytics and practices.
The Company expected and previously disclosed that FDIC assessment expense for 2016 would be significantly higher than 2015. For the nine months ended September 30, 2016 the FDIC assessment totaled $4.0 million compared to $1.3 million for the same nine month period in 2015.For the three months ended September 30, 2016, FDIC insurance expense was $814 thousand compared to $416 thousand for the three months ended September 30, 2015, increasing $398 thousand. However, the third quarter of 2016 FDIC premium declined $767 thousand from the second quarter of 2016. Beginning July 1, 2016 the FDIC assessment system was revised. Revisions for “small institutions” (under $10 billion in assets) resulted in, among other things, the elimination of risk categories and utilization of a financial ratios method to determine assessment rates. The changes reduced the Company’s assessment rate by nearly 50%, when compared to the second quarter 2016 assessment rate.
The Company also expected and previously disclosed that other operating expenses, including professional fees, would be higher in 2016. Professional fees increased $123 thousand for the three months ended September 30, 2016 and $515 thousand for the nine months ended September 30, 2016, as compared to the same periods of 2015. Given the Company’s significant growth and high concentration in multifamily lending, the Company accelerated costs over 2016 to ensure it adhered to best in class risk management practices. The Company had originally planned for such expenditures over a two to three year period, but felt it prudent to push them forward into 2016.
PRIVATE WEALTH MANAGEMENT DIVISION: This division has served in the roles of executor and trustee while providing investment management, custodial, tax, retirement and financial services to its growing client base. Officers from the Private Wealth Management Division are available to provide trust and investment services at the Bank’s corporate headquarters in Bedminster, at private banking locations in Bedminster, Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiary, PGB Trust & Investments of Delaware, in Greenville, Delaware.
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The following table presents certain key aspects of the Bank’s Private Wealth Management Division performance for the nine months ended September 30, 2016 and 2015.
At or For | ||||||||||||
Nine Months Ended September 30, | Change | |||||||||||
(In thousands) | 2016 (1) | 2015 | 2016 v 2015 | |||||||||
Total fee income | $ | 13,630 | $ | 12,732 | $ | 898 | ||||||
Assets under administration | ||||||||||||
(market value) | $ | 3,495,206 | $ | 3,250,835 | $ | 244,371 |
(1) | 2016 results include the income and expenses of the Wealth Management Consultants Division, which was acquired in May 2015. |
In the September 2016 quarter, the Private Wealth Management Division generated $4.4 million in fee income compared to $4.2 million for the September 2015 quarter, reflecting a 6 percent increase. For the nine months ended September 30, 2016, the Private Wealth Management Division generated $13.6 million in fee income compared to $12.7 million for the same period in 2015, reflecting a 7 percent increase. The market value of the assets under administration (“AUA”) of the wealth management division was $3.50 billion at September 30, 2016, reflecting an increase of 8 percent from $3.25 billion at September 30, 2015. The growth in fee income was due to several factors, including continued healthy new business results, somewhat offset by normal levels of disbursements and outflows. The net positive contribution to revenue from fee income was partially offset by the broader market declines in the latter part of 2015, as well as the first quarter of 2016, which negatively impacted AUA and the correlated investment fee revenue at the outset of 2016.
The Company continues to incorporate wealth management into conversations it has with the Company’s clients, across business lines. The Company has expanded its wealth management team and will continue to grow its team and expand its products, services, and advice delivered to clients.
While the “Operating Expenses” section above offers an overall discussion of the Corporation’s expenses, including the Private Wealth Management Division, operating expenses relative to the Private Wealth Management Division totaled $3.6 million and $3.7 million for the third quarters of 2016 and 2015, respectively, a decrease of $145 thousand, or 4 percent. Operating expenses relative to the Private Wealth Management Division totaled $11.1 million and $10.5 million for the nine months ended September 30, 2016 and 2015, respectively, an increase of $626 thousand, or 6 percent. Increased expenses in 2016 include the expenses of the Wealth Management Consultants Division, which was acquired in May 2015. Remaining expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel. Revenue and profitability related to the new personnel will generally 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; however, Management believes that the Bank generates adequate liquidity to support the expenses of the Private Wealth Management Division should it be necessary.
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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 (dollars in thousands):
As of | ||||||||||||||||||||
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
2016 | 2016 | 2016 | 2015 | 2015 | ||||||||||||||||
Loans past due over 90 days | ||||||||||||||||||||
and still accruing | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Nonaccrual loans | 10,840 | 8,049 | 7,278 | 6,747 | 7,615 | |||||||||||||||
Other real estate owned | 534 | 767 | 861 | 563 | 330 | |||||||||||||||
Total nonperforming assets | $ | 11,374 | $ | 8,816 | $ | 8,139 | $ | 7,310 | $ | 7,945 | ||||||||||
Performing TDRs | $ | 18,078 | $ | 18,570 | $ | 16,033 | $ | 16,231 | $ | 14,609 | ||||||||||
Loans past due 30 through 89 | ||||||||||||||||||||
days and still accruing | $ | 8,238 | $ | 6,576 | $ | 1,393 | $ | 2,143 | $ | 2,748 | ||||||||||
Classified loans | $ | 49,627 | $ | 51,084 | $ | 48,817 | $ | 42,777 | $ | 41,985 | ||||||||||
Impaired loans | $ | 28,951 | $ | 26,643 | $ | 23,335 | $ | 23,107 | $ | 22,224 | ||||||||||
Nonperforming loans (1) as a % of | ||||||||||||||||||||
total loans | 0.34 | % | 0.26 | % | 0.24 | % | 0.23 | % | 0.27 | % | ||||||||||
Nonperforming assets (1) as a % of | ||||||||||||||||||||
total assets | 0.30 | % | 0.24 | % | 0.23 | % | 0.22 | % | 0.24 | % | ||||||||||
Nonperforming assets (1) as a % of | ||||||||||||||||||||
total loans plus other real | ||||||||||||||||||||
estate owned | 0.35 | % | 0.28 | % | 0.27 | % | 0.25 | % | 0.28 | % |
(1) | Nonperforming loans/assets do not include performing TDRs. |
The Company does not hold and has not made or invested in subprime loans or “Alt-A” type mortgages.
PROVISION FOR LOAN LOSSES : The provision for loan losses was $2.1 million for the third quarter of 2016 and $1.6 million for the same quarter of 2015. For the nine months ended September 30, 2016 and 2015 the provision for loan losses was $6.0 million and $5.2 million, respectively. The amount of the loan loss provision and the level of the allowance for loan losses are based upon a number of 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 proper level of the allowance for loan losses.
The provision for loan losses of $2.1 million in the third quarter of 2016 was primarily related to loan growth experienced by the Company, as well as greater qualitative factor allocations of the allowance to commercial loans and commercial real estate loans. Originations of commercial loans and commercial real estate loans have increased, and these loans have historically carried a higher general reserve allocation than multifamily loans. In the third quarter of 2016, Management reevaluated the qualitative factors for these loan types and as a result of the evaluation, increased the allocations. In addition, the multifamily portfolio is more seasoned and the Company continues to reduce concentration risk through multifamily loan participations and whole loan sales.
61
The overall allowance for loan losses was $30.6 million as of September 30, 2016 compared to $25.9 million at December 31, 2015. As a percentage of loans, the allowance for loan losses was 0.95 percent as of September 30, 2016 and 0.89 percent as of December 31, 2015. The specific reserves on impaired loans have increased to $690 thousand at September 30, 2016 compared to $490 thousand as of December 31, 2015. Total impaired loans were $29.0 million and $23.1 million as of September 30, 2016 and December 31, 2015, respectively. The general component of the allowance increased from $25.4 million at December 31, 2015 to $29.9 million at September 30, 2016, due principally to the loan growth and the greater qualitative factor allocations referenced previously.
A summary of the allowance for loan losses for the quarterly periods indicated follows:
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
(In thousands) | 2016 | 2016 | 2016 | 2015 | 2015 | |||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||
Beginning of period | $ | 29,219 | $ | 27,321 | $ | 25,856 | $ | 24,374 | $ | 22,969 | ||||||||||
Provision for loan losses | 2,100 | 2,200 | 1,700 | 1,950 | 1,600 | |||||||||||||||
Charge-offs, net | (703 | ) | (302 | ) | (235 | ) | (468 | ) | (195 | ) | ||||||||||
End of period | $ | 30,616 | $ | 29,219 | $ | 27,321 | $ | 25,856 | $ | 24,374 | ||||||||||
Allowance for loan losses as | ||||||||||||||||||||
a % of total loans | 0.95 | % | 0.93 | % | 0.90 | % | 0.89 | % | 0.85 | % | ||||||||||
Allowance for loan losses as | ||||||||||||||||||||
a % of nonperforming loans | 282.44 | % | 363.01 | % | 375.39 | % | 383.22 | % | 320.08 | % |
INCOME TAXES: For the third quarter of 2016 and 2015 income tax expense as a percentage of pre-tax income was 38.3 percent and 39.0 percent, respectively. For the nine months ending September 30, 2016 and 2015 income tax expense as a percentage of pre-tax income was 38.1 percent and 38.8 percent, respectively.
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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 businesses, even in stressed environments. Quarterly stress testing is integral to the Company’s capital management process.
The Company strives to maintain capital levels in excess of internal “triggers” and in excess of those considered to be well capitalized under regulatory guidelines applicable to banks. 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 quarter ended September 30, 2016 was benefitted by net income of $7.1 million and by $5.4 million of voluntary share purchases by our shareholders under the Dividend Reinvestment Plan.
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 I capital (as defined) to average assets (as defined). At September 30, 2016 and December 31, 2015, 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.
The Bank’s actual capital amounts and ratios are presented in the following table:
To Be Well | For Capital | |||||||||||||||||||||||||||||||
Capitalized Under | For Capital | Adequacy Purposes | ||||||||||||||||||||||||||||||
Prompt Corrective | Adequacy | Including Capital | ||||||||||||||||||||||||||||||
Actual | Action Provisions | Purposes | Conservation Buffer (A) | |||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
As of September 30, 2016: | ||||||||||||||||||||||||||||||||
Total capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | $ | 376,220 | 12.78 | % | $ | 294,305 | 10.00 | % | $ | 235,444 | 8.00 | % | $ | 253,838 | 8.625 | % | ||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 345,604 | 11.74 | 235,444 | 8.00 | 176,583 | 6.00 | 194,977 | 6.625 | ||||||||||||||||||||||||
Common equity tier I | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 345,601 | 11.74 | 191,299 | 6.50 | 132,437 | 4.50 | 150,832 | 5.125 | ||||||||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to average assets) | 345,604 | 9.41 | 183,730 | 5.00 | 146,984 | 4.00 | 146,984 | 4.00 | ||||||||||||||||||||||||
As of December 31, 2015: | ||||||||||||||||||||||||||||||||
Total capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | $ | 297,497 | 11.32 | % | $ | 262,719 | 10.00 | % | $ | 210,176 | 8.00 | % | N/A | N/A | ||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 271,641 | 10.34 | 210,176 | 8.00 | 157,632 | 6.00 | N/A | N/A | ||||||||||||||||||||||||
Common equity tier I | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 271,641 | 10.34 | 170,768 | 6.50 | 118,224 | 4.50 | N/A | N/A | ||||||||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to average assets) | 271,641 | 8.04 | 169,027 | 5.00 | 135,221 | 4.00 | N/A | N/A | ||||||||||||||||||||||||
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The Company’s actual capital amounts and ratios are presented in the following table:
To Be Well | For Capital | |||||||||||||||||||||||||||||||
Capitalized Under | For Capital | Adequacy Purposes | ||||||||||||||||||||||||||||||
Prompt Corrective | Adequacy | Including Capital | ||||||||||||||||||||||||||||||
Actual | Action Provisions | Purposes | Conservation Buffer (A) | |||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
As of September 30, 2016: | ||||||||||||||||||||||||||||||||
Total capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | $ | 387,597 | 13.17 | % | $ | N/A | N/A | % | $ | 235,519 | 8.00 | % | $ | 253,919 | 8.625 | % | ||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 308,250 | 10.47 | N/A | N/A | 176,639 | 6.00 | 195,039 | 6.625 | ||||||||||||||||||||||||
Common equity tier I | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 308,247 | 10.47 | N/A | N/A | 132,479 | 4.50 | 150,879 | 5.125 | ||||||||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to average assets) | 308,250 | 8.39 | N/A | N/A | 147,011 | 4.00 | 147,011 | 4.00 | ||||||||||||||||||||||||
As of December 31, 2015: | ||||||||||||||||||||||||||||||||
Total capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | $ | 299,593 | 11.40 | % | $ | N/A | N/A | % | $ | 210,209 | 8.00 | % | N/A | N/A | ||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 273,738 | 10.42 | N/A | N/A | 157,657 | 6.00 | N/A | N/A | ||||||||||||||||||||||||
Common equity tier I | ||||||||||||||||||||||||||||||||
(to risk-weighted assets) | 273,738 | 10.42 | N/A | N/A | 118,242 | 4.50 | N/A | N/A | ||||||||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||||||||||
(to average assets) | 273,738 | 8.10 | N/A | N/A | 135,237 | 4.00 | N/A | N/A | ||||||||||||||||||||||||
(A) |
When fully phased in on January 1, 2019, the Basel Rules will 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 will 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 will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
|
The Company’s regulatory total risk based capital ratio beginning June 30, 2016 was benefitted by the $49 million (net) subordinated debt issuance that closed in June 2016. The Company down-streamed approximately $40 million of those proceeds to the Bank as capital, benefitting all the Bank’s regulatory capital ratios at that time.
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. The Reinvestment Plan provided $5.4 million of capital to the Company in the third quarter of 2016 and provides a continuing source of capital.
As previously announced, on October 27, 2016, the Board of Directors declared a regular cash dividend of $0.05 per share payable on November 25, 2016 to shareholders of record on November 10, 2016.
Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient common equity to support its planned growth and expansion for the immediate future. The Company continually assesses other potential sources of capital, other than common equity 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.
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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 $159.6 million at September 30, 2016. In addition, the Company had $249.6 million in securities designated as available for sale at September 30, 2016. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. 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 borrowing capacity. At September 30, 2016, unused borrowing commitments totaled $1.0 billion from the FHLB, $231.6 million from the Federal Reserve Bank and $15.0 million from correspondent banks.
During the September 2016 quarter, customer deposit growth of $191.0 million (principally noninterest-bearing and money market) and increased capital of $13.5 million, basically funded net asset growth of $169.7 million, and reduced other borrowings of $42 million.
Brokered interest-bearing demand (“overnight”) deposits stayed flat at $200 million at September 30, 2016. 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.
From a liquidity/funding perspective, such brokered deposits, at a cost of approximately 50 to 60 basis points (excluding cost of hedging), are generally a more cost effective alternative than other borrowings and do not require use of pledged collateral, as secured wholesale borrowings do. From a balance sheet management perspective, the rate paid on these short term brokered deposits is used as the basis to transact longer term interest rate swaps, basically extending repricing generally to five years for asset matching / interest rate risk management purposes. As of September 30, 2016, the Company has transacted pay fixed, receive floating interest rate swaps totaling $180.0 million 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.
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 have the ability to 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.
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The following strategies are among those used to manage interest rate risk:
· | Actively market commercial and industrial (C&I) loan originations, which tend to have adjustable rate features, and which generate customer relationships that can result in higher core deposit accounts; |
· | Actively market commercial mortgage loan originations, which tend to have shorter terms and higher interest rates than residential mortgage loans, and which generate customer relationships that can result in higher core deposit accounts; |
· | Manage growth in the residential mortgage portfolio to adjustable-rate and/or shorter-term and/or “relationship” loans that result in core deposit 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 and/or loan participations. |
The 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.
In addition, during the second quarter of 2015, 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 with 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 September 30, 2016, $70.8 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 model is based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The model incorporates certain prepayment and interest rate assumptions, which management believes to be reasonable as of September 30, 2016. The model assumes changes in interest rates without any proactive change in the balance sheet by management. In the model, the forecasted shape of the yield curve remains static as of September 30, 2016.
In an immediate and sustained 200 basis point increase in market rates at September 30, 2016, net interest income for year 1 would increase approximately 6.2 percent, when compared to a flat interest rate scenario. In year 2 this sensitivity improves to an increase of 9.6 percent, when compared to a flat interest rate scenario.
In an immediate and sustained 100 basis point decrease in market rates at September 30, 2016, net interest income would decline approximately 4.4 percent for year 1 and 6.3 percent for year 2, compared to a flat interest rate scenario.
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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 September 30, 2016.
(1) | EVPE is the discounted present value of expected cash flows from assets and liabilities. |
(2) | Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. |
(3) | 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.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to information regarding quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year to the date of the most recent interim financial statements (September 30, 2016).
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 September 30, 2016 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 CEO and CFO, 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.
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 asset claims that if adversely decided, we believe would have a material adverse effect on the Company.
There were no material changes in the Corporation’s risk factors during the nine months ended September 30, 2016 from the risk factors disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases or unregistered sales of the Corporation’s stock during the quarter.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
None.
3 | 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 3.1 of the Registrant’s Current Report on Form 8-K filed on January 26, 2015 (File No. 001-16197). | |
10 | Peapack-Gladstone Financial Corporation 2012 Long-Term Stock Incentive Plan, as amended and restated (filed herewith). | |
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). | |
32 | 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. | |
101 | Interactive Data File |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PEAPACK-GLADSTONE FINANCIAL CORPORATION | |
(Registrant) | |
DATE: November 7, 2016 | By: /s/ Douglas L. Kennedy |
Douglas L. Kennedy | |
President and Chief Executive Officer | |
DATE: November 7, 2016 | By: /s/ Jeffrey J. Carfora |
Jeffrey J. Carfora | |
Senior Executive Vice President, Chief Financial Officer | |
(Principal Financial Officer) | |
DATE: November 7, 2016 | By: /s/ Francesco S. Rossi |
Francesco S. Rossi, Chief Accounting Officer | |
(Principal Accounting Officer) |
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Exhibit 10
PEAPACK-GLADSTONE FINANCIAL CORPORATION
2012 LONG-TERM STOCK INCENTIVE PLAN
(Adopted by Directors January 19, 2012)
(Approved by Shareholders April 24 , 2012)
( Amended by Directors March 21, 2013, Approved by Shareholders April 23, 2013)
(Amended by Directors March 20, 2014, Approved by Shareholders April 22, 2014)
(Amended by Directors March 26, 2015)
(Amended by Directors March 16, 2016, Approved by Shareholders April __, 2016)
1. Purpose . The purpose of the Plan is to provide additional incentive to those officers and key employees of the Company and its Subsidiaries, and certain members of the Board of Directors of the Company whose substantial contributions are essential to the continued growth and success of the Company’s business in order to strengthen their commitment to the Company and its Subsidiaries, to motivate such officers, employees and Directors to faithfully and diligently perform their assigned responsibilities and to attract and retain competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company. To accomplish such purposes, the Plan provides that the Company may grant Incentive Stock Options, Nonqualified Stock Options, Restricted Stock Awards, Restricted Stock Units, Stock Appreciation Rights and Cash-Based Awards.
2. Definitions . For purposes of this Plan:
(a) “Agreement” means the written agreement between the Company and a Grantee evidencing the grant of an Option or Award and setting forth the terms and conditions thereof.
(b) “Award” means a grant of Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, or a Cash-Based Award or any combination of the foregoing.
(c) “Bank” means Peapack-Gladstone Bank, a Subsidiary.
(d) “Board” means the Board of Directors of the Company.
(e) “Cash-Based Award” means any right granted under Section 10.
(f) “Cause” means an intentional failure to perform stated duties, breach of a fiduciary duty involving personal dishonesty, or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. Notwithstanding anything else herein to the contrary, in the event that an employee or Director is terminated or removed for Cause, or resigns at a time when Cause exists, or if, following termination, resignation or removal it is determined that Cause existed at the time of such termination, resignation or removal, then any and all Options and Awards will automatically be terminated and void as of the date that Cause arose, and no notice to that effect is required in order to effect that result.
(g) “Change in Capitalization” means any increase, reduction, change or exchange of Shares for a different number or kind of shares or other securities of the Company by reason of a reclassification, recapitalization, merger, consolidation, reorganization, issuance of warrants or rights, extraordinary cash dividend, stock dividend, stock split or reverse stock split, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise.
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(h) “Change in Control” means an event of a nature that: (1) any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) who is not now presently but becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the Company’s outstanding securities except for any securities purchased by any tax-qualified employee benefit plan of the Company; or (2) individuals who constitute the Board on the date hereof (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company’s stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (2), considered as though he were a member of the Incumbent Board; or (3) consummation of regulatory approval to implement a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or similar transaction in which the Company is not the resulting entity or such plan, merger, consolidation, sale or similar transaction occurs; or (4) a proxy statement soliciting proxies from shareholders of the Company shall be distributed by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations , and, following such distribution , the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company; or (5) a tender offer is made for 25% or more of the voting securities of the Company.
(i) “Code” means the Internal Revenue Code of 1986, as amended.
(j) “Committee” means a committee consisting solely of two (2) or more directors who are Non-Employee Directors (as defined in Rule 16b-3 of the Exchange Act as it may be amended from time to time) of the Company and outside directors as defined pursuant to Section 162(m) of the Code (as it may be amended from time to time) appointed by the Board to administer the Plan and to perform the functions set forth herein. Directors appointed by the Board to the Committee shall have the authority to act notwithstanding the failure to be so qualified.
(k) “Company” means Peapack-Gladstone Financial Corporation, a New Jersey corporation.
(l) “Director” means a member of the Board who is not also serving as an employee of the Company.
(m) “Disability” means the permanent and total inability by reason of mental or physical infirmity, or both, of an employee or Director to perform the work customarily assigned to him. Additionally, a medical doctor selected or approved by the Board must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of the individual’s lifetime.
(n) “Eligible Employee” means any officer or other key employee of the Company or a Subsidiary designated by the Committee as eligible to receive Options or Awards subject to the conditions set forth herein.
(o) “Escrow Agent” means the escrow agent under the Escrow Agreement, designated by the Committee. The Bank may be appointed as the Escrow Agent.
(p) “Escrow Agreement” means an agreement between the Company, the Escrow Agent and a Grantee, in the form specified by the Committee, under which shares of Restricted Stock awarded pursuant hereto shall be held by the Escrow Agent until either (a) the restrictions relating to such shares expire and the shares are delivered to the Grantee or (b) the Company reacquires the shares pursuant hereto and the shares are delivered to the Company.
(q) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(r) “Fair Market Value” means the fair market value of the Shares as determined by the Committee in its sole discretion using a method that complies with Section 409A of the Code; provided, however, that (A) if the Shares are listed on NASDAQ, the New York Stock Exchange or other national securities exchange, Fair Market Value on any date shall be the last sale price reported for the Shares on such exchange on such date or on the last date preceding such date on which a sale was reported, or (B) if the Shares are then traded in an over-the-counter market, Fair Market Value on any date shall be the mean of the high bid and low asked prices for the Shares in such over-the-counter market for such date or on the last date preceding such date on which high bid and low asked prices exist.
(s) “Grantee” means a person to whom an Option or Award has been granted under the Plan.
(t) “Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.
(u) “Nonqualified Stock Option” means an Option which is not an Incentive Stock Option.
(v) “Option” means an Incentive Stock Option, a Nonqualified Stock Option, or either or both of them.
(w) “Parent” means any corporation in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock of one of the other corporations in such chain.
(x) “Plan” means the Peapack-Gladstone Financial Corporation 2012 Long-Term Stock Incentive Plan as set forth in this instrument and as it may be amended from time to time.
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(y) “Restricted Stock” means Shares issued or transferred to an Eligible Employee or Director which may be subject to restrictions as provided in Section 8 hereof.
(z) “Restricted Stock Unit” means a right to receive one Share upon the satisfaction of terms and conditions as provided in Section 9 hereof, including without limitation the satisfaction of specified performance or other criteria. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided by the Committee.
(aa) “Retirement” means the retirement from active employment of an employee or officer, but only if such person meets all of the following requirements: (i) he has a minimum combined total of years of service to the Company or any Subsidiary (excluding service to any acquired company) and age equal to eighty (80), (ii) he is age sixty-two (62) or older, and (iii) he provides six (6) months prior written notice to the Company of the retirement. For Directors, the term “Retirement” shall mean the date on which the Director ceases to be a member of the Board after both attaining age sixty (60) and completing at least ten (10) years of service on the Board.
(bb) “Shares” means the common stock, no par value, of the Company (including any new, additional or different stock or securities resulting from a Change in Capitalization).
(cc) “Stock Appreciation Right” means a right to receive all or some portion of the increase in the value of shares of Common Stock as provided in Section 7 hereof.
(dd) “Subsidiary” means any corporation in an unbroken chain of corporations, beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
(ee) “Ten-Percent Shareholder” means an Eligible Employee, who, at the time an Incentive Stock Option is to be granted to him, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, a Parent or a Subsidiary within the meaning of Section 422(b)(6) of the Code.
3. Administration .
(a) The Plan shall be administered by the Committee which shall hold meetings at such times as may be necessary for the proper administration of the Plan. The Committee shall keep minutes of its meetings. A majority of the Committee shall constitute a quorum and a majority of a quorum may authorize any action. Each member of the Committee shall be a Non-Employee Director (as defined in Rule 16b-3 of the Exchange Act as it may be amended from time to time) and an outside director as defined pursuant to Section 162(m) of the Code as it may be amended from time to time. No failure to be so qualified shall invalidate any Option or Award or any action or inaction under the Plan. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, the Options or the Awards, and all members of the Committee shall be fully indemnified by the Company with respect to any such action, determination or interpretation.
Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time:
(1) to determine those Eligible Employees to whom Options shall be granted under the Plan and the number of Incentive Stock Options and/or Nonqualified Options to be granted to each Eligible Employee and to prescribe the terms and conditions (which need not be identical) of each Option, including the purchase price per share of each Option;
(2) to select those Eligible Employees to whom Awards shall be granted under the Plan and to determine the number of shares of Restricted Stock, Restricted Stock Units and/or Stock Appreciation Rights to be granted pursuant to each Award and the amount or value of Cash-Based Awards, the terms and conditions of each Award, including the restrictions or performance criteria relating to such shares, units or rights, the purchase price per share, if any, of Restricted Stock or Restricted Stock Units and whether Stock Appreciation Rights will be granted alone or in conjunction with an Option;
(3) to construe and interpret the Plan and the Options and Awards granted thereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable to make the Plan fully effective, and all decisions and determinations by the Committee in the exercise of this power shall be final and binding upon the Company or a Subsidiary and Grantees;
(4) to determine the duration and purposes for leaves of absence which may be granted to a Grantee without constituting a termination of employment or service for purposes of the Plan; and
(5) generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan.
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Subject to the terms and conditions set forth herein, the Committee may, from time to time, recommend the grant of Options and Awards to the Directors in such numbers and upon such terms as it deems appropriate, but all such grants must be approved by the Company’s Board of Directors.
4. Stock Subject to Plan; Individual Award Limits .
(a) The maximum number of Shares that may be issued or transferred pursuant to all Options and Awards under this Plan is 1,200,000, of which not more than 200,000 Shares may be issued or transferred pursuant to Options, Restricted Stock Awards, Restricted Stock Unit Awards and/or Stock Appreciation Rights to any one Eligible Employee during any one calendar year. Not more than 10,000 Shares may be issued or transferred pursuant to Options and/or Awards to any Director during any one calendar year. The maximum number of Shares that may be issued or transferred pursuant to Incentive Stock Options shall be 200,000. Upon a Change in Capitalization after the adoption of this Plan by the Board, the Shares shall be adjusted to the number and kind of Shares of stock or other securities existing after such Change in Capitalization. The maximum aggregate amount of any Cash-Based Awards that may be paid to any one Grantee in any one calendar year shall be $2 million dollars.
(b) Whenever any outstanding Option or portion thereof expires, is cancelled or is otherwise terminated (other than by exercise of the Option or any related Stock Appreciation Right), the shares of Common Stock allocable to the unexercised portion of such Option may again be the subject of Options and Awards hereunder.
(c) Whenever any Shares subject to an Award or Option are (i) resold to the Company, (ii) retained by the Company upon exercise of an Award or Option in order to satisfy the exercise price for such Award or Option or any withholding or other taxes due with respect to such Option or Award, or (iii) forfeited for any reason pursuant to the terms of the Plan, such Shares may again be the subject of Options and Awards hereunder.
5. Eligibility . Subject to the provisions of the Plan, the Committee (or, with respect to Directors, the Board) shall have full and final authority to select those Eligible Employees who will receive Options and/or Awards, but no person shall receive any Options or Awards unless he or she is an employee of the Company or a Subsidiary, or a Director, at the time the Option or Award is granted.
6. Stock Options . The Committee (or, with respect to Directors, the Board) may grant Options in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. Each Option and Option Agreement shall be subject to the following conditions:
(a) Purchase Price . The purchase price or the manner in which the purchase price is to be determined for Shares under each Option shall be set forth in the Agreement, provided that the purchase price per Share under each Incentive Stock Option shall not be less than 100% of the Fair Market Value of a Share at the time the Option is granted (110% in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder) and under each Nonqualified Stock Option shall not be less than 100% of the Fair Market Value of a Share at the time the Option is granted. Incentive Stock Options cannot be granted to Directors.
(b) Duration . Options granted hereunder shall be for such term as the Committee shall determine, provided that (i) no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder) and (ii) no Nonqualified Stock Option shall be exercisable after the expiration of ten (10) years and one (1) day from the date it is granted.
(c) Non-Transferability . No Option granted hereunder shall be transferable by the Grantee to whom granted otherwise than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of such Grantee only by the Grantee or his guardian or legal representative. The terms of such Option shall be binding upon the beneficiaries, executors, administrators, heirs and successors of the Grantee.
(d) Stock Options; Vesting . Each Option shall be exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee or the Board as set forth in the Option Agreement. Unless otherwise provided in the Agreement, to the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. Upon the death, Disability or Retirement of a Grantee, all Options shall become immediately exercisable , provided, however, that the Committee shall have the authority to grant Options that do not become immediately exercisable in the event of the death, Disability or Retirement of a Grantee by including such provision in the Option Agreement evidencing such Option . Notwithstanding the foregoing, the Committee (or, with respect to Directors, the Board) may accelerate the exercisability of any Option or portion thereof at any time.
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(e) Method of Exercise . The exercise of an Option shall be made only by a written notice delivered in person or by mail (including electronic mail) to the Secretary of the Company at the Company’s principal executive office, specifying the number of Shares to be purchased and accompanied by payment therefor, as well as for any required tax withholding, and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option and required tax withholding shall be paid in full upon such exercise in cash, by check, or, at the discretion of the Committee and upon such terms and conditions as the Committee shall approve, by transferring Shares to the Company or by having Shares that would otherwise have been delivered to the Grantee upon exercise of an Option withheld by the Company. Any Shares transferred to or withheld by the Company as payment of the purchase price or tax withholding under an Option shall be valued at their Fair Market Value on the day preceding the date of exercise of such Option. If requested by the Committee, the Grantee shall deliver the Agreement evidencing the Option and the Agreement evidencing any related Stock Appreciation Right to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Grantee.
(f) Rights of Grantees . No Grantee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the Shares to the Grantee, and (iii) the Grantee’s name shall have been entered as a shareholder of record on the books of the Company. Thereupon, the Grantee shall have full voting, dividend and other ownership rights with respect to such Shares.
(g) Termination of Employment . In the event that a Grantee who is not a Director ceases to be employed by the Company or any Subsidiary, any outstanding Options held by such Grantee shall, unless the Option Agreement evidencing such Option provides otherwise, terminate as follows:
(1) If the Grantee’s termination of employment is due to his death or Disability, the Options shall become fully vested and shall be exercisable for a period of three years following such termination of employment, and shall thereafter terminate;
(2) If the Grantee’s termination of employment is by the Grantee (other than due to the Grantee’s Retirement), the Option shall terminate on the date of the termination of employment;
(3) If the termination of employment is due to the Grantee’s Retirement, the Option shall become fully vested and shall be exercisable for 90 days (three years for an Option designated initially as a Nonqualified Stock Option); and
(4) If the Grantee’s termination of employment is for any other reason, the Option (to the extent exercisable at the time of the Grantee’s termination of employment) shall be exercisable for a period of ninety (90) days following such termination of employment, and shall thereafter terminate.
Notwithstanding the foregoing, the Committee may provide, either at the time an Option is granted or thereafter, that the Option may be exercised after the periods provided for in this Section 6(g), but in no event beyond the term of the Option. Notwithstanding anything to the contrary in this Section 6(g), no Option shall be exercisable beyond the term of the Option.
(h) Termination of Service for Directors . Unless otherwise provided in the Option Agreement, upon the termination of a Director’s service as a member of the Board for any reason other than Retirement, Disability, Change in Control or death, the Director’s Options shall be exercisable only as to those Shares which were immediately exercisable by the Director at the date of termination. Unless otherwise provided in the Option Agreement, in the event of the death, Retirement or Disability of a Director, all Options held by the Director shall become immediately exercisable; and upon termination of the Director’s service due to or within 12 months after a Change in Control, all Options held by the Director shall become immediately exercisable. Options granted to a Director shall expire and no longer be exercisable upon the earlier of (i) one hundred twenty (120) months following the date of grant, or (ii) three (3) years following the date on which the Director ceases to serve as a Director (for any reason other than Cause).
7. Stock Appreciation Rights . The Committee may, in its discretion, either alone or in connection with the grant of an Option, grant Stock Appreciation Rights in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. If granted in connection with an Option, a Stock Appreciation Right shall cover the same shares covered by the Option (or such lesser number of shares as the Committee may determine) and shall, except as provided in this Section 7, be subject to the same terms and conditions as the related Option.
(a) Time of Grant . A Stock Appreciation Right may be granted:
(i) at any time if unrelated to an Option; or
(ii) if related to an Option, at the time of grant of the Option.
(b) Stock Appreciation Rights Related to an Option.
(1) Payment . A Stock Appreciation Right granted in connection with an Option shall entitle the holder thereof, upon exercise of the Stock Appreciation Right or any portion thereof, to receive payment of an amount computed pursuant to Section 7(b)(3).
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(2) Exercise . A Stock Appreciation Right granted in connection with an Option shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related Option may be transferable. A Stock Appreciation Right granted in connection with an Incentive Stock Option shall be exercisable only if the Fair Market Value of a Share on the date of exercise exceeds the purchase price specified in the related Incentive Stock Option.
(3) Amount Payable . Upon the exercise of a Stock Appreciation Right related to an Option, the Grantee shall be entitled to receive an amount determined by multiplying (A) the excess of the Fair Market Value of a Share on the date of exercise of such Stock Appreciation Right over the per Share purchase price under the related Option, by (B) the number of Shares as to which such Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted.
(4) Treatment of Related Options and Stock Appreciation Rights Upon Exercise . Except as provided in Section 7(b)(5), (A) upon the exercise of a Stock Appreciation Right granted in connection with an Option, the Option shall be cancelled to the extent of the number of Shares as to which the Stock Appreciation Right is exercised and (B) upon the exercise of an Option granted in connection with a Stock Appreciation Right, the Stock Appreciation Right shall be cancelled to the extent of the number of Shares as to which the Option is exercised.
(5) Simultaneous Exercise of Stock Appreciation Right and Option . The Committee may provide, either at the time a Stock Appreciation Right is granted in connection with a Nonqualified Stock Option or thereafter during the term of the Stock Appreciation Right, that upon exercise of such Option, the Stock Appreciation Right shall automatically be deemed to be exercised to the extent of the number of Shares as to which the Option is exercised. In such event, the Grantee shall be entitled to receive the amount described in Section 7(b)(3) (or some percentage of such amount if so provided in the Agreement evidencing the Stock Appreciation Right), in addition to the Shares acquired pursuant to the exercise of the Option. The inclusion in an Agreement evidencing a Stock Appreciation Right of a provision described in this Section 7(b)(5) may be in addition to and not in lieu of the right to exercise the Stock Appreciation Right as otherwise provided herein and in the Agreement.
(c) Stock Appreciation Rights Unrelated to an Option . The Committee may grant to Eligible Employees (and the Board may grant to Directors) Stock Appreciation Rights unrelated to Options. Stock Appreciation Rights unrelated to Options shall contain such terms and conditions as to exercisability, vesting and duration as the Committee or the Board shall determine, but in no event shall they have a term of greater than ten (10) years. Upon the death, Disability or Retirement of a Grantee, all Stock Appreciation Rights shall become immediately exercisable provided, however, that the Committee or Board shall have the authority to grant Stock Appreciation Rights that do not become immediately exercisable in the event of the death, Disability or Retirement of a Grantee by including such provision in the Agreement evidencing such Stock Appreciation Right . Unless otherwise provided in the Agreement, upon the death or Disability of a Grantee, the exercisable portion of Stock Appreciation Rights held by that Grantee shall be exercisable for a period of one (1) year following such termination of employment or service, and shall thereafter terminate; and upon the Retirement of a Grantee, the exercisable portion of Stock Appreciation Rights held by that Grantee shall be exercisable for a period of ninety (90) days following such Retirement, and shall thereafter terminate. The amount payable upon exercise of such Stock Appreciation Rights shall be determined in accordance with Section 7(b)(3), except that “Fair Market Value of a Share on the date of the grant of the Stock Appreciation Right” shall be substituted for “purchase price under the related Option.”
(d) Method of Exercise . Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered in person or by mail to the Secretary of the Company at the Company’s principal executive office, specifying the number of Shares with respect to which the Stock Appreciation Right is being exercised. If requested by the Committee, the Grantee shall deliver the Agreement evidencing the Stock Appreciation Right being exercised and the Agreement evidencing any related Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreements to the Grantee.
(e) Form of Payment . Payment of the amount determined under Sections 7(b)(3) or 7(c), may be made solely in whole shares of Common Stock in a number determined at their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, solely in cash, or in a combination of cash and Shares as the Committee deems advisable. If the Committee decides to make full payment in Shares, and the amount payable results in a fractional Share, payment for the fractional Share will be made in cash.
8. Restricted Stock . The Committee (or, with respect to Directors, the Board) may grant Awards of Restricted Stock which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee or Board may require and (without limiting the generality of the foregoing) such Agreements may require that an appropriate legend be placed on Share certificates. Awards of Restricted Stock shall be subject to the following terms and provisions:
(a) Rights of Grantee . Shares of Restricted Stock granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted and the purchase price, if any, is paid by the Grantee; provided, that the Grantee has executed an Agreement evidencing the Award, an Escrow Agreement, appropriate blank stock powers and any other documents which the Committee, in its absolute discretion, may require as a condition to the issuance of such Shares. If a Grantee shall fail to execute the Agreement evidencing a Restricted Stock Award, an Escrow Agreement or appropriate blank stock powers or shall fail to pay the purchase price, if any, for the Restricted Stock, the Award shall be null and void. Shares issued in connection with a Restricted Stock Award, together with the stock powers, shall be deposited with the Escrow Agent. Except as restricted by the terms of the Agreement, upon the delivery of the Shares to the Escrow Agent, the Grantee shall have all of the rights of a shareholder with respect to such Shares, including the right to vote the shares and to receive, subject to Section 8(d), all dividends or other distributions paid or made with respect to the Shares.
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(b) Non-Transferability . Until any restrictions upon the Shares of Restricted Stock awarded to a Grantee shall have lapsed in the manner set forth in Section 8(c), such Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated, nor shall they be delivered to the Grantee. Upon the termination of employment of the Grantee, all of such Shares with respect to which restrictions have not lapsed shall be resold by the Grantee to the Company at the same price paid by the Grantee for such Shares or shall be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company if no purchase price had been paid for such Shares. The Committee may also impose such other restrictions and conditions on the Shares as it deems appropriate.
(c) Lapse of Restrictions .
(1) Restrictions , if any, upon Shares of Restricted Stock awarded hereunder shall lapse at such time or times and on such terms, conditions and satisfaction of performance criteria as the Committee (or, when applicable, the Board) may determine; provided, however , that the restrictions upon such Shares shall lapse only if the Grantee on the date of such lapse is then and has continuously been an employee of the Company or a Subsidiary (or a member of the Board) from the date the Award was granted, or unless the Committee sets a later date for the lapse of such restrictions.
(2) In the event of termination of employment (or termination of service as a Director) as a result of death, Disability or Retirement of a Grantee, all restrictions upon Shares of Restricted Stock awarded to such Grantee shall thereupon immediately lapse , provided, however, that the Committee or Board shall have the authority to grant Awards the restrictions on which do not lapse in the event of the termination of employment or service as a result of the death, Disability or Retirement of a Grantee by including such provision in the Agreement evidencing such Award.
(3) The Committee or Board may also decide at any time in its absolute discretion and on such terms and conditions as it deems appropriate, to remove or modify the restrictions upon Shares of Restricted Stock awarded hereunder.
(d) Treatment of Cash Dividends . At the time of an Award of Shares of Restricted Stock, the Committee may, in its discretion, determine that the payment to the Grantee of cash dividends, or a specified portion thereof, declared or paid on Shares of Restricted Stock by the Company, shall be deferred until the earlier to occur of (i) the lapsing of the restrictions, if any, imposed upon such Shares, in which case such cash dividends shall be paid over to the Grantee, or (ii) the forfeiture of such Shares under Section 8(b) hereof, in which case such cash dividends shall be forfeited to the Company, and such dividends shall be held by the Company for the account of the Grantee until such time. In the event of such deferral, interest may be credited on the amount of any such cash dividends held by the Company for the account of the Grantee from time to time at such rate per annum as the Committee, in its discretion, may determine. Payment of deferred cash dividends, together with any interest accrued thereon as aforesaid, shall be made upon the earlier to occur of the events specified in (i) and (ii) of the immediately preceding sentence, in the manner specified therein.
(e) Delivery of Shares . When any restrictions imposed hereunder and in the Plan expire or have been cancelled with respect to one or more shares of Restricted Stock, the Company shall notify the Grantee and the Escrow Agent of same. The Escrow Agent shall then return the certificate covering the Shares of Restricted Stock to the Company and upon receipt of such certificate the Company shall deliver to the Grantee (or such Grantee’s legal representative, beneficiary or heir) a certificate for a number of shares of Common Stock, without any legend or restrictions (except those required by any federal or state securities laws), equivalent to the number of Shares of Restricted Stock for which restrictions have been cancelled or have expired (or alternatively, an applicable book entry shall be made for uncertificated Shares). If applicable, a new certificate covering Shares of Restricted Stock previously awarded to the Grantee which remain restricted shall be issued to the Grantee and held by the Escrow Agent and the Agreement, as it relates to such shares, shall remain in effect. Notwithstanding the foregoing, if requested by the Grantee, the Committee or the Board, in its discretion, has the right to cancel Shares of Restricted Stock to be delivered to the Grantee having a Fair Market Value, on the day preceding the date of vesting of the Restricted Stock, equal to the aggregate required tax withholding in connection with such vesting, and to apply the value of such Shares of Restricted Stock as payment for the Grantee’s aggregate required tax withholding for the vesting of any Shares of Restricted Stock.
(f) Unrestricted Shares. Notwithstanding anything to the contrary in this Plan, the Committee shall have the right to grant Awards of Restricted Stock to employees of the Company that are not evidenced by an Agreement, which are fully vested as of the grant date of the Award and which do not contain a restrictive legend. The amount of any aggregate Awards under this Section 8(f) shall not exceed 10,000 shares and any individual Award under this Section 8(f) shall not exceed 5 shares.
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9. Restricted Stock Units . The Committee (or, with respect to Directors, the Board) may grant Awards of Restricted Stock Units which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee or Board may require. Awards of Restricted Stock Units shall be subject to the following terms and provisions:
(a) Rights of Grantee . Restricted Stock Units granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted and the purchase price, if any, is paid by the Grantee, provided that the Grantee has executed an Agreement evidencing the Award and any other documents which the Committee, in its absolute discretion, may require as a condition to the issuance of such Restricted Stock Units. If a Grantee shall fail to execute the Agreement evidencing a Restricted Stock Unit Award or shall fail to pay the purchase price, if any, for the Restricted Stock Units, the Award shall be null and void. The Grantee shall not have any of the rights of a shareholder with respect to Restricted Stock Units, subject to Section 9(d).
(b) Non-Transferability . Until any restrictions upon the Restricted Stock Units awarded to a Grantee shall have lapsed in the manner set forth in Section 9(c), such Restricted Stock Units shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. Upon the termination of employment of the Grantee, all of such Restricted Stock Units with respect to which restrictions have not lapsed shall be forfeited at no cost to the Company if no purchase price had been paid for such Restricted Stock Units. The Committee may also impose such other restrictions and conditions on the Restricted Stock Units as it deems appropriate.
(c) Lapse of Restrictions .
(1) Restrictions upon Restricted Stock Units awarded hereunder shall lapse at such time or times and on such terms, conditions and satisfaction of performance criteria as the Committee (or, when applicable, the Board) may determine; provided, however, that the restrictions upon such Restricted Stock Units shall lapse only if the Grantee on the date of such lapse is then and has continuously been an employee of the Company or a Subsidiary (or a member of the Board) from the date the Award was granted, or unless the Committee sets a later date for the lapse of such restrictions.
(2) In the event of termination of employment (or termination of service as a Director) as a result of death, Disability or Retirement of a Grantee, all restrictions upon Restricted Stock Units awarded to such Grantee shall thereupon immediately lapse, provided, however, that the Committee or Board shall have the authority to grant Awards of Restricted Stock Units the restrictions on which do not lapse in the event of the termination of employment or service as a result of the death, Disability or Retirement of a Grantee by including such provision in the Agreement evidencing such Award.
(3) The Committee or Board may also decide at any time in its absolute discretion and on such terms and conditions as it deems appropriate, to remove or modify the restrictions upon Restricted Stock Units awarded hereunder.
(d) Treatment of Cash Dividends . At the time of an Award of Restricted Stock Units, the Committee may, in its discretion, determine to provide the Grantee with the right to receive cash Dividend Equivalents with respect to the Restricted Stock Units subject to the Award, or a specified portion thereof. A “Dividend Equivalent” is an amount equal to the cash dividend payable per Share, if any, multiplied by the number of Shares then underlying the Award with respect to any cash dividends declared or paid by the Company while the Award is outstanding. Any such Dividend Equivalents shall be credited to the Grantee at the time the Company pays any cash dividend on its Shares. Until such time as the Dividend Equivalents vest or are forfeited, interest may be credited on the amount of such Dividend Equivalents held by the Company for the account of the Grantee from time to time at such rate per annum as the Committee, in its discretion, may determine. Any Dividend Equivalents credited to the Grantee shall vest at the same time as the underlying Restricted Stock Units, and payment of credited Dividend Equivalents, together with any interest accrued thereon, shall be made at the time when the underlying Restricted Stock Units convert to Shares. In the event any Restricted Stock Units are forfeited under Section 9(c) hereof, any Dividend Equivalents credited to Grantee with respect to such forfeited Restricted Stock Units and any interest accrued thereon shall be forfeited to the Company, and the Grantee shall have no rights and the Company shall have no liability as to such Dividend Equivalents or interest.
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(e) Delivery of Shares . When the restrictions imposed hereunder and in the Plan expire or have been cancelled with respect to one or more of the Restricted Stock Units granted under the Plan, the Company shall notify the Grantee of same. The Company shall then deliver to the Grantee (or such Grantee’s legal representative, beneficiary or heir) a certificate for a number of Shares, without any legend or restrictions (except those required by any federal or state securities laws), equivalent to the number of Restricted Stock Units for which restrictions have been cancelled or have expired (or alternatively, an applicable book entry shall be made for uncertificated Shares). Notwithstanding the foregoing, if requested by the Grantee, the Committee or the Board, in its discretion, has the right to cancel Shares to be delivered to the Grantee having a Fair Market Value, on the day preceding the date of vesting of the Restricted Stock Units, equal to the aggregate required tax withholding in connection with such vesting, and to apply the value of such Shares as payment for the Grantee’s aggregate required tax withholding for the vesting of any Restricted Stock Units.
(f) Compliance with Section 409A of the Code . Restricted Stock Units are intended to comply with Section 409A of the Code and provisions of the Plan and Awards shall be interpreted in a manner intended to be consistent with Section 409A.
10. Cash-Based Awards . The Committee is hereby authorized to grant Cash-Based Awards to Grantees denominated in cash in such amounts and subject to such terms and conditions as the Committee may determine. Each such Cash-Based Award shall specify a payment amount, payment range or a value determined with respect to the Fair Market Value of the Shares, as determined by the Committee. The Committee may designate Cash-Based Awards as “performance-based compensation” under Code Section 162(m) by conditioning the Award or the lapse of restrictions on the achievement of performance goals in accordance with Section 11(a) and by administering the Award to otherwise comply with the requirements of Section 11 and Code Section 162(m). The Committee is authorized at any time during or after a Performance Period to exercise negative discretion to reduce or eliminate a Cash-Based Award of any Grantee for any reason in its discretion, including, without limitation, changes in the position or duties of any Grantee with the Company or any Subsidiary during or after a Performance Period, whether due to any termination of employment (including death, disability, retirement, voluntary termination or termination with or without cause) or otherwise.
11. Performance Goals
(a) If, at the time of grant, the Committee intends a Restricted Stock Award, Restricted Stock Unit Award or Cash-Based Award to qualify as “other performance based compensation” within the meaning of Code Section 162(m), the Committee must establish performance goals for the applicable Performance Period no later than 90 days after the Performance Period begins (or by such other date as may be required under Code Section 162(m)). Such performance goals must be based on one or more of the criteria described in Section 11(b). “Performance Period” means the period selected by the Committee during which performance is measured for purpose of determining the extent to which an award of Restricted Stock, Restricted Stock Units or a Cash-Based Award has been earned.
(b) A performance goal described in Section 11(a) shall be based on one or more of the following criteria: earnings, earnings growth, earnings per share, stock price (including growth measures and total shareholder return), improvement of financial ratings, internal rate of return, market share, cash flow, operating income, operating margin, net profit after tax, earnings before or after deduction for all or any portion of interest, taxes, depreciation, or amortization, whether or not on a continuing operations or an aggregate or per share basis, gross profit, operating profit, cash generation, revenues, asset quality, return on equity, return on assets, return on operating assets, cost saving levels, efficiency ratio, net income, marketing-spending efficiency, core non-interest income, change in working capital, return on capital, book value or tangible book value, or shareholder return. The performance goals may be described in terms of objectives that are related to the individual Grantee or objectives that are Company-wide or related to a Subsidiary, division, department, region, branch, function or business unit and may, but need not be, measured on an absolute or cumulative basis or on the basis of percentage of improvement over time, measured in terms of Company performance (or performance of the applicable Subsidiary, division, department, region, branch, function or business unit) or measured relative to selected peer companies or a market index. Any performance goals that are financial metrics, may be determined in accordance with Generally Accepted Accounting Principles (“GAAP”), or may be adjusted when established to include or exclude any items otherwise includable or excludable under GAAP. For any Award not intended to meet the requirements of Code Section 162(m), the Committee may establish performance goals based on any other performance criteria it deems appropriate. These performance goals are subject to approval by shareholders at the Company’s 2016 annual meeting, and once approved, should be submitted for re-approval by the Company’s shareholders no later than the 2021 annual shareholder meeting, and thereafter, once every five years.
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(c) When the Committee determines whether a performance goal has been satisfied for any period, the Committee may include or exclude unusual, infrequently occurring or non-recurring charges, asset write downs, losses from discontinued operations, restatements and accounting changes and other unplanned special charges such as restructuring expenses, acquisitions, acquisition or disposition expenses, including expenses related to goodwill and other intangible assets, stock offerings, stock repurchases and loan loss provisions; provided that in the case of an Award intended to qualify for the exemption from the limitation on deductibility imposed by Code Section 162(m), such inclusion or exclusion shall be made in compliance with Code Section 162(m).
(d) If the Committee determines that a performance goal has been satisfied and the satisfaction of such goal was intended to meet the requirements of Code Section 162(m), the Committee shall certify that the goal has been satisfied in accordance with the requirements set forth under Code Section 162(m).
12. Effect of a Change in Control . Notwithstanding anything herein to the contrary (with the exception of Sec. 6(h)), the provisions of this Section 12 shall apply in the case of a Change in Control of the Company, unless otherwise provided by the Committee in the Agreement and as supplemented by Section 14.
(a) Awards Assumed or Substituted by Surviving Entity . With respect to Options and Awards assumed by the surviving entity or otherwise equitably converted or substituted in connection with a Change in Control: if within two years after the effective date of the Change in Control, a Grantee’s employment is terminated without Cause or the Grantee resigns for Good Reason, then (i) all of the Grantee’s outstanding Options and Stock Appreciation Rights shall become fully vested and exercisable and shall remain exercisable for three years following such termination, provided no Option or Stock Appreciation Right shall be exercisable beyond the term of the Option or Stock Appreciation Right, (ii) all time-based vesting restrictions on his or her outstanding Awards shall lapse, and (iii) unless otherwise provided in the Agreement, the payout level under all of the Grantee’s performance-based that were outstanding immediately prior to effective time of the Change in Control shall be determined and deemed to have been earned as of the date of termination based upon an assumed achievement of all relevant performance goals at the target level, or at a level in excess of target in the Committee’s discretion, and there shall be a pro rata payout to such Grantee within sixty (60) days following the date of termination of employment based upon the length of time within the performance period that has elapsed prior to the date of termination of employment. With regard to each Award or Option, a Grantee shall not be considered to have resigned for Good Reason unless either (i) the Agreement provides for a Good Reason termination or (ii) the Grantee is party to an employment, severance or similar agreement with the Company or a Subsidiary that includes provisions in which the Grantee is permitted to resign for Good Reason. To the extent that this provision causes Incentive Stock Options to no longer satisfy the requirements of Code Section 422, the affected Options shall be deemed to be Nonqualified Stock Options.
(b) Awards not Assumed or Substituted by Surviving Entity . Upon the occurrence of a Change in Control, and except with respect to any Options or Awards assumed by the surviving entity or otherwise equitably converted or substituted in connection with the Change in Control: (i) outstanding Options and Stock Appreciation Rights shall become fully vested and exercisable, (ii) time-based vesting restrictions on outstanding Awards shall lapse, and (iii) unless otherwise provided in the Agreement, the target payout opportunities attainable under outstanding performance-based Awards shall be deemed to have been earned as of the effective date of the Change in Control based upon an assumed achievement of all relevant performance goals at the target level, or at a level in excess of target in the Committee’s discretion, and there shall be a pro rata payout to Grantees within sixty (60) days following the Change in Control based upon the length of time within the performance period that has elapsed prior to the Change in Control. To the extent that this provision causes Incentive Stock Options to no longer satisfy the requirements of Code Section 422, the affected Options shall be deemed to be Nonqualified Stock Options.
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(c) Definitions .
(1) A surviving entity will be deemed to have “assumed by the surviving entity or otherwise equitably converted or substituted” an Award or Option under this Plan if the surviving entity substitutes an Award or Option under this Plan or an award or stock option under a plan of the surviving entity having equivalent value to and terms and conditions no less favorable than the original Award or Option, or otherwise assumes the obligations under and/or equitably adjusts such original Award or Option. The Committee or the Board shall have sole authority to determine whether the proposed assumption of an Award or Option by a surviving entity meets the requirements listed in this Section 12(c)(1).
(2) “Good Reason” (or a similar term denoting constructive termination) has the meaning, if any, assigned such term in the employment, severance or similar agreement, if any, between a Grantee and the Company or a Subsidiary; provided, however, if there is no such employment, severance or similar agreement in which such term is defined, “Good Reason” shall have the meaning, if any, given such term in the applicable Agreement. If not defined in either such document, the term “Good Reason” as used herein shall not apply to a particular Award.
13. Adjustment Upon Changes in Capitalization.
(a) In the event of a Change in Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to the maximum number and class of shares of stock with respect to which Options or Awards may be granted under the Plan, the number and class of shares as to which Options or Awards have been granted under the Plan, and the purchase price therefor, if applicable.
(b) Any such adjustment in the Shares or other securities subject to outstanding Incentive Stock Options (including any adjustments in the purchase price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, a Grantee of an Award shall be entitled to new, additional or different shares of stock or securities, such new additional or different shares shall thereupon be subject to all of the conditions, restrictions and performance criteria which were applicable to the Shares or units pursuant to the Award prior to such Change in Capitalization.
14. Effect of Certain Transactions . Upon the occurrence or in anticipation of any corporate event or transaction involving the Company (including, without limitation, any merger, consolidation, reorganization, recapitalization, combination or exchange of shares, liquidation or dissolution, sale or disposition of all or substantially all of the Company’s assets, or any Change in Capitalization), the Committee may, in its sole discretion, notwithstanding Section 12 hereunder, provide (i) that Options or Awards will be settled in cash rather than stock or in unrestricted shares of stock of the surviving entity, (ii) that Options or Awards will become immediately vested and non-forfeitable and exercisable (in whole or in part) and will be cancelled after a designated period of time to the extent not then exercised, (iii) that Options or Awards will be assumed by another party to a transaction or otherwise be equitably converted or substituted in connection with such transaction, (iv) that outstanding Options or Awards may be settled by payment in cash or cash equivalents equal to the excess of the fair market value of the underlying stock, as of a specified date associated with the transaction (or the per share transaction price), over the exercise or base price of the Option or Award and those Options or Awards not eligible for payment shall be cancelled, (v) that performance targets and performance periods for performance-based Awards and Options will be modified, consistent with Code Section 162(m) where applicable, or (vi) any combination of the foregoing. The Committee’s determination need not be uniform and may be different for different Grantees whether or not such Grantees are similarly situated.
15. Termination and Amendment of the Plan . The Plan shall terminate on the day preceding the tenth anniversary of its effective date and no Option or Award may be granted thereafter. The Board may sooner terminate or amend the Plan at any time, and from time to time; provided, however , that, except as provided in Sections 13 and 14 hereof, no amendment shall be effective unless approved by the shareholders of the Company in accordance with applicable law and regulations at an annual or special meeting held within twelve months before or after the date of adoption of such amendment, where approval of such amendment is required under applicable laws, policies or regulations or applicable listing or other requirements of the national securities exchange upon which the Shares are then listed, including amendments that will:
(a) increase the number of Shares as to which Options or Awards may be granted under the Plan;
(b) change the class of persons eligible to participate in the Plan; or
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(c) materially extend the term of the Plan.
Except as otherwise provided herein, rights and obligations under any Option or Award granted before any amendment of the Plan shall not be altered or impaired by such amendment, except with the consent of the Grantee.
16. Non-Exclusivity of the Plan . The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases.
17. Limitation of Liability . As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to:
(a) give any person any right to be granted an Option or Award other than at the sole discretion of the Committee or the Board;
(b) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan;
(c) limit in any way the right of the Company to terminate the employment or service of any person at any time; or
(d) be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person in any particular position at any particular rate of compensation or for any particular period of time.
18. Regulations and Other Approvals; Governing Law.
(a) This Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of New Jersey without giving effect to the choice of law principles thereof, except to the extent that such law is preempted by federal law.
(b) The obligation of the Company to sell or deliver Shares with respect to Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
(c) The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and Section 162(m) of the Code (each as amended from time to time) and the Committee shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith to the extent necessary. Any provisions inconsistent with such Rule or Section shall be inoperative but shall not affect the validity of the Plan or any grants thereunder.
(d) Except as otherwise provided in Section 15, the Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain for Eligible Employees granted Incentive Stock Options the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder.
(e) Each Option and Award is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or Award or the issuance of Shares, no Options or Awards shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions unacceptable to the Committee.
(f) In the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, or regulations thereunder, and the Committee may require any individual receiving Shares pursuant to the Plan, as a condition precedent to receipt of such Shares (including upon exercise of an Option), to represent to the Company in writing that the Shares acquired by such individual are acquired for investment only and not with a view to distribution.
19. Miscellaneous.
(a) Multiple Agreements . The terms of each Option or Award may differ from other Options or Awards granted under the Plan at the same time, or at some other time. The Committee may also grant more than one Option or Award to a given Eligible Employee during the term of the Plan, either in addition to, or in substitution for, one or more Options or Awards previously granted to that Eligible Employee. The grant of multiple Options and/or Awards may be evidenced by a single Agreement or multiple Agreements, as determined by the Committee.
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(b) Withholding of Taxes . The Company shall have the right to deduct from any distribution of cash to any Grantee an amount equal to the federal, state and local income taxes and other amounts required by law to be withheld with respect to any Option or Award. Notwithstanding anything to the contrary contained herein, if a Grantee is entitled to receive Shares upon exercise of an Option or pursuant to an Award, the Company shall have the right to require such Grantee, prior to the delivery of such Shares, to pay to the Company the amount of any federal, state or local income taxes and other amounts which the Company is required by law to withhold. A Grantee who is an Eligible Employee may be permitted, in the Committee’s discretion, to satisfy any amounts required to be withheld by the Company under applicable federal, state and local tax laws in effect from time to time, by electing to have the Company withhold a portion of the Shares to be delivered for the payment of such taxes. The Agreement evidencing any Incentive Stock Options granted under this Plan shall provide that if the Grantee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him or her pursuant to his or her exercise of the Incentive Stock Option within the two-year period commencing on the day after the date of grant of such Option or within the one-year period commencing on the day after the date of transfer of the Share or Shares to the Grantee pursuant to the exercise of such Option, he or she shall, within ten (10) days of such disposition, notify the Company thereof.
(c) Designation of Beneficiary . Each Grantee may, with the consent of the Committee, designate a person or persons to receive in the event of his/her death, any Option or Award or any amount payable pursuant thereto, to which he/she would then be entitled. Such designation will be made upon forms supplied by and delivered to the Company and may be revoked in writing. If a Grantee fails effectively to designate a beneficiary, then his/her estate will be deemed to be the beneficiary.
(d) Section 409A Compliance . The Plan is intended to be administered and interpreted in a manner consistent with the requirements, where applicable, of Section 409A of the Code. Where reasonably possible and practicable, the Plan shall be administered in a manner to avoid the imposition on Grantees in the Plan of immediate tax recognition and additional taxes pursuant to Section 409A. Notwithstanding the foregoing, neither the Company, the Board nor the Committee shall have any liability to any person in the event Section 409A applies to any such Award or Option in a manner that results in adverse tax consequences for the Grantee or any of his/her beneficiaries or transferees.
(e) Recoupment . To the extent required by applicable law (including, without limitation, Section 304 of the Sarbanes-Oxley Act and Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and/or the rules and regulations of any securities exchange or inter-dealer quotation service on which the Shares are listed or quoted, or if so required pursuant to a written policy adopted by the Company, Options and Awards shall be subject (including on a retroactive basis) to clawback, forfeiture or similar requirements.
20. Effective Date . The effective date of the Plan shall be the date of its adoption by the Board, subject only to the approval by the affirmative vote of a majority of the votes cast at a meeting of shareholders at which a quorum is present to be held within twelve (12) months of such adoption. No Options or Awards shall vest hereunder unless such shareholder approval is obtained.
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Exhibit 31.1
CERTIFICATION
I, Douglas L. Kennedy, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Peapack-Gladstone Financial Corporation; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
(b) | Any fraud, whether or not material, that involves Management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 7, 2016 | By: /s/ Douglas L. Kennedy |
Name: Douglas L. Kennedy | |
Title: President and Chief Executive Officer
|
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Exhibit 31.2
CERTIFICATION
I, Jeffrey J. Carfora, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Peapack-Gladstone Financial Corporation; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
(b) |
Any fraud, whether or not material, that involves Management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: November 7, 2016 | By: /s/ Jeffrey J. Carfora |
Name: Jeffrey J. Carfora | |
Title: Senior Executive Vice President, | |
Chief Financial Officer | |
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CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Peapack-Gladstone Financial Corporation (the “Corporation”), for the quarterly period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Douglas L. Kennedy, as Chief Executive Officer of the Corporation, and Jeffrey J. Carfora, as Chief Financial Officer of the Corporation, each hereby certify, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. |
/s/ Douglas L. Kennedy |
Name: Douglas L. Kennedy |
Title: President and Chief Executive Officer |
Date: November 7, 2016 |
/s/ Jeffrey J. Carfora |
Name: Jeffrey J. Carfora |
Title: Senior Executive Vice President |
Chief Financial Officer |
Date: November 7, 2016 |
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