AND RESULTS OF OPERATIONS
GENERAL: The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management's view of future interest income and net loans, Management's confidence and strategies and Management's expectations about new and existing programs and products, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "may", "will", or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Corporation's Form 10-K for the year ended
December 31, 2013and the following:
• inability to successfully grow our business and implement our strategic plan
including an inability to generate revenues to offset the increased personnel
and other costs related to the strategic plan;
• inability to manage our growth;
• inability to successfully integrate our expanded employee base;
• a continued or unexpected decline in the economy, in particular in our New
New Yorkmarket areas; • declines in value in our investment portfolio; • higher than expected increases in our allowance for loan losses; • higher than expected increases in loan losses or in the level of non-performing loans; • declines in our net interest margin caused by the low interest rate environment and highly competitive market; • unexpected changes in interest rates;
• a continued or unexpected decline in real estate values within our market
legislative and regulatory actions (including the impact of the Dodd-Frank
• Wall Street Reform and Consumer Protection Act, Basel III and related
regulations) subject us to additional regulatory oversight which may result in
increased compliance costs;
• successful cyber-attacks against our IT infrastructure or that of our IT
providers; • higher than expected
FDICinsurance premiums; • adverse weather conditions; 32 Index
• inability to successfully generate new business in new geographic markets;
• inability to execute upon new business initiatives; • lack of liquidity to fund our various cash obligations; • reduction in our lower-cost funding sources; • our inability to adapt to technological changes;
• claims and litigation pertaining to fiduciary responsibility, environmental
laws and other matters; and
• other unexpected material adverse changes in our operations or earnings.
The Corporation assumes no responsibility to update such forward-looking statements in the future even if experience shows that the indicated results or events will not be realized. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Corporation cannot guarantee future results, levels of activity, performance, or achievements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES:Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Corporation'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 Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements for the year ended
December 31, 2013, contains a summary of the Corporation's significant accounting policies. Management believes that the Corporation'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 requires 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 probable incurred losses 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 Corporation's allowance for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Corporation's loans are secured by real estate in the
State of New Jerseyand New York. Accordingly, the collectability of a substantial portion of the carrying value of the Corporation's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values continue to decline or New Jerseyor New Yorkexperience continuing adverse economic conditions. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control. 33 Index
The Corporation accounts for its securities in accordance with "Accounting for Certain Investments in Debt and Equity Securities," which was codified into ASC 320. All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. For declines in the fair value of securities below their cost that are other-than-temporary, the amount of impairment is split into two components - other-than-temporary impairment related to other factors, which is recognized in other comprehensive income and other-than-temporary impairment related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. In estimating other-than-temporary losses on a quarterly basis, Management considers the length of time and extent that fair value has been less than cost; the financial condition and near-term prospects of the issuer; and whether the Corporation has the intent to sell these securities or it is likely that it will be required to sell the securities before their anticipated recovery. Securities are evaluated on at least a quarterly basis to determine whether a decline in their values is other-than-temporary. To determine whether a loss in value is other-than-temporary, Management utilizes criteria such as the reasons underlying the decline, the magnitude and the duration of the decline and whether the Corporation intends to sell or is likely to be required to sell the security before its anticipated recovery. "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. The Corporation recognized no other-than-temporary impairment charges in the three months ended
2014 and 2013.
EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended
Three Months Ended
(In thousands, except per share data) 2014 2013
2014 v 2013 Results of Operations: Interest income $ 16,949
$ 13,432 $ 3,517Interest expense 1,378 1,005 373 Net interest income 15,571 12,427 3,144 Provision for loan losses 1,325 850 475
Net interest income after provision
for loan losses 14,246 11,577 2,669 Other income 4,995 5,604 (609 ) Other operating expense 14,339 12,293 2,046
Income before income tax expense 4,902 4,888
14 Income tax expense 1,871 1,995 (124 ) Net income $ 3,031
$ 2,893 $ 138Per Share Data:
Basic earnings per common share $ 0.26
$ 0.33 $ (0.07 )Diluted earnings per common share 0.26 0.32
Average common shares outstanding 11,606,933 8,870,559
2,736,374 Diluted average common shares outstanding 11,710,940 8,917,180 2,793,760 Average equity to average assets 8.40 % 7.54 % 11.41 %
Return on average assets annualized 0.59 0.71
(16.90 ) Return on average equity annualized 7.01 9.40 (25.43 ) 34 Index Three Months Ended March 31, Percent Change 2014 2013 2014 v 2013 Selected Balance Sheet Ratios: Total capital to risk-weighted assets 14.34 % 13.41 % 6.94 % Leverage ratio 8.48 7.37 15.06 Average loans to average deposits 95.74 77.16 24.08
Allowance for loan losses to total
loans 0.94 1.14 (17.54 ) Allowance for loan losses to nonperforming loans 221.96 117.62 88.71
Nonperforming loans to total loans 0.42 0.97 (56.70 )
Noninterest bearing deposits to
total deposits 18.54 20.78 (10.78 ) Time deposits to total deposits 11.45 11.77
For the first quarter of 2014, the Corporation recorded net income of
$3.0 millioncompared to $2.9 millionfor the same quarter of 2013. Diluted earnings per common share were $0.26and $0.32for the first quarters of 2014 and 2013, respectively. Annualized return on average assets was 0.59 percent and annualized return on average common equity was 7.01 percent for the first quarter of 2014. Increased earnings for the first quarter of 2014 over the same quarter in 2013 were due to increased net interest income and wealth management fee income offset by lower gains on mortgage loans sold and increased expenses largely due to costs associated with the Strategic Plan. CONTRACTUAL OBLIGATIONS: For a discussion of our contractual obligations, see the information set forth in the Corporation's 2013 Annual Report on Form 10-K under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" which is incorporated herein by reference. OFF-BALANCE SHEET ARRANGEMENTS: For a discussion of our off-balance sheet arrangements, see the information set forth in the Corporation's 2013 Annual Report on Form 10-K under the heading "Management's Discussion and Analysis - Off-Balance Sheet Arrangements" which is incorporated herein by reference.
EARNINGS ANALYSIS NET INTEREST INCOME: The primary source of the Corporation's operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans to individuals and businesses, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits,
Federal Home Loan Bankadvances and other borrowings. Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing liabilities ("Net Interest Spread") and the relative amounts of earning assets and interest-bearing liabilities. The Corporation's net interest spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets. 35 Index
The following table summarizes the Company's net interest income and related spread and margin for the periods indicated:
Three Months Ended March 31, (In thousands) 2014 2013 Net interest income
$ 15,571 $ 12,427Interest rate spread 3.10 % 3.21 % Net interest margin 3.18 3.28 36 Index The following table reflects the components of net interest income for the period indicated: Average Balance Sheet Unaudited Three Months Ended March 31, 2014 March 31, 2013 Average Income/ Average Income/ Balance Expense Yield Balance Expense Yield ASSETS: Interest-earning assets: Investments: Taxable (1) $ 207,649 $ 1,0612.04 % $ 248,641 $ 1,2772.05 % Tax-exempt (1) (2) 60,217 337 2.24 49,749 325 2.61 Loans held for sale 1,324 10 3.04 16,890 196 4.63 Loans (2) (3): Mortgages 533,377 4,553 3.41 521,594 4,740 3.63 Commercial mortgages 935,784 9,045 3.87 431,158 4,963 4.60 Commercial 132,549 1,402 4.23 111,493 1,307 4.69 Commercial construction 5,872 67 4.58 9,217 104 4.53 Installment 21,563 228 4.24 20,930 230 4.40 Home equity 46,832 373 3.18 48,038 379 3.16 Other 563 13 8.94 626 15 9.48 Total loans 1,676,540 15,681 3.74 1,143,056 11,738 4.11 Federal funds sold 101 - 0.10 101 - 0.10 Interest-earning deposits 31,652 12 0.15 77,612 48 0.25 Total interest-earning assets 1,977,483 17,101 3.46 % 1,536,049 13,584 3.54 % Noninterest-earning assets: Cash and due from banks 6,395
Allowance for loan losses (15,988 ) (13,075 ) Premises and equipment 30,748 29,808 Other assets 61,009 75,111 Total noninterest-earning assets 82,164 97,677 Total assets
$ 2,059,647 $ 1,633,726LIABILITIES:
$ 401,310 $ 920.09 % $ 350,483 $ 790.09 % Money markets 653,624 333 0.20 552,863 214 0.15 Savings 116,518 15 0.05 110,662 14 0.05 Certificates of deposit-retail 149,458 355 0.95 171,551 485 1.13 Certificates of deposit-brokered 13,711 31 0.90 5,000 15 1.20 Subtotal interest-bearing deposits 1,334,621 826 0.25 1,190,559 807 0.27 Interest-bearing demand-brokered 75,356 43 0.23 - - - Total interest-bearing deposits 1,409,977 869 0.25 1,190,559 807 0.27 Borrowings 115,585 390 1.35 12,139 92 3.03
8,936 106 4.74 Total interest-bearing liabilities 1,535,509 1,378 0.36 1,211,634 1,005 0.33 Noninterest-bearing liabilities: Demand deposits 341,196 290,835 Accrued expenses and other liabilities 9,999 8,107 Total noninterest-bearing liabilities 351,195 298,942 Shareholders' equity 172,943 123,150 Total liabilities and shareholders' equity
$ 2,059,647 $ 1,633,726Net interest income (tax-equivalent basis) 15,723 12,579 Net interest spread 3.10 % 3.21 % Net interest margin (4) 3.18 % 3.28 %
Tax equivalent adjustment (152 ) (152 ) Net interest income
$ 15,571 $ 12,427
Average balances for available for sale securities are based on amortized (1) cost.
Interest income is presented on a tax-equivalent basis using a 35 percent (2) federal tax rate. (3) Loans are stated net of unearned income and include nonaccrual loans.
Net interest income on a tax-equivalent basis as a percentage of total (4) average interest-earning assets.
The effect of volume and rate changes on net interest income (on a tax-equivalent basis) for the periods indicated are shown below:
Compared With Quarter Ended March 31, 2014 March 2013 Difference due to Change In Change In: Income/ (In Thousands): Volume Rate Expense ASSETS: Investments
$ (116 )$ (88 ) $ (204 ) Loans 5,277 (1,334 ) 3,943 Loans held for sale (119 ) (67 ) (186 ) Federal funds sold - - - Interest-earning deposits (22 ) (14 ) (36 ) Total interest income $ 5,020 $ (1,503 )$ 3,517 LIABILITIES: Checking $ 61 $ (6 ) $ 55 Money market 45 75 120 Savings 1 - 1 Certificates of deposit (35 ) (79 ) (114 ) Borrowed funds 351 (53 ) 298 Capital lease obligation 12 1 13 Total interest expense $ 435 $ (62 ) $ 373 Net interest income $ 4,585 $ (1,441 )$ 3,144 For the first quarter of 2014, the Corporation recorded net interest income, on a fully tax-equivalent basis, of $15.7 million, an increase of $3.1 millionor 25.0 percent, compared to the same period of 2013. The net interest margin was 3.18 percent and 3.28 percent, for the first quarters of 2014 and 2013, respectively. Net interest income for the first quarter of 2014 increased due to significant loan growth in the last half of 2013 and first quarter 2014, particularly in commercial and multifamily mortgages. The increase was tempered by lower interest rates on investments and loans. On a fully tax-equivalent basis, interest income on earning assets totaled $17.1 millionand $13.6 millionfor the first quarters of 2014 and 2013, respectively, reflecting an increase of $3.5 millionor 25.9 percent from the first quarter in 2013. For the first quarter of 2014, average earning assets totaled $1.98 billion, an increase of $441.4 millionor 28.7 percent over the $1.54 billionover the same quarter of 2013. The commercial mortgage portfolio more than doubled from the first quarter of 2013, averaging $935.8 millionfor the first quarter of 2014. The increase was attributable to the addition of seasoned banking professionals over the course of 2013; a more concerted focus on the client service aspect of the lending process; more of a focus on New Jerseymarkets; and a focus on New York Citymultifamily markets beginning in mid-2013. The increase was also due to demand from high quality borrowers looking to refinance multifamily and other commercial mortgages held by other institutions. The average rates earned on earning assets was 3.46 percent for the three months ended March 31, 2014, compared to 3.54 percent for the same period in 2013, a decrease of eight basis points. The decline in the average rates on earning assets was due to continued decreases to already very low market rates for
all asset types. For the first quarter of 2014, total deposits averaged
$1.75 billion, increasing $269.8 millionor 18.2 percent from the average balance for the same period of 2013. Growth in customer deposits (non-brokered deposits) has come from the addition of seasoned banking professionals over the course of 2013, including relationship bankers and private bankers; an intense focus on providing high touch client service; and a new full array of treasury management products that support core deposit growth. Brokered certificates of deposit have been used in the Company's interim funding and interest rate risk management practices. Brokered interest bearing demand deposits have also been utilized as interim funding vehicles in place of wholesale overnight borrowings as a more cost effective alternative. The Company does ensure ample available collateralized liquidity as a backup to these short term brokered deposits. Average rates paid on interest-bearing deposits were 25 basis points and 27 basis points for the first quarters of 2014 and 2013, respectively. 38 Index Overnight borrowings from the Federal Home Loan Bank of New Yorkaveraged $34.5 millionfor the three months ended March 31, 2014compared to zero for the same quarter of 2013. For the first quarters of 2014 and 2013, other borrowings totaled $81.1 millionand $12.1 million, respectively, increasing $69.0 millionwhen compared to the same period of 2013. The Company has utilized medium/longer term Federal Home Loan Bankadvances in its' interest rate risk management. OTHER INCOME:The following table presents the major components of other income: Quarters Ended March 31, Change (In thousands) 2014 2013 2014 v 2013 Service charges and fees $ 694 $ 676$ 18
Gain on sale of loans (mortgage banking) 112 470 (358 ) Gain on sale of classified loans - 522
(522 ) Bank owned life insurance 266 272 (6 ) Securities gains 98 289 (191 ) Other income 71 7 64 Total other income
$ 1,241 $ 2,236 $ (995 )The March 2014quarter included $112 thousandof income from the sale of newly originated residential mortgage loans, down from $470 thousandin the same 2013 quarter. The rise in mortgage rates in the middle of 2013 caused a decrease in residential mortgage loan originations and resultant mortgage banking income. Reduced levels of mortgage banking income was expected and planned for, and reduced levels of mortgage banking income are expected to be ongoing. The gain on the sale of classified loans of $522 thousandfor 2013 was due to the sale of classified loans held for sale as of December 31, 2012. Securities gains were $98 thousandfor the March 2014quarter compared to $289 thousandfor the March 2013quarter. Sales of securities have been generally employed to benefit interest rate risk, prepayment risk, and/or liquidity risk. Given the short duration of the securities portfolio, sales have been employed less often in recent periods.
OPERATING EXPENSES: The following table presents the components of operating expenses for the periods indicated:
Quarters Ended March 31, Change (In thousands) 2014 2013 2014 v 2013
Salaries and employee benefits
$ 8,848 $ 7,079$
1,769 Premises and equipment 2,438 2,304 134 Other Operating Expenses: FDIC assessment 275 280 (5 ) Wealth management division other expense 547 494 53 Professional and legal fees 451 501 (50 ) Loan expense 99 198 (99 ) Telephone 228 172 56 Advertising 68 105 (37 ) Postage 102 105 (3 ) Provision for ORE losses 100 - 100 Other operating expenses 1,183 1,055 128 Total operating expenses
$ 14,339 $ 12,293 $ 2,04639 Index The Corporation recorded operating expenses of $14.3 millionand $12.3 million, for the first quarters of 2014 and 2013, respectively, an increase of $2.0 millionor 16.6 percent. Salary and benefit expense was $8.8 millionfor the first quarter of 2014, compared to $7.1 millionin the same quarter of 2013, an increase of $1.8 millionor 25.0 percent. The increase is largely due to strategic hiring in line with the Company's Strategic Plan, as well as normal salary increases and increased bonus/incentive accruals. Premises and equipment expense increased $134 thousandin the first quarter of 2014 when compared to the same quarter in 2013 due to increased occupancy costs associated with the new Princetonand Teaneck Private Banking offices. Loan expense for the first quarters of 2014 and 2013 were $99 thousandand $198 thousand, respectively, a decrease of $99 thousand, and is attributed to a decline in problem loan expense. The Corporation strives to operate in an efficient manner and control costs; however, given its plans to grow its core businesses, it expects higher operating expenses in 2014 compared to prior periods. The Corporation anticipates that revenue and related profitability associated with these plans will begin to improve after lagging expenses by several quarters. PRIVATE WEALTH MANAGEMENT DIVISION: This division has served in the roles of executor and trustee while providing investment management, custodial, tax, retirement and financial services to its growing client base. Officers from the Private Wealth Management Divisionare available to provide trust and investment services at the Bank's corporate headquarters in Bedminster, at private banking locations in Bedminster, Morristown, Princetonand Teaneck, New Jerseyand at the Bank's subsidiary, PGB Trust & Investmentsof Delawarein Greenville, Delaware. The following table presents certain key aspects of the Private Wealth Management Divisionperformance for the quarters ended March 31, 2014and 2013. Quarters Ended March 31, Change (In thousands) 2014 2013 2014 v 2013 Total fee income $ 3,754 $ 3,368$ 386
Salaries and benefits (included in
Operating Expenses section above) 1,833 1,289
Other operating expense (included in
Operating Expenses section above) 1,369 1,385 (16 ) Assets under administration (market value)
$ 2,745,955 $ 2,544,465 $ 201,490
The market value of assets under administration for the
The Private Wealth Management Divisiongenerated fee income of $3.8 millionfor the first quarter of 2014 compared to $3.4 millionfor the same quarter of 2013, an increase of $386 thousandor 11.5 percent. The increase reflects increased relationships, a greater mix of higher margin business and an improvement in the market value of assets under management. While the "Operating Expenses" section above offers an overall discussion of the Corporation's expenses including the Private Wealth Management Division, operating expenses relative to the Private Wealth Management Divisiontotaled $3.2 millionand $2.7 millionfor the first quarters of 2014 and 2013, respectively, an increase of $528 thousandor 19.7 percent. For the first quarter of 2014, salaries and benefits expense increased $544 thousand, or 42.2 percent when compared to the same period in 2013, due principally to strategic hiring in line with the Company's strategic plan. During the same time periods, other operating expenses decreased $16 thousand, or 1.2 percent. 40 Index The Private Wealth Management Divisioncurrently generates adequate revenue to support the salaries, benefits and other expenses of the Division; however, Management believes that the Bank generates adequate liquidity to support the expenses of the Division should it be necessary. NONPERFORMING ASSETS: Other real estate owned (OREO), loans past due in excess of 90 days and still accruing, and nonaccrual loans are considered nonperforming assets. These assets totaled $9.5 millionand $8.6 millionat March 31, 2014and December 31, 2013, respectively. The following table sets forth asset quality data on the dates indicated (in thousands): As of March 31, Dec 31, Sept 30, June 30, March 31, 2014 2013 2013 2013 2013
Loans past due over 90 days
and still accruing $ - $ - $ - $ - $ - Nonaccrual loans 7,473 6,630 6,891 8,075 11,290 Other real estate owned 2,062 1,941 2,759 3,347 4,141 Total nonperforming assets
$ 9,535 $ 8,571 $ 9,650 $ 11,422 $ 15,431Accruing TDR's $ 12,340 $ 11,114 $ 6,133 $ 6,131 $ 5,986
Loans past due 30 through 89
days and still accruing (B)
$ 5,027 $ 2,953 $ 2,039 $ 1,544 $ 1,791Classified loans (A) $ 35,075 $ 33,827 $ 32,430 $ 32,123 $ 35,945Impaired loans (A) $ 19,814 $ 17,744 $ 16,794 $ 17,977 $ 21,046
Nonperforming loans as a % of
total loans 0.42 % 0.42 % 0.49 % 0.64 % 0.97 % Nonperforming assets as a % of total assets 0.42 % 0.44 % 0.54 % 0.68 % 0.94 % Nonperforming assets as a % of
total loans plus other real
estate owned 0.54 % 0.54 % 0.69 % 0.91 % 1.32 %
(A) Classified loans include substandard impaired loans.
commercial real estate loan in the amount of
informed the Company that the property is under contract for sale and that
repayment would be made in full upon sale.
We do not hold and have not made or invested in subprime loans or "Alt-A" type mortgages.
41 Index PROVISION FOR LOAN LOSSES: The provision for loan losses was
$1.3 millionfor the first quarter of 2014 and $850 thousandfor the same quarter of 2013. The amount of the loan loss provision and the level of the allowance for loan losses are based upon a number of factors including Management's evaluation of probable losses inherent in the portfolio, after consideration of appraised collateral values, financial condition and past credit history of the borrowers as well as prevailing economic conditions. Commercial credits carry a higher risk profile, which is reflected in Management's determination of the proper level of the allowance for loan losses. The provision for loan losses of $1.3 millionin the first quarter of 2014 was primarily related to the changes in the specific reserves on impaired loans, and for loan growth experienced by the Corporation. The overall allowance for loan losses was $16.6 millionas of March 31, 2014compared to $15.4 millionat December 31, 2013. As a percentage of loans, the allowance for loan losses was 0.94 percent as of March 31, 2014and 0.98 percent as of December 31, 2013. The specific reserves on impaired loans have decreased to $1.3 millionat March 31, 2014compared to $1.7 millionas of December 31, 2013. Total impaired loans were $19.8 millionand $17.7 millionas of March 31, 2014and December 31, 2013, respectively. The general component of the allowance increased from $13.7 millionat December 31, 2013to $15.2 millionat March 31, 2014. As a percentage of non-impaired loans, the general reserve remained relatively stable and was 0.87 percent and 0.88 percent at March 31, 2014and December 31, 2013, respectively. Although the Corporation has experienced loan growth, there has been a shift in the loan portfolio to less risky loans, such as commercial mortgage loans secured by multifamily properties, from the riskier construction and commercial loans that carried higher general reserves. A summary of the allowance for loan losses for the quarterly periods indicated follows: March 31, Dec 31, Sept 30, June 30, March 31, (In thousands) 2014 2013 2013 2013 2013 Allowance for loan losses: Beginning of period $ 15,373 $ 14,056 $ 13,438 $ 13,279 $ 12,735Provision for loan losses 1,325 1,325 750 500 850 Charge-offs, net (111 ) (8 ) (132 ) (341 ) (306 ) End of period $ 16,587 $ 15,373 $ 14,056 $ 13,438 $ 13,279Allowance for loan losses as a % of total loans 0.94 % 0.98 % 1.01 % 1.07 % 1.14 % Allowance for loan losses as a % of nonperforming loans 221.96 % 231.87 % 203.98 % 166.41 % 117.62 %
INCOME TAXES: For the first quarters of 2014 and 2013, income tax expense as a percentage of pre-tax income was 38 percent and 41 percent, respectively.
CAPITAL RESOURCES: The Corporation's total shareholders' equity at
A solid capital base provides the Corporation with the ability to support future growth and financial strength, and is essential to executing the Corporation's Strategic Plan - "Expanding Our Reach." The Corporation's capital strategy is intended to provide stability to expand its businesses, even in stressed environments. The Corporation strives to maintain capital levels in excess of those considered to be well capitalized under regulatory guidelines applicable to banks. Maintaining an adequate capital position supports the Corporation's goal of providing shareholders an attractive and stable long-term return on investment. In addition, the Corporation, through the Bank, is subject to various regulatory capital requirements administered by the Federal banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation and the Bank's consolidated financial statements. 42 Index
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1
Capitalto average assets. For the first quarter of 2014, the Bank's capital ratios met or exceeded the minimum to be categorized as well capitalized under the regulatory framework for prompt corrective action. Tier 1 Capitalconsists of common stock, retained earnings, minority interests in the equity accounts of consolidated subsidiaries, non-cumulative preferred stock, and cumulative preferred stock issued to the U.S. Treasury in the Capital Purchase Program, less goodwill and certain other intangibles. The remainder of capital may consist of other preferred stock, certain other instruments and a portion of the allowance for loan loss. At March 31, 2014, the Bank's Tier 1 Capitaland Total Capital ratios to risk-weighted assets were 12.65 percent and 13.90 percent, respectively, both in excess of the well-capitalized standards of 6.0 percent and 10.0 percent, respectively. The Federal Reserve Board("FRB") has also established minimum leverage ratio guidelines. At March 31, 2014, the Bank's leverage ratio was 8.19 percent, in excess of the well-capitalized standard of 5.0 percent. As previously announced, on April 17, 2014, the Board of Directors declared a regular cash dividend of $0.05per share payable on May 15, 2014to shareholders of record on May 1, 2014. In addition, the Dividend Reinvestment Plan of Peapack-Gladstone Financial Corporation, or the Plan, allows shareholders of the Corporation 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 $50,000per quarter to purchase additional shares of common stock. The Plan is a continuing source of future capital and provided an additional $1.7 millionin capital in the first quarter of 2014. On July 2, 2013, the Federal Reserve Boardapproved the final rules implementing the Basel Committee on Banking Supervision'scapital guidelines for U.S. banks. The rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.50 percent and a common equity Tier 1 capital conservation buffer of 2.50 percent of risk weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00 percent to 6.00 percent and require a minimum leverage ratio of 4.00 percent. The final rules also implement strict eligibility criteria for regulatory capital instruments. The phase-in period for the final rules will begin for the Corporation on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management expects that the Bank's capital levels will meet or exceed the levels required to be considered well-capitalized under the new capital requirements.
Management believes the Corporation's capital position and capital ratios are adequate.
LIQUIDITY: : Liquidity refers to an institution's ability to meet short-term requirements including loan fundings, deposit withdrawals and maturing obligations, as well as long-term obligations, including potential capital expenditures. The Corporation's liquidity risk management is intended to ensure the Corporation 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, brokered deposits, securities available for sale, deposit inflows, loan repayments and secured borrowings. Management actively monitors and manages the Corporation's liquidity position and feels it is sufficient to meet future needs. Cash and cash equivalents, including federal funds sold and interest-earning deposits, totaled
$101.5 millionat March 31, 2014. In addition, the Corporation has $248.1 millionin securities designated as available for sale at March 31, 2014, of which $197.1 millionis unencumbered. These securities can be sold in response to liquidity concerns. In addition, the Corporation generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed
securities. 43 Index Another source of liquidity is borrowing capacity. At
March 31, 2014, unused borrowing capacity totaled $512.2 millionfrom the FHLB and $29.0 millionfrom correspondent banks. Asset growth in the first quarter of 2014 was funded by a diversified source of funding alternatives, including customer deposits, brokered CDs, investment securities cash flows and FHLB advances. Short-term funding, which includes overnight wholesale borrowings and short-term brokered interest-bearing demand deposit balances, provided additional funding in the first quarter of 2014. Brokered interest-bearing demand deposits have been utilized in place of wholesale overnight borrowings as a more cost effective alternative. The Company does ensure ample available collateralized liquidity as a backup to these short term brokered deposits. Excess cash on hand held as of March 31, 2014was used to pay down $60.0 millionof overnight borrowings on April 1, 2014. Medium, longer-term brokered CDs were added in mid-April 2014with proceeds used to further reduce overnight borrowings. Finally, the sale of the $49.8 millionof one-to-four family residential mortgage loans held for sale as of March 31, 2014was closed on April 24, 2014with the proceeds used to reduce short-term funding.
The Corporation has a Board-approved Contingency Funding Plan in place. This document provides a framework for managing adverse liquidity stress and contingent sources of liquidity. The Corporation conducts liquidity stress testing on a regular basis to ensure sufficient liquidity in a stressed environment.
Management believes the Corporation's liquidity position and sources are adequate.
ASSET/LIABILITY MANAGEMENT: The Corporation's Asset/Liability Committee (ALCO) is responsible for developing, implementing and monitoring asset/liability management strategies and reports and advising the Board of Directors on such, as well as the related level of interest rate risk. In this regard, interest rate risk simulation models are prepared on a quarterly basis. These models have the ability to demonstrate balance sheet gaps, and predict changes to net interest income and economic/market value of portfolio equity under various interest rate scenarios. In addition, these models, as well as ALCO processes and reporting, are subject to annual independent third-party review. ALCO is generally authorized to manage interest rate risk through management of capital and management of cash flows and duration of assets and liabilities, including sales and purchases of assets, as well as additions of wholesale borrowings, brokered deposits, and other sources of medium/longer term funding. ALCO has also recently been authorized to engage in interest rate swaps as a means of extending the duration of shorter term liabilities. The following strategies are among those used to manage interest rate risk:
· Actively market commercial mortgage loans, 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;
· Actively market commercial & industrial loans, which tend to have adjustable
rate features, and which generate customer relationships that can result in
higher core deposit accounts;
· Actively market adjustable-rate and/or shorter-term residential mortgage loans;
· Actively sell longer duration residential mortgage loans originated in the
current low rate environment;
· Actively market core deposit relationships, which are generally longer duration
· Utilize medium to longer term wholesale borrowings and/or brokered deposits to
extend liability duration;
· Utilize medium to longer term interest rate swaps as a means of extending
duration of shorter term liabilities;
· Closely monitor and actively manage the investment portfolio, including
management of duration, prepayment and interest rate risk; and
· Maintain adequate levels of capital.
At this time, the Corporation is not engaged in hedging through the use of interest rate swaps, nor does it use interest rate caps and floors. However, as noted above, ALCO has been authorized to engage in interest rate swaps as a means of extending the duration of shorter term liabilities.
As noted above, ALCO uses simulation modeling to analyze the Corporation's net interest income sensitivity, as well as the Corporation'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
March 31, 2014. The model assumes changes in interest rates without any proactive change in the balance sheet by Management. In the model, the forecasted shape of the yield curve remains static as of March 31, 2014. In an immediate and sustained 200 basis point increase in market rates at March 31, 2014, net interest income for year one would decline approximately eight percent and two percent for year two, compared to a flat interest rate scenario. In an immediate and sustained 100 basis point decrease in market rates at March 31, 2014, net interest income would decline approximately four percent in year one and six percent for year two, compared to a flat interest rate scenario. The table below shows the estimated changes in the Corporation's economic value of portfolio equity ("EVPE") that would result from an immediate parallel change in the market interest rates at March 31, 2014. 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 $ 194,429 $ (46,322 )(19.24 )% 9.38 % (149.5 ) +100 221,837 (18,914 ) (7.86 ) 10.35 (53.2 ) Flat interest rates 240,751 - - 10.88 - -100 253,870 13,118 5.45 11.18 30.3
(1) EVPE is the discounted present value of expected cash flows from assets and
(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.
Management believes the Corporation's interest rate risk position is reasonable.