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 June 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 August 1, 2016:

16,657,816

 

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

PART 1 FINANCIAL INFORMATION

 

Item 1		Financial Statements
		Consolidated Statements of Condition at June 30, 2016 and December 31, 2015	Page 3
		Consolidated Statements of Income for the three months and six months ended June 30, 2016 and 2015	Page 4
		Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2016 and 2015	Page 5
		Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2016	Page 6
		Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	Page 7
		Notes to Consolidated Financial Statements	Page 8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 44
Item 3		Quantitative and Qualitative Disclosures about Market Risk	Page 66
Item 4		Controls and Procedures	Page 66

 

 

PART 2 OTHER INFORMATION

 

Item 1		Legal Proceedings	Page 66
Item 1A		Risk Factors	Page 66
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds	Page 67
Item 3		Defaults Upon Senior Securities	Page 67
Item 4		Mine Safety Disclosures	Page 67
Item 5		Other Information	Page 67
Item 6		Exhibits	Page 67

 

Item 1. Financial Statements (Unaudited)  

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

(Dollars in thousands, except share data)  

 

		(unaudited)				(audited)
		June 30,				December 31,
		2016				2015
ASSETS
Cash and due from banks		$	18,261			$	11,550
Federal funds sold			101				101
Interest-earning deposits			62,968				58,509
Total cash and cash equivalents			81,330				70,160
Securities available for sale			206,216				195,630
FHLB and FRB stock, at cost			14,623				13,984
Residential mortgage loans held for sale, at fair value			4,133				1,558
Multifamily mortgage loans held for sale, at lower of cost or fair value			60,291				82,200
Loans			3,148,899				2,913,242
Less: Allowance for loan losses			29,219				25,856
Net loans			3,119,680				2,887,386
Premises and equipment			29,199				30,246
Other real estate owned			767				563
Accrued interest receivable			7,733				6,820
Bank owned life insurance			43,325				42,885
Deferred tax assets, net			18,190				15,582
Goodwill			1,573				1,573
Other intangible assets			1,646				1,708
Other assets			15,997				14,364
TOTAL ASSETS		$	3,604,703			$	3,364,659
LIABILITIES
Deposits:
Noninterest-bearing demand deposits		$	469,809			$	419,887
Interest-bearing deposits:
Interest-bearing deposits checking			897,210				861,697
Savings			120,617				115,007
Money market accounts			861,664				810,709
Certificates of deposit  - Retail			466,079				434,450
Subtotal deposits			2,815,379				2,641,750
Interest-bearing demand – Brokered			200,000				200,000
Certificates of deposit - Brokered			93,660				93,720
Total deposits			3,109,039				2,935,470
Overnight borrowings with Federal Home Loan Bank			29,450				40,700
Federal Home Loan Bank advances			83,692				83,692
Capital lease obligation			9,961				10,222
Subordinated debt, net			48,698				—
Accrued expenses and other liabilities			28,330				18,899
TOTAL LIABILITIES			3,309,170				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, 17,065,581 at June 30, 2016 and
16,476,297 at December 31, 2015; outstanding shares, 16,657,403 at
June 30, 2016 and 16,068,119 at December 31, 2015			14,208				13,717
Surplus			224,258				213,203
Treasury stock at cost, 408,178 shares at June 30, 2016 and
December 31, 2015			(8,988	)			(8,988	)
Retained earnings			68,558				58,123
Accumulated other comprehensive loss, net of income tax			(2,503	)			(379	)
TOTAL SHAREHOLDERS’ EQUITY			295,533				275,676
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY		$	3,604,703			$	3,364,659

See accompanying notes to consolidated financial statements

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
INTEREST INCOME
Interest and fees on loans		$	27,735			$	22,624			$	54,488			$	43,611
Interest on securities available for sale:
Taxable			914				1,037				1,840				2,219
Tax-exempt			128				128				249				267
Interest on loans held for sale			182				24				193				34
Interest on interest-earning deposits			76				39				163				82
Total interest income			29,035				23,852				56,933				46,213
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts			1,226				837				2,386				1,627
Interest on certificates of deposit			1,545				1,051				3,034				1,714
Interest on borrowed funds			573				428				1,052				820
Interest on capital lease obligation			120				126				242				254
Interest on subordinated debt			139				—				139				—
Subtotal - interest expense			3,603				2,442				6,853				4,415
Interest on interest-bearing demand – brokered			760				562				1,501				843
Interest on certificates of deposits – brokered			496				504				993				1,028
Total Interest expense			4,859				3,508				9,347				6,286
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES			24,176				20,344				47,586				39,927
Provision for loan losses			2,200				2,200				3,900				3,550
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			21,976				18,144				43,686				36,377
OTHER INCOME
Wealth management fee income			4,899				4,532				9,194				8,563
Service charges and fees			818				837				1,625				1,642
Bank owned life insurance			345				248				687				785
Gain on loans held for sale at fair value (mortgage banking)			309				161				430				309
Gain on loans held for sale at lower of cost or fair value			500				—				624				—
Other income			559				545				1,032				638
Securities gains, net			18				176				119				444
Total other income			7,448				6,499				13,711				12,381
OPERATING EXPENSES
Salaries and employee benefits			11,100				9,872				22,008				19,297
Premises and equipment			2,742				2,778				5,606				5,394
Other operating expense			4,933				3,616				10,367				7,343
Total operating expenses			18,775				16,266				37,981				32,034
INCOME BEFORE INCOME TAX EXPENSE			10,649				8,377				19,416				16,724
Income tax expense			4,085				3,139				7,363				6,478
NET INCOME		$	6,564			$	5,238			$	12,053			$	10,246
EARNINGS PER SHARE
Basic		$	0.41			$	0.34			$	0.75			$	0.68
Diluted		$	0.40			$	0.34			$	0.74			$	0.67
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic			16,172,223				15,082,516				16,015,251				14,996,596
Diluted			16,341,975				15,233,151				16,179,700				15,189,781

 

See accompanying notes to consolidated financial statements

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net income		$	6,564			$	5,238			$	12,053			$	10,246
Other comprehensive income:
Unrealized gains on available for sale
securities:
Unrealized holding gains/(loss) arising
during the period			325				(1,135	)			1,431				97
Less: Reclassification adjustment for net gains
included in net income			18				176				119				444
			307				(1,311	)			1,312				(347	)
Tax effect			(116	)			501				(496	)			142
Net of tax			191				(810	)			816				(205	)
Unrealized loss on cash flow hedges:
Unrealized holding loss			(1,151	)			631				(4,971	)			(361	)
Reclassification adjustment for losses included in
net income			—				—				—				—
			(1,151	)			631				(4,971	)			(361	)
Tax effect			471				(257	)			2,031				148
Net of tax			(680	)			374				(2,940	)			(213	)
Total other comprehensive (loss)/income			(489	)			(436	)			(2,124	)			(418	)
Total comprehensive income		$	6,075			$	4,802			$	9,929			$	9,828

 

See accompanying notes to consolidated financial statements

 

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Six Months Ended June 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															12,053								12,053
Net change in accumulated
other comprehensive income																			(2,124	)			(2,124	)
Issuance of restricted stock, net
of forfeitures, (4,442)  shares			(4	)			4																—
Restricted stock repurchased on
vesting to pay taxes,
(24,049) shares			(20	)			(475	)															(495	)
Amortization of restricted stock							1,429																1,429
Cash dividends declared on
common stock
($0.10 per share)															(1,618	)							(1,618	)
Common stock option expense							34																34
Common stock options exercised,
7,465 net of 1,317 used to
exercise and related tax benefits,
6,148 shares			6				70																76
Sales of shares (Dividend
Reinvestment Program),
591,869 shares			493				9,652																10,145
Issuance of shares for
Employee Stock Purchase
Plan, 19,758 shares			16				341																357
Balance at June 30, 2016
16,657,403 common shares
outstanding		$	14,208			$	224,258			$	(8,988	)		$	68,558			$	(2,503	)		$	295,533

 

See accompanying notes to consolidated financial statements

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2016				2015
OPERATING ACTIVITIES:
Net income		$	12,053			$	10,246
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			1,519				1,605
Amortization of premium and accretion of discount on securities, net			715				938
Amortization of restricted stock			1,429				1,098
Amortization of intangible			62				—
Amortization of subordinated debt costs			5				—
Provision of loan losses			3,900				3,550
Benefit for deferred taxes			(1,073	)			(1,892	)
Stock-based compensation, including ESPP			99				172
Gains on securities, available for sale			(119	)			(444	)
Loans originated for sale at fair value			(28,284	)			(20,661	)
Proceeds from sales of loans at fair value			26,139				21,064
Gains on loans held for sale at fair value			(430	)			(309	)
Net gains on loans held for sale at lower of cost or fair value			(624	)			—
Losses on sale of other real estate owned			—				38
Gain on death benefit			—				(88	)
Increase in cash surrender value of life insurance, net			(440	)			(323	)
Increase in accrued interest receivable			(913	)			(1,080	)
Decrease in other assets			65				2,908
Increase in accrued expenses, capital lease obligations
and other liabilities			2,436				1,175
NET CASH PROVIDED BY OPERATING ACTIVITIES			16,539				17,997
INVESTING ACTIVITIES:
Maturities of securities available for sale			29,416				39,479
Redemptions for FHLB & FRB stock			56,097				32,200
Call of securities available for sale			1,540				14,880
Sales of securities available for sale			5,499				36,865
Purchase of securities available for sale			(46,325	)			(5,310	)
Purchase of FHLB & FRB stock			(56,736	)			(36,197	)
Proceeds from sales of loans held for sale at lower of cost or fair value			138,196				—
Net increase in loans			(352,391	)			(491,732	)
Sales of other real estate owned			330				330
Purchase of premises and equipment			(472	)			(984	)
Acquisition of wealth management company			—				(800	)
Proceeds from death benefit			—				238
NET CASH USED IN INVESTING ACTIVITIES			(224,846	)			(411,031	)
FINANCING ACTIVITIES:
Net increase in deposits			173,569				365,053
Net (decrease)/ increase in overnight borrowings			(11,250	)			32,900
Cash dividends paid on common stock			(1,618	)			(1,531	)
Exercise of Stock Options, net of stock swap			76				29
Restricted stock tax expense			(495	)			(54	)
Subordinated debt			48,693				—
Sales of shares (DRIP Program)			10,145				3,812
Purchase of shares for Profit Sharing Plan			—				306
Issuance of shares for employee stock purchase plan			357				—
NET CASH PROVIDED BY FINANCING ACTIVITIES			219,477				400,515
Net increase in cash and cash equivalents			11,170				7,481
Cash and cash equivalents at beginning of period			70,160				31,207
Cash and cash equivalents at end of period		$	81,330			$	38,688
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest			7,927				5,722
Taxes			9,350				4,198
Transfer of loans to loans held for sale		$	115,663			$	—
Transfer of loans to other real estate owned			534				—

 

See accompanying notes to consolidated financial statements

 

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 June 30, 2016 and the results of operations and comprehensive income for the three and six months ended June 30, 2016 and 2015, and shareholders’ equity and cash flow statements for the six months ended June 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.

 

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.

 

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.

 

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.

 

 

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.

 

 

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 June 30, 2016 and 2015, the Company recorded total compensation cost for stock options of $14 thousand and $56 thousand respectively, with a recognized tax benefit of $1 thousand and $6 thousand for the quarters ended June 30, 2016 and 2015, respectively. The Company recorded total compensation cost for stock options for the six months ended June 30, 2016 and 2015, of $34 thousand and $121 thousand, respectively, with a recognized tax benefit of $3 thousand for the six months ended June 30, 2016 and $12 thousand for the six months ended June 30, 2015. There was approximately $28 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock incentive plans at June 30, 2016. That cost is expected to be recognized over a weighted average period of 0.63 years.

For the Company’s stock option plans, changes in options outstanding during the six months ended June 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			(7,465	)			13.57
Expired during 2016			(13,579	)			21.82
Forfeited during 2016			(442	)			16.12
Balance, June 30, 2016			245,803			$	17.15				3.94 years			$	334
Vested and expected to vest (1)			245,201			$	17.18				3.94 years			$	326
Exercisable at June 30, 2016			235,776			$	17.31				3.85 years			$	283

 

(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 second quarter of 2016 and the exercise price, multiplied by the number of in-the-money options). The Company’s closing stock price on June 30, 2016 was $18.51.

 

There were no stock options granted in the six months ended June 30, 2016.

 

The Company has previously granted performance based and service based restricted stock awards. In the second quarter of 2016, the Company granted 2,788 restricted stock units, which are service based units that vest ratably over a one, three or five year period. 

 

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 June 30, 2016.

 

Changes in nonvested shares dependent on performance criteria for the six months ended June 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, June 30, 2016			92,767			$	18.12

 

 

Changes in service based restricted stock awards/units for the six months ended June 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			(99,826	)			18.37
Forfeited during 2016			(7,677	)			18.88
Balance, June 30, 2016			402,315			$	18.57

 

As of June 30, 2016, there was $6.3 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 1.64 years. Stock compensation expense recorded for the second quarter of 2016 and 2015 totaled $830 thousand and $623 thousand, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded total compensation cost for stock awards/units of $1.4 million and $1.1 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 $29 thousand and $24 thousand of expense in salaries and employee benefits expense for the three months ended June 30, 2016 and 2015, respectively related to the ESPP. Total shares issued under the ESPP during the second quarter of 2016 and 2015 were 10,214 and 7,571, respectively.

The Company recorded $64 thousand and $51 thousand of expense in salaries and employee benefits expense for the six months ended June 30, 2016 and 2015, respectively related to the ESPP. Total shares issued under the ESPP for the six months ended June 30, 2016 and 2015 were 19,758 and 15,459, 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.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except per share data)		2016				2015				2016				2015
Net income to shareholders		$	6,564			$	5,238				12,053				10,246
Basic weighted-average shares outstanding			16,172,223				15,082,516				16,015,251				14,996,596
Plus: common stock equivalents			169,752				150,635				164,449				193,185
Diluted weighted-average shares outstanding			16,341,975				15,233,151				16,179,700				15,189,781
Net income per share
Basic		$	0.41			$	0.34				0.75				0.68
Diluted			0.40				0.34				0.74				0.67

 

Stock options totaling 83,799 and 114,198 shares were not included in the computation of diluted earnings per share in the second quarters of 2016 and 2015, respectively, because they were considered antidilutive. Stock options totaling 85,156 and 254,767 shares were not included in the computation of diluted earnings per share in the six months ended June 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 2012 or by New Jersey tax authorities for years prior to 2011.

 

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, net amortization of the unrealized loss on securities transferred to held to maturity from available for sale and accretion of the non-credit component on certain held to maturity securities with other-than-temporary impairment charges in previous periods.

Transfers of Financial Assets:  Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.  Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Goodwill and Other Intangible Assets:  Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the 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 June 30, 2016 and December 31, 2015 follows:

 

		June 30, 2016
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
U.S. government-sponsored entities		$	7,987			$	15			$	—			$	8,002
Mortgage-backed securities – residential			155,176				2,171				(55	)			157,292
SBA pool securities			7,406				—				(74	)			7,332
State and political subdivisions			27,665				474				(8	)			28,131
Single-issuer trust preferred security			2,999				—				(539	)			2,460
CRA investment			3,000				—				(1	)			2,999
Total		$	204,233			$	2,660			$	(677	)		$	206,216

 

		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

 

 

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 June 30, 2016 and December 31, 2015.

 

		June 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
Mortgage-backed
securities-residential		$	7,795			$	(38	)		$	4,172			$	(17	)		$	11,967			$	(55	)
SBA pool securities			—				—				7,332				(74	)			7,332				(74	)
State and political
subdivisions			911				(8	)			—				—				911				(8	)
Single-issuer trust
preferred security			—				—				2,460				(539	)			2,460				(539	)
CRA investment fund			—				—				2,999				(1	)			2,999				(1	)
Total		$	8,706			$	(46	)		$	16,963			$	(631	)		$	25,669			$	(677	)

 

		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 June 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 June 30, 2016, the unrealized loss on the single-issuer trust preferred security of $539 thousand was related to a debt security issued by a large bank holding company that has experienced declines in all its securities due to the turmoil in the financial markets and a merger. 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 June 30, 2016.

 

 

3. LOANS

 

Loans outstanding, excluding those held for sale, by general ledger classification, as of June 30, 2016 and December 31, 2015, consisted of the following:

 

						% of								% of
		June 30,				Totals				December 31,				Total
(In thousands)		2016				Loans				2015				Loans
Residential mortgage		$	479,839				15.24	%		$	470,869				16.16	%
Multifamily mortgage			1,501,915				47.70				1,416,775				48.63
Commercial mortgage			459,744				14.60				413,118				14.18
Commercial loans			576,169				18.30				512,886				17.60
Construction loans			—				—				1,401				0.05
Home equity lines of credit			63,188				2.01				52,649				1.81
Consumer loans, including fixed
rate home equity loans			67,614				2.14				45,044				1.55
Other loans			430				0.01				500				0.02
Total loans		$	3,148,899				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 June 30, 2016 and December 31, 2015:

 

						% of								% of
		June 31,				Totals				December 31,				Total
(In thousands)		2016				Loans				2015				Loans
Primary residential mortgage		$	510,062				16.21	%		$	483,085				16.59	%
Home equity lines of credit			63,188				2.01				52,804				1.81
Junior lien loan on residence			10,476				0.33				11,503				0.39
Multifamily property			1,501,915				47.72				1,416,775				48.66
Owner-occupied commercial real estate			166,124				5.28				176,276				6.05
Investment commercial real estate			642,530				20.41				568,849				19.54
Commercial and industrial			179,892				5.72				154,295				5.30
Secured by farmland/agricultural
production			174				0.01				179				0.01
Commercial construction loans			99				—				151				0.01
Consumer and other loans			72,844				2.31				47,635				1.64
Total loans		$	3,147,304				100.00	%		$	2,911,552				100.00	%
Net deferred costs			1,595								1,690
Total loans including net deferred costs		$	3,148,899							$	2,913,242

 

 

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 June 30, 2016 and December 31, 2015:

 

		June 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		$	13,374			$	228			$	496,688			$	2,555			$	510,062			$	2,783
Home equity lines
of credit			150				—				63,038				223				63,188				223
Junior lien loan
on residence			166				—				10,310				19				10,476				19
Multifamily
property			—				—				1,501,915				11,639				1,501,915				11,639
Owner-occupied
commercial
real estate			1,241				—				164,883				1,733				166,124				1,733
Investment
commercial
real estate			11,488				219				631,042				9,402				642,530				9,621
Commercial and
industrial			224				133				179,668				2,818				179,892				2,951
Secured by
farmland and
agricultural
production			—				—				174				2				174				2
Commercial
construction			—				—				99				1				99				1
Consumer and
Other			—				—				72,844				247				72,844				247
Total ALLL		$	26,643			$	580			$	3,120,661			$	28,639			$	3,147,304			$	29,219

 

		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

 

Impaired loans include nonaccrual loans of $8.0 million at June 30, 2016 and $6.7 million at December 31, 2015. Impaired loans also include performing TDR loans of $18.6 million at June 30, 2016 and $16.2 million at December 31, 2015. At June 30, 2016, the allowance allocated to TDR loans totaled $417 thousand, of which $157 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 accruing TDR loans were paying in accordance with restructured terms as of June 30, 2016. The Company has not committed to lend additional amounts as of June 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 June 30, 2016 and December 31, 2015 (The average impaired loans on the following tables represent year to date impaired loans.):

 

		June 30, 2016
		Unpaid												Average
		Principal				Recorded				Specific				Impaired
(In thousands)		Balance				Investment				Reserves				Loans
With no related allowance recorded:
Primary residential mortgage		$	13,337			$	11,512			$	—			$	7,577
Owner-occupied commercial real estate			1,451				1,241				—				1,266
Investment commercial real estate			10,438				9,847				—				10,210
Commercial and industrial			231				91				—				6
Home equity lines of credit			439				150				—				217
Junior lien loan on residence			569				166				—				316
Total loans with no related allowance		$	26,465			$	23,007			$	—			$	19,592
With related allowance recorded:
Primary residential mortgage		$	1,899			$	1,862			$	228			$	1,875
Investment commercial real estate			1,657				1,641				219				1,242
Commercial and industrial			179				133				133				137
Total loans with related allowance		$	3,735			$	3,636			$	580			$	3,254
Total loans individually evaluated for
impairment		$	30,200			$	26,643			$	580			$	22,846

 

		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 six months ended June 30, 2016 and 2015, was not material. The Company did not recognize any income on nonaccruing impaired loans for the three and six months ended June 30, 2016 and 2015.

 

Loans held for sale, at lower of cost or fair value at June 30, 2016, represents loans that the Company has the intent to sell. The Company expects sale price to approximate recorded investment. During the six months ending June 30, 2016, proceeds for sale of loans held for sale, at lower of cost or fair value totaled approximately $138 million. The sale included whole loans and participations. The Company recorded gain on sale of whole loans of $624 thousand. No loans were sold at a loss during the three and six months ended June 30, 2016. The sale of these loans were part of the Company’s balance sheet management strategy.

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 June 30, 2016 and December 31, 2015:

		June 30, 2016
						Loans Past Due
						Over 90 Days
						And Still
(In thousands)		Nonaccrual				Accruing Interest
Primary residential mortgage		$	6,030			$	—
Home equity lines of credit			126				—
Junior lien loan on residence			110				—
Owner-occupied commercial real estate			1,241				—
Investment commercial real estate			408				—
Commercial and industrial			134				—
Total		$	8,049			$	—

 

		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			$	—

 

 

The following tables present the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015 by class of loans, excluding nonaccrual loans:

		June 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		$	4,352			$	—			$	—			$	4,352
Home equity lines of credit			—				157				—				157
Investment commercial real estate			1,954				—				—				1,954
Commercial and industrial			—				91				—				91
Consumer and other			22				—				—				22
Total		$	6,328			$	248			$	—			$	6,576

 

		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 $500,000 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.

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 June 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		$	495,876			$	673			$	13,513			$	—
Home equity lines of credit			63,038				—				150				—
Junior lien loan on residence			10,310				—				166				—
Multifamily property			1,499,558				1,950				407				—
Owner-occupied commercial real estate			160,427				906				4,791				—
Investment commercial real estate			606,571				4,127				31,832				—
Commercial and industrial			174,237				5,430				225				—
Farmland			174				—				—				—
Commercial construction			—				99				—				—
Consumer and other loans			72,844				—				—				—
Total		$	3,083,035			$	13,185			$	51,084			$	—

 

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			$	—

 

At June 30, 2016, $25.4 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 June 30, 2016 is summarized below:

		April 1,																June 30,
		2016																2016
		Beginning												Provision				Ending
(In thousands)		ALLL				Charge-offs				Recoveries				(Credit)				ALLL
Primary residential mortgage		$	2,503			$	(285	)		$	7			$	558			$	2,783
Home equity lines of credit			133				(91	)			6				175				223
Junior lien loan on residence			13				—				53				(47	)			19
Multifamily property			11,631				—				—				8				11,639
Owner-occupied commercial real estate			1,683				—				—				50				1,733
Investment commercial real estate			8,527				—				4				1,090				9,621
Commercial and industrial			2,691				—				8				252				2,951
Secured by farmland and agricultural production			2				—				—				—				2
Commercial construction			2				—				—				(1	)			1
Consumer and other loans			136				(4	)			—				115				247
Total ALLL		$	27,321			$	(380	)		$	78			$	2,200			$	29,219

 

 

The activity in the allowance for loan losses for the six months ended June 30, 2016 is summarized below:

		January 1,																June 30,
		2016																2016
		Beginning												Provision				Ending
(In thousands)		ALLL				Charge-offs				Recoveries				(Credit)				ALLL
Primary residential mortgage		$	2,297			$	(298	)		$	21			$	763			$	2,783
Home equity lines of credit			86				(91	)			8				220				223
Junior lien loan on residence			66				—				70				(117	)			19
Multifamily property			11,813				—				—				(174	)			11,639
Owner-occupied commercial real estate			1,679				—				—				54				1,733
Investment commercial real estate			7,590				(258	)			6				2,283				9,621
Commercial and industrial			2,209				(3	)			12				733				2,951
Secured by farmland and agricultural production			2				—				—				—				2
Commercial construction			2				—				—				(1	)			1
Consumer and other loans			112				(5	)			1				139				247
Total ALLL		$	25,856			$	(655	)		$	118			$	3,900			$	29,219

 

The activity in the allowance for loan losses for the three months ended June 30, 2015 is summarized below:

		April 1,																June 30,
		2015																2015
		Beginning												Provision				Ending
(In thousands)		ALLL				Charge-offs				Recoveries				(Credit)				ALLL
Primary residential mortgage		$	2,314			$	(68	)		$	4			$	159			$	2,409
Home equity lines of credit			97				(10	)			1				25				113
Junior lien loan on residence			71				—				10				(8	)			73
Multifamily property			8,738				—				—				(115	)			8,623
Owner-occupied commercial real estate			2,347				—				—				(61	)			2,286
Investment commercial real estate			6,135				—				4				1,640				7,779
Commercial and industrial			1,011				(7	)			21				564				1,589
Secured by farmland and agricultural production			3				—				—				(1	)			2
Commercial construction			23				—				—				(21	)			2
Consumer and other loans			77				(4	)			2				18				93
Total ALLL		$	20,816			$	(89	)		$	42			$	2,200			$	22,969

 

The activity in the allowance for loan losses for the six months ended June 30, 2015 is summarized below:

		January 1,																June 30,
		2015																2015
		Beginning												Provision				Ending
(In thousands)		ALLL				Charge-offs				Recoveries				(Credit)				ALLL
Primary residential mortgage		$	2,923			$	(111	)		$	70			$	(473	)		$	2,409
Home equity lines of credit			156				(110	)			1				66				113
Junior lien loan on residence			109				—				38				(74	)			73
Multifamily property			8,983				—				—				(360	)			8,623
Owner-occupied commercial real estate			1,547				—				11				728				2,286
Investment commercial real estate			4,751				—				10				3,018				7,779
Commercial and industrial			880				(7	)			46				670				1,589
Secured by farmland and agricultural production			4				—				—				(2	)			2
Commercial construction			31				—				—				(29	)			2
Consumer and other loans			96				(21	)			12				6				93
Total ALLL		$	19,480			$	(249	)		$	188			$	3,550			$	22,969

 

Troubled Debt Restructurings:

The Company has allocated $417 thousand and $441 thousand of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of June 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 six month period ended June 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 June 30, 2016:

 

						Pre-Modification				Post-Modification
						Outstanding				Outstanding
		Number of				Recorded				Recorded
(Dollars in thousands)		Contracts				Investment				Investment
Primary residential mortgage			4			$	3,424			$	3,424
Investment commercial real estate			1				79				79
Commercial and industrial			1				91				91
Total			6			$	3,594			$	3,594

 

The following table presents loans by class modified as TDRs during the six month period ended June 30, 2016:

 

						Pre-Modification				Post-Modification
						Outstanding				Outstanding
		Number of				Recorded				Recorded
(Dollars in thousands)		Contracts				Investment				Investment
Primary residential mortgage			6			$	4,556			$	4,556
Investment commercial real estate			1				79				79
Commercial and industrial			1				91				91
Total			8			$	4,726			$	4,726

 

The identification of the troubled debt restructurings did not have a significant impact on the allowance for loan losses.

 

The following table presents loans by class modified as TDRs during the three and six month periods ended June 30, 2015:

 

						Pre-Modification				Post-Modification
						Outstanding				Outstanding
		Number of				Recorded				Recorded
(Dollars in thousands)		Contracts				Investment				Investment
Primary residential mortgage			2			$	225			$	225
Owner-occupied real estate			1				767				767
Total			3			$	992			$	992

 

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 six months ended June 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 and six month periods ended June 30, 2015

 

		Number of				Recorded
(Dollars in thousands)		Contracts				Investment
Primary residential mortgage			2			$	532
Total			2			$	532

 

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.

 

 

4. DEPOSITS

Certificates of deposit, excluding brokered certificates of deposit over $250,000 totaled $122.4 million and $82.2 million at June 30, 2016 and 2015, respectively.

The following table sets forth the details of total deposits as of June 30, 2016 and December 31, 2015:

 

		June 30,								December 31,
		2016								2015
(In thousands)		$				%				$				%
Noninterest-bearing demand deposits		$	469,809				15.11	%		$	419,887				14.30	%
Interest-bearing checking			897,210				28.86				861,697				29.36
Savings			120,617				3.88				115,007				3.92
Money market			861,664				27.72				810,709				27.62
Certificates of deposit			466,079				14.99			$	434,450				14.80
Subtotal deposits			2,815,379				90.56				2,641,750				90.00
Interest-bearing demand - Brokered			200,000				6.43				200,000				6.81
Certificates of deposit - Brokered			93,660				3.01				93,720				3.19
Total deposits		$	3,109,039				100.00	%		$	2,935,470				100.00	%

 

 

The scheduled maturities of certificates of deposit, including brokered certificates of deposit, as of June 30, 2016 are as follows:

(In thousands)
2016		$	54,290
2017			128,712
2018			192,075
2019			67,680
2020			34,545
Over 5 Years			82,437
Total		$	559,739

 

5. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of New York (“FHLB”) totaled $83.7 million at both June 30, 2016 and December 31, 2015, with a weighted average interest rate of 1.78 percent.

At June 30, 2016, advances totaling $71.7 million with a weighted average interest rate of 1.57 percent had fixed maturity dates. The fixed rate advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $378.9 million and multifamily mortgages totaling $1.0 billion at June 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.

Also at June 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 $16.6 million at June 30, 2016.

The final maturity dates of the FHLB advances are scheduled as follows:

(In thousands)
2016		$	21,897
2017			23,897
2018			34,898
2019			3,000
2020			—
Over 5 years			—
Total		$	83,692

 

Overnight borrowings with the Federal Home Loan Bank totaled $29.5 million with a weighted average interest rate of 0.57 percent and $40.7 million with a weighted average rate of 0.52 percent at June 30, 2016 and December 31, 2015, respectively.

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.

 

The following tables present the statements of income and total assets for the Corporation’s reportable segments for the three and six months ended June 30, 2016 and 2015.

		Three Months Ended June 30, 2016
						Wealth
						Management
(In thousands)		Banking				Division				Total
Net interest income		$	22,778			$	1,398			$	24,176
Noninterest income			2,432				5,016				7,448
Total income			25,210				6,414				31,624
Provision for loan losses			2,200				—				2,200
Salaries and benefits			9,033				2,067				11,100
Premises and equipment expense			2,507				235				2,742
Other noninterest expense			3,529				1,404				4,933
Total noninterest expense			17,269				3,706				20,975
Income before income tax expense			7,941				2,708				10,649
Income tax expense			3,032				1,053				4,085
Net income		$	4,909			$	1,655			$	6,564

 

		Three Months Ended June 30, 2015
						Wealth
						Management
(In thousands)		Banking				Division				Total
Net interest income		$	19,351			$	993			$	20,344
Noninterest income			1,896				4,603				6,499
Total income			21,247				5,596				26,843
Provision for loan losses			2,200				—				2,200
Salaries and benefits			7,830				2,042				9,872
Premises and equipment expense			2,549				229				2,778
Other noninterest expense			2,461				1,155				3,616
Total noninterest expense			15,040				3,426				18,466
Income before income tax expense			6,207				2,170				8,377
Income tax expense			2,294				845				3,139
Net income		$	3,913			$	1,325			$	5,238

 

		Six Months Ended June 30, 2016
						Wealth
						Management
(In thousands)		Banking				Division				Total
Net interest income		$	44,768			$	2,818			$	47,586
Noninterest income			4,312				9,399				13,711
Total income			49,080				12,217				61,297
Provision for loan losses			3,900				—				3,900
Salaries and benefits			17,845				4,163				22,008
Premises and equipment expense			5,144				462				5,606
Other noninterest expense			7,446				2,921				10,367
Total noninterest expense			34,335				7,546				41,881
Income before income tax expense			14,745				4,671				19,416
Income tax expense			5,546				1,817				7,363
Net income		$	9,199			$	2,854			$	12,053
Total assets for period end		$	3,555,910			$	48,793			$	3,604,703

 

		Six Months Ended June 30, 2015
						Wealth
						Management
(In thousands)		Banking				Division				Total
Net interest income		$	37,921			$	2,006			$	39,927
Noninterest income			3,673				8,708				12,381
Total income			41,594				10,714				52,308
Provision for loan losses			3,550				—				3,550
Salaries and benefits			15,370				3,927				19,297
Premises and equipment expense			4,934				460				5,394
Other noninterest expense			4,956				2,387				7,343
Total noninterest expense			28,810				6,774				35,584
Income before income tax expense			12,784				3,940				16,724
Income tax expense			4,945				1,533				6,478
Net income		$	7,839			$	2,407			$	10,246
Total assets for period end		$	3,084,507			$	33,663			$	3,118,170

 

 

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.

 

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 June 30, 2016, all collateral-dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old.

 

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
		June 30,				Assets				Inputs				Inputs
(In thousands)		2016				(Level 1)				(Level 2)				(Level 3)
Assets:
Available for sale:
U.S. government-sponsored
entities		$	8,002			$	—			$	8,002			$	—
Mortgage-backed securities-
residential			157,292				—				157,292				—
SBA pool securities			7,332				—				7,332				—
State and political subdivisions			28,131				—				28,131				—
Single-Issuer Trust Preferred			2,460				—				2,460				—
CRA investment fund			2,999				2,999				—				—
Loans held for sale, at fair value			4,133				—				4,133				—
Derivatives:
Loan level swaps			2,908				—				2,908				—
Total		$	213,257			$	2,999			$	210,258			$	—
Liabilities:
Derivatives:
Cash flow hedges		$	(6,302	)		$	—			$	(6,302	)		$	—
Loan level swaps			(2,908	)			—				(2,908	)			—
Total		$	(9,210	)		$	—			$	(9,210	)		$	—

 

 

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 June 30, 2016 and December 31, 2015.

 

The following tables present residential loans held for sale, at fair value for the periods indicated:

 

(In thousands)		June 30, 2016				December 31, 2015
Residential loans contractual balance		$	4,067			$	1,536
Fair value adjustment			66				22
Total fair value of residential loans held for sale		$	4,133			$	1,558

 

There were no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2016.

 

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
						Identical				Observable				Unobservable
		June 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 June 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 six months ended June 30, 2016 and June 30, 2015.

The carrying amounts and estimated fair values of financial instruments at June 30, 2016 are as follows:

 

						Fair Value Measurements at June 30, 2016 using
		Carrying
(In thousands)		Amount				Level 1				Level 2				Level 3				Total
Financial assets
Cash and cash equivalents		$	81,330			$	81,330			$	—			$	—			$	81,330
Securities available for sale			206,216				2,999				203,217				—				206,216
FHLB and FRB stock			14,623				—				—				—				N/A
Loans held for sale, at fair value			4,133				—				4,133				—				4,133
Loans held for sale, at lower of cost
or fair value			60,291				—				60,291				—				60,291
Loans, net of allowance for loan losses			3,119,680				—				—				3,127,282				3,127,282
Accrued interest receivable			7,733				—				624				7,109				7,733
Loan level swap derivatives			2,908				—				2,908				—				2,908
Financial liabilities
Deposits		$	3,109,039			$	2,549,300			$	567,473			$	—			$	3,116,773
Overnight borrowings			29,450				—				29,450				—				29,450
Federal home loan bank advances			83,692				—				84,839				—				84,839
Subordinated debt			48,698				—				—				48,698				48,698
Accrued interest payable			1,177				125				919				133				1,177
Cash flow hedge derivatives			6,302				—				6,302				—				6,302
Loan level swap derivatives			2,908				—				2,908				—				2,908

 

 

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: It is not practicable to determine the fair value of FHLB or FRB stock 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.

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								Six Months Ended
		June 30,								June 30,
(In thousands)		2016				2015				2016				2015
FDIC assessment		$	1,581			$	431				3,140				913
Wealth management division
other expense			481				512				1,103				1,133
Professional and legal fees			756				583				1,742				1,351
Loan expense			121				76				233				189
Other operating expenses			1,994				2,014				4,149				3,757
Total other operating expenses		$	4,933			$	3,616				10,367				7,343

 

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 June 30, 2016 and 2015:

										Amount				Other
										Reclassified				Comprehensive
						Other				From				Income/(Loss)
						Comprehensive				Accumulated				Three Months
		Balance at				Income/(Loss)				Other				Ended				Balance at
		April 1,				Before				Comprehensive				June 30,				June 30,
(In thousands)		2016				Reclassifications				(Income)				2016				2016
Net unrealized holding gain
on securities available for sale,
net of tax		$	1,033			$	203			$	(12	)		$	191			$	1,224
Losses on cash flow hedges			(3,047	)			(680	)			—				(680	)			(3,727	)
Accumulated other
comprehensive income/(loss),
net of tax		$	(2,014	)		$	(477	)		$	(12	)		$	(489	)		$	(2,503	)

 

 

										Amount				Other
										Reclassified				Comprehensive
						Other				From				Income/(Loss)
						Comprehensive				Accumulated				Three Months
		Balance at				Income/(Loss)				Other				Ended				Balance at
		April 1,				Before				Comprehensive				June 30,				June 30,
(In thousands)		2015				Reclassifications				(Income)				2015				2015
Net unrealized holding gain
on securities available for sale,
net of tax		$	1,926			$	(706	)		$	(104	)		$	(810	)		$	1,116
Losses on cash flow hedges			(687	)			374				—				374				(313	)
Accumulated other
comprehensive income,
net of tax		$	1,239			$	(332	)		$	(104	)		$	(436	)		$	803

 

The following represents the reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2016 and 2015:

		Three Months Ended
		June 30,
(In thousands)		2016				2015				Affected Line Item in Income
Unrealized gains on
securities available for sale:
Realized net gain on securities sales		$	18			$	176			Securities gains, net
Income tax expense			(6	)			(72	)		Income tax expense
Total reclassifications, net of tax		$	12			$	104

 

The following is a summary of the accumulated other comprehensive (loss)/income balances, net of tax, for the six months ended June 30, 2016 and 2015:

										Amount				Other
										Reclassified				Comprehensive
						Other				From				Income/(Loss)
						Comprehensive				Accumulated				Six Months
		Balance at				Income/(Loss)				Other				Ended				Balance at
		January 1,				Before				Comprehensive				June 30,				June 30,
(In thousands)		2016				Reclassifications				(Income)				2016				2016
Net unrealized holding gain
on securities available for sale,
net of tax		$	408			$	890			$	(74	)		$	816			$	1,224
Losses on cash flow hedges			(787	)			(2,940	)			—				(2,940	)			(3,727	)
Accumulated other
comprehensive income/(loss),
net of tax		$	(379	)		$	(2,050	)		$	(74	)		$	(2,124	)		$	(2,503	)

 

 

										Amount				Other
										Reclassified				Comprehensive
						Other				From				Income/(Loss)
						Comprehensive				Accumulated				Six Months
		Balance at				Income/(Loss)				Other				Ended				Balance at
		January 1,				Before				Comprehensive				June 30,				June 30,
(In thousands)		2015				Reclassifications				(Income)				2015				2015
Net unrealized holding gain
on securities available for sale,
net of tax		$	1,321			$	57			$	(262	)		$	(205	)		$	1,116
Losses on cash flow hedges			(100	)			(213	)			—				(213	)			(313	)
Accumulated other
comprehensive income,
net of tax		$	1,221			$	(156	)		$	(262	)		$	(418	)		$	803

 

The following represents the reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2016 and 2015:

		Six Months Ended
		June 30,
(In thousands)		2016				2015				Affected Line Item in Income
Unrealized gains on
securities available for sale:
Realized net gain on securities sales		$	119			$	444			Securities gains, net
Income tax expense			(45	)			(182	)		Income tax expense
Total reclassifications, net of tax		$	74			$	262

 

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 June 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 six months ended June 30, 2016. As such, no amount of ineffectiveness has been included in net income during the three and six months periods ended June 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.

 

The following information about the interest rate swaps designated as cash flow hedges as of June 30, 2016 and December 31, 2015 is presented in the following table:

(Dollars in thousands)		June 30, 2016				December 31, 2015
Notional amount		$	180,000			$	180,000
Weighted average pay rate			1.64	%			1.64	%
Weighted average receive rate			0.52	%			0.29	%
Weighted average maturity			3.75	years			4.25	years
Unrealized loss		$	(6,302	)		$	(1,331	)
Number of contracts			9				9

 

Net interest expense recorded on these swap transactions totaled $503 thousand and $1.0 million for the three and six months ended June 30, 2016 and is reported as a component of interest expense. Net interest expenses recorded on these swap transactions totaled $376 thousand and $471 thousand for the three and six months ended June 30, 2015 and is reported as a component of interest expense.

Cash Flow Hedges

 

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 June 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

$

(680

)

$

—

$

—

 

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 June 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

$

374

$

—

$

—

 

 

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 six months ended June 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

$

(2,940

)

$

—

$

—

 

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 six months ended June 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

$

(213

)

$

—

$

—

 

The following tables reflect the cash flow hedges included in the financial statements as of June 30, 2016 and December 31, 2015:

		June 30, 2016
		Notional				Fair
(In thousands)		Amount				Value
Interest rate swaps related to interest-bearing
demand brokered deposits		$	180,000			$	(6,302	)
Total included in other assets		$	—			$	—
Total included in other liabilities		$	180,000			$	(6,302	)

 

		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.

Information about these swaps is as follows:

(Dollars in thousands)		June 30, 2016				December 31, 2015
Notional amount		$	34,606			$	27,259
Fair value		$	2,908			$	1,106
Weighted average pay rates			3.25	%			3.06	%
Weighted average receive rates			1.86	%			1.44	%
Weighted average maturity			14.0	years			15.8	years
Number of contracts			3				3

 

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 $43.3 million of common equity 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 is currently evaluating the potential impact of ASU 2014-09, and subsequent amendments, 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.

 

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 financial position, results of operations and cash flows.

 

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;

·

higher than expected FDIC insurance premiums;

·

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;

·

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 six months ended June 30, 2016 and 2015. For equity securities, the entire amount of impairment is recognized through earnings.

EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended June 30, 2016 and 2015.

 

		Three Months Ended June 30,								Change
(Dollars in thousands, except per share data)		2016(A)				2015				2016 vs 2015
Results of Operations:
Net interest income		$	24,176			$	20,344			$	3,832
Provision for loan losses			2,200				2,200				—
Net interest income after provision
for loan losses			21,976				18,144				3,832
Other income			7,448				6,499				949
Operating expense			18,775				16,266				2,509
Income before income tax expense			10,649				8,377				2,272
Income tax expense			4,085				3,139				946
Net income		$	6,564			$	5,238			$	1,326
Total revenue (Net interest income
plus other income)		$	31,624			$	26,843			$	4,781
Diluted earnings per share		$	0.40			$	0.34			$	0.06
Diluted average shares outstanding			16,341,975				15,233,151				1,108,824
Return on average assets annualized (ROAA)			0.73	%			0.70	%			0.03
Return on average equity
annualized (ROAE)			9.06				8.24				0.82

 

(A)	The quarter ended June 2016 included $950 thousand of additional charges related to increased FDIC premiums.

The following table presents certain key aspects of our performance for the six months ended June 30, 2016 and 2015.

 

		Six Months Ended June 30,								Change
(Dollars in thousands, except per share data)		2016(A)				2015				2016 vs 2015
Results of Operations:
Net interest income		$	47,586			$	39,927			$	7,659
Provision for loan losses			3,900				3,550				350
Net interest income after provision
for loan losses			43,686				36,377				7,309
Other income			13,711				12,381				1,330
Operating expense			37,981				32,034				5,947
Income before income tax expense			19,416				16,724				2,692
Income tax expense			7,363				6,478				885
Net income		$	12,053			$	10,246			$	1,807
Total revenue (Net interest income
plus other income)		$	61,297			$	52,308			$	8,989
Diluted earnings per share		$	0.74			$	0.67			$	0.07
Diluted average shares outstanding			16,179,700				15,189,781				989,919
Return on average assets annualized (ROAA)			0.68	%			0.70	%			(0.02	)
Return on average equity
annualized (ROAE)			8.45				8.19				0.26

 

(A)	The six months ended June 2016 included $1.90 million of additional charges related to increased FDIC premiums.

 

		June 30,				December 31,				Change
		2016				2015				2016 vs 2015
Selected Balance Sheet Ratios:
Total capital (Tier I + II) to risk-weighted assets			12.99	%			11.40	%			1.59	%
Tier I leverage ratio			8.19				8.10				0.09
Loans to deposits			101.28				99.24				2.04
Allowance for loan losses to total
loans			0.93				0.89				0.04
Allowance for loan losses to
nonperforming loans			363.01				383.22				(20.21	)
Nonperforming loans to total loans			0.26				0.23				0.03

 

For the second quarter of 2016, the Company recorded net income of $6.6 million compared to $5.2 million for the same quarter of 2015. For the three months ended June 30, 2016 and 2015, diluted earnings per share were $0.40 and $0.34, respectively. Annualized return on average assets was 0.73 percent and annualized return on average equity was 9.06 percent for the second quarter of 2016, compared to 0.70 percent and 8.24 percent, respectively, for the same quarter of 2015.

 

For the six months ended June 30, 2016, the Company recorded net income of $12.1 million compared to $10.2 million for the same period of 2015. Diluted earnings per common share were $0.74 and $0.67 for the first six months of 2016 and 2015, respectively. Annualized return on average assets was 0.68 percent and annualized return on average common equity was 8.45 percent for the first six months of 2016, compared to 0.70 percent and 8.19 percent, respectively, for the six months ending June 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 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.

 

 

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 June 30,
(Dollars in thousands)		2016				2015
Net interest income		$	24,410			$	20,462
Interest rate spread			2.65	%			2.68	%
Net interest margin			2.79				2.80

 

		Six Months Ended June 30,
(Dollars in thousands)		2016				2015
Net interest income		$	48,024			$	40,153
Interest rate spread			2.68	%			2.73	%
Net interest margin			2.80				2.84

 

Net interest income, on a fully tax-equivalent basis, for the three months ended June 30, 2016, grew $3.9 million, or 19 percent from the three months ended June 30, 2015. The six months ended June 30, 2016 increased $7.9 million or 20 percent when compared to the same period in 2015. This growth is due to increased earning assets, principally loan growth. Net interest spread and margin for the three and six months ending June 30, 2016 declined when compared to the same 2015 periods partially due to 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 six months ended June 30, 2016 was benefitted by significant loan growth during 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
		June 30,				June 30,
(In thousands)		2016				2015
Residential mortgage loans retained		$	32,513			$	23,117
Residential mortgage loans sold			20,221				10,978
Total residential mortgage loans			52,734				34,095
Commercial real estate loans			36,554				29,561
Multifamily properties			150,709				206,803
Commercial loans (A)			61,309				136,483
SBA			2,285				—
Wealth Lines of Credit (A)			785				6,150
Total commercial loans			251,642				378,997
Installment loans			1,077				1,128
Home equity lines of credit (A)			14,435				3,225
Total loans closed		$	319,888			$	417,445

 

(A)	Includes loans and lines of credit that closed in the period, but not necessarily funded.

 

		For the Six Months Ended
		June 30,				June 30,
(In thousands)		2016				2015
Residential mortgage loans retained		$	50,260			$	40,103
Residential mortgage loans sold			28,283				19,916
Total residential mortgage loans			78,543				60,019
Commercial real estate loans			45,893				87,348
Multifamily properties			258,744				415,837
Commercial loans (A)			128,797				177,179
SBA			3,340				—
Wealth Lines of Credit (A)			2,585				16,410
Total commercial loans			439,359				696,774
Installment loans			1,563				1,472
Home equity lines of credit (A)			18,039				6,602
Total loans closed		$	537,504			$	764,867

 

(A)	Includes loans and lines of credit that closed in the period, but not necessarily funded.

 

 

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.

 

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

 

		June 30, 2016												June 30, 2015
		Average				Income/								Average				Income/
(Dollars in thousands)		Balance				Expense				Yield				Balance				Expense				Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (1)		$	200,804			$	914				1.82	%		$	244,087			$	1,037				1.70	%
Tax-exempt (1) (2)			27,127				211				3.11				30,941				210				2.71
Loans (2) (3):
Mortgages			473,293				3,927				3.32				468,082				3,824				3.27
Commercial mortgages			2,047,112				17,830				3.48				1,663,150				14,767				3.55
Commercial			552,955				5,392				3.90				360,517				3,347				3.71
Commercial construction			1,305				13				3.98				5,713				61				4.27
Installment			63,158				420				2.66				29,169				256				3.51
Home equity			58,146				475				3.27				51,710				417				3.23
Other			462				11				9.52				527				12				9.11
Total loans			3,196,431				28,068				3.51				2,578,868				22,684				3.52
Federal funds sold			101				—				0.25				101				—				0.10
Interest-earning deposits			79,264				76				0.39				69,780				39				0.22
Total interest-earning assets			3,503,727				29,269				3.34	%			2,923,777				23,970				3.28	%
Noninterest-earning assets:
Cash and due from banks			16,122												6,385
Allowance for loan losses			(28,056	)											(21,493	)
Premises and equipment			29,452												31,983
Other assets			88,907												66,131
Total noninterest-earning assets			106,425												83,006
Total assets		$	3,610,152											$	3,006,783
LIABILITIES:
Interest-bearing deposits:
Checking		$	906,611			$	607				0.27	%		$	670,473			$	359				0.21	%
Money markets			818,453				602				0.29				703,236				462				0.26
Savings			120,094				17				0.06				117,411				16				0.05
Certificates of deposit - retail			450,675				1,545				1.37				343,781				1,051				1.22
Subtotal interest-bearing deposits			2,295,833				2,771				0.48				1,834,901				1,888				0.41
Interest-bearing demand - brokered			200,000				760				1.52				265,802				562				0.85
Certificates of deposit - brokered			93,642				496				2.12				98,191				504				2.05
Total interest-bearing deposits			2,589,475				4,027				0.62				2,198,894				2,954				0.54
Borrowings			222,667				573				1.03				146,441				428				1.17
Capital lease obligation			10,007				120				4.80				10,515				126				4.79
Subordinated debt			8,777				139				6.33				—				—				—
Total interest-bearing liabilities			2,830,926				4,859				0.69	%			2,355,850				3,508				0.60	%
Noninterest-bearing liabilities:
Demand deposits			464,074												384,604
Accrued expenses and
other liabilities			25,247												12,133
Total noninterest-bearing liabilities			489,321												396,737
Shareholders’ equity			289,905												254,196
Total liabilities and
shareholders’ equity		$	3,610,152											$	3,006,783
Net interest income
(tax-equivalent basis)							24,410												20,462
Net interest spread											2.65	%											2.68	%
Net interest margin (4)											2.79	%											2.80	%
Tax equivalent adjustment							(234	)											(118	)
Net interest income						$	24,176											$	20,344

 

(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.

 

Average Balance Sheet

Unaudited

Six Months Ended

 

		June 30, 2016												June 30, 2015
		Average				Income/								Average				Income/
(Dollars in thousands)		Balance				Expense				Yield				Balance				Expense				Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (1)		$	200,192			$	1,840				1.84	%		$	258,934			$	2,219				1.71	%
Tax-exempt (1) (2)			25,586				411				3.21				34,268				441				2.57
Loans (2) (3):
Mortgages			469,895				7,745				3.30				467,293				7,619				3.26
Commercial mortgages			2,003,619				35,000				3.49				1,562,073				28,356				3.63
Commercial			539,426				10,492				3.89				338,435				6,244				3.69
Commercial construction			1,350				27				4.00				5,821				123				4.23
Installment			54,032				755				2.79				28,484				508				3.57
Home equity			55,601				915				3.29				51,188				822				3.21
Other			474				23				9.70				528				25				9.47
Total loans			3,124,397				54,957				3.52				2,453,822				43,697				3.56
Federal funds sold			101				—				0.24				101				—				0.10
Interest-earning deposits			78,583				163				0.42				80,658				82				0.20
Total interest-earning assets			3,428,859				57,371				3.35	%			2,827,783				46,439				3.28	%
Noninterest-earning assets:
Cash and due from banks			15,862												6,594
Allowance for loan losses			(27,319	)											(20,778	)
Premises and equipment			29,726												32,118
Other assets			86,070												65,006
Total noninterest-earning assets			104,339												82,940
Total assets		$	3,533,198											$	2,910,723
LIABILITIES:
Interest-bearing deposits:
Checking		$	894,554			$	1,178				0.26	%		$	650,909			$	673				0.21	%
Money markets			819,135				1,175				0.29				706,893				924				0.26
Savings			118,327				33				0.06				115,434				30				0.05
Certificates of deposit - retail			446,619				3,034				1.36				296,085				1,714				1.16
Subtotal interest-bearing deposits			2,278,635				5,420				0.48				1,769,321				3,341				0.38
Interest-bearing demand - brokered			200,000				1,501				1.50				253,221				843				0.67
Certificates of deposit - brokered			93,658				993				2.12				112,219				1,028				1.83
Total interest-bearing deposits			2,572,293				7,914				0.62				2,134,761				5,212				0.49
Borrowings			188,971				1,052				1.11				128,142				820				1.28
Capital lease obligation			10,074				242				4.80				10,575				254				4.80
Subordinated debt			4,388				139				6.34				—				—				—
Total interest-bearing liabilities			2,775,726				9,347				0.67	%			2,273,478				6,286				0.55	%
Noninterest-bearing liabilities:
Demand deposits			449,922												375,527
Accrued expenses and
other liabilities			22,373												11,446
Total noninterest-bearing liabilities			472,295												386,973
Shareholders’ equity			285,177												250,272
Total liabilities and
shareholders’ equity		$	3,533,198											$	2,910,723
Net interest income
(tax-equivalent basis)							48,024												40,153
Net interest spread											2.68	%											2.73	%
Net interest margin (4)											2.80	%											2.84	%
Tax equivalent adjustment							(438	)											(226	)
Net interest income						$	47,586											$	39,927

 

(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.

 

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 Ended June 30, 2016								Three Months Ended June 30, 2015
		Difference due to								Change In
		Change In:								Income/
(In Thousands):		Volume				Rate				Expense
ASSETS:
Investments		$	(170	)		$	48			$	(122	)
Loans			5,404				(20	)			5,384
Federal funds sold			—				—				—
Interest-earning deposits			5				32				37
Total interest income		$	5,239			$	60			$	5,299
LIABILITIES:
Interest-bearing checking		$	190			$	58			$	248
Money market			105				35				140
Savings			—				1				1
Certificates of deposit - retail			362				132				494
Certificates of deposit - brokered			(24	)			16				(8	)
Interest bearing demand brokered			(140	)			338				198
Borrowed funds			109				36				145
Capital lease obligation			(6	)			—				(6	)
Subordinated debt			139				—				139
Total interest expense		$	735			$	616			$	1,351
Net interest income		$	4,504			$	(556	)		$	3,948

 

 

		Six Months Ended June 30, 2016								Six Months Ended June 30, 2015
		Difference due to								Change In
		Change In:								Income/
(In Thousands):		Volume				Rate				Expense
ASSETS:
Investments		$	(552	)		$	143			$	(409	)
Loans			11,932				(672	)			11,260
Federal funds sold			—				—				—
Interest-earning deposits			(2	)			83				81
Total interest income		$	11,378			$	(446	)		$	10,932
LIABILITIES:
Interest-bearing checking		$	448			$	56			$	504
Money market			198				53				251
Savings			(3	)			6				3
Certificates of deposit - retail			986				334				1,320
Certificates of deposit - brokered			(185	)			150				(35	)
Interest bearing demand brokered			(392	)			1,051				659
Borrowed funds			178				54				232
Capital lease obligation			(13	)			1				(12	)
Subordinated debt			139				—				139
Total interest expense		$	1,356			$	1,705			$	3,061
Net interest income		$	10,022			$	(2,151	)		$	7,871

 

Interest income on earning assets, on a fully tax-equivalent basis, totaled $29.3 million for the second quarter of 2016 compared to $24.0 million for the same quarter of 2015, reflecting an increase of $5.3 million or 22 percent from the second quarter in 2015. Average earning assets totaled $3.50 billion for the second quarter of 2016, an increase of $580.0 million or 20 percent from the same period of 2015. The average commercial loan portfolio increased $192.4 million or 53 percent from the second quarter of 2015, averaging $553.0 million for the second quarter of 2016. The average commercial mortgage portfolio (which includes multifamily mortgage loans) increased $351.0 million to $2.01 billion for the second quarter of 2016 when compared to the same period in 2015. The increase was attributable to the addition of seasoned banking professionals over the course of 2015; a more concerted focus on the client service aspect of the lending process; and more of a focus on New York City markets. The increase was also due to demand from borrowers looking to refinance multifamily mortgages held by other institutions. Multifamily lending will remain a focus of the Company, however, it is anticipated that multifamily loan growth will be less robust than in 2015.

 

For the quarters ended June 30, 2016 and 2015, the average rates earned on earning assets was 3.34 percent and 3.28 percent, respectively, an increase of 6 basis points. The increased overall yield was due to growth in commercial loans at higher yields than the existing portfolio, as well as certain cash flows from the investment portfolio and interest-earning deposits being invested in higher yielding loans.

 

For the second quarter of 2016, total interest-bearing deposits averaged $2.59 billion, increasing $390.6 million or 18 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 in Footnote 4 and 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 62 basis points and 54 basis points for the second quarters of 2016 and 2015, respectively, an increase of 8 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 competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth.

 

For the second quarters of 2016 and 2015, average borrowings totaled $222.7 million and $146.4 million, respectively, increasing $76.2 million when compared to the same period of 2015. The increase was due to periodic increased short-term borrowings to fund loan growth ahead of deposit growth.

 

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 $411.2 million for the June 30, 2016 quarter and $232.2 million for June 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 second quarter of 2016, the subordinated debt balance averaged $8.8 million.

 

Interest income on earning assets, on a fully tax-equivalent basis increased by $10.9 million or 24 percent for the first six months of 2016 compared to the same period in 2015. For the six months ended June 30, 2016 average earning assets increased $601.1 million from $2.83 billion for the same period in 2015. For the six months ended June 30, 2016 the average commercial portfolio increased $201.0 million or 59 percent from the same period in 2015. This increase was due to the addition of highly regarded bankers with industry and capital markets expertise in 2015 and in the first half of 2016. For the six months ended June 30, 2016 the average commercial mortgage portfolio (which includes multifamily mortgage loans) increased $424.9 million from $1.56 billion in the same period in 2015. The increase was attributable to the addition of seasoned banking professionals over the course of 2015; a more concerted focus on the client service aspect of the lending process; more of a focus on New Jersey markets; and a focus on New York City multifamily markets through 2015 and continuing into the first half of 2016. The increase was also due to demand from borrowers looking to refinance multifamily and other commercial mortgages held by other institutions.

 

For the six months ended June 30, 2016 and 2015, the average rates earned on earning assets was 3.35 percent and 3.28 percent, respectively, an increase of 7 basis points. The increase in the average rates on earning assets was partially due to the maintenance of much larger commercial loans which produce a higher yield, as well as certain cash flows from the investment portfolio and interest-earning deposits being invested in higher yielding loans

 

For the six months ended June 30, 2016 total interest-bearing deposits averaged $2.57 billion, increasing $437.5 million or 20 percent from the average balance for the same 2015 period. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand, but including reciprocal funds) of $509.3 million for the first half 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 six 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 six months ended June 30, 2016 were 62 basis points compared to 49 basis points for the same period in 2015, reflecting an increase of 13 basis points. The increase in the average rate paid on deposits was principally due to competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth.

 

Average borrowings increased by $60.8 million to $189.0 million for the six months ended June 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.

 

 

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 June 30, 2016, the Company had investment securities available for sale with a fair value of $206.2 million compared with $195.6 million at December 31, 2015. Net unrealized gains (net of income tax) of $1.2 million and $408 thousand were included in shareholders’ equity at June 30, 2016 and December 31, 2015, respectively.

 

 

The carrying value of investment securities available for sale as of June 30, 2016 and December 31, 2015 are shown below:

 

		June 30,				December 31,
(In thousands)		2016				2015
U.S. treasury and U.S. government-
Sponsored entity bonds		$	8,002			$	—
Mortgage-backed securities-residential
(principally U.S. government-sponsored
entities)			157,292				160,607
SBA pool securities			7,332				7,520
State and political subdivision			28,131				22,029
Single-issuer trust preferred security			2,460				2,535
CRA investment fund			2,999				2,939
Total		$	206,216			$	195,630

 

 

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of June 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-		$	—			$	—			$	8,002			$	—			$	8,002
Sponsored entity bonds			—	%			—	%			2.21	%			—	%			2.21	%
Mortgage-backed securities-		$	9			$	17,460			$	41,034			$	98,789			$	157,292
residential (1)			4.33	%			2.68	%			1.69	%			1.59	%			1.73	%
SBA pool securities		$	—			$	—			$	—			$	7,332			$	7,332
			—	%			—	%			—	%			0.73	%			0.73	%
State and political subdivisions (2)		$	6,925			$	9,911			$	6,293			$	5,002			$	28,131
			1.83	%			3.49	%			3.15	%			3.02	%			2.92	%
Single-issuer trust preferred security (1)		$	—			$	—			$	—			$	2,460			$	2,460
			—	%			—	%			—	%			1.44	%			1.44	%
Total		$	6,934			$	27,371			$	55,329			$	113,583			$	203,217
			1.83	%			2.98	%			1.93	%			1.59	%			1.87	%

 

(1)    Shown using state 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 June 30,								Change
(In thousands)		2016				2015				2016 vs 2015
Service charges and fees		$	818			$	837			$	(19	)
Gain on sale of loans (mortgage banking)			309				161				148
Gain on sale of loans, at lower of
cost or fair value			500				—				500
Bank owned life insurance			345				248				97
Securities gains			18				176				(158	)
Other income			559				545				14
Total other income		$	2,549			$	1,967			$	582

 

		Six Months Ended June 30,								Change
(In thousands)		2016				2015				2016 vs 2015
Service charges and fees		$	1,625			$	1,642			$	(17	)
Gain on sale of loans (mortgage banking)			430				309				121
Gain on sale of loans, at lower of
cost or fair value			624				—				624
Bank owned life insurance			687				785				(98	)
Securities gains			119				444				(325	)
Other income			1,032				638				394
Total other income		$	4,517			$	3,818			$	699

 

Service charges and fees for the three and six months ended June 30, 2016 were flat compared to the same periods last year, partially due to increases income from debit card usage, as well as account analysis fees, offset by declines in overdraft/NSF fees.

 

For the three months ended June 30, 2016, income from the sale of newly originated residential mortgage loans was $309 thousand compared to $161 thousand the same prior year period. For the six months ended June 30, 2016 income from the sale of newly originated residential mortgages loans increased from $309 thousand to $430 thousand for the same period in 2015. The volume of loans originated for sale were higher in the 2016 periods when compared to the same periods in 2015.

 

For the three and six months ended June 30, 2016, the Company recorded $345 thousand and $687 thousand, respectively of bank owned life insurance (BOLI) income as compared to $248 thousand and $785 thousand for the same periods in 2015. The six months ended June 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 six months ended June 30, 2016 benefitted from the increase of the BOLI policy by $10 million which occurred in the fourth quarter of 2015.

Securities gains were $18 thousand for the June 2016 quarter compared to $176 thousand for the same 2015 quarter. For the six months ended June 30, 2016 securities gains were $119 thousand compared to $444 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.

Gain on sale of multifamily loans held for sale at lower of cost or fair value was $500 thousand for the quarter ending June 30, 2016 and $624 thousand for the six months ending June 30, 2016. During the first quarter of 2016, the Company began selling whole multifamily loans. The Company intends to continue to employ loan sales and loan participations to manage the Company’s balance sheet.

Other income was $559 thousand for the June 2016 quarter compared to $545 thousand for the June 2015 quarter. The three months ended June 30, 2016 included $212 thousand of income related to the Company’s SBA lending and sale program. The SBA program was implemented in the first quarter of 2016 and will be part of the Company’s normal ongoing operations. The three months ended June 2015 included $373 thousand of fee income related to the Company’s loan level / back-to-back swap program, which was implemented during mid-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, these programs are a part of ongoing operations. Other improvements in other income in the June 2016 quarter included greater loan servicing fees due principally to continued multifamily loan participations, and higher unused line of credit fees associated with the Commercial & Industrial lending business. Other income was $1.0 million for the six months ending June 30, 2016 compared to $638 thousand for the same period in 2015. The six months ending June 30, 2016 included $259 thousand of income related to the Company’s SBA lending and sale program which as stated previously above is a program that started in 2016. For the six months ended June 30, 2016, other improvements were seen in loan servicing fees due to continued multifamily loan participations and higher unused line of credit fees associated with the Commercial & Industrial lending business.

 

OPERATING EXPENSES: The following table presents the components of operating expenses for the periods indicated:

		Three Months Ended June 30,								Change
(In thousands)		2016				2015				2016 vs 2015
Salaries and employee benefits		$	11,100			$	9,872			$	1,228
Premises and equipment			2,742				2,778				(36	)
Other Operating Expenses:
FDIC assessment			1,581				431				1,150
Wealth management division
other expense			481				512				(31	)
Professional and legal fees			756				583				173
Loan expense			121				76				45
Telephone			235				231				4
Advertising			226				316				(90	)
Postage			62				88				(26	)
Other			1,471				1,379				92
Total operating expenses		$	18,775			$	16,266			$	2,509

 

		Six Months Ended June 30,								Change
(In thousands)		2016				2015				2016 vs 2015
Salaries and employee benefits		$	22,008			$	19,297			$	2,711
Premises and equipment			5,606				5,394				212
Other Operating Expenses:
FDIC assessment			3,140				913				2,227
Wealth management division
other expense			1,103				1,133				(30	)
Professional and legal fees			1,742				1,351				391
Loan expense			233				189				44
Telephone			473				454				19
Advertising			370				464				(94	)
Postage			169				192				(23	)
Other			3,137				2,647				490
Total operating expenses		$	37,981			$	32,034			$	5,947

 

The Company’s total operating expenses were $18.8 million for the quarter ended June 30, 2016 compared to $16.3 million in the same 2015 quarter, reflecting a net increase of $2.5 million or 15 percent. Total operating expense grew by $5.9 million to $38.0 million for the six months ending June 30, 2016 when compared to the same period in 2015, reflecting an increase of 19 percent.

Salary and benefits expense increased to $11.1 million in the second quarter of 2016 from $9.9 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, the acquisition of Wealth Management Consultants in the second quarter of 2015, normal salary increases and increased bonus/incentive accruals associated with the Company’s growth, all contributed to the increase from the June 2015 quarter to the June 2016 quarter. The six months ended June 30, 2016 had salary and benefits expense increasing to $22.0 million from $19.3 million for the same period in 2015. This increase is due to the same reasons noted previously.

Premises and equipment expense totaled $2.7 million for the quarter ended June 30, 2016, which was relatively flat to the same 2015 period. Premises and equipment expense for the six months ended June 30, 2016 increased by $212 thousand to $5.6 million when compared to the six months ended June 30, 2015. The increases were consistent with the Company’s continued growth, as well as certain investment in risk management related analytics and practices.

 

During the second quarter of 2016, other operating expenses included increased FDIC premiums and increased investment in risk management related analytics and practices, as was expected and previously disclosed. For the three months ended June 30, 2016, FDIC insurance expense was $1.58 million compared to $431 thousand for the three months ended June 30, 2015, increasing $1.2 million. The Company incurred an increased FDIC premium accrual of approximately $950 thousand in the second quarter of 2016. The FDIC premium expense for the six months ended June 30, 2016 was $3.1 million compared to $913 thousand for the same period in 2015.

 

Expense increases were generally planned and expected. Previously, the Company disclosed that given its significant growth and high concentration in multifamily lending, Management had decided to accelerate approximately $2.0 million of costs over 2016 to ensure it adhered to best in class risk management practices. The Company had originally planned for such expenditures over the next 24 to 30 months, but felt it prudent to push them forward. The Company had also previously disclosed the additional FDIC premiums. The first half of 2016 expenses related to these were in line with that guidance.

 

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.

The following table presents certain key aspects of the Bank’s Private Wealth Management Division performance for the quarters ended June 30, 2016 and 2015.

 

		Three Months Ended June 30,								Change
(In thousands)		2016 (2)				2015				2016 v 2015
Total fee income		$	4,899			$	4,532			$	367
Salaries and benefits (1)			2,067				2,042				25
Other operating expense (1)			1,639				1,384				255

 

The following table presents certain key aspects of the Bank’s Private Wealth Management Division performance for the six months ended June 30, 2016 and 2015.

 

		Six Months Ended June 30,								Change
(In thousands)		2016 (2)				2015				2016 v 2015
Total fee income		$	9,194			$	8,563			$	631
Salaries and benefits (1)			4,163				3,927				236
Other operating expense (1)			3,383				2,847				536
Assets under administration
(market value)		$	3,418,566			$	3,445,939			$	(27,373	)

 

(1)

Expenses are included in the Operating Expenses discussion above.

(2)

2016 results include the income and expenses of the Wealth Management Consultants Division, which was acquired in May 2015.

 

In the June 2016 quarter, the Private Wealth Management Division generated $4.9 million in fee income compared to $4.5 million for the June 2015 quarter, reflecting an 8 percent increase. For the six months ended June 30, 2016, the Private Wealth Management Division generated $9.2 million in fee income compared to $8.6 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 $3.42 billion at June 30, 2016, down less than 1 percent from $3.45 billion at June 30, 2015. The growth in fee income was due to several factors including the acquisition of a wealth management company in early May 2015, continued healthy new business results, higher yields on new business as compared to lost/closed business and the conversion of lower fee custody relationships to higher fee advisory relationships, as well as positive market action relative to prior quarter levels. The decrease in the market value of AUA is principally due to the broader market declines in the second half of 2015, as well as the first quarter of 2016.

 

The Company continues to incorporate wealth into every conversation it has with all of the Company’s clients, across all 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 $3.7 million and $3.4 million for the second quarters of 2016 and 2015, respectively, an increase of $280 thousand, or 8 percent. Operating expenses relative to the Private Wealth Management Division totaled $7.5 million and $6.8 million for the six months ended June 30, 2016 and 2015, respectively, an increase of $772 thousand, or 11 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 Division should it be necessary.

 

NONPERFORMING ASSETS: OREO, loans past due in excess of 90 days and still accruing, and nonaccrual loans are considered nonperforming assets.

The following table sets forth asset quality data on the dates indicated (in thousands):

 

		As of
		June 30,				March 31,				December 31,				September 30,				June 30,
		2016				2016				2015				2015				2015
Loans past due over 90 days
and still accruing		$	—			$	—			$	—			$	—			$	—
Nonaccrual loans			8,049				7,278				6,747				7,615				7,111
Other real estate owned			767				861				563				330				956
Total nonperforming assets		$	8,816			$	8,139			$	7,310			$	7,945			$	8,067
Performing TDRs		$	18,570			$	16,033			$	16,231			$	14,609			$	13,695
Loans past due 30 through 89
days and still accruing		$	6,576			$	1,393			$	2,143			$	2,748			$	1,744
Classified loans		$	51,084			$	48,817			$	42,777			$	41,985			$	38,676
Impaired loans		$	26,643			$	23,335			$	23,107			$	22,224			$	20,806
Nonperforming loans as a % of
total loans			0.26	%			0.24	%			0.23	%			0.27	%			0.26	%
Nonperforming assets as a % of
total assets			0.24	%			0.23	%			0.22	%			0.24	%			0.26	%
Nonperforming assets as a % of
total loans plus other real
estate owned			0.28	%			0.27	%			0.25	%			0.28	%			0.29	%

 

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 $2.2 million for the second quarter of 2016 and $2.2 million for the same quarter of 2015. For the six months ended June 30, 2016 and 2015 the provision for loan losses was $3.9 million and $3.6 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 carry a higher risk profile, which is reflected in Management’s determination of the proper level of the allowance for loan losses.

 

The provision for loan losses of $2.2 million in the second 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 and commercial real estate loans. Originations of commercial and commercial real estate loans have increased and these loans have historically carried a higher general reserve allocation than multifamily loans. In the second 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 loan participations and whole multifamily loan sales.

 

The overall allowance for loan losses was $29.2 million as of June 30, 2016 compared to $25.9 million at December 31, 2015. As a percentage of loans, the allowance for loan losses was 0.93 percent as of June 30, 2016 and 0.89 percent as of December 31, 2015. The specific reserves on impaired loans have increased to $580 thousand at June 30, 2016 compared to $490 thousand as of December 31, 2015. Total impaired loans were $26.6 million and $23.1 million as of June 30, 2016 and December 31, 2015, respectively. The general component of the allowance increased from $25.4 million at December 31, 2015 to $28.6 million at June 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:

 

		June 30,				March 31,				December 31,				September 30, 30,				June 30,
(In thousands)		2016				2016				2015				2015				2015
Allowance for loan losses:
Beginning of period		$	27,321			$	25,856			$	24,374			$	22,969			$	20,816
Provision for loan losses			2,200				1,700				1,950				1,600				2,200
Charge-offs, net			(302	)			(235	)			(468	)			(195	)			(47	)
End of period		$	29,219			$	27,321			$	25,856			$	24,374			$	22,969
Allowance for loan losses as
a % of total loans			0.93	%			0.90	%			0.89	%			0.85	%			0.84	%
Allowance for loan losses as
a % of nonperforming loans			363.01	%			375.39	%			383.22	%			320.08	%			323.01	%

 

INCOME TAXES: For the second quarter of 2016 and 2015 income tax expense as a percentage of pre-tax income was 38.4 and 37.5 percent, respectively. For the six months ending June 30, 2016 and 2015 income tax expense as a percentage of pre-tax income was 37.9 and 38.7 percent, respectively. The lower effective tax for the six months ended June 30, 2016 was a result of higher tax exempt income along with the Company implementing a state tax planning strategy during the fourth quarter of 2015.

 

 

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. The Company strives to maintain capital levels 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 June 30, 2016 was benefitted by net income of $6.6 million and by $5.7 million of voluntary share purchases by our shareholders under the Dividend Reinvestment Plan and the successful sale of $48.7 million (net of underwriting fees and expenses) of subordinated notes.

 

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 June 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 June 30, 2016:
Total capital
(to risk-weighted assets)		$	361,334				12.58	%		$	287,262				10.00	%		$	229,810				8.00	%		$	247,763				8.625	%
Tier I capital
(to risk-weighted assets)			332,115				11.56				229,810				8.00				172,357				6.00				190,311				6.625
Common equity tier I
(to risk-weighted assets)			332,112				11.56				186,720				6.50				129,268				4.50				147,222				5.125
Tier I capital
(to average assets)			332,115				9.21				180,349				5.00				144,279				4.00				144,279				4.000
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

 

 

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 June 30, 2016:
Total capital
(to risk-weighted assets)		$	373,360				12.99	%	$		N/A		N/A	%	$	229,856				8.00	%		$	247,813				8.625	%
Tier I capital
(to risk-weighted assets)			295,443				10.28			N/A			N/A			172,392				6.00				190,349				6.625
Common equity tier I
(to risk-weighted assets)			295,440				10.28			N/A			N/A			129,294				4.50				147,251				5.125
Tier I capital
(to average assets)			295,443				8.19			N/A			N/A			144,302				4.00				144,302				4.000
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 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. Beginning with the August 19, 2015 dividend payment, 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 $5.7 million of capital to the Company in the second quarter of 2016. The Reinvestment Plan provides a continuing source of capital.

 

As previously announced, on July 28, 2016, the Board of Directors declared a regular cash dividend of $0.05 per share payable on August 25, 2016 to shareholders of record on August 11, 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 continues to assess other potential sources of capital, such as subordinated debt, to support future growth.

LIQUIDITY: Liquidity refers to an institution’s ability to meet short-term requirements including funding of loans, deposit withdrawals and maturing obligations, as well as long-term obligations, including potential capital expenditures. The Company’s liquidity risk management is intended to ensure the Company has adequate funding and liquidity to support its assets across a range of market environments and conditions, including stressed conditions. Principal sources of liquidity include cash, temporary investments, securities available for sale, customer deposit inflows, loan repayments and secured borrowings. Other liquidity sources include loan sales and loan participations.

 

Management actively monitors and manages the Company’s liquidity position and believes it is sufficient to meet future needs. Cash and cash equivalents, including federal funds sold and interest-earning deposits, totaled $81.3 million at June 30, 2016. In addition, the Company had $206.2 million in securities designated as available for sale at June 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 June 30, 2016, unused borrowing commitments totaled $968.3 million from the FHLB, $115.7 million from the Federal Reserve Bank and $22.0 million from correspondent banks.

 

During the June 2016 quarter, customer deposit growth of $65 million (principally noninterest-bearing and money market), the subordinated debt issuance of $48.7 million (net of underwriting fees and expenses), and increased capital of $12 million, basically funded new asset growth of $139 million.

 

Brokered interest-bearing demand (“overnight”) deposits stayed flat at $200 million at June 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 June 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 reports and advising the Board of Directors on such, 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 management of capital and management of cash flows and duration of assets and liabilities, including sales and purchases of assets, as well as additions of wholesale borrowings and other sources of medium/longer term funding. ALCO is authorized to engage in interest rate swaps as a means of extending the duration of shorter term liabilities.

 

The following strategies are among those used to manage interest rate risk:

 

·

Actively market 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 and correlation analysis, daily mark-to-market 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 June 30, 2016, $34.6 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 June 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 June 30, 2016.

In an immediate and sustained 200 basis point increase in market rates at June 30, 2016, net interest income for year 1 would increase approximately 5.6 percent, when compared to a flat interest rate scenario. In year 2 this sensitivity improves to an increase of 9.8 percent, when compared to a flat interest rate scenario.

In an immediate and sustained 100 basis point decrease in market rates at June 30, 2016, net interest income would decline approximately 3.6 percent for year 1 and 4.2 percent for year 2, compared to a flat interest rate scenario.

The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at June 30, 2016.

 

		Estimated Increase/												EVPE as a Percentage of
(Dollars in thousands)	Decrease in EVPE													Present Value of Assets (2)
Change In
Interest
Rates		Estimated												EVPE				Increase/(Decrease)
(Basis Points)		EVPE (1)				Amount				Percent				Ratio (3)				(basis points)
+200		$	388,976			$	8,274				2.2	%			11.31	%			76
+100			390,009				9,307				2.4				11.07				52
Flat interest rates			380,702				—				—				10.55				—
-100			347,083				(33,619	)			(8.8	)			9.49				(106	)

 

(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.

 

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 (June 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 June 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.

 

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

 

In the normal course of its business, lawsuits and claims may be brought against the Company and its subsidiaries. There is no currently pending or threatened litigation or proceedings against the Company or its subsidiaries, which asset claims that if adversely decided, we believe would have a material adverse effect on the Company.

 

ITEM 1A. Risk Factors

 

There were no material changes in the Corporation’s risk factors during the six months ended June 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.

 

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.

 

ITEM 5. Other Information

 

None.

 

ITEM 6. Exhibits

 

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	A.	Underwriting Agreement, dated June 10, 2016, by and between the Company and Sandler O’Neill & Partners, L.P. as representative of the underwriters named therein, incorporated herein by reference to Exhibit 1.1 of the Registrant’s Form 8-K filed on June 15, 2016.
	B.	Indenture, dated as of June 15, 2016, by and between the Company and U.S. Bank National Association, as Trustee, incorporated herein by reference to Exhibit 4.1 of the Registrant’s Form 8-K filed on June 15, 2016.
	C.	First Supplemental Indenture, dated as of June 15, 2016, by and between the Company and U.S. Bank National Association, as Trustee, incorporated herein by reference to Exhibit 4.2 of the Registrant’s Form 8-K filed on June 15, 2016.
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

 

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:  August 5, 2016	By:  /s/ Douglas L. Kennedy
	Douglas L. Kennedy
	President and Chief Executive Officer
DATE:  August 5, 2016	By:  /s/ Jeffrey J. Carfora
	Jeffrey J. Carfora
	Senior Executive Vice President, Chief Financial Officer
	and Chief Accounting Officer