10-K 1 form10k-19610_pgfc.htm 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the Fiscal Year Ended December 31, 2017 Commission File No. 000-16197

 

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, NJ 07921
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number (908) 234-0700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Name of Exchange on which Registered
Common Stock, No par value NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x.

 

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 requirements 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 of Regulation 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o Accelerated filer x  
Non-accelerated filer o   Smaller reporting company  o  
Emerging growth company o    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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

 

The aggregate market value of the shares held by unaffiliated stockholders was approximately $526 million on June 30, 2017.

 

As of March 1, 2018, 18,946,564 shares of no par value Common Stock were outstanding.

 

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DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s Definitive Proxy Statement for the Company’s 2018 Annual Meeting of Shareholders (the “2018 Proxy Statement”) are incorporated by reference into Part III. The Company will file the 2018 Proxy Statement within 120 days of December 31, 2017.

 

 

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FORM 10-K

PEAPACK-GLADSTONE FINANCIAL CORPORATION

For the Year Ended December 31, 2017

Table of Contents

 

PART I    
     
Item 1. Business 5
     
Item 1A. Risk Factors 12
     
Item 1B. Unresolved Staff Comments 19
     
Item 2. Properties 19
     
Item 3. Legal Proceedings 19
     
Item 4. Mine Safety Disclosure 19
     
PART II    
     
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20
     
Item 6. Selected Financial Data 22
     
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52
     
Item 8. Financial Statements and Supplementary Data 54
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 107
     
Item 9A. Controls and Procedures 107
     
Item 9B. Other Information 108
     
PART III    
     
Item 10. Directors, Executive Officers and Corporate Governance 108
     
Item 11. Executive Compensation 109
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 110
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 110
     
Item 14. Principal Accountant Fees and Services 110
     
PART IV    
     
Item 15. Exhibits and Financial Statement Schedules 111
     
Item 16. Form 10-K Summary 114
     
  Signatures 115

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PART I

 

Item 1.BUSINESS

 

The disclosures set forth in this Form 10-K are qualified by Item 1A-Risk Factors and the section captioned “Cautionary Statement Concerning Forward-Looking Statements” in Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report and filed by us from time to time with the Securities and Exchange Commission. The terms “Peapack,” the “Company,” “we,” “our” and “us” refer to Peapack-Gladstone Financial Corporation and its wholly-owned subsidiaries unless otherwise indicated or the context requires otherwise.

 

The Corporation

 

Peapack-Gladstone Financial Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”). The Company was organized under the laws of New Jersey in August 1997 by the Board of Directors of Peapack-Gladstone Bank (the “Bank”), its principal subsidiary, to become a holding company for the Bank. The Bank is a state chartered commercial bank founded in 1921 under the laws of the State of New Jersey. The Bank is a member of the Federal Reserve System. Through its branch network in Somerset, Morris, Hunterdon and Union counties and its private banking locations in Bedminster, Morristown, Princeton and Teaneck, its private wealth management, commercial private banking, retail private banking and residential lending divisions, along with its online platforms, Peapack-Gladstone Bank offers an unparalleled commitment to client service.

 

Our wealth management clients include individuals, families, foundations, endowments, trusts and estates. Our commercial loan clients are business people, including business owners, professionals, retailers, contractors and real estate investors. Most forms of commercial lending are offered, including working capital lines of credit, term loans for fixed asset acquisitions, commercial mortgages, multifamily mortgages and other forms of asset-based financing.

 

In addition to commercial lending activities, we offer a wide range of consumer banking services, including checking and savings accounts, money market and interest-bearing checking accounts, certificates of deposit, and individual retirement accounts held in certificates of deposit. We also offer residential mortgages, home equity lines of credit and other second mortgage loans. Automated teller machines are available at 20 locations. Internet banking, including an online bill payment option and mobile phone banking, is available to clients.

 

Available Information

 

Peapack-Gladstone Financial Corporation is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission (the “SEC”).  These reports and any amendments to these reports are available for free on our website, www.pgbank.com, as soon as reasonably practical after they have been filed with or furnished to the SEC.  Information on our website should not be considered a part of this Annual Report on Form 10-K.

 

Employees

 

As of December 31, 2017, the Company employed 384 full-time equivalent persons. Management considers relations with employees to be satisfactory.

 

Peapack-Gladstone Bank’s Private Wealth Management Division

 

The Bank’s Private Wealth Management Division, is one of the largest New Jersey-based trust and investment businesses with $5.5 billion of assets under management and/or administration as of December 31, 2017. It is headquartered in Bedminster, with additional private banking locations in Morristown, Princeton and Teaneck, New Jersey, as well as at the Bank’s subsidiaries, PGB Trust & Investments of Delaware, in Greenville, Delaware, Murphy Capital Management (“MCM”), in Gladstone, New Jersey and Quadrant Capital Management (“Quadrant”), in Fairfield, New Jersey. The Bank’s Private Wealth Management Division is known for its integrity, client service and broad range of fiduciary, investment management and tax services, designed specifically to meet the needs of high net-worth individuals, families, foundations and endowments.

 

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We believe our wealth management business differentiates us from our competition and adds significant value. We intend to grow this business further both in and around our market areas through our Delaware Trust subsidiary; through our existing wealth, loan and depository client base; through our innovative private banking service model, which utilizes private bankers working together to provide fully integrated client solutions; and through potential acquisitions of complimentary and/or additive wealth management businesses. Throughout the wealth management division and all other business lines, we will continue to provide the unparalleled personalized, high-touch service our valued clients have come to expect.

 

Our Markets

 

Our current market is defined as the NY-NJ-PA metropolitan statistical area. Our primary market areas are located in New Jersey and areas of New York. New Jersey had a total population exceeding 8.9 million and a median household income of $73,702 as of 2012-2016, compared to the U.S. median household income of $55,322 as of 2012-2016, according to estimates from the United States Census Bureau. Somerset County, where we are headquartered, is among one of the wealthiest in New Jersey, with a 2012-2016 median household income of $102,405 according to estimates from the United States Census Bureau. We believe that these markets have economic and competitive dynamics that are consistent with our objectives and favorable to executing our growth strategy.

 

Competition

We operate in a market area with a high concentration of banking and financial institutions and we face substantial competition in attracting deposits and in originating loans and leases. A number of our competitors are significantly larger institutions with greater financial and managerial resources and lending limits.  Our ability to compete successfully is a significant factor affecting our growth potential and profitability.

Our competition for deposits, loans and leases historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions, leasing companies and credit unions located in our primary market area.  We also compete with mortgage banking and finance companies for real estate loans and with commercial banks and savings institutions for consumer loans.

The Company also faces direct competition for wealth and advisory services from registered investment advisory firms and investment management companies.

 

Our Business Strategy

 

We began our growth strategy – Expanding Our Reach – in 2013 to principally address three industry headwinds:

 

·that the low interest rate and tight spread environment would likely continue;
·that costs associated with compliance and risk management would increase significantly; and
·that our clients would continue to shift from traditional branches in favor of electronic channels.

 

Through 2017 the key elements of our business strategy have included:

 

·enhanced risk management;
·expansion of our commercial and industrial (“C&I”) lending business through Private Bankers and/or Private Banking teams, who lead with deposit gathering and wealth management;
·initiation of a specialty area, Equipment Finance, staffed by seasoned professionals and with a national footprint;
·expansion of our wealth management business; and
·expansion of our residential and commercial real estate lending businesses.

 

In particular, we have focused on the following areas of our business:

 

·Wealth Management. We have been in the wealth management business since 1972. The business adds significant value to our Company and differentiates us from many of our competitors. Conversations with all clients and potential clients across all lines of business have included and will continue to include a wealth management discussion. The market value of the assets under administration of the wealth management division was $5.5 billion at December 31, 2017.

 

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·Commercial Lending. We have continued to help businesses emerge, expand and evolve through growth in our C&I, commercial real estate lending and equipment finance businesses. During 2017, the Company was successful in bringing on a team of very experienced bankers to focus on equipment financing which further enhanced C&I production. We further expanded our comprehensive C&I lending program designed to service individuals, professional service firms, foundations, and privately-owned businesses. This C&I lending program, similar to our wealth management business, has been fully integrated into our private banking platform. Private bankers focus holistically on C&I lending, wealth advisory and deposit solutions to provide a high-touch, “white-glove” client service. Growth in 2018 and beyond will focus on C&I lending.

 

·Retail Banking – Deposits. We see a lot of opportunity for growth in our core markets. We continued with the concept of high-touch relationship-style banking, which we introduced in 2013. Much like the private banking service model, this team has intimate knowledge of all Bank products and services and serves as the primary contact for clients seeking wealth, lending and deposit solutions. The structure of this team enables our existing branch network to maintain its primary objective of providing unique and unparalleled client service. Additionally, our private banking platform has and will continue to contribute significantly to our retail deposit growth, not only through stand-alone deposit relationships, but through comprehensive new relationships associated with C&I lending.

 

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Governmental Policies and Legislation

 

The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in state legislatures and before various bank regulatory agencies. The likelihood of any major changes and the impact such changes might have on the Company or the Bank is impossible to predict. The following description is not intended to be complete and is qualified in its entirety to applicable laws and regulations.

 

Bank Regulation

 

As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and examination of the New Jersey Department of Banking and Insurance (“NJDOBI”).  As a state-chartered, Federal Reserve-member bank, the Bank is subject to the regulation, supervision and examination of the Federal Reserve Board (“FRB”) as its primary federal regulator. The regulations of the FRB and the NJDOBI impact virtually all of our activities, including the minimum level of capital we must maintain, our ability to pay dividends, our ability to expand through new branches or acquisitions and various other matters.

 

Investment Advisory Regulations

 

In addition to the Bank’s Private Wealth Management Division, we offer wealth management services through two subsidiaries of the Bank. These subsidiaries are registered investment advisers under the Investment Advisers Act of 1940, as amended, and as such are supervised by the SEC. They are also subject to various other federal laws and state licensing and/or registration requirements. These laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws.

 

 

Holding Company Supervision

 

The Company is a bank holding company within the meaning of the Holding Company Act. As a bank holding company, the Company is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require.

 

The Holding Company Act prohibits the Company, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by the Company of more than five percent of the voting stock of any additional bank. Satisfactory capital ratios, Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through the Bank require the approval of the FRB and the NJDOBI.

  

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

 

The Dodd-Frank Wall Street Report and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act also created a new Consumer Financial Protection Bureau (the “CFPB”) with extensive powers to supervise and enforce consumer protection laws.  The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The CFPB also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets, such as the Bank, will continue to be examined by their applicable federal bank regulators.  The Dodd-Frank Act required the CFPB to issue regulations requiring lenders to make a reasonable good faith determination as to a prospective

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borrower’s ability to repay a residential mortgage loan.  The final “Ability to Repay” rules, which were effective beginning January 2014, established a “qualified mortgage” safe harbor for loans whose terms and features are deemed to make the loan less risky.

 

The CFPB may issue additional final rules regarding mortgages in the future, including amendments to certain mortgage servicing rules regarding forced-placed insurance notices, policies and procedures and other matters. We cannot ensure you that existing or future regulations will not have a material adverse impact on our residential mortgage loan business.

 

On December 10, 2013, the FRB, the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission (the “CFTC”) and the SEC issued final rules to implement the Volcker Rule contained in Section 619 of the Dodd-Frank Act. The Volcker Rule prohibits an insured depository institution and its affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading and prohibits the use of some hedging strategies.

 

To the extent the Dodd-Frank Act remains in place or is not materially amended it is likely to continue to affect our cost of doing business, limit our permissible activities, and affect the competitive balance within our industry and market areas.

 

Capital Requirements

 

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution.

 

FRB regulations require member banks to meet several minimum capital standards:  a common equity Tier 1 (“CET1”) capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio.  The present capital requirements were effective January 1, 2015 and represent increased standards over the previous requirements.  The current requirements implement recommendations of the Basel Committee on Banking Supervision and certain requirements of federal law.

The capital standards require the maintenance of CET1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital.  CET1 capital is generally defined as common stockholders’ equity and retained earnings.  Tier 1 capital is generally defined as CET1 and additional Tier 1 capital.  Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.

 

When fully phased in on January 1, 2019, the capital requirements will also require the Company and the Bank to maintain a 2.5% “capital conservation buffer,” composed entirely of CET1, on top of the minimum risk-weighted asset ratios, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%. 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. As of January 1, 2017, the Company and the Bank were required to maintain a capital conservation buffer of 1.25%.

 

Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the

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Company and the Bank, may make a one-time permanent election to continue to exclude these items effective as of January 1, 2015. This election was made by the Company. The deductions and other adjustments to CET1 are being phased in incrementally between January 1, 2015 and January 1, 2018.

Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. The FRB has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015.  An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a CET1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a CET1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a CET1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a CET1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

 

The Bank’s capital ratios were all above the minimum levels required for it to be considered a “well capitalized” financial institution at December 31, 2017 under the “prompt corrective action” regulations in effect as of such date.

  

 

Insurance Funds Legislation

 

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Under the FDIC’s risk-based system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors with less risky institutions paying lower assessments on their deposits.

 

Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories. Assessments for institutions are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund's reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion in total assets to a range of 1.5 basis points to 30 basis points.

 

Restrictions on the Payment of Dividends

 

The holders of the Company’s common stock are entitled to receive dividends, when, as and if declared by the Board of Directors of the Company out of funds legally available. The only statutory limitation is that such dividends may not be paid when the Company is insolvent. Since the principal source of income for the Company will be dividends on Bank common stock paid to the Company by the Bank, the Company’s ability to pay dividends to its shareholders will depend on whether the Bank pays dividends to it. As a practical matter, restrictions on the ability of the Bank to pay dividends act as restrictions on the amount of funds available for the payment of dividends by the Company. As a New Jersey chartered commercial bank, the Bank is subject to the restrictions on the payment of dividends contained in the New Jersey Banking Act of 1948, as amended (the “Banking Act”). Under the Banking Act, the Bank may pay dividends only out of retained earnings, and out of surplus to the extent that surplus exceeds 50% of stated capital. Under the Financial Institutions Supervisory Act, the FDIC has the authority to prohibit a state-chartered bank from engaging in conduct that, in the FDIC’s opinion, constitutes an unsafe or unsound banking practice. Under certain circumstances, the FDIC could claim that the payment of a dividend or other distribution by the Bank to the Company constitutes an unsafe or unsound practice. The Company is also subject to FRB policies, which may, in certain circumstances, limit its ability to pay dividends. The FRB policies require, among other things, that a bank holding company maintain a minimum capital base and serve as a source of strength to its subsidiary bank. The FRB by supervisory letters has advised holding corporations that it is has supervisory concerns when the level of dividends is too high and would seek to prevent dividends if the dividends paid by the holding company exceeded its earnings. The FRB would most likely seek to prohibit any dividend payment that would reduce a holding company’s capital below these minimum amounts.

 

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Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 was enacted to address, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have existing policies, procedures and systems designed to comply with these regulations.

 

Other Laws and Regulations

 

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.  The Bank’s operations are also subject to federal laws (and their implementing regulations) applicable to credit transactions, such as the:

  • Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

  • Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

 

  • Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

  • Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

  • Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

  • Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

 

  • Truth in Savings Act, prescribing disclosure and advertising requirements with respect to deposit accounts.

 

The operations of the Bank also are subject to the:

  • Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

  • Electronic Funds Transfer Act and Regulation E promulgated thereunder, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

  • Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

  • USA PATRIOT Act, which requires institutions operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

 

  • Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

 

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Item 1A.RISK FACTORS

 

The material risks and uncertainties that Management believes affect the Company are described below. These risks and uncertainties are not the only ones affecting the Company. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any one or more of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected.

 

Risks Relating to Ownership of Our Common Stock

 

We may not be able to continue to grow our business, which may adversely impact our results of operations.  

 

Our business strategy calls for continued expansion. Our ability to continue to grow depends, in part, upon our ability to successfully attract deposits and identify favorable loan and investment opportunities. We expect to add personnel to assist in this growth. In the event that we do not continue to grow, or the new personnel do not produce sufficient new revenues, our results of operations could be adversely impacted.

 

We may not be able to manage our growth, which may adversely impact our financial results.  

 

As part of our expansion strategy, we plan to broaden and expand our commercial lending in both existing and new geographic markets. In addition, as part of our expansion strategy, we may add new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. We may invest significant time and resources to develop and market new lines of business and/or products and services. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting customer preferences may also impact the successful implementation of a new line of business or a new product or service. Additionally, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks could have a material adverse effect on our business, results of operations and financial condition.

 

Our ability to implement our expansion strategy will depend upon a variety of factors, including our ability to attract and retain experienced personnel, the continued availability of desirable business opportunities and locations, the competitive responses from other financial institutions in the new market areas and our ability to manage growth. In order to implement our expansion strategy, we plan to hire new personnel in our existing and target markets. However, we may be unable to hire qualified management. In addition, the organizational and overhead costs may be greater than we anticipated. Moreover, we may not be able to obtain the regulatory approvals necessary. New business expansion efforts may take longer than expected to reach profitability, and we cannot assure that they will become profitable. The additional costs of adding new personnel may adversely impact our financial results.

 

Our ability to manage growth successfully will depend on whether we can continue to fund this growth while maintaining cost controls and asset quality, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs and maintain asset quality, such growth could adversely impact our earnings and financial condition.

 

The Company is required by Federal regulatory authorities to maintain adequate levels of capital to support its operations. The Company may at some point need to raise additional capital to support continued growth. The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the Company’s control, and on its financial performance. Accordingly, the Company cannot assure you of its ability to raise additional capital if needed or on terms acceptable to the Company. If the Company cannot raise additional capital when needed, the ability to further expand its operations could be materially impaired.

 

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The Dodd-Frank Wall Street Reform and Consumer Protection Act has and may continue to adversely affect our business activities, financial position and profitability by increasing our regulatory compliance burden and associated costs, placing restrictions on certain products and services, and limiting our future capital raising strategies. 

 

The Dodd-Frank Act has and may continue to increase our regulatory compliance burden.  Among the Dodd-Frank Act’s significant regulatory changes, it created the CFPB which is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection.   The CFPB has exclusive authority to issue regulations, orders and guidance to administer and implement the objectives of federal consumer protection laws.  Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and state attorney generals may enforce consumer protection rules issued by the CFPB.  The Dodd-Frank Act also changed the scope of federal deposit insurance coverage.  The CFPB and these other changes have increased, and may continue to increase, our regulatory compliance burden and costs and may restrict the financial products and services we offer to our clients.

 

The Dodd-Frank Act also imposed more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier I capital.  These restrictions may limit our future capital strategies.  The Dodd-Frank Act also increases regulation of derivatives and hedging transactions, which could limit our ability to enter into, or increase the costs associated with, interest rate and other hedging transactions.

 

Negative developments in the financial services industry and U.S. and global credit markets may adversely impact our operations and results.

 

Our businesses and operations, which primarily consist of lending money to clients in the form of loans, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process and the medium and long-term fiscal outlook of the federal government is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions are often characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity.

 

Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.

 

Much of our business is with clients located within Central and Northern New Jersey, as well as New York City. Our business loans are generally made to small to mid-sized businesses, most of whose success depends on the regional economy. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Adverse economic and business conditions in our market area could reduce our growth rate, affect our borrowers' ability to repay their loans and, consequently, adversely affect our financial condition and performance. Further, we place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could leave many of our loans under-secured, which could adversely affect our earnings.

 

If our allowance for loan losses were not sufficient to cover actual loan losses, our earnings would decrease.

 

We maintain an allowance for loan losses based on, among other things, the level of non-performing loans, loan growth, national and regional economic conditions, historical loss experience, delinquency trends among loan types and various qualitative factors. However, we cannot predict loan losses with certainty and we cannot assure you that charge-offs in future periods will not exceed the allowance for loan losses. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Factors that require an increase in our allowance for loan losses could reduce our earnings.

 

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Changes in interest rates may adversely affect our earnings and financial condition.

 

Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds.

 

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.

 

We may be adversely affected by recent changes in U.S. tax laws.

 

The Tax Cuts and Jobs Act, which was enacted in December 2017, is likely to have both positive and negative effects on our financial performance. For example, the new legislation will result in a reduction in our federal corporate tax rate from 35 percent to 21 percent beginning in 2018, which will have a favorable impact on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. These limitations include (1) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (2) the elimination of interest deductions for home equity loans, (3) a limitation on the deductibility of business interest expense and (4) a limitation on the deductibility of property taxes and state and local income taxes.

 

The recent changes in the tax laws may have an adverse effect on the market for, and the valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, like New Jersey. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

 

Our exposure to credit risk could adversely affect our earnings and financial condition.

 

There are certain risks inherent in making loans, including risks that the principal of or interest on the loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting clients and the quality of the loan portfolio. Finally, many of our loans are made to small and medium-sized businesses that are less able to withstand competitive, economic and financial pressures than larger borrowers. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability.

 

We face substantial competition in originating loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, and more accessible branch office locations.

 

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In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations and increase our cost of funds.

 

We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.

 

Limits on our ability to use brokered deposits as part of our funding strategy may adversely affect our ability to grow.

 

A “brokered deposit” is any deposit that is obtained from or through the mediation or assistance of a deposit broker, which includes larger correspondent banks and securities brokerage firms. These deposit brokers attract deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates. At December 31, 2017, brokered deposits represented approximately 16.6 percent of our total deposits and equaled $612.5 million, comprised of the following: interest-bearing demand-brokered of $180.0 million, brokered certificates of deposits of $72.6 million and reciprocal deposits of $359.9 million. There are risks associated with using brokered deposits. In order to continue to maintain our level of brokered deposits, we may be forced to pay higher interest rates than contemplated by our asset-liability pricing strategy. In addition, banks that become less than “well capitalized” under applicable regulatory capital requirements may be restricted in their ability to accept or prohibited from accepting brokered deposits. If this funding source becomes more difficult to access, we will have to seek alternative funding sources in order to continue to fund our growth. This may include increasing our reliance on Federal Home Loan Bank borrowings, attempting to attract non-brokered deposits, reducing our available for sale securities portfolio and selling loans. There can be no assurance that brokered deposits will be available, or if available, sufficient to support our continued growth.

 

Our commercial real estate loan portfolio exposes us to risks that may be greater than the risks related to our other mortgage loans.

 

Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a single or multifamily residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition, results of operations and prospects.

 

We are subject to environmental liability risk associated with our lending activities.

 

In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Any

15 

significant environmental liabilities could cause a material adverse effect on our business, financial condition, results of operations and prospects.

 

Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.

 

A large portion of loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could materially adversely affect our business, financial condition, results of operations and prospects.

 

Deterioration in the fiscal position of the U.S. federal government could adversely affect us and our banking operations.

 

The fiscal position of the U.S. federal government may become uncertain. In addition to causing economic and financial market disruptions, any deterioration in the fiscal outlook of the U.S. federal government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Any of these developments could materially adversely affect our business, financial condition, results of operations and prospects.

 

Government regulation significantly affects our business.

 

The banking industry is extensively regulated. Banking regulations are intended primarily to protect depositors, and the FDIC deposit insurance fund, not the shareholders of the Company. We are subject to regulation and supervision by the New Jersey Department of Banking and Insurance and the Federal Reserve Bank. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. We are subject to various regulatory capital requirements, which involve both quantitative measures of our assets and liabilities and qualitative judgments by regulators regarding risks and other factors. Failure to meet minimum capital requirements or comply with other regulations could result in actions by regulators that could adversely affect our ability to pay dividends or otherwise adversely impact operations. In addition, changes in laws, regulations and regulatory practices affecting the banking industry may limit the manner in which we conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and achieve satisfactory spreads and may impose additional costs on us.

 

The Bank is also subject to a number of Federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The Bank's compliance with these laws will be considered by the Federal banking regulators when reviewing bank merger and bank holding company acquisitions or commencing new activities or making new investments in reliance on the Gramm-Leach-Bliley Act. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act, as well as any rules or regulations promulgated by the SEC or the NASDAQ Stock Market.

 

We are subject to certain capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

 

A final capital rule that became effective for financial institutions on January 1, 2015, included minimum risk-based capital and leverage ratios, and refined the definition of what constitutes “capital” for purposes of calculating these ratios. The final rule also established a “capital conservation buffer” of 2.5%. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. A financial institution, such as the Bank, is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such actions.

 

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The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.  Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets.  See Part I, Item1, “Business - Capital Requirements.”

 

We are subject to liquidity risk.

 

Liquidity risk is the potential that we will be unable to meet our obligations as they become due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.

 

Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders, operating expenses and capital expenditures.

 

Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; principal and interest payments; sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.

 

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as banking organizations face turmoil and domestic and worldwide credit markets deteriorate. Our ability to borrow from alternative sources, such as brokered deposits could also be impaired should the Bank’s regulatory capital falls below well capitalized.

 

Cyber-attacks and information security breaches could compromise our information or result in the data of our customers being improperly divulged, which could expose us to liability and losses.

 

Many financial institutions and companies engaged in data processing have reported significant breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Although we have not experienced, to date, any material losses relating to such cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Additionally, our risk exposure to security matters may remain elevated or increase in the future due to, among other things, the increasing size and prominence of the Company in the financial services industry, our expansion of Internet and mobile banking tools and products based on customer needs, and the system and customer account conversions associated with the integration of merger targets.

 

Our ability to pay dividends to our common shareholders is limited.

 

Since the principal source of income for the Company is dividends paid to the Company by the Bank, the Company’s ability to pay dividends to its shareholders will depend on whether the Bank pays dividends to it. As a practical matter, restrictions on the ability of the Bank to pay dividends act as restrictions on the amount of funds available for the payment of dividends by the Company. As a New Jersey-chartered commercial bank, the Bank is subject to the restrictions on the payment of dividends contained in the New Jersey Banking Act of 1948, as amended. Under the Banking Act, the Bank may pay dividends only out of retained earnings, and out of surplus to the extent that surplus exceeds 50% of stated capital. The Company is also subject to FRB policies, which may, in certain circumstances, limit its ability to pay dividends. The FRB policies require, among other things, that a bank holding company maintain a minimum capital base and the FRB in supervisory guidance has cautioned bank holding companies about paying out too much of their earnings in dividends and has stated that banks should not pay out more in dividends than they earn. The FRB would most likely seek to prohibit any dividend payment that would reduce a holding company's capital below these minimum amounts.

 

17 

 

We may lose lower-cost funding sources.

 

Checking, savings, and money market deposit account balances and other forms of client deposits can decrease when clients perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If clients move money out of bank deposits and into other investments, we could lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

 

There may be changes in accounting policies or accounting standards.

 

Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. We identified our accounting policies regarding the allowance for loan losses, goodwill and other intangible assets, and income taxes to be critical because they require Management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under each of these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.

 

From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the form and content of our external financial statements. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, SEC, banking regulators and our independent auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond our control, can be hard to predict and could materially impact how we report our financial results and condition. In certain cases, we could be required to apply a new or revised standard retroactively or apply an existing standard differently (also retroactively) which may result in our revising prior period financial statements in material amounts.

 

The FASB has recently issued an accounting standard update that will result in a significant change in how the Company recognizes credit losses and may have a material impact on the Company’s financial condition or results of operations.

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss ("CECL") model. Under the CECL model, the Company will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current generally accepted accounting principles ("GAAP"), which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how the Company determines the allowance for loan losses and could require the Company to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase the level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

 

We encounter continuous technological change.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve clients and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. 

 

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We are subject to operational risk.

 

We face the risk that the design of our controls and procedures, including those to mitigate the risk of fraud by employees or outsiders, may prove to be inadequate or are circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

 

We may also be subject to disruptions of our systems arising from events that are wholly or partially beyond our control (including, for example, computer viruses or electrical or telecommunications outages), which may give rise to losses in service to clients and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate.

 

Our performance is largely dependent on the talents and efforts of highly skilled individuals. There is intense competition in the financial services industry for qualified employees. In addition, we face increasing competition with businesses outside the financial services industry for the most highly skilled individuals. Our business operations could be adversely affected if we were unable to attract new employees and retain and motivate our existing employees.

 

Legal proceedings and related matters could adversely affect us.

 

From time to time as part of the Company’s normal course of business, clients make claims and take legal action against the Company based on its actions or inactions. If such claims and legal actions are not resolved in a manner favorable to the Company, they may result in financial liability and/or adversely affect the market perception of the Company and its products and services. This may also impact client demand for the Company’s products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

 

Item 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

 

Item 2.PROPERTIES

 

The Company owns nine branches and leases 11 branches. The Company leases an administrative and operations office building in Bedminster, New Jersey, private banking offices in Princeton, Morristown and Teaneck, New Jersey and wealth offices in Greenville, Delaware, Gladstone and Fairfield, New Jersey.

 

Item 3.LEGAL PROCEEDINGS

 

In the normal course of 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 assert claims that if adversely decided, we believe would have a material adverse effect on the Company.

 

Item 4.MINE SAFETY DISCLOSURE

 

Not applicable.

 

19 

 

PART II

 

Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol “PGC”. The following table sets forth, for the periods indicated, the reported high and low sale prices on known trades and cash dividends declared per share by the Company.

           Dividend 
2017  High   Low   Per Share 
1st QUARTER  $33.30   $28.24   $0.05 
2nd QUARTER   33.68    28.59    0.05 
3rd QUARTER   34.58    29.21    0.05 
4th QUARTER   37.30    30.85    0.05 

 

           Dividend 
2016  High   Low   Per Share 
1st QUARTER  $21.60   $16.17   $0.05 
2nd QUARTER   20.09    16.60    0.05 
3rd QUARTER   22.53    18.53    0.05 
4th QUARTER   31.98    20.83    0.05 

 

Future dividends payable by the Company will be determined by the Board of Directors after consideration of earnings and financial condition of the Company, need for capital and such other matters as the Board of Directors deems appropriate. The payment of dividends is subject to certain restrictions, see Part I, Item 1, “Business - Restrictions on the Payment of Dividends.”

 

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Performance

 

The following graph compares the cumulative total return on a hypothetical $100 investment made on December 31, 2012 in (a) the Company’s common stock; (b) the Russell 3000 Stock Index, and (c) the Keefe, Bruyette & Woods KBW 50 Index (top 50 U.S. banks). The graph is calculated assuming that all dividends are reinvested during the relevant periods. The graph shows how a $100 investment would increase or decrease in value over time, based on dividends (stock or cash) and increases or decreases in the market price of the stock.

 

 

 

 

  

    Period Ending  
Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
Peapack-Gladstone Financial Corporation 100.00 137.31 134.84 151.22 228.74 261.02
Russell 3000 Index 100.00 133.55 150.32 151.04 170.28 206.26
KBW NASDAQ Bank Index 100.00 137.75 150.65 151.39 194.56 230.73

 

Also, on March 1, 2018, there were approximately 888 registered shareholders of record.

 

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The following table sets forth information for the last quarter of the fiscal year ended December 31, 2017 with respect to common shares withheld to satisfy withholding obligations (or repurchases of outstanding common shares):

 

               Approximate 
           Total   Dollar Value of 
           Number of Shares   Shares That May 
           Purchased   Yet Be Purchased 
   Total       As Part of   Under the Plans 
   Number of Shares   Average Price Paid   Publicly Announced   Or Programs 
   Withheld/Purchased (1)   Per Share   Plans or Programs   (In Thousands) 
October 1, 2017 -                    
October 31, 2017   —   $—    —   $— 
November 1, 2017 -                    
November 30, 3017   —    —    —    — 
December 1, 2017 -                    
December 31, 2017   11,706    35.04    —    — 
Total   11,706   $35.04    —   $— 

 

   
(1)  Soley represents shares withheld to satisfy tax withholding obligations upon the exercise of stock options and vesting of restricted stock awards/units.

 

Sales of Unregistered Securities

 

None.

 

Item 6.SELECTED FINANCIAL DATA

 

The following is selected consolidated financial data for the Company and its subsidiaries for the years indicated. This information is derived from the historical consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes.

 

   Years Ended December 31, 
(In thousands, except per share data)  2017   2016   2015   2014   2013 
Summary earnings:                         
  Interest income  $138,727   $117,048   $99,142   $75,575   $57,053 
  Interest expense   27,586    20,613    14,690    7,681    4,277 
    Net interest income   111,141    96,435    84,452    67,894    52,776 
  Provision for loan losses   5,850    7,500    7,100    4,875    3,425 
    Net interest income after provision                         
     for loan losses   105,291    88,935    77,352    63,019    49,351 
  Wealth management income   23,183    18,240    17,039    15,242    13,838 
  Other income, exclusive of securities gains, net   11,444    10,559    6,148    5,305    5,917 
Securities gains, net   —    119    527    260    840 
Total expenses   85,611    75,112    68,926    59,540    55,183 
    Income before income tax expense   54,307    42,741    32,140    24,286    14,763 
  Income tax expense   17,810    16,264    12,168    9,396    5,502 
Net income available to common shareholders  $36,497   $26,477   $19,972   $14,890   $9,261 
                          
Per share data:
  Earnings per share-basic  $2.06   $1.62   $1.31   $1.23   $1.02 
  Earnings per share-diluted   2.03    1.60    1.29    1.22    1.01 
  Cash dividends declared   0.20    0.20    0.20    0.20    0.20 
  Book value end-of-period   21.68    18.79    17.61    16.36    14.79 
  Basic weighted average shares outstanding   17,659,625    16,318,868    15,187,637    12,065,615    9,094,111 
  Common stock equivalents (dilutive)   284,060    196,130    247,359    106,492    82,688 
  Fully diluted weighted average shares outstanding   17,943,685    16,514,998    15,434,996    12,172,107    9,176,799 

 

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   Years Ended December 31, 
   2017   2016   2015   2014   2013 
Balance sheet data (at period end):                    
  Total assets  $4,260,547   $3,878,633   $3,364,659   $2,702,397   $1,966,948 
  Securities available to sale   327,633    305,388    195,630    332,652    268,447 
  FHLB and FRB stock, at cost   13,378    13,813    13,984    11,593    10,032 
  Total loans   3,704,440    3,312,144    2,913,242    2,250,267    1,574,201 
  Allowance for loan losses   36,440    32,208    25,856    19,480    15,373 
  Total deposits   3,698,354    3,411,837    2,935,470    2,298,693    1,647,250 
  Total shareholders’ equity   403,678    324,210    275,676    242,267    170,657 
  Cash dividends:                         
    Common   3,548    3,296    3,100    2,414    1,802 
  Assets under management and/or administration at                         
    Wealth Management Division (market value)   5.5 billion    3.7 billion    3.3 billion    3.0 billion    2.7 billion 
                          
Selected performance ratios:                    
  Return on average total assets   0.89%   0.72%   0.64%   0.63%   0.54%
  Return on average common shareholders’ equity   10.12    8.92    7.71    7.96    7.37 
  Dividend payout ratio   9.72    12.45    15.52    16.21    19.46 
  Average equity to average assets ratio   8.80    8.12    8.30    7.94    7.26 
                          
  Net interest margin   2.80    2.74    2.80    3.01    3.26 
  Non-interest expenses to average assets   2.09    2.06    2.21    2.53    3.19 
  Non-interest income to average assets   0.85    0.79    0.76    0.88    1.19 
                          

Asset quality ratios (at period end):

                    
  Nonperforming loans to total loans   0.37%   0.34%   0.23%   0.30%   0.42%
  Nonperforming assets to total assets   0.37    0.30    0.22    0.30    0.44 
  Allowance for loan losses to nonperforming loans   269.33    285.94    383.22    284.38    231.87 
  Allowance for loan losses to total loans   0.98    0.97    0.89    0.87    0.98 
  Net charge-offs to average loans                         
       plus other real estate owned   0.05    0.04    0.03    0.04    0.06 
                          
Liquidity and capital ratios:                    
  Average loans to average deposits   99.63%   100.97%   98.30%   92.55%   83.05%
  Total shareholders’ equity to total assets   9.47    8.36    8.19    8.96    8.68 
                          
Company:                         
  Total capital to risk-weighted assets   14.84    13.25    11.40    15.55    15.33 
  Tier 1 capital to risk-weighted assets   11.31    10.60    10.42    14.38    14.07 
  Common equity tier 1 capital ratio to risk-                         
     weighted assets   11.31    10.60    10.42    N/A    N/A 
  Tier 1 leverage ratio   9.04    8.35    8.10    9.11    9.00 
                          
Bank:                         
  Total capital to risk-weighted assets   14.34    12.87    11.32    14.96    14.47 
  Tier 1 capital to risk-weighted assets   13.27    11.82    10.34    13.80    13.24 
  Common equity tier 1 capital ratio to risk-                         
     weighted assets   13.27    11.82    10.34    N/A    N/A 
  Tier 1 leverage ratio   10.61    9.31    8.04    8.74    8.75 

 

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Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS: This Annual Report on Form 10-K, both in the foregoing discussion 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 confidence and strategies and Management’s expectations about new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

 

·our inability to successfully grow our business and implement our strategic plan, including an inability to generate revenues to offset the increased personnel and other costs related to the strategic plan;
·the impact of anticipated higher operating expenses in 2018 and beyond;
·our inability to successfully integrate wealth management firm acquisitions;
·our inability to manage our growth;
·our inability to successfully integrate our expanded employee base;
·an unexpected decline in the economy, in particular in our New Jersey and New York market areas;
·declines in our net interest margin caused by the low interest rate environment and highly competitive market;
·declines in value in our investment portfolio;
·higher than expected increases in our allowance for loan and lease losses;
·higher than expected increases in loan and lease losses or in the level of nonperforming loans;
·unexpected changes in interest rates;
·an 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) that may result in increased compliance costs;
·changes in monetary policy by the Federal Reserve Board;
·changes to legislation or policy relating to tax or accounting matters;
·successful cyberattacks against our IT infrastructure and that of our IT providers;
·higher than expected FDIC insurance premiums;
·adverse weather conditions;
·our inability to successfully generate new business in new geographic markets;
·our inability to execute upon new business initiatives;
·our lack of liquidity to fund our various cash obligations;
·reduction in our lower-cost funding sources;
·our inability to adapt to technological changes;
·claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters; and
·other unexpected material adverse changes in our operations or earnings.

 

 

The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements.

 

OVERVIEW: The following discussion and analysis is intended to provide information about the financial condition and results of operations of the Company and its subsidiaries on a consolidated basis and should be read in conjunction with the consolidated financial statements and the related notes and supplemental financial information appearing elsewhere in this report.

 

For the year ended December 31, 2017, the Company recorded net income of $36.50 million, and diluted earnings per share of $2.03 compared to $26.48 million and $1.60, respectively, for 2016, reflecting increases of $10.02 million, or 38 percent, and $0.43 per share, or 27 percent, respectively. During 2017, the Company continued to focus on executing its Strategic

24 

Plan – known as “Expanding Our Reach” – which focuses on the client experience and organic growth across all lines of business. The Strategic Plan called for expansion of the Company’s wealth management business, organically and through wealth business acquisitions, and also expansion of the Company’s commercial and industrial (“C&I”) lending platform, through the use of private bankers, who lead with deposit gathering and wealth management discussions.

 

The following are select highlights for 2017:

 

·At December 31, 2017, the market value of assets under management and/or administration at the Private Wealth Management Division of the Bank was $5.5 billion, reflecting an increase of 49 percent from the balance at December 31, 2016.
·Fee income from the Private Wealth Management Division totaled $23.2 million for 2017, growing from $18.2 million for 2016.
·Loans at December 31, 2017 totaled $3.70 billion. This reflected net growth of $392 million, or 12 percent, from $3.31 billion at December 31, 2016.
·Total C&I loans at December 31, 2017 totaled $958 million. This reflected net growth of $321 million, or 50 percent, from $637 million at December 31, 2016.
·Total “customer” deposits (defined as deposits excluding brokered CDs and brokered “overnight” interest-bearing demand deposits) at December 31, 2017 were $3.45 billion, reflecting an increase of $308 million, or 10 percent, when compared to $3.14 billion at December 31, 2016.
·Asset quality metrics continued to be strong at December 31, 2017. Nonperforming assets at December 31, 2017 were $15.6 million, or 0.37 percent of total assets. Total loans past due 30 through 89 days and still accruing were $246 thousand or 0.01 percent of total loans at December 31, 2017.
·The Company’s and Bank’s capital ratios at December 31, 2017 all increased compared to the December 31, 2016 levels.

 

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 consolidated financial statements 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 the New York City area. 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 may experience 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. Debt securities are classified as held to maturity and carried at amortized cost when Management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity due to changes in interest rates,

25 

prepayment risk, liquidity or other factors. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. At December 31, 2017 and 2016, all securities were classified as available for sale.

 

Securities are evaluated on at least a quarterly basis to determine whether a decline in value is other-than-temporary. To determine whether a decline in value is other-than-temporary, Management considers the reasons underlying the decline, the near-term prospects of the issuer, the extent and duration of the decline and whether the Company 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. “Other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the amount of the impairment is recognized through earnings. No impairment charges were recognized in 2017, 2016 or 2015. For equity securities, the entire amount of impairment is recognized through earnings.

 

EARNINGS SUMMARY:

 

The following table presents certain key aspects of our performance for the years ended December 31, 2017, 2016 and 2015.

 

   Years Ended December 31,   Change 
(Dollars in thousands, except per share data)  2017   2016   2015   2017 v
2016		   2016 v
2015		 
Results of Operations:                    
Interest income  $138,727   $117,048   $99,142   $21,679   $17,906 
Interest expense   27,586    20,613    14,690    6,973    5,923 
   Net interest income   111,141    96,435    84,452    14,706    11,983 
Provision for loan losses   5,850    7,500    7,100    (1,650)   400 
Net interest income after provision                         
   for loan losses   105,291    88,935    77,352    16,356    11,583 
Wealth management fee income   23,183    18,240    17,039    4,943    1,201 
Other income   11,444    10,678    6,675    766    4,003 
Total operating expense   85,611    75,112    68,926    10,499    6,186 
Income before income tax expense   54,307    42,741    32,140    11,566    10,601 
Income tax expense   17,810    16,264    12,168    1,546    4,096 
Net income  $36,497   $26,477   $19,972   $10,020   $6,505 
                          
Per Share Data:                         
Basic earnings per common share  $2.06   $1.62   $1.31   $0.44   $0.31 
Diluted earnings per common share   2.03    1.60    1.29    0.43    0.31 
                          
Average common shares outstanding   17,659,625    16,318,868    15,187,637    1,340,757    1,131,231 
Diluted average common shares                         
   outstanding   17,943,685    16,514,998    15,434,996    1,428,687    1,080,002 
                          
Average equity to                         
   average assets   8.80%   8.12%   8.30%   0.68%   (0.18)%
Return on average assets   0.89    0.72    0.64    0.17    0.08 
Return on average equity   10.12    8.92    7.71    1.20    1.21 
                          
Selected Balance Sheet Ratios of the Company:                    
Total capital to risk-weighted assets   14.84%   13.25%   11.40%   1.59%   1.85%
Leverage ratio   9.04    8.35    8.10    0.69    0.25 
Average loans to average deposits   99.63    100.97    98.30    (1.34)   1.90 
Allowance for loan losses to total loans   0.98    0.97    0.89    0.01    0.08 
Allowance for loan losses to                         
   nonperforming loans   269.33    285.94    383.22    (16.61)   (97.28)
Nonperforming loans to total loans   0.37    0.34    0.23    0.03    0.11 
Noninterest bearing deposits to                         
   total deposits   14.58    14.35    14.30    0.23    0.05 
Time deposits to total deposits   16.65    16.14    17.99    0.51    (1.85)
                          

 

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2017 compared to 2016

 

The Company recorded net income of $36.50 million and diluted earnings per share of $2.03 for the year ended December 31, 2017 compared to net income of $26.48 million and diluted earnings per share of $1.60 for the year ended December 31, 2016. These results produced a return on average assets of 0.89 percent and 0.72 percent in 2017 and 2016, respectively, and a return on average shareholders’ equity of 10.12 percent and 8.92 percent in 2017 and 2016, respectively.

 

The increase in net income for 2017 was due to higher net interest income and wealth management income, offset by increased operating expenses when compared to 2016. In addition, net income included a $1.60 million tax benefit from the reduction of the Company’s deferred tax liability due to the new tax law. Higher operating expenses were principally due to costs associated with the implementation of the Strategic Plan, described in the “Overview” section above. Additionally, the Company recorded expense of $1.3 million related to the separation of two senior officers.

 

2016 compared to 2015

 

The Company recorded net income of $26.48 million and diluted earnings per share of $1.60 for the year ended December 31, 2016 compared to net income of $19.97 million and diluted earnings per share of $1.29 for the year ended December 31, 2015. These results produced a return on average assets of 0.72 percent and 0.64 percent in 2016 and 2015, respectively, and a return on average shareholders’ equity of 8.92 percent and 7.71 percent in 2016 and 2015, respectively.

 

The increase in net income for 2016 was due to higher net interest income and other income, offset by an increased provision for loan losses and other operating expenses when compared to 2015. Higher operating expenses were principally due to costs associated with the implementation of the Strategic Plan, described in the “Overview” section above.

 

NET INTEREST INCOME AND NET INTEREST MARGIN

 

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, money market, 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 (“interest rate spread”) and the relative amounts of earning assets and interest-bearing liabilities. The Company’s interest rate 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 for the periods indicated:

 

   Years Ended December 31, 
(Dollars in thousands)  2017   2016   2015 
Net interest income  $111,141   $96,435   $84,452 
Interest rate spread   2.62%   2.60%   2.69%
Net interest margin   2.80    2.74    2.80 

 

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The following table compares the average balance sheets, interest rate spreads and net interest margins for the years ended

December 31, 2017, 2016 and 2015 (on a fully tax-equivalent basis “FTE”):

 

Year Ended December 31, 2017
   Average   Income/Expense   Yield 
(In thousands except yield information)  Balance   (FTE)   (FTE) 
Assets:            
Interest-earnings assets:               
  Investments:               
     Taxable (1)  $300,590   $6,271    2.09%
     Tax-exempt (1)(2)   26,046    766    2.94 
  Loans (2)(3):               
      Mortgages   586,722    19,025    3.24 
      Commercial mortgages   2,073,804    75,304    3.63 
      Commercial   761,401    32,564    4.28 
      Commercial construction   96    4    4.17 
      Installment   75,995    2,322    3.06 
      Home Equity   67,420    2,489    3.69 
      Other   550    45    8.18 
      Total loans   3,565,988    131,753    3.69 
  Federal funds sold   101    —    0.25 
  Interest-earning deposits   115,567    1,021    0.88 
     Total interest-earning assets   4,008,292   $139,811    3.49 
Noninterest-earning assets:               
  Cash and due from banks   8,986           
  Allowance for loan losses   (35,246)          
  Premises and equipment   30,021           
  Other assets   83,060           
     Total noninterest-earning assets   86,821           
     Total assets  $4,095,113           
Liabilities and shareholders’ equity:               
Interest-bearing deposits:               
  Checking  $1,092,545   $5,039    0.46%
  Money markets   1,076,492    5,499    0.51 
  Savings   120,896    66    0.05 
  Certificates of deposit - retail   486,960    7,118    1.46 
     Subtotal interest-bearing deposits   2,776,893    17,722    0.64 
  Interest-bearing demand - brokered   180,000    2,934    1.63 
  Certificates of deposit - brokered   86,967    1,910    2.20 
  Total interest-bearing deposits   3,043,860    22,566    0.74 
  Borrowed funds   71,788    1,363    1.90 
  Capital lease obligation   9,375    451    4.81 
  Subordinated debt   50,733    3,206    6.32 
     Total interest-bearing liabilities   3,175,756    27,586    0.87 
Noninterest-bearing liabilities:               
  Demand deposits   535,451           
  Accrued expenses and other liabilities   23,413           
     Total noninterest-bearing liabilities   558,864           
Shareholders’ equity   360,493           
     Total liabilities and shareholders’ equity  $4,095,113           
        Net interest income       $112,225      
        Net interest spread             2.62%
        Net interest margin (4)             2.80%
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.

 

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Year Ended December 31, 2016

   Average   Income/Expense   Yield 
(In thousands except yield information)  Balance   (FTE)   (FTE) 
Assets:               
Interest-earnings assets:               
  Investments:               
     Taxable (1)  $208,980   $4,018    1.92%
     Tax-exempt (1)(2)   27,225    840    3.09 
  Loans (2)(3):               
      Mortgages   483,088    15,790    3.27 
      Commercial mortgages   2,022,936    70,775    3.50 
      Commercial   564,598    22,206    3.93 
      Commercial construction   991    41    4.14 
      Installment   61,362    1,737    2.83 
      Home Equity   59,555    1,964    3.30 
      Other   474    47    9.92 
      Total loans   3,193,004    112,560    3.53 
  Federal funds sold   101    —    0.24 
  Interest-earning deposits   128,488    551    0.43 
     Total interest-earning assets   3,557,798   $117,969    3.32 
Noninterest-earning assets:               
  Cash and due from banks   9,580           
  Allowance for loan losses   (29,068)          
  Premises and equipment   29,839           
  Other assets   86,228           
     Total noninterest-earning assets   96,579           
     Total assets  $3,654,377           
Liabilities and shareholders’ equity:               
Interest-bearing deposits:               
  Checking  $926,713   $2,547    0.27%
  Money markets   894,215    2,775    0.31 
  Savings   119,043    68    0.06 
  Certificates of deposit - retail   455,946    6,270    1.38 
     Subtotal interest-bearing deposits   2,395,917    11,660    0.49 
  Interest-bearing demand - brokered   199,208    3,020    1.52 
  Certificates of deposit - brokered   93,674    1,995    2.13 
  Total interest-bearing deposits   2,688,799    16,675    0.62 
  Borrowed funds   132,985    1,764    1.33 
  Capital lease obligation   9,940    478    4.81 
  Subordinated debt   26,679    1,696    6.36 
     Total interest-bearing liabilities   2,858,403    20,613    0.72 
Noninterest-bearing liabilities:               
  Demand deposits   473,536           
  Accrued expenses and other liabilities   25,530           
     Total noninterest-bearing liabilities   499,066           
Shareholders’ equity   296,908           
     Total liabilities and shareholders’ equity  $3,654,377           
        Net interest income       $97,356      
        Net interest spread             2.60%
        Net interest margin (4)             2.74%
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.

29 

 

 Year Ended December 31, 2015

       Income/     
   Average   Expense   Yield 
(In thousands except yield information)  Balance   (FTE)   (FTE) 
Assets:               
Interest-earnings assets:               
  Investments:               
     Taxable (1)  $231,152   $4,079    1.76%
     Tax-exempt (1)(2)   31,158    858    2.75 
  Loans (2)(3):               
     Mortgages   466,873    15,244    3.27 
     Commercial mortgages   1,718,171    61,286    3.57 
     Commercial   404,908    15,101    3.73 
     Commercial construction   3,679    156    4.24 
     Installment   32,774    1,096    3.34 
     Home Equity   51,227    1,657    3.23 
     Other   518    48    9.27 
     Total loans   2,678,150    94,588    3.53 
  Federal funds sold   101    —    0.10 
  Interest-earning deposits   95,287    204    0.21 
     Total interest-earning assets   3,035,848   $99,729    3.29 
Noninterest-earning assets:               
  Cash and due from banks   7,445           
  Allowance for loan losses   (22,550)          
  Premises and equipment   31,771           
  Other assets   67,915           
     Total noninterest-earning assets   84,581           
     Total assets  $3,120,429           
Liabilities and shareholders’ equity:               
Interest-bearing deposits:               
  Checking  $741,199   $1,495    0.20%
  Money markets   746,329    2,047    0.27 
  Savings   116,289    64    0.06 
  Certificates of deposit - retail   354,626    4,411    1.24 
     Subtotal interest-bearing deposits   1,958,443    8,017    0.41 
  Interest-bearing demand – brokered   268,414    2,534    0.94 
  Certificates of deposit – brokered   102,937    2,034    1.98 
  Total interest-bearing deposits   2,329,794    12,585    0.54 
  Borrowed funds   113,027    1,602    1.42 
  Capital lease obligation   10,452    503    4.81 
     Total interest-bearing liabilities   2,453,273    14,690    0.60 
Noninterest-bearing liabilities:               
  Demand deposits   394,567           
  Accrued expenses and other liabilities   13,530           
     Total noninterest-bearing liabilities   408,097           
Shareholders’ equity   259,059           
     Total liabilities and shareholders’ equity  $3,120,429           
        Net interest income       $85,039      
        Net interest spread             2.69%
        Net interest margin (4)             2.80%
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.

 

30 

 

The effect of volume and rate changes on net interest income (on a tax-equivalent basis) for the periods indicated are shown below:

 

   Year Ended 2017 Compared with 2016   Year Ended 2016 Compared with 2015 
           Net           Net 
   Difference due to   Change In   Change In   Change In 
   Change In:   Income/   Income/   Income/ 
(In Thousands):  Volume   Rate   Expense   Volume   Rate   Expense 
ASSETS:                        
Investments  $1,691   $488   $2,179   $(370)  $291   $(79)
Loans   14,141    5,052    19,193    18,288    (316)   17,972 
Federal funds sold   —    —    —    —    —    — 
Interest-earning deposits   (61)   531    470    87    260    347 
Total interest income  $15,771   $6,071   $21,842   $18,005   $235   $18,240 
LIABILITIES:                              
Checking  $161   $2,331   $2,492   $541   $510   $1,051 
Money market   901    1,823    2,724    518    212    730 
Savings   11    (13)   (2)   3    —    3 
Certificates of deposit - retail   458    390    848    1,333    526    1,859 
Certificates of deposit - brokered   (154)   69    (85)   (1,071)   1,557    486 
Interest bearing demand brokered   (299)   213    (86)   (189)   150    (39)
Borrowed funds   (803)   402    (401)   63    99    162 
Capital lease obligation   (27)   —    (27)   (26)   1    (25)
Subordinated debt  1,521    (11)   1,510    1,696    —    1,696 
Total interest expense  $1,769   $5,204   $6,973   $2,868   $3,055   $5,923 
Net interest income  $14,002   $867   $14,869   $15,137   $(2,820)  $12,317 
                               

 

2017 compared to 2016

 

Net interest income, on a fully tax-equivalent basis, grew $14.9 million, or 15 percent, in 2017 to $112.2 million from net interest income of $97.4 million in 2016. The net interest margin was 2.80 percent and 2.74 percent for the years ended December 31, 2017 and 2016, respectively, an increase of 6 basis points year over year. The growth in net interest income was due to increases in the average balance and yield on the Company’s interest-earning assets, especially C&I loans, which typically have higher yields. In addition, yields on loans benefitted from prepayment premiums on multifamily loans and $1.2 million on the recognition of deferred fees and prepayment premiums on two C&I credits during 2017. This increase was partially offset by increases in interest-bearing liabilities and the Company’s cost of funds. Net interest margin in 2017 was negatively affected by a full year of the 2016 subordinated debt issuance and from the $35.0 million subordinated debt offering in December 2017. The Company continues to be impacted by competitive pressures in attracting new loans and deposits.

 

On a fully tax-equivalent basis, interest income on earning assets increased $21.8 million, or 19 percent, to $139.8 million in 2017 from $118.0 million in 2016. Average earning assets for the year ended December 31, 2017 totaled $4.01 billion compared to $3.56 billion for 2016, an increase of $450.5 million or 13 percent. The average rate earned on earning assets was 3.49 percent in 2017, compared to 3.32 percent in 2016, an increase of 17 basis points.

 

Average interest-bearing liabilities for the year ended December 31, 2017 totaled $3.18 billion, an increase of $317.4 million, or 11 percent, from $2.86 billion for 2016. The average rate paid increased to 0.87 percent for 2017 from 0.72 percent for 2016. The increase in the average rate on interest-bearing liabilities was principally due to growth in higher costing certificates of deposit, the issuance of subordinated debt to help manage the Company’s regulatory capital and interest rate risk positions, and competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth. The Company uses interest rate swaps to hedge against future rises in interest rates on the $180.0 million of interest-bearing demand-brokered deposits. These swaps resulted in an increase of approximately $898 thousand in interest expense, or an additional 0.50 percent in the average rate paid on those $180.0 million of deposits. Brokered certificates of deposit are generally medium/longer term and have been used in the Company’s interest rate risk management practices. The Company utilized a diverse funding mix to meet its funding needs to manage interest rate risk, as well as to retain a higher level of liquidity on its balance sheet.

 

31 

The average balance of borrowings was $71.8 million for 2017 compared to $133.0 million during 2016, a decrease of $61.2 million. The average rates paid on total borrowings was 1.90 percent during 2017 compared to 1.33 percent during 2016, an increase of 57 basis points. The decrease in the average balance of borrowings was due to a decrease in the use of overnight borrowings and the maturity of $24.9 million of FHLB advances during 2017. The decrease in borrowings was offset by strong deposit growth and the issuance of $35.0 million of subordinated debt in December 2017.

 

In December 2017, the Company issued $35.0 million of subordinated debt ($34.1 million net of issuance costs) bearing interest at an annual rate of 4.75 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2027 or earlier redemption. 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 until maturity in June 2026 or earlier redemption.

 

The average balance on capital lease obligations was $9.4 million and $9.9 million during 2017 and 2016, respectively, while the average rate paid on capital lease obligations was 4.81 percent for both 2017 and 2016.

 

2016 compared to 2015

 

Net interest income, on a fully tax-equivalent basis, grew $12.3 million, or 14 percent, in 2016 to $97.4 million from net interest income of $85.0 million in 2015. The net interest margin was 2.74 percent and 2.80 percent for the years ended December 31, 2016 and 2015, respectively, a decrease of 6 basis points year over year. Net interest income increased in 2016 due to an increase in average loans, especially commercial mortgages and commercial loans, partially offset by the effect of lower market rates on loans and investments and an increased cost of funds. The net interest margin in 2016 was impacted by the effect from the $50 million subordinated debt offering in June 2016, and also continued to be impacted by the effect of the low interest rate environment throughout the majority of 2016, as well as competitive pressures in attracting new loans and deposits.

 

On a fully tax-equivalent basis, interest income on earning assets increased $18.2 million, or 18 percent, to $118.0 million in 2016 from $99.7 million in 2015. Average earning assets for the year ended December 31, 2016 totaled $3.56 billion compared to $3.04 billion for the same period of 2015, an increase of $522 million or 17 percent over 2015 average earning assets. The average rate earned on earning assets was 3.32 percent in 2016, compared to 3.29 percent in 2015, an increase of 3 basis points.

 

Average interest-bearing liabilities for the year ended December 31, 2016, totaled $2.86 billion, an increase of $405 million, or 17 percent, over the average interest-bearing liabilities for 2015 of $2.45 billion. The average rate paid increased to 0.72 percent for 2016 from 0.60 percent for 2015. The increase in the average rate on interest-bearing liabilities was principally due to growth in higher costing certificates of deposit, the issuance of subordinated debt to help manage the Company’s interest rate risk position, and competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth. The increase in the average rate paid on interest-bearing demand-brokered deposits is primarily due to interest paid on the $180.0 million notional principal in interest rate swaps that the Company is using to hedge against future rises in interest rates. These swaps resulted in an increase of approximately $2.0 million in interest expense, or an additional 0.53 percent in the average rate paid. Brokered certificates of deposit are generally medium/longer term and have been used in the Company’s interest rate risk management practices. The Company utilized a diverse funding mix to meet its funding needs to manage interest rate risk, as well as to retain a higher level of liquidity on its balance sheet.

 

The average balance of borrowings was $133.0 million for 2016 compared to $113.0 million during 2015, an increase of $20.0 million. The average rates paid on total borrowings was 1.33 percent during 2016 compared to 1.42 percent during 2015, a decrease of 9 basis points. The increase in the average balance of short-term borrowings was due to increased use of overnight borrowings to fund loan growth ahead of deposit growth, which positively impacted the cost of funds on borrowings.

 

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 until maturity in June 2026 or earlier redemption.

 

The average balance on capital lease obligations was $9.9 million and $10.5 million during 2016 and 2015, respectively, while the average rate paid on capital lease obligations was 4.81 percent for both 2016 and 2015.

 

32 

 

INVESTMENT SECURITIES AVAILABLE FOR SALE: Investment securities available for sale are purchased, sold and/or maintained as a part of the Company’s overall balance sheet, liquidity and interest rate risk management strategies, 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 December 31, 2017, the Company had investment securities available for sale with a fair value of $327.6 million compared with $305.4 million at December 31, 2016. A net unrealized loss (net of income tax) of $1.8 million and of $1.1 million were included in shareholders’ equity at December 31, 2017 and 2016, respectively.

 

The carrying value of investment securities available for sale for the years ended December 31, 2017, 2016 and 2015 are shown below:

 

(In thousands)  2017   2016   2015 
U.S. treasury and U.S. government-               
  sponsored entity bonds  $43,701   $21,517   $— 
Mortgage-backed securities-residential               
  (principally U.S. government-sponsored               
  entities)   243,116    237,617    160,607 
SBA pool securities   5,205    6,713    7,520 
State and political subdivision   24,868    28,993    22,029 
Corporate bond   3,082    3,113    — 
Single-issuer trust preferred securities   2,837    2,610    2,535 
CRA investment fund   4,824    4,825    2,939 
  Total  $327,633   $305,388   $195,630 

 

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of December 31, 2017:

 

       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-  $9,939   $4,767   $28,995   $—   $43,701 
  sponsored entity bonds   1.25%   1.82%   2.32%   —%   2.02%
Mortgage-backed securities-  $266   $14,870   $16,812   $211,168   $243,116 
  residential (1)   3.21%   2.03%   1.91%   2.13%   2.11%
SBA pool securities  $—   $—   $—   $5,205   $5,205 
    —%   —%   —%   1.46%   1.46%
State and political subdivisions (2)  $8,060   $10,947   $2,480   $3,381   $24,868 
    1.88%   3.03%   3.12%   3.03%   2.67%
Corporate bond  $—   $—   $3,082   $—   $3,082 
    —%   —%   5.25%   —%   5.25%
Single-issuer trust preferred securities (1)  $—   $—   $2,837   $—   $2,837 
    —%   —%   2.18%   —%   2.18%
  Total  $18,265   $30,584   $54,206   $219,754   $322,809 
    1.56%   2.35%   2.38%   2.13%   2.16%

 

(1)Shown using stated final maturity
(2)Yields presented on a fully tax-equivalent basis.

 

Federal funds sold and interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during 2017 was $115.7 million compared to $128.6 million in 2016.

 

33 

LOANS: The loan portfolio represents the largest portion of the Company’s earning assets and is the primary source of interest and fee income. Loans are primarily originated in New Jersey and the boroughs of New York City and, to a lesser extent, Pennsylvania. As of December 31, 2017, 37 percent of the total loan portfolio is concentrated in multifamily mortgages, 26 percent in C&I loans and 17 percent of the total loan portfolio is concentrated in commercial mortgages.

 

Total loans were $3.70 billion and $3.31 billion at December 31, 2017 and 2016, respectively, an increase of $392.3 million, or 12 percent, over the previous year. During 2017, commercial mortgages increased $75.4 million due to a continued focus on this type of business. Commercial loans totaled $958.3 million at December 31, 2017, increasing $321.6 million, or 51 percent, from 2016, as the Company continued its comprehensive C&I lending program and added seasoned bankers focused on C&I lending in both 2016 and 2017, including a seasoned team of bankers to focus on equipment financing hired during the second quarter of 2017. Residential mortgage loans totaled $576.4 million at December 31, 2017, an increase of $49.0 million, or 9 percent, from 2016, as the Company focused on relationship based residential mortgage lending. Multifamily mortgage loans were $1.39 billion at December 31, 2017, a decrease of $70.6 million or 5 percent when compared to 2016, through reduced origination levels and loan sales and participations. This was part of the Company’s balance sheet management strategy to reduce multifamily loans as a percent of the overall loan portfolio and as a percent of total regulatory capital, with C&I loans becoming a larger percentage of the overall loan portfolio.

 

In late 2015, the Company began providing loans that are partially guaranteed by the Small Business Administration (“SBA”), for the purposes of providing working capital and/or, financing the purchase of equipment, inventory or commercial real estate and that could be used for start-up businesses. All SBA loans are underwritten and documented as prescribed by the SBA. The Company will generally sell the guaranteed portion of the SBA loans in the secondary market, with the non-guaranteed portion held in the loan portfolio. During 2017, the Bank sold $15.1 million of the guaranteed portion of SBA loans into the secondary market. As of December 31, 2017, the balance of the non-guaranteed portion of SBA loans held on our balance sheet totaled $6.7 million.

 

The following table presents an analysis of outstanding loans by loan type, excluding multifamily loans held for sale, net of unamortized discounts and deferred loan origination costs, at the periods presented,

 

   December 31, 
(In thousands)  2017   2016   2015   2014   2013 
Residential mortgage  $576,356   $527,370   $470,869   $466,760   $532,911 
Multifamily mortgage   1,388,958    1,459,594    1,416,775    1,080,256    541,503 
Commercial mortgage   626,656    551,233    413,118    308,491    290,494 
Commercial loans   958,294    636,714    512,886    308,743    131,795 
Construction loans   —    1,405    1,401    5,998    5,893 
Home equity lines of credit   67,497    65,682    52,649    50,141    47,905 
Consumer and other loans   86,679    70,146    45,544    29,878    23,700 
  Total loans  $3,704,440   $3,312,144   $2,913,242   $2,250,267   $1,574,201 

 

The following table presents the contractual repayments of the loan portfolio, by loan type, at December 31, 2017:

 

   Within   After 1 But   After     
(In thousands)  One Year   Within 5 Years   5 Years   Total 
Residential mortgage  $138,876   $293,438   $144,042   $576,356 
Commercial mortgage                    
   (including multifamily)   598,933    1,270,711    145,970    2,015,614 
Commercial loans   624,425    300,698    33,171    958,294 
Construction loans   —    —    —    — 
Home equity lines of credit   67,497    —    —    67,497 
Consumer and other loans   76,589    6,847    3,243    86,679 
  Total loans  $1,506,320   $1,871,694   $326,426   $3,704,440 

 

34 

 

The following table presents the loans, by loan type, that have a predetermined interest rate and an adjustable interest rate due after one year at December 31, 2017:

 

   Predetermined   Adjustable 
(In thousands)  Interest Rate   Interest Rate 
Residential mortgage  $223,469   $287,096 
Commercial mortgage          
   (including multifamily)   161,737    1,383,587 
Commercial loans   80,111    91,838 
Consumer loans   13,301    — 
  Total loans  $478,618   $1,762,521 

 

The Company has not made nor invested in subprime loans or “Alt-A” type mortgages. At December 31, 2017, there were no commitments to lend additional funds to borrowers whose loans were classified as nonperforming.

 

Consistent with the Company’s balance sheet management strategy, the Company sold approximately $66 million of performing multifamily mortgages and $43 million of residential mortgages in 2017. The Company sold approximately $234 million of performing multifamily mortgages, of which $34 million were participations in 2016. There were no multifamily loans held for sale as of December 31, 2017 and 2016.

 

The geographic breakdown of the multifamily portfolio, net of participated multifamily loans, at December 31, 2017 is as follows:

 

(Dollars in thousands)        
New York  $741,096    53%
New Jersey   483,738    35 
Pennsylvania   164,124    12 
   Total Multifamily  $1,388,958    100%

 

A further breakdown of the multifamily portfolio by county within each respective State is as follows:

 

New Jersey New York Pennsylvania
Hudson County 25 % Bronx County 64 % Philadelphia 67 %
Essex County 22   New York County 16   Bucks County 12  
Passaic County 7   Kings County 13   Lehigh County 5  
Monmouth County 6   All other NY     All other PA    
Bergen County 4     counties 7     counties 16  
All other NJ Counties 36               
   Total 100 %     Total 100 %   Total 100 %

 

Principal types of owner occupied commercial real estate properties (by Call Report code), included in commercial loans on the balance sheet, at December 31, 2017 are:

 

(Dollars in thousands)        
Industrial (including Warehouse)  $53,198    21%
Office Buildings/Office Condominiums   48,030    19 
Medical Offices   46,123    18 
Retail Buildings/ Shopping Centers   34,114    14 
Auto Dealerships    18,854    7 
Recreational Facilities   12,252    5 
Schools   8,048    3 
Restaurants   7,304    3 
Other Owner Occupied CRE Properties   25,569    10 
   Total Owner Occupied CRE Loans  $253,492    100%

 

35 

 

Principal types of non-owner occupied commercial real estate properties (by Call Report code), at December 31, 2017 are as follows. These loans are included in commercial mortgage loans and commercial loans on the Company’s balance sheet.

 

(Dollars in thousands)        
Retail Buildings/Shopping Centers  $213,515    24%
Healthcare   159,290    18 
Office Buildings/Office Condominiums   113,546    13 
Hotels and Hospitality   102,179    12 
Industrial (including Warehouse)   65,141    8 
Medical Offices   54,289    6 
Mixed Use (Commercial / Residential)   42,505    5 
Mixed Use (Retail / Office)   41,760    5 
Manufactured Home Parks   36,081    4 
Other Non-Owner Occupied CRE Properties   45,792    5 
   Total Non-Owner Occupied CRE Loans  $874,098    100%

 

At December 31, 2017 and 2016, the Bank had a concentration in commercial real estate loans as defined by applicable regulatory guidance.

 

The following table presents such concentration levels at December 31, 2017 and 2016:

 

   As of December 31, 
   2017   2016 
Multifamily mortgage loans as a percent of        
   total regulatory capital of the Bank   286%   372%
           
Non-owner occupied commercial real estate          
   loans as a percent of total regulatory capital of          
   the Bank   180    192 
           
Total CRE concentration   466%   564%

 

The Bank believes it addresses the key elements in the risk management framework laid out by its regulators for the effective management of CRE concentration risks.

 

DEPOSITS: At December 31, 2017 and 2016, the Company reported total deposits of $3.70 billion and $3.41 billion, an increase of $286.5 million, or 8 percent, year over year. The Company’s strategy is to fund a majority of its loan growth with core deposits, which is an important factor in the generation of net interest income. The Company’s average deposits for 2017 increased $417.0 million, or 13 percent, over 2016 average levels to $3.58 billion. On average, the Company saw the largest dollar growth in non-interest-bearing demand, interest-bearing checking, money market, and retail certificate of deposit balances. The Company has successfully focused on:

 

·Growth in deposits associated with its private banking activities, including lending activities;
·Business and personal core deposit generation, particularly checking; and
·Municipal relationships within its market territory.

 

The Company continues to maintain brokered interest-bearing demand deposits as an additional source of liquidity. Such deposits are generally a more cost-effective alternative to wholesale borrowings and do not require pledging of collateral, as the borrowings do. These deposits remained flat at $180.0 million at December 31, 2017 and December 31, 2016. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. There are $180.0 million of notional principal interest rate swaps matched to these deposits for interest rate risk management purposes.

 

Average brokered certificates of deposit were reduced by $6.7 million in 2017. The majority of these deposits are longer term and were transacted as part of the Company’s interest rate risk management strategy.

36 

The following table sets forth information concerning the composition of the Company’s average deposit base and average interest rates paid for the following years:

 

(Dollars in thousands)  2017   2016   2015 
Noninterest-bearing demand  $535,451    —%  $473,536    —%  $394,567    —%
Checking   1,092,545    0.46    926,713    0.27    741,199    0.20 
Savings   120,896    0.05    119,043    0.06    116,289    0.06 
Money markets   1,076,492    0.51    894,215    0.31    746,329    0.27 
Certificates of deposit - retail   486,960    1.46    455,946    1.38    354,626    1.24 
Interest-bearing                              
   Demand - brokered   180,000    1.63    199,208    1.52    268,414    0.94 
Certificates of deposit - brokered   86,967    2.20    93,674    2.13    102,937    1.98 
  Total deposits  $3,579,311    0.63%  $3,162,335    0.53%  $2,724,361    0.46%

 

The Company is a participant in the Reich & Tang Demand Deposit Marketplace (“DDM”) program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts issued by other participating banks. Customer funds are placed at one or more participating bank 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 and Promontory programs are 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. Reciprocal deposits of $359.9 million, $393.0 million, and $417.0 million are included in the Company’s interest-bearing checking deposits as of December 31, 2017, 2016, and 2015, respectively.

 

The following table shows the maturity for certificates of deposit of $100,000 or more as of December 31, 2017 (in thousands):

 

Three months or less  $79,656 
Over three months through six months   95,999 
Over six months through twelve months   102,117 
Over twelve months   154,916 
  Total  $432,688 

 

FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: At December 31, 2017, Federal Home Loan Bank (“FHLB”) advances totaled $37.9 million with a weighted average interest rate of 2.20 percent compared to $61.8 million with a weighted average interest rate of 2.02 percent for 2016. The Company considers FHLB advances an added source of funding, and accordingly, may execute transactions from time to time as an additional part of the Company’s liquidity and interest rate risk management strategies. The FHLB advances outstanding at December 31, 2017 have varying maturities, call dates and interest rates, as well as prepayment penalties. There were no overnight borrowings at December 31, 2017 or 2016.

SUBORDINATED DEBT: During June 2016, the Company issued $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2016 Notes”) to certain institutional investors. The 2016 Notes are non-callable for five years, have a stated maturity of June 30, 2026, and bear interest at a fixed rate of 6.0 percent per year until June 30, 2021. From June 30, 2021 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 485 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $1.3 million and are being amortized to maturity.  

Approximately $40.0 million of the net proceeds from the sale of the 2016 Notes were contributed by the Company to the Bank in the second quarter of 2016. The remaining funds (approximately $10 million) were retained by the Company for operational purposes.

During December 2017, the Company issued $35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2017 Notes”) to certain institutional investors. The 2017 Notes are non-callable for five years, have a stated

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maturity of December 15, 2027, and bear interest at a fixed rate of 4.75 percent per year until December 15, 2022. From December 16, 2022 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $875 thousand and are being amortized to maturity.

Approximately $29.1 million of the net proceeds from the sale of the 2017 Notes were contributed by the Company to the Bank in the fourth quarter of 2017. The remaining funds of approximately $5 million, representing three years of interest payments, were retained by the Company for operational purposes.

Subordinated debt is presented net of issuance cost on the Consolidated Statements of Condition. The subordinated debt issuances are included in the Company’s regulatory total capital amount and ratio.

In connection with the issuance of the 2017 Notes, the Company obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned an investment grade rating of BBB- for the Company’s subordinated debt.

ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses was $36.4 million at December 31, 2017 compared to $32.2 million at December 31, 2016. At December 31, 2017, the allowance for loan losses as a percentage of total loans outstanding was 0.98 percent compared to 0.97 percent at December 31, 2016. The provision for loan losses was $5.9 million for 2017, $7.5 million for 2016 and $7.1 million for 2015.

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:

a)Primary Residential Mortgages. The Bank originates one to four family residential mortgage loans in the Tri-State area, Pennsylvania and Florida. On a case by case basis, the Bank will lend in additional states. When reviewing residential mortgage loan applications, detailed verifiable information is gathered on income, assets, employment and a tri-merged credit report obtained from a credit repository that will determine total monthly debt obligations. Utilizing an independent appraisal from an approved appraisal management company, the Bank makes residential mortgage loans up to 80 percent of the appraised value and up to 97 percent with private mortgage insurance. The Bank has developed a portfolio of mortgage products that are used exclusively to attract or maintain wealth, commercial or retail banking relationships. There is no differentiation by property type and loan-to-value (“LTVs”) are done uniformly. There are three loan levels: (1) loans up to $1 million, (2) loans greater than $1 million to $3 million, and (3) loans greater than $3 million to $5 million. Loans greater than $5 million will also be considered based on the strength of the overall credit profile of the borrower. Underwriting guidelines include (i) minimum credit report scores of 700 and (ii) a maximum debt to income ratio of 45 percent. The Bank may consider an exception to any guideline if there are strong compensating factors that address and mitigate any risk. Generally, the Bank retains in its portfolio residential mortgage loans with fixed rate maturities of no greater than 7 years, which then convert to annually adjusted floating rates. Community Development loans granted under the Affordable Housing Program are offered with 30 year maturities. Loans with longer maturities or lower credit scores are sold to secondary market investors. The Bank does not originate, purchase or carry any sub-prime mortgage loans.

 

Risk characteristics associated with primary residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

 

b)Home Equity Lines of Credit. The Bank provides revolving lines of credit against one to four family residences in the Tri-State area. These loans are primarily in a second lien position, but may be used as a first lien, in lieu of a primary residential first mortgage. When reviewing home equity line of credit applications, the Bank collects detailed verifiable information regarding income, assets, employment and a single merged credit report that will determine total monthly debt obligations. The Bank will use an automated valuation model on all lines up to $250,000 and will obtain an independent appraisal of the subject property on all applications exceeding $250,000. LTVs and combined LTVs are capped at 80 percent or 65 percent on primary residences, depending on the combined debt amount, and are not allowed on investment properties. These loans may be subordinate to a first mortgage which may be from another lending institution. The Bank will require that the mortgage securing the home equity line of credit be no lower than a second lien position. The combined first mortgage and home equity line, must be no more than 80 percent of the appraised value of the property when the combined debt is less than or equal to $800,000. For line amounts where the combined debt exceeds $800,000, the maximum LTV ratio is 65 percent. All applications for home equity lines of credit adhere to the underwriting standards and guidelines that consumer lending is regulated and governed by. Exceptions can be made to these guidelines with compensating factors that address and mitigate the risk associated with the exception.

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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 values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

 

c)Junior Lien Loan on Residence. The Bank provides junior lien loans (“JLL”) against one to four family properties in the Tri-State area. Junior lien loans can be either in the form of an amortizing fixed rate 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. The Bank will require that the mortgage securing the JLL be no lower than a second lien position. When reviewing the JLL application, the Bank collects detailed verifiable information regarding income, assets, employment and a single merged credit report that will determine total monthly debt obligations. The Bank will use an automated valuation model on all JLLs up to $250,000 and will obtain an independent appraisal of the subject property on all applications exceeding $250,000. LTV and combined LTVs are capped at 80 percent or 65 percent on primary residences, depending on the combined debt amount, and are not allowed on investment properties. The combined first mortgage and JLL, must be no more than 80 percent of the appraised value of the property when the combined debt is less than or equal to $800,000. For JLL amounts where the combined debt exceeds $800,000, the maximum loan-to-value ratio is 65 percent. All applications for JLLs adhere to the underwriting standards and guidelines that consumer lending is regulated and governed by. Exceptions can be made to these guidelines with compensating factors that address and mitigate the risk associated with the exception. Primary risk characteristics associated with JLLs typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.
d)Multifamily Loans. Multifamily loans are commercial mortgages on residential apartment buildings. Within the multifamily sector, the Bank’s primary focus is to lend against larger non-luxury apartment buildings and rent regulated properties with at least 30 units that are owned and managed by experienced sponsors. As of December 31, 2017, the average property size in the portfolio was 46 units.

 

Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expense, maintenance, taxes and debt service. The Bank includes debt service coverage covenants in these loans and the average ratio at original underwriting was about 1.5x. Increases in vacancy rates, interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to repay the loan. Certain markets, such as the Boroughs of New York City, are rent regulated, and as such, feature rents that are considered to be below market rates. Generally, rent regulated properties are characterized by relatively stable occupancy levels and longer-term tenants. As a loan asset class for many banks, multifamily loans have experienced much lower historical loss rates compared to other types of commercial lending.

 

The Bank’s loan policy allows loan to appraised value ratios of up to 75 percent and the overall portfolio average loan to value ratio was approximately 60 percent at December 31, 2017. To obtain the optimum 50 percent risk capital rating under regulatory guidance, we have modified our underwriting of multifamily loans. The majority of all new originations have a ten-year maturity with a five-year reprice as contrasted with our former standard of a five-year maturity with the borrower having an option to renew for five years at a reprice. For all new originations of refinances, we obtain prior pay history documentation, so that we can document an adequate twelve-month pay history. These changes allow us to use a 50 percent risk rating for multifamily loans as long as other criteria are met.

 

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Multifamily loan terms include prepayment penalties for early payoffs and generally require that the Bank escrow for real estate taxes. Multifamily loans will typically have a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions. In the loan underwriting process, the Bank requires an independent appraisal and review, appropriate environmental due diligence and an assessment of the property’s condition.

 

e)Commercial Real Estate Loans. The Bank provides mortgage loans for commercial real estate that is either owner occupied or managed as an investment property (non-owner occupied).

The terms and conditions of all commercial mortgage loans are tailored to the specific attributes of the borrower and any guarantors as well as the nature of the property and loan purpose. In the case of investment commercial real estate properties, the Bank reviews, among other things, the composition and mix of the underlying tenants, terms and conditions of the underlying tenant lease agreements, the resources and experience of the sponsor, and the condition and location of the subject property.

 

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 various industry or economic conditions. To mitigate this risk, the Bank will generally require an assignment of leases, direct recourse to the owners, and a risk appropriate interest rate and loan structure. In underwriting an investment commercial real estate loan, the Bank evaluates the property’s historical operating income as well as its projected sustainable cash flows and generally requires a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions.

 

With an owner-occupied property, a detailed credit assessment is made of the operating business since its ongoing success and profitability will be the primary source of repayment. While owner-occupied properties include the real estate as collateral, the risk assessment of the operating business is more similar to the underwriting of commercial and industrial loans (described below). The Bank will evaluate factors such as, but not limited to, the expected sustainability of profits and cash flows, the depth and experience of management and ownership, the nature of competition, and the impact of forces like regulatory change and evolving technology.

 

The Bank’s policy allows loan to appraised value ratios of up to 75 percent. Commercial mortgage loans are generally made on a fixed-rate basis with periodic rate resets every five or seven years over an underlying market index. Resets may not be automatic and subject to re-approval. Commercial mortgage loan terms include prepayment penalties for early payoffs and generally require that the Bank escrow for real estate taxes. The Bank requires an independent appraisal, an assessment of the property’s condition, and appropriate environmental due diligence. With all commercial real estate loans, the Bank’s standard practice is to require a depository relationship.

 

f)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. When underwriting business loans, among other things, the Bank evaluates the historical profitability and debt servicing capacity of the borrowing entity and the financial resources and character of the principal owners and guarantors.

 

Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flows. Factors that may influence a business’ profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. 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.

 

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g)Leasing and Equipment Finance. Peapack Capital Corporation (“PCC”), a subsidiary of the Bank, offers a range of finance solutions nationally. PCC provides term loans and leases secured by assets financed for U.S. based mid-size and large companies. Facilities tend to be fully drawn under fixed-rate terms. PCC serves a broad range of industries including transportation, manufacturing, heavy construction and utilities.

 

Asset risk in PCC’s portfolio is generally recognized through changes to loan income, or through changes to lease- related income streams due to fluctuations in lease rates. Changes to lease income can occur when the existing lease contract expires, the asset comes off lease, or the business seeks to enter a new lease agreement. Asset risk may also change depreciation, resulting from changes in the residual value of the operating lease asset or through impairment of the asset carrying value, which can occur at any time during the life of the asset.

 

Credit risk in PCC’s portfolio generally results from the potential default of borrowers or lessees, which may be driven by customer specific or broader industry related conditions. Credit losses can impact multiple parts of the income statement including loss of interest/lease/rental income and/or via higher costs and expenses related to the repossession, refurbishment, re-marketing and or re-leasing of assets.

 

h)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.

 

Bank Management believes that the underwriting guidelines previously described address the primary risk characteristics. Further, the Bank has dedicated staff and system resources to monitor and collect on any potentially problematic loans.

 

The provision for loan losses was based upon Management’s review and evaluation of the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, general market and economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and the existence and fair value of the collateral and guarantees securing the loans. Although Management used 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 the New York City area. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in market conditions in these areas and may be adversely affected should real estate values decline further or if the geographic areas serviced experience continued adverse economic conditions. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

 

The following table presents the loan loss experience, by loan type, during the periods ended December 31, of the years indicated:

 

(Dollars in thousands)  2017   2016   2015   2014   2013 
Allowance for loan losses at                         
  Beginning of year  $32,208   $25,856   $19,480   $15,373   $12,735 
Loans charged-off during the period:                         
  Residential mortgage   889    1,047    638    273    611 
  Commercial mortgage   734    531    16    669    56 
  Commercial   298    16    73    123    16 
  Home equity lines of credit   23    91    210    —    — 
  Consumer and other   77    5    54    23    357 
  Total loans charged-off   2,021    1,690    991    1,088    1,040 
Recoveries during the period:                         
  Residential mortgage   173    28    17    1    48 
  Commercial mortgage   22    318    29    124    114 
  Commercial   141    92    205    85    65 
  Home equity lines of credit   62    16    2    —    — 
  Consumer and other   5    88    14    110    26 
  Total recoveries   403    542    267    320    253 
Net charge-offs   1,618    1,148    724    768    787 
Provision charge to expense   5,850    7,500    7,100    4,875    3,425 
Allowance for loan losses at end of year  $36,440   $32,208   $25,856   $19,480   $15,373 
                          
Ratios:                         
Allowance for loan losses/total loans   0.98%   0.97%   0.89%   0.87%   0.98%
Allowance for loan losses/                         
   total nonperforming loans   269.33    285.94    383.22    284.38    231.87 

 

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The following table shows the allocation of the allowance for loan losses and the percentage of each loan category, by collateral type, to total loans as of December 31, of the years indicated:

                                         
       % of       % of       % of       % of       % of 
       Loan       Loan       Loan       Loan       Loan 
       Category       Category       Category       Category       Category 
(Dollars in      To Total       To Total       To Total       To Total       To Total 
thousands)  2017   Loans   2016   Loans   2015   Loans   2014   Loans   2013   Loans 
Residential   4,318    18.4    3,915    19.1    2,449    18.8    3,188    24.1    2,698    38.7 
Commercial                                                  
  and other   31,773    78.9    28,050    78.7    23,293    79.6    16,196    74.7    12,597    60.3 
Consumer   349    2.7    243    2.2    112    1.6    96    1.2    78    1.0 
  Total   36,440    100.0    32,208    100.00    25,856    100.0    19,480    100.0    15,373    100.0 

 

The allowance for loan losses as of December 31, 2017 totaled $36.4 million compared to $32.2 million at December 31, 2016. The allowance for loan loss as a percentage of loans increased to 0.98 percent at December 31, 2017 compared to 0.97 percent at December 31, 2016. The provision for loan losses made during 2017 totaled $5.9 million compared with $7.5 million for 2016. The provision for loan losses made was primarily influenced by net charge offs taken during the year of $1.6 million and the impact of loan growth experienced during 2017, specifically lease financing which is a new business line for the Company. The Company believes that the allowance for loan losses as of December 31, 2017 represents a reasonable estimate for probable incurred losses in the portfolio.

 

The portion of the allowance for loan losses allocated to loans collectively evaluated for impairment, commonly referred to as general reserves, was $35.9 million at December 31, 2017 and $31.4 million at December 31, 2016. General reserves at December 31, 2017 and 2016 represent 0.98 percent and 0.96 percent, respectively, of loans collectively evaluated for impairment. The increase in general reserves is a result of growth experienced by the Company in certain loan classes (C&I, CRE, Lease Financing) that carry a higher general reserve calculation because of the inherent nature of these loans compared to less risky loans, such as multifamily and residential that carry a lower general reserve allocation. The Company experienced growth in the loan portfolio of approximately $392 million, including loans held for sale. Multifamily and residential loan classes make up 53 percent of the loan portfolio as of December 31, 2017 compared to approximately 60 percent at December 31, 2016.

 

The specific reserve component of the allowance for loan losses decreased to $522 thousand at December 31, 2017 compared to $824 thousand as of December 31, 2016.

 

The allowance for loan losses as a percentage of nonperforming loans decreased, as the level of nonperforming loans increased during the year. Nonperforming loans are specifically evaluated for impairment. Also, Management commonly records partial charge-offs of the excess of the principal balance over the fair value, less costs to sell, of collateral for collateral dependent impaired loans. As a result, the allowance for loan losses does not always change proportionately with changes in nonperforming loans. Management charged off $1.8 million on loans identified as collateral-dependent impaired loans during 2017 and charged off $1.7 million on loans identified as collateral-dependent impaired loans during 2016.

 

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ASSET QUALITY:

 

The following table presents various asset quality data for the years indicated. These tables do not include loans held for sale.

 

   Years Ended December 31, 
(Dollars in thousands)  2017   2016   2015   2014   2013 
                     
Loans past due 30-89 days  $246   $1,356   $2,143   $1,755   $2,953 
                          
Troubled debt restructured loans  $17,591   $22,275   $18,663   $15,033   $13,966 
Loans past due 90 days or                         
  more and still accruing interest  $—   $—   $—   $—   $— 
Nonaccrual loans   13,530    11,264    6,747    6,850    6,630 
  Total nonperforming loans   13,530    11,264    6,747    6,850    6,630 
Other real estate owned   2,090    534    563    1,324    1,941 
  Total nonperforming assets  $15,620   $11,798   $7,310   $8,174   $8,571 
                          
Ratios:                         
Total nonperforming loans/total loans   0.37%   0.34%   0.23%   0.30%   0.42%
Total nonperforming loans/total assets   0.32    0.29    0.20    0.25    0.34 
Total nonperforming assets/total assets   0.37    0.30    0.22    0.30    0.44 

 

Some borrowers have found it difficult to make their loan payments under contractual terms. In some of these cases, the Company has chosen to grant concessions and modify certain loan terms, which may be characterized as troubled debt restructurings.

 

The following table presents the troubled debt restructured loans, by collateral, at December 31, 2017 and 2016:

 

   December 31,   Number of   December 31,   Number of 
(Dollars in thousands)  2017   Relationships   2016   Relationships 
Primary residential mortgage  $6,909    28   $10,369    31 
Junior Lien Loan on Residence   —    —    114    2 
Owner-occupied commercial real estate   —    —    711    1 
Investment commercial real estate   10,682    3    10,927    3 
Commercial and industrial   —    —    154    2 
  Total  $17,591    31   $22,275    39 

 

At December 31, 2017, there were $8.1 million of troubled debt restructured loans included in nonaccrual loans above compared to $4.5 million at December 31, 2016. All troubled debt restructured loans are considered and included in impaired loans at December 31, 2017 and had specific reserves of $423 thousand. At December 31, 2016, all troubled debt restructured loans were considered and included in impaired loans and had specific reserves of $550 thousand.

 

Except as disclosed, the Company does not have any potential problem loans that causes Management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans.

 

Impaired loans totaled $23.1 million and $29.1 million at December 31, 2017 and 2016. Impaired loans include nonaccrual loans of $13.5 million and $11.3 million at December 31, 2017 and 2016, respectively. Impaired loans also include accruing troubled debt restructuring loans of $9.5 million at December 31, 2017 and $17.8 million at December 31, 2016.

 

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The following table presents impaired loans, by collateral type, at December 31, 2017 and 2016.

 

   December 31,   Number of   December 31,   Number of 
(Dollars in thousands)  2017   Relationships   2016   Relationships 
Primary residential mortgage  $9,802    45   $15,814    52 
Home equity lines of credit   27    2    53    3 
Junior lien loan on residence   52    1    229    4 
Owner-occupied commercial real estate   2,503    4    1,486    3 
Investment commercial real estate   10,681    3    11,335    4 
Commercial and industrial   —    —    154    2 
  Total  $23,065    55   $29,071    68 
Specific reserves, included in the                    
  allowance for loan losses  $522        $824      

 

CONTRACTUAL OBLIGATIONS: The following table shows the significant contractual obligations of the Company by expected payment period, as of December 31, 2017:

 

   Less Than           More Than     
(In thousands)  One Year   1-3 Years   3-5 Years   5 Years   Total 
Loan commitments  $629,004   $—   $—   $—   $629,004 
Long-term debt obligations   34,898    3,000    —    —    37,898 
Purchase obligations   5,032    11,565    5,695    —    22,292 
Capital lease obligations   1,127    2,341    2,624    5,196    11,288 
Operating lease obligations   2,472    3,150    2,009    1,312    8,943 
  Total contractual obligations  $672,533   $20,056   $10,328   $6,508   $709,425 

 

Long-term debt obligations include borrowings from the Federal Home Loan Bank with defined terms. The table reflects scheduled repayments of principal.

 

Leases represent obligations entered into by the Company for the use of land and premises. The leases generally have escalation terms based upon certain defined indexes. Common area maintenance charges may also apply and are adjusted annually based on the terms of the lease agreements.

 

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist of contractual obligations under data processing service agreements. The Company also enters into various routine rental and maintenance contracts for facilities and equipment. These contracts are generally for one year.

 

The Company is a limited partner in a Small Business Investment Company (“SBIC”). As of December 31, 2017, the Company had unfunded commitments of $2.7 million for its investment in SBIC qualified funds.

 

OFF-BALANCE SHEET ARRANGEMENTS: The following table shows the amounts and expected maturities of significant commitments, consisting primarily of letters of credit, as of December 31, 2017.

 

   Less Than           More Than     
(In thousands)  One Year   1-3 Years   3-5 Years   5 Years   Total 
Financial letters of credit  $6,234   $3,049   $707   $—   $9,990 
Performance letters of credit   3,446    3,686    —    —    7,132 
  Total letters of credit  $9,680   $6,735   $707   $—   $17,122 

 

Commitments under standby letters of credit, both financial and performance, do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

 

44 

 

OTHER INCOME: The following table presents the major components of other income:

 

   Years Ended December 31,   Change 
(In thousands)  2017   2016   2015   2017 v 2016   2016 v 2015 
Service charges and fees  $3,239   $3,252   $3,323   $(13)  $(71)
Bank owned life insurance   1,356    1,407    1,297    (51)   110 
Loan fee income   1,568    1,259    567    309    692 
Gains on loans held for sale at fair                         
   value (mortgage banking)   401    1,010    528    (609)   482 
Securities gains, net   —    119    527    (119)   (408)
Fee income related to loan level,                         
   back-to-back swaps   2,814    1,638    373    1,176    1,265 
Gains on loans held for sale at                         
   lower of cost or fair value   412    1,233    —    (821)   1,233 
Gain on sale of SBA loans   1,564    623    7    941    616 
Other income   90    137    53    (47)   84 
Total other income  $11,444   $10,678   $6,675   $766   $4,003 

 

 

2017 compared to 2016

 

The Company recorded total other income of $11.4 million, excluding wealth management fee income, reflecting an increase of $766 thousand, or 7 percent, compared to 2016 levels. The increase in 2017 was attributable to increases in fee income related to loan level, back-to-back swaps, gain on sale of SBA loans, and loan fee income. These increases were partially offset by a decrease in gains on loans held for sale at lower of cost or fair value, security gains and gains on loans held for sale at fair value (mortgage banking).

 

Loan fee income, including late fees, unused credit lines fees and loan servicing income, increased $309 thousand to $1.6 million for 2017 from $1.3 million for 2016. The Company recorded greater unused line of credit fees and letter of credit fees associated with the commercial lending business.

 

For the years ended December 31, 2017 and 2016, income from the sale of newly originated residential mortgage loans was $401 thousand and $1.0 million, respectively. The decreased income for 2017 was a result of lower volume of residential mortgage loans originated for sale for the year ended December 31, 2017 compared to the year ended December 31, 2016, as a result of reduced refinance activity due principally to the higher market rate environment.

 

There were no securities gains for 2017 compared to $119 thousand for 2016. 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.

 

Fee income related to loan level, back-to-back swaps was $2.8 million for 2017 compared to $1.6 million in 2016. The increase was a result of new contracts in 2017. The program utilizes mirror interest rate swaps, one directly with a commercial real estate loan customer and one directly with a well-established counterparty. This enables a commercial loan customer to benefit from a fixed-rate loan, while the Company records a floating-rate loan. The program provides enhanced interest rate risk management, as well as the potential for fee income for the Company. While the Company cannot predict the amount of fee income that may be recognized each period, this program is a part of ongoing operations.

 

The Company sold approximately $109 million in multifamily and residential loans in 2017 as compared to sales of $234 million of multifamily loans in 2016. Gains on the sale of loans held for sale at the lower of cost or fair value was $412 thousand for 2017 compared to $1.2 million in 2016. The Company will employ loan sales and loan participations, as needed, to manage the Company’s balance sheet.

 

In late 2015, the Company began providing loans that are partially guaranteed by the SBA, for the purposes of providing working capital and/or, financing the purchase of equipment, inventory or commercial real estate and that could be used for start-up business. All SBA loans are underwritten and documented as prescribed by the SBA. The Company will generally sell the guaranteed portion of the SBA loans in the secondary market, with the non-guaranteed portion of SBA loans held in the loan portfolio. Gain on sale of SBA loans for 2017 resulted in $1.6 million of income related to the Company’s SBA lending and sale program for 2017 compared to $623 thousand in 2016.

 

45 

2016 compared to 2015

 

The Company recorded total other income of $10.7 million, excluding wealth management fee income, reflecting an increase of $4.0 million, or 60 percent, compared to 2015 levels. The increase in 2016 was attributable to increases in fee income related to loan level, back-to-back swaps, gain on SBA loans, loan fee income, and gain on sale of loans held for sale at lower of cost or fair value, partially offset by a decrease in securities gains.

 

Loan fee income, including late fees, unused credit lines fees and loan servicing income increased $692 thousand to $1.3 million for 2016 as compared to 2015. Increases in loan servicing fees were due to our continued multifamily loan participations. Additionally, the Company recorded greater unused line of credit fees associated with the commercial lending business.

 

Securities gains were $119 thousand for 2016 compared to $527 thousand for 2015. 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.

 

BOLI income was $1.4 million for 2016 compared to $1.3 million for 2015, an increase of $110 thousand related to an increase in the BOLI policy of $10 million which occurred in the fourth quarter of 2015. This increase was partially offset by additional income related to the net life insurance death benefit under its BOLI policies in 2015.

 

Fee income related to loan level, back-to-back swaps was $1.6 million for 2016 compared to $373 thousand in 2015. The increase was a result of new contracts in 2016.

 

Gain on sale of SBA loans for 2016 included $623 thousand of income related to the Company’s SBA lending and sale program.

 

Gains on the sale of multifamily loans held for sale at the lower of cost or fair value was $1.2 million for 2016. During the first quarter of 2016, the Company began selling whole multifamily loans in addition to multifamily loan participations. The Company intends to continue to employ loan sales and loan participations, as needed, to manage the Company’s balance sheet.

 

OPERATING EXPENSES: The following table presents the major components of operating expenses:

 

   Years Ended December 31,   Change 
(In thousands)  2017   2016   2015   2017 v 2016   2016 v 2015 
Compensation and employee benefits  $53,956   $45,003   $40,278   $8,953   $4,725 
Premises and equipment   11,988    11,245    11,569    743    (324)
FDIC assessment   2,366    4,758    2,154    (2,392)   2,604 
Other operating expenses:                         
Professional and legal fees   4,486    3,459    2,747    1,027    712 
Wealth Division other expense   2,418    2,029    2,147    389    (118)
Branch restructure   —    —    1,735    —    (1,735)
Telephone   998    976    942    22    34 
Advertising   1,108    824    637    284    187 
Loan expense   485    715    426    (230)   289 
Postage   403    341    376    62    (35)
Stationery and supplies   317    297    318    20    (21)
Provision for ORE losses   —    —    250    —    (250)
Other operating expenses   7,086    5,465    5,347    1,621    118 
Total operating expense  $85,611   $75,112   $68,926   $10,499   $6,186 

 

46 

 

2017 compared to 2016

 

Operating expenses totaled $85.6 million in 2017, compared to $75.1 million in 2016, reflecting an increase of $10.5 million, or 14 percent. Compensation and employee benefits expense, which accounts for the largest portion of operating expenses, totaled $54.0 million in 2017, reflecting an increase of $9.0 million or 20 percent, when compared to 2016. Strategic hiring, normal salary increases, and increased bonus/incentive accruals associated with the Company’s growth and results contributed to the increase in compensation and employee benefits expense. Additionally, the acquisitions of MCM in August 2017 and Quadrant in November 2017, the hiring of a team of experienced bankers to focus on equipment financing, and $1.3 million of separation expenses for two senior officers also contributed to the increase during 2017.

 

The Company recorded FDIC assessment expense of $2.4 million and $4.8 million in 2017 and 2016, respectively, a decrease of $2.4 million, or 50 percent year over year. Starting in the third quarter of 2016, the Company’s FDIC premium declined because the FDIC assessment system was revised. Revisions for “small institutions” (under $10 billion in assets) resulted in, among other things, the elimination of risk categories and utilization of a financial ratios method to determine assessment rates. The changes reduced the Company’s assessment rate by nearly 50 percent in the third and fourth quarters of 2016.

 

The Company also previously disclosed that other operating expenses, including professional fees, would be higher in 2017. Professional and legal fees were $4.5 million for the twelve months ended December 31, 2017 as compared to $3.5 million for the twelve months ended December 31, 2016, an increase of $1.0 million or 30 percent. This included approximately $660 thousand of investment banking expenses related to wealth acquisitions. In addition, advertising expense grew by $284 thousand to $1.1 million when comparing 2017 to 2016. The increased advertising and marketing expenses related to various target marketing campaigns.

 

The acquisitions of MCM in August 2017 and Quadrant in November 2017, and the hiring of a team of experienced bankers to focus on equipment financing, all contributed to the increase in other operating expenses during 2017.

 

2016 compared to 2015

 

Operating expenses totaled $75.1 million in 2016, compared to $68.9 million in 2015, reflecting an increase of $6.2 million, or 9 percent. Salaries and benefits expense, which accounts for the largest portion of operating expenses, totaled $45.0 million in 2016, reflecting an increase of $4.7 million or 12 percent, when compared to 2015. Strategic hiring that was in line with the Company’s Strategic Plan, including staff associated with credit and risk management, normal salary increases, the acquisition of Wealth Management Consultants in May 2015 and increased bonus/incentive accruals associated with the Company’s growth, all of which contributed to the increase in salaries and benefits expense when comparing the 2016 to the 2015 years.

 

In 2015, the Company recorded a total of $2.5 million of charges related to the closure of two branch offices. Branch restructure charges, included in other operating expenses, totaled $1.7 million, while depreciation expense, included in premises and equipment expense, related to the closures totaled $723 thousand of the $2.5 million.

 

The Company recorded FDIC assessment expense of $4.8 million and $2.2 million in 2016 and 2015, respectively, an increase of $2.6 million, or 121 percent year over year. The Company previously disclosed the FDIC assessment expense for 2016 would be significantly higher than 2015. However, starting in the third quarter of 2016, the Company’s FDIC premium declined because the FDIC assessment system was revised. Revisions for “small institutions” (under $10 billion in assets) resulted in, among other things, the elimination of risk categories and utilization of a financial ratios method to determine assessment rates. The changes reduced the Company’s assessment rate by nearly 50 percent in the third and fourth quarters of 2016, when compared to the first and second quarters’ 2016 assessment rate.

 

The Company also previously disclosed that other operating expenses, including professional fees, would be higher in 2016. Professional fees were $3.5 million for the twelve months ended December 31, 2016 as compared to $2.7 million for the twelve months ended December 31, 2015, an increase of $712 thousand or 26 percent. Given the Company’s significant growth and high concentration in multifamily lending, the Company accelerated costs over 2016 to ensure it adhered to best in class risk management practices. The Company had originally planned for such expenditures over a two to three-year period, but felt it prudent to push them forward into 2016.

 

47 

INCOME TAXES: Income tax expense for the year ended December 31, 2017 was $17.8 million compared to income tax expense of $16.3 million for the same period of 2016. The effective tax rate for the year ended December 31, 2017 was 32.80 percent compared to 38.05 percent for the year ended December 31, 2016. The increase in income tax expense for the year ended December 31, 2017 was due to an increase in pre-tax income offset by a $1.60 million tax benefit from the reduction of the Company’s deferred tax liability due to Federal Tax Reform, as discussed below. In addition, income tax expense in 2017 benefitted from the vesting of restricted stock at market prices above initial grant prices.

 

On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Act”) was signed into law.  The Act contains several changes in existing tax law impacting businesses, including a reduction in the Federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. The Company determined a reduction in the value of its net deferred tax liability of approximately $1.6 million, which was a result of a reduction in the Federal corporate tax rate that is expected to apply to the reversal of the Company’s temporary differences. The Company recorded the reduction in the deferred tax liability as an income tax benefit in the Company’s statement of income for the fourth quarter ended December 31, 2017.

 

CAPITAL RESOURCES: A solid capital base provides the Company with the ability to support future growth and financial strength and is essential to executing the Company’s Strategic Plan – “Expanding Our Reach.” The Company’s capital strategy is intended to provide stability to expand its businesses, even in stressed environments. Quarterly stress testing is integral to the Company’s capital management process.

 

The Company strives to maintain capital levels in excess of internal “triggers” and in excess of those considered to be well capitalized under regulatory guidelines applicable to banks. Maintaining an adequate capital position supports the Company’s goal of providing shareholders an attractive and stable long-term return on investment.

 

The Company’s capital position during 2017 was benefitted by net income of $36.5 million and $36.6 million related to voluntary share purchases under the Dividend Reinvestment Plan, which the Company believes will continue to be a source of new capital for the Company.

 

At December 31, 2017, the Company’s GAAP capital as a percent of total assets was 9.47 percent. At December 31, 2017, the Company’s regulatory leverage, common equity tier 1, tier 1 and total risk based capital ratios were 9.04 percent, 11.31 percent, 11.31 percent and 14.84 percent, respectively. At December 31, 2017, the Bank’s regulatory leverage, common equity tier 1, tier 1 and total risk based capital ratios were 10.61 percent, 13.27 percent, 13.27 percent and 14.34 percent, respectively. The Bank’s regulatory capital ratios are all above the ratios to be considered well capitalized under regulatory guidance.

 

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 December 31, 2017:                                
  Total capital                                        
  (to risk-weighted assets)  $485,252    14.34%  $338,327    10.00%  $270,662    8.00%  $312,953    9.25%
                                         
  Tier I capital                                        
  (to risk-weighted assets)   448,812    13.27    270,662    8.00    202,996    6.00    245,287    7.25 
                                         
  Common equity tier I                                        
  (to risk-weighted assets)   448,810    13.27    219,913    6.50    152,247    4.50    194,538    5.75 
                                         
  Tier I capital                                        
  (to average assets)   448,812    10.61    211,523    5.00    169,219    4.00    169,219    4.00 
                                         
As of December 31, 2016:                                        
  Total capital                                        
  (to risk-weighted assets)  $392,305    12.87%  $304,758    10.00%  $243,806    8.00%   262,854    8.625 
                                         
  Tier I capital                                        
  (to risk-weighted assets)   360,097    11.82    243,806    8.00    182,855    6.00    201,902    6.625 
                                         
  Common equity tier I                                        
  (to risk-weighted assets)   360,094    11.82    198,093    6.50    137,141    4.50    156,188    5.125 
                                         
  Tier I capital                                        
  (to average assets)   360,097    9.31    193,430    5.00    154,744    4.00    154,744    4.00 
                                         

 

48 

 

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 December 31, 2017:                                
  Total capital                                        
  (to risk-weighted assets)  $502,334    14.84%   N/A    N/A   $270,866    8.00%  $313,189    9.25%
                                         
  Tier I capital                                        
  (to risk-weighted assets)   382,870    11.31    N/A    N/A    203,149    6.00    245,472    7.25 
                                         
  Common equity tier I                                        
  (to risk-weighted assets)   382,868    11.31    N/A    N/A    152,362    4.50    194,685    5.75 
                                         
  Tier I capital                                        
  (to average assets)   382,870    9.04    N/A    N/A    169,318    4.00    169,318    4.00 
                                         
As of December 31, 2016:                                        
  Total capital                                        
  (to risk-weighted assets)  $404,017    13.25%   N/A    N/A   $243,910    8.00%   262,966    8.625 
                                         
  Tier I capital                                        
  (to risk-weighted assets)   323,045    10.60    N/A    N/A    182,933    6.00    201,988    6.625 
                                         
  Common equity tier I                                        
  (to risk-weighted assets)   323,042    10.60    N/A    N/A    137,200    4.50    156,255    5.125 
                                         
  Tier I capital                                        
  (to average assets)   323,045    8.35    N/A    N/A    154,788    4.00    154,788    4.00 
                                         

 

(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) Common Equity Tier 1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

 

The Company’s regulatory total risk based capital ratio beginning June 30, 2016 was benefitted by the $48.7 million (net) subordinated debt issuance that closed in June 2016. The Company down-streamed approximately $40 million of those proceeds to the Bank as capital, benefitting all the Bank’s regulatory capital ratios at that time.

 

In addition, on December 12, 2017, the Company issued $35 million in aggregate principal amount of Fixed-to-Floating Subordinated Notes due December 15, 2027 (the “Notes”). The Company downstreamed approximately $29.1 million of those proceeds to the Bank as capital.

 

The Dividend Reinvestment Plan of Peapack-Gladstone Financial Corporation, or the “Reinvestment Plan,” allows shareholders of the Company to purchase additional shares of common stock using cash dividends without payment of any brokerage commissions or other charges. Shareholders may also make voluntary cash payments of up to $200 thousand per quarter to purchase additional shares of common stock. Such optional cash purchases provided $36.6 million and $22.5 million of common equity in 2017 and 2016, respectively.

 

The Company filed a shelf registration statement with the SEC in December 2016 that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, common stock, preferred stock and other non-

49 

equity securities not to exceed $100.0 million. The shelf registration provides the Company with flexibility in issuing capital instruments and more readily accessing the capital markets as needed to pursue future growth opportunities and ensure continued compliance with regulatory capital requirements. Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient common equity to support its planned growth and expansion for the immediate future. The Company continually assesses other potential sources of capital, in addition to common equity to support future growth.

 

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

 

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 $113.4 million at December 31, 2017. In addition, the Company had $327.6 million in securities designated as available for sale at December 31, 2017. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. In addition, the Company generates significant liquidity from principal repayments of loans and mortgage-backed securities.

 

A further source of liquidity is borrowing capacity. At December 31, 2017, unused secured borrowing commitments totaled $1.2 billion from the FHLB and $785.6 million from the Federal Reserve Bank of New York.

 

Customer deposits at December 31, 2017 increased $307.6 million (including interest-bearing checking, money market and certificates of deposit), when compared to December 31, 2016. Capital increased $79.5 million at December 31, 2017 when compared to December 31, 2016. This increase in customer deposits and capital primarily funded $23.9 million in maturing FHLB advances, an increase in loans of approximately $392.3 million, and an increase in investment securities of approximately $22.2 million.

 

Brokered interest-bearing demand (“overnight”) deposits stayed flat at $180.0 million at December 31, 2017 from December 31, 2016. The interest rate paid on these deposits allowed the Bank to fund operations at attractive rates and engage in interest rate swaps as part of its asset-liability interest rate risk management. As of December 31, 2017, the Company has transacted pay fixed, receive floating interest rate swaps totaling $180.0 million in notional amount. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits.

 

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.

 

EFFECTS OF INFLATION AND CHANGING PRICES: The financial statements and related financial data presented herein have been prepared in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than do general levels of inflation.

 

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. This division also provides lending, residential mortgages and deposit services to high net worth individuals. Officers from the Private Wealth Management Division are available to provide wealth management, trust and investment services at the Bank’s corporate headquarters in Bedminster, at private banking locations in Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware in Greenville, Delaware, Murphy Capital Management (“MCM”), in Gladstone, New Jersey and Quadrant Capital Management (“Quadrant”), in Fairfield, New Jersey.

 

 

50 

The following table presents certain key aspects of the Private Wealth Management Division’s performance for the years ended December 31, 2017, 2016 and 2015.

 

   Years Ended December 31,   Change 
(In thousands, except per share data)  2017   2016   2015   2017 v 2016   2016 v 2015 
                     
Total fee income  $23,183   $18,240   $17,039   $4,943   $1,201 
                          
Compensation and benefits (included in                         
   Operating Expenses section above)   11,039    8,975    8,389    2,064    586 
                          
Other operating expense (included in                         
  Operating Expenses section above)   9,141    6,573    6,398    2,568    175 
                          
Assets under management and/or                         
  administration (AUM) (market value)   5.5 billion    3.7 billion    3.3 billion           

 

 

2017 compared to 2016

 

The market value of AUM at December 31, 2017 and 2016 was $5.5 billion and $3.7 billion, respectively, an increase of 49 percent over the prior year. This includes assets held at the Bank at December 31, 2017 and 2016 of $263.2 million and $334.4 million, respectively. The increase in assets under management and/or administration (“AUM”) was due to acquisitions of two registered investment advisory firms (“RIA”) and organic growth during 2017. Effective August 1, 2017, the Bank acquired MCM, an RIA, based in Gladstone, NJ. MCM contributed approximately $850 million of AUM at the time of acquisition. Effective November 1, 2017, the Bank acquired Quadrant, an RIA, based in Fairfield, NJ, which contributed approximately $460 million of AUM at the time of acquisition. Organic growth, which includes equity market appreciation, contributed an additional $500 million in AUM during 2017.

 

Wealth management fees increased $4.9 million or 27 percent to $23.2 million for the year ended December 31, 2017 from $18.2 million in 2016. The growth in fee income was due to several factors, including the acquisitions noted above, as well as continued healthy new business results, somewhat offset by normal levels of disbursements and outflows.

 

The Company continues to incorporate wealth management into conversations it has with the Company’s clients, across 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.

 

Private Wealth Management Division expenses increased to $20.2 million for the year ended December 31, 2017 from $15.5 million for 2016, an increase of $4.6 million, or 30 percent. Other operating expenses increased $2.6 million or 39 percent to $9.1 million for the year ended 2017 when compared to 2016. Compensation and benefits expense totaled $11.0 million and $9.0 million for the years ended December 31, 2017 and 2016, respectively, increasing $2.1 million or 23 percent. The increase in expenses in 2017 are partially due to MCM and Quadrant. 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.

 

2016 compared to 2015

 

The market value of assets under administration at December 31, 2016 and 2015 was $3.7 billion and $3.3 billion, respectively, an increase of 11 percent over the prior year. This includes assets held at the Bank at December 31, 2016 and 2015 of $334.4 million and $237.7 million, respectively.

 

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Wealth management fees increased $1.2 million or 7 percent to $18.2 million for the year ended December 31, 2016 from $17.0 million in 2015. The growth in fee income was due to several factors, including continued healthy new business results, somewhat offset by normal levels of disbursements and outflows.

 

Private Wealth Management Division expenses increased to $15.5 million compared to $14.8 million for 2015, an increase of $761 thousand, or 5 percent. Other operating expenses increased $175 thousand or 3 percent to $6.6 million for the year ended December 31, 2016 when compared to 2015. Compensation and benefits expense totaled $9.0 million and $8.4 million for the years ended December 31, 2016 and 2015, respectively, increasing $586 thousand or 7 percent. Expenses in 2016 include the expenses of the Wealth Management Consultants Division for a full year, 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.

 

 

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Company’s Asset/Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset/liability management strategies and advising the Board of Directors on such strategies, as well as the related level of interest rate risk. In this regard, interest rate risk simulation models are prepared on a quarterly basis. These models have the ability to demonstrate balance sheet gaps and predict changes to net interest income and economic/market value of portfolio equity under various interest rate scenarios. In addition, these models, as well as ALCO processes and reporting, are subject to annual independent third-party review.

 

ALCO is generally authorized to manage interest rate risk through the management of capital, cash flows and duration of assets and liabilities, including sales and purchases of assets, as well as additions of wholesale borrowings and other sources of medium/longer-term funding. ALCO is authorized to engage in interest rate swaps as a means of extending the duration of shorter-term liabilities.

 

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

 

·Actively market 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 residential mortgage portfolio originations 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, especially longer-term residential loans, and/or loan participations.

 

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The interest rate swap program is administered by ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. In all of these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $180.0 million.

 

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 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 December 31, 2017, $317.4 million of notional value in swaps were executed and outstanding with borrowers under this program.

 

As noted above, ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The 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 December 31, 2017. 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 remained static as of December 31, 2017.

 

In an immediate and sustained 200 basis point increase in market rates at December 31, 2017, net interest income for year 1 would increase approximately 3.3 percent, when compared to a flat interest rate scenario. In year 2 this sensitivity improves to an increase of 7.9 percent, when compared to a flat interest rate scenario

 

In an immediate and sustained 100 basis point decrease in market rates at December 31, 2017, net interest income would decline approximately 4.7 percent for year 1 and 7.3 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 December 31, 2017.

 

   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  $561,707   $(1,507)   (0.27)%   13.84%   54 
+100   568,361    5,147    0.91    13.70    40 
Flat interest rates   563,214    —    —    13.30    — 
-100   542,563    (20,651)   (3.67)   12.58    (72)

 

(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.

 

53 

 

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

Shareholders and the Board of Directors of Peapack-Gladstone Financial Corporation

Bedminster, New Jersey

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated statements of condition of Peapack-Gladstone Financial Corporation (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

 

Basis for Opinions

 

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded

54 

as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

  /s/ Crowe Horwath LLP
   

We have served as the Company’s auditor since 2006.

 

Livingston, New Jersey

March 12, 2018

 

 

55 

CONSOLIDATED STATEMENTS OF CONDITION

   December 31, 
(In thousands, except share and per share data)  2017   2016 
ASSETS        
Cash and due from banks  $4,415   $24,580 
Federal funds sold   101    101 
Interest-earning deposits   108,931    138,010 
  Total cash and cash equivalents   113,447    162,691 
Securities available for sale   327,633    305,388 
FHLB and FRB stock, at cost   13,378    13,813 
Loans held for sale, at fair value   984    1,200 
Loans held for sale, at lower of cost or fair value   187    388 
Loans   3,704,440    3,312,144 
  Less:  allowance for loan losses   36,440    32,208 
  Net loans   3,668,000    3,279,936 
Premises and equipment   29,476    30,371 
Other real estate owned   2,090    534 
Accrued interest receivable   9,452    8,153 
Bank owned life insurance   44,586    43,806 
Deferred tax assets, net   552    15,320 
Goodwill   17,107    1,573 
Other intangible assets   6,729    1,584 
Other assets   26,926    13,876 
  Total assets  $4,260,547   $3,878,633 
LIABILITIES          
Deposits:          
  Noninterest-bearing demand deposits  $539,304   $489,485 
  Interest-bearing deposits:          
    Checking   1,152,483    1,023,081 
    Savings   119,556    120,056 
    Money market accounts   1,091,385    1,048,494 
    Certificates of deposit   543,035    457,000 
Subtotal deposits   3,445,763    3,138,116 
    Interest-bearing demand – Brokered   180,000    180,000 
    Certificates of deposit - Brokered   72,591    93,721 
Total deposits   3,698,354    3,411,837 
Overnight borrowings   —    — 
Federal home loan bank advances   37,898    61,795 
Capital lease obligation   9,072    9,693 
Subordinated debt, net   83,024    48,764 
Accrued expenses and other liabilities   28,521    22,334 
  Total liabilities   3,856,869    3,554,423 
SHAREHOLDERS’ EQUITY          
Preferred stock (no par value; authorized 500,000 shares)   —    — 
Common stock (no par value; stated value $0.83 per share;          
  authorized 21,000,000 shares; issued shares, 19,027,812 at          
  December 31, 2017 and 17,666,173 at December 31, 2016;          
  outstanding shares, 18,619,634 at December 31, 2017 and          
  17,257,995 at December 31, 2016)   15,858    14,717 
Surplus   283,552    238,708 
Treasury stock at cost (408,178 shares at December 31, 2017 and 2016)   (8,988)   (8,988)
Retained earnings   114,468    81,304 
Accumulated other comprehensive loss   (1,212)   (1,531)
    Total shareholders’ equity   403,678    324,210 
    Total liabilities and shareholders’ equity  $4,260,547   $3,878,633 

See accompanying notes to consolidated financial statements

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CONSOLIDATED STATEMENTS OF INCOME

   Years Ended December 31, 
(In thousands, except per share data)  2017   2016   2015 
INTEREST INCOME               
Loans, including fees  $130,971   $111,971   $94,339 
Securities available for sale:               
  Taxable   6,271    4,018    4,079 
  Tax-exempt   464    508    520 
Interest-earning deposits   1,021    551    204 
   Total interest income   138,727    117,048    99,142 
INTEREST EXPENSE               
Checking accounts   4,229    2,146    1,495 
Savings and money market accounts   6,375    3,244    2,111 
Certificates of deposit   7,118    6,270    4,411 
Overnight and short-term borrowings   220    316    107 
Federal Home Loan Bank advances   1,143    1,448    1,495 
Capital lease obligation   451    478    503 
Subordinated debt   3,206    1,696    — 
   Subtotal – interest expense   22,742    15,598    10,122 
Interest-bearing demand - brokered   2,934    3,020    2,534 
Interest on certificates of deposits – brokered   1,910    1,995    2,034 
  Total interest expense   27,586    20,613    14,690 
   Net interest income before provision for loan losses   111,141    96,435    84,452 
Provision for loan losses   5,850    7,500    7,100 
   Net interest income after provision for loan losses   105,291    88,935    77,352 
OTHER INCOME               
Wealth management fee income   23,183    18,240    17,039 
Service charges and fees   3,239    3,252    3,323 
Bank owned life insurance   1,356    1,407    1,297 
Gain on loans held for sale at fair value (mortgage banking)   401    1,010    528 
Gain on loans held for sale at lower of cost or fair value   412    1,233    — 
Fee income related to loan level, back-to-back swaps   2,814    1,638    373 
Gain on sale of SBA loans   1,564    623    7 
Other income   1,658    1,396    620 
Securities gains, net   —    119    527 
  Total other income   34,627    28,918    23,714 
OPERATING EXPENSES               
Compensation and employee benefits   53,956    45,003    40,278 
Premises and equipment   11,988    11,245    11,569 
FDIC insurance expense   2,366    4,758    2,154 
Other operating expenses   17,301    14,106    14,925 
  Total operating expenses   85,611    75,112    68,926 
Income before income tax expense   54,307    42,741    32,140 
Income tax expense   17,810    16,264    12,168 
  Net income  $36,497   $26,477   $19,972 
                
EARNINGS PER SHARE               
  Basic  $2.06   $1.62   $1.31 
  Diluted   2.03    1.60    1.29 

 

See accompanying notes to consolidated financial statements    

57 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   Years Ended December 31, 
   2017   2016   2015 
(Dollars in thousands)            
Net income  $36,497   $26,477   $19,972 
Other comprehensive (loss)/income:               
   Unrealized losses on available for sale securities:               
      Unrealized losses arising during the period   (1,169)   (2,310)   (959)
                
     Less:  Reclassification adjustment for net gains               
       included in net income   —    (119)   (527)
    (1,169)   (2,429)   (1,486)
  Tax effect   438    930    573 
Net of tax   (731)   (1,499)   (913)
                
Unrealized gain/(loss) on cash flow hedge               
    Unrealized holding gain/(loss)   2,138    587    (1,162)
    Reclassification adjustment for losses               
       included in net income   —    —    — 
    2,138    587    (1,162)
    Tax effect   (873)   (240)   475 
Net of tax   1,265    347    (687)
                
Total other comprehensive income/(loss)   534    (1,152)   (1,600)
                
Total comprehensive income  $37,031   $25,325   $18,372 
                

 

See accompanying notes to consolidated financial statements

58 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

                       Accumulated Other     
   Preferred   Common       Treasury   Retained   Comprehensive     
(In thousands, except share and per share data)  Stock   Stock   Surplus   Stock   Earnings   Income/(Loss)   Total 
Balance at January 1, 2015                                   
15,155,717 common shares outstanding  $—   $12,954   $195,829   $(8,988)  $41,251   $1,221   $242,267 
Net Income 2015                       19,972         19,972 
Other comprehensive loss                            (1,600)   (1,600)
Issuance of restricted stock, net of                                   
   forfeitures, 160,457 shares        134    (134)                  — 
Restricted stock repurchased on vesting                                   
   to pay taxes, (3,776) shares        (3)   (78)                  (81)
Amortization of restricted stock             1,621                   1,621 
Cash dividends declared on common stock                                   
  ($0.20 per share)                       (3,100)        (3,100)
Common stock option expense             219                   219 
Common stock options exercised, 18,891                                   
   net of 7,506 shares used to exercise and                                   
   related tax benefits, 11,385 shares        11    75