PEAPACK-GLADSTONE FINANCIAL CORPORATION CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS: This Annual Report on Form 10-K 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 ability to successfully grow our business and implement our strategic
plan, including our ability to generate revenues to offset the increased
personnel and other costs related to the strategic plan;
• the impact of anticipated higher operating expenses in 2022 and beyond;
21
--------------------------------------------------------------------------------• our ability to successfully integrate wealth management firm acquisitions;
• our ability to manage our growth; • our ability to successfully integrate our expanded employee base;
• an unexpected decline in the economy, in particular in our
• declines in our net interest margin caused by the interest rate environment
and/or our highly competitive market;
• declines in the value in our investment portfolio;
• impact from the pandemic on our business, operations, customers, allowance
for loan losses and capital levels;
• 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
delinquent, nonperforming, classified and criticized loans;
• changes in interest rates;
• decline in real estate values within our market areas;
• legislative and regulatory actions (including the impact of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Basel III and related
regulations) that may result in increased compliance costs;
• successful cyberattacks against our IT infrastructure and that of our IT and
third-party providers;
• higher than expected FDIC insurance premiums;
• adverse weather conditions;
• our inability to successfully generate new business in new geographic
markets;
• a reduction in our lower-cost funding sources;
• our inability to adapt to technological changes;
• claims and litigation pertaining to fiduciary responsibility, environmental
laws and other matters;
• our inability to retain key employees;
• demands for loans and deposits in our market areas;
• adverse changes in securities markets;
• changes in accounting policies and practices; and
• other unexpected material adverse changes in our operations or earnings.
Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and/or abates. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
• demand for our products and services may decline, making it difficult
to grow assets and income;
• if the economy worsens, loan delinquencies, problem assets, and
foreclosures may increase, resulting in increased charges and reduced
income;
• collateral for loans, especially real estate, may decline in value,
which could cause loan losses to increase;
• our allowance for loan losses may increase if borrowers experience
financial difficulties, which will adversely affect our net income;
• the net worth and liquidity of loan guarantors may decline, impairing
their ability to honor commitments to us;
• a material decrease in net income or a net loss over several quarters
could result in an elimination or decrease in the rate of our
quarterly cash dividend;
• our wealth management revenues may decline with continuing market turmoil;
• a worsening of business and economic conditions or in the financial
markets could result in an impairment of certain intangible assets,
such as goodwill;
• the unanticipated loss or unavailability of key employees due to the
outbreak, which could harm our ability to operate our business or
execute our business strategy, especially as we may not be successful
in finding and integrating suitable successors;
• our cyber security risks are increased as the result of an increase in
the number of employees working remotely; and
• FDIC premiums may increase if the agency experience additional
resolution costs.
22-------------------------------------------------------------------------------- Except as may be required by applicable law or regulation, 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 endedDecember 31, 2021 , the Company recorded net income of$56.6 million , and diluted earnings per share of$2.93 compared to$26.2 million and$1.37 , respectively, for 2020, reflecting increases of$30.4 million , or 116 percent, and$1.56 per share, or 114 percent, respectively. During 2021, the Company continued to focus on executing its Strategic 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 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 from 2021:
• At
administration at Peapack Private was
of 26 percent from
• Record wealth fee income from Peapack Private of
growing from
• On
Strategies Group ("PPSG") increasing assets under management by approximately$520 million .
• At
Paycheck Protection Program ("PPP") loans) comprised 41 percent of the total
loan portfolio.
• Total "customer" deposits (defined as deposits excluding brokeredcertificate of deposits ("CDs") and brokered "overnight" interest-bearing
demand deposits) at
increase of
December 31, 2020 . • Asset quality metrics continued to be strong atDecember 31 ,
2021. Nonperforming assets at
percent of total assets. Total loans past due 30 through 89 days and still
accruing were $8.6 million or 0.18 percent of total loans at December 31,
2021 .
• The Bank's capital ratios at
well capitalized standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements, which have been prepared in accordance withU.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 and lease losses involves a high 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 accounting policy and its application are periodically reviewed with the Audit Committee and the Board of Directors. 23 -------------------------------------------------------------------------------- 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, classified loans and nonperforming loans, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses the best information available, the level of the allowance for loan and lease losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan and lease losses. Such agencies may require the Company to take additional provisions for loan and lease losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company's loans are secured by real estate inNew Jersey and, to a lesser extent,New York City . Accordingly, the collectability of a substantial portion of the carrying value of the Company's loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for loan and lease losses and allowance for loan and lease losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control. 24 --------------------------------------------------------------------------------
EARNINGS SUMMARY: The following table presents certain key aspects of our
performance for the years ended
At or for the Years Ended December 31, Change
(Dollars in thousands, except share 2021 v 2020 v
and per share data) 2021 2020 2019 2020 2019
Results of Operations:
Interest income $ 160,067 $ 165,750 $ 180,670 $ (5,683 ) $ (14,920 )
Interest expense 22,006 38,148 60,396 (16,142 ) (22,248 )
Net interest income 138,061 127,602 120,274 10,459 7,328
Provision for loan losses 6,475 32,400 4,000 (25,925 ) 28,400
Net interest income after provision
for
loan losses 131,586 95,202 116,274 36,384 (21,072 )
Wealth management fee income 52,987 40,861 38,363 12,126 2,498
Other income 19,256 20,899 16,333 (1,643 ) 4,566
Total operating expense 126,167 124,959 104,848 1,208 20,111
Income before income tax expense 77,662 32,003 66,122 45,659 (34,119 )
Income tax expense 21,040 5,811 18,688 15,229 (12,877 )
Net income $ 56,622 $ 26,192 $ 47,434 $ 30,430 $ (21,242 )
Per Share Data:
Basic earnings per common share $ 3.01 $ 1.39 $ 2.46 $ 1.62 $ (1.07 )
Diluted earnings per common share 2.93 1.37 2.44 1.56 (1.07 )
Cash dividends declared 0.20 0.20 0.20 - -
Book value end-of-period 29.70 27.78 26.61 1.92 1.17
Average common shares outstanding 18,788,679 18,896,825 19,268,870 (108,146 ) (372,045 ) Common stock equivalents (dilutive) 503,923 184,362
142,578 319,561 41,784 Diluted average common shares outstanding 19,292,602 19,081,187 19,411,448 211,415 (330,261 ) Average equity to average assets 8.93 % 8.87 % 10.19 % 0.06 % (1.32 )% Return on average assets 0.94 0.45 0.99 0.49 (0.54 ) Return on average equity 10.56 5.11 9.70 5.45 (4.59 ) Dividend payout ratio 6.67 14.43 8.15 (7.76 ) 6.28 Net interest margin 2.38 2.31 2.63 0.07 (0.32 ) Noninterest expenses to average assets 2.10 2.16 2.19 (0.06 ) (0.03 ) Noninterest income to average assets 1.20 1.07 1.14 0.13 (0.07 ) Balance sheet data (at period end): Total assets$ 6,077,993 $ 5,890,442 $ 5,182,879 $ 187,551 $ 707,563 Securities held to maturity 108,680 - - 108,680 - Securities available to sale 796,753 622,689 390,755 174,064 231,934 Equity security 14,685 15,117 10,836 (432 ) 4,281 FHLB and FRB stock, at cost 12,950 13,709 24,068 (759 ) (10,359 ) Total loans 4,806,721 4,372,437 4,394,137 434,284 (21,700 ) Allowance for loan losses 61,697 67,309 43,676 (5,612 ) 23,633 Total deposits 5,266,149 4,818,484 4,243,511 447,665 574,973 Total shareholders' equity 546,388 527,122 503,652 19,266 23,470
Cash dividends:
Common 3,775 3,780 3,865 (5 ) (85 ) Assets under management and/or administration atWealth Management Division (market value) 11.1 billion 8.8 billion
7.5 billion 2.3 billion 1.3 billion
Asset quality ratios (at period
end):
25
--------------------------------------------------------------------------------Nonperforming loans to total loans 0.32 % 0.26 % 0.66 %
0.06 % (0.40 )%
Nonperforming assets to total
assets 0.26 0.19 0.56 0.07 (0.37 )
Allowance for loan losses to
nonperforming loans 396.18 589.91 151.23 (193.73 ) 438.68
Allowance for loan losses to total
loans 1.28 1.54 0.99 (0.26 ) 0.55
Net charge-offs/(recoveries) to
average loans plus other
real estate owned 0.27 0.19 (0.03 ) 0.08 0.22
Liquidity and capital ratios:
Average loans to average deposits 89.17 % 96.97 % 100.80 % (7.80 )% (3.83 )%
Total shareholders' equity to total
assets 8.99 8.95 9.72 0.04 (0.77 )
Selected Balance Sheet Ratios of the Company: Regulatory total capital to risk-weighted assets 14.64 % 17.67 % 14.20 % (3.03 )% 3.47 % Regulatory leverage ratio 8.29 8.53 9.33 (0.24 ) (0.80 ) Average loans to average deposits 89.28 96.97 100.80 (7.69 ) (3.83 ) Noninterest bearing deposits to total deposits 18.16 17.30 12.47 0.86 4.83 Time deposits to total deposits 9.02 12.37 16.85 (3.35 ) (4.48 ) 2021 compared to 2020 The Company recorded net income of$56.62 million and diluted earnings per share of$2.93 for the year endedDecember 31, 2021 , compared to net income of$26.19 million and diluted earnings per share of$1.37 for the year endedDecember 31, 2020 . These results produced a return on average assets of 0.94 percent and 0.45 percent for 2021 and 2020, respectively, and a return on average shareholders' equity of 10.56 percent and 5.11 percent for 2021 and 2020, respectively. The increase in net income for 2021 was principally driven by the Company's wealth management and commercial banking businesses. 2021 included increased wealth management income, corporate advisory fees and SBA income, as well as increased net interest income resulting from asset growth, coupled with margin improvement. The earnings for 2021 also benefitted from a significantly lower provision for loan losses. These improvements to net income were partially offset by a tax benefit of$3.2 million recorded in the first quarter of 2020 caused by the changes in the treatment of tax net operating losses ("NOL") under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Increased net interest income was due to the Company strategically lowering its cost of interest-bearing liabilities by increasing transaction accounts and decreasing the certificates of deposits and borrowed funds combined with an increase in average interest-earning assets in 2021. Operating expenses increased by$1.2 million due to twelve months of expense related to theDecember 2020 hires ofNoyes and Lucas, six months of expense related theJuly 2021 acquisition of PPSG, a swap valuation allowance of$2.20 million , the redemption of subordinated debt expense of$648,000 , and severance expense related to corporate restructurings of$1.5 million . 2020 operating expenses included a$4.78 million prepayment of FHLB advances,$4.43 million valuation allowance for a loan held for sale,$210,000 for the consolidation of two private banking offices and$278,000 for the closure of a retail branch.
NET INTEREST INCOME AND NET INTEREST MARGIN
The major source of the Company's operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Interest-earning assets include loans, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits,Federal Home Loan Bank advances, subordinated debt and other borrowings. Net interest income is determined by the difference between the average yields earned on interest-earning assets and the average cost of interest-bearing liabilities ("net interest spread") and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest margin is calculated as net interest income as a percent of total interest-earning assets. The Company's net interest income, spread and margin are affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets. 26 --------------------------------------------------------------------------------
The following table summarizes the Company's net interest income and margin, on a fully tax-equivalent basis ("FTE basis"), for the periods indicated:
Years Ended December 31,
(Dollars in thousands) 2021 2020 2019
NII/NIM excluding the below (1)
2.58 %$ 119,032 2.67 % Prepayment premiums received on loan paydowns 2,085 0.04 1,452 0.02 1,328 0.03 Effect of maintaining excess interest earning cash (420 ) (0.17 ) (1,320 ) (0.21 ) (86 ) (0.07 ) Effect of PPP loans 2,190 0.01 4,371 (0.08 ) - - NII/NIM as reported$ 138,061 2.38 %$ 127,602 2.31 %$ 120,274 2.63 % (1) "NII" means net interest income and "NIM means net interest margin. 27 -------------------------------------------------------------------------------- The following table compares the average balance sheets, interest rate spreads and net interest margins for the years endedDecember 31, 2021 , 2020 and 2019 (on an FTE basis): Year Ended December 31, 2021 Average Income/Expense Yield (Dollars in thousands) Balance (FTE) (FTE) Assets: Interest-earnings assets: Investments: Taxable (1)$ 838,174 $ 11,577 1.38 % Tax-exempt (1)(2) 6,579 296 4.50 Loans (2)(3): Mortgages 503,616 15,359 3.05 Commercial mortgages 2,032,318 63,298 3.11 Commercial 1,881,683 66,652 3.54 Commercial construction 20,420 692 3.39 Installment 34,390 1,030 3.00 Home Equity 44,735 1,479 3.31 Other 247 21 8.50 Total loans 4,517,409 148,531 3.29 Federal funds sold 48 - 0.13 Interest-earning deposits 477,477 545 0.11 Total interest-earning assets 5,839,687 160,949 2.76 % Noninterest-earning assets: Cash and due from banks 10,396 Allowance for loan losses (67,075 ) Premises and equipment 23,094 Other assets 197,893 Total noninterest-earning assets 164,308 Total assets$ 6,003,995 Liabilities and shareholders' equity: Interest-bearing deposits: Checking$ 2,078,658 $ 4,426 0.21 % Money markets 1,260,865 2,882 0.23 Savings 146,210 75 0.05 Certificates of deposit - retail and listing service 483,889 4,058 0.84 Subtotal interest-bearing deposits 3,969,622 11,441 0.29 Interest-bearing demand - brokered 96,301 1,721 1.79 Certificates of deposit - brokered 33,790 1,058 3.13 Total interest-bearing deposits 4,099,713 14,220 0.35 Borrowed funds 110,077 473 0.43 Finance lease liability 6,260 300 4.79 Subordinated debt 156,888 7,013 4.47 Total interest-bearing liabilities 4,372,938 22,006 0.50 % Noninterest-bearing liabilities: Demand deposits 959,912 Accrued expenses and other liabilities 134,948 Total noninterest-bearing liabilities 1,094,860 Shareholders' equity 536,197 Total liabilities and shareholders' equity$ 6,003,995 Net interest income$ 138,943 Net interest spread 2.26 % Net interest margin (4) 2.38 %
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 21 percent
federal income tax rate.
3. Loans are stated net of unearned income and include nonaccrual loans.
4. Net interest income on an FTE basis as a percentage of total average
interest-earning assets.
28--------------------------------------------------------------------------------
Year Ended December 31, 2020
Average Income/Expense Yield
(Dollars in thousands) Balance (FTE) (FTE)
Assets:
Interest-earnings assets:
Investments:
Taxable (1) $ 510,245 $ 8,782 1.72 %
Tax-exempt (1)(2) 9,479 477 5.03
Loans (2)(3):
Mortgages 528,687 17,882 3.38
Commercial mortgages 1,958,262 64,541 3.30
Commercial 1,969,115 71,037 3.61
Commercial construction 5,932 295 4.97
Installment 51,007 1,532 3.00
Home Equity 53,853 1,940 3.60
Other 311 29 9.32
Total loans 4,567,167 157,256 3.44
Federal funds sold 102 - 0.25
Interest-earning deposits 504,753 968 0.19
Total interest-earning assets 5,591,746 $ 167,483 3.00 %
Noninterest-earning assets:
Cash and due from banks 7,025
Allowance for loan losses (61,401 )
Premises and equipment 21,455
Other assets 219,287
Total noninterest-earning assets 186,366
Total assets $ 5,778,112
Liabilities and shareholders' equity:
Interest-bearing deposits:
Checking $ 1,742,846 $ 7,279 0.42 %
Money markets 1,227,295 6,185 0.50
Savings 120,780 63 0.05
Certificates of deposit - retail and listing
service 654,652 11,476 1.75
Subtotal interest-bearing deposits 3,745,573 25,003 0.67
Interest-bearing demand - brokered 143,388 2,773 1.93
Certificates of deposit - brokered 33,735 1,061 3.15
Total interest-bearing deposits 3,922,696 28,837 0.74
Borrowed funds 308,814 3,976 1.29
Finance lease liability 7,157 343 4.79
Subordinated debt 86,246 4,992 5.79
Total interest-bearing liabilities 4,324,913 38,148 0.88 %
Noninterest-bearing liabilities:
Demand deposits 787,191
Accrued expenses and other liabilities 153,648
Total noninterest-bearing liabilities 940,839
Shareholders' equity 512,360
Total liabilities and shareholders' equity $ 5,778,112
Net interest income $ 129,335
Net interest spread 2.12 %
Net interest margin (4) 2.31 %
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 21 percent
federal income tax rate.
3. Loans are stated net of unearned income and include nonaccrual loans.
4. Net interest income on an FTE basis as a percentage of total average
interest-earning assets.
29--------------------------------------------------------------------------------
Year Ended December 31, 2019
Average Income/Expense Yield
(Dollars in thousands) Balance (FTE) (FTE)
Assets:
Interest-earnings assets:
Investments:
Taxable (1) $ 391,666 $ 10,228 2.61 %
Tax-exempt (1)(2) 14,930 728 4.88
Loans (2)(3):
Mortgages 565,935 19,321 3.41
Commercial mortgages 1,857,014 72,061 3.88
Commercial 1,498,077 71,071 4.74
Commercial construction 1,881 132 7.02
Installment 54,555 2,246 4.12
Home Equity 60,036 2,981 4.97
Other 391 42 10.74
Total loans 4,037,889 167,854 4.16
Federal funds sold 102 - 0.25
Interest-earning deposits 223,629 4,457 1.99
Total interest-earning assets 4,668,216 $ 183,267 3.93 %
Noninterest-earning assets:
Cash and due from banks 5,477
Allowance for loan losses (40,328 )
Premises and equipment 21,176
Other assets 142,156
Total noninterest-earning assets 128,481
Total assets $ 4,796,697
Liabilities and shareholders' equity:
Interest-bearing deposits:
Checking $ 1,342,901 $ 15,789 1.18 %
Money markets 1,189,880 16,434 1.38
Savings 113,312 63 0.06
Certificates of deposit - retail and listing
service 631,999 14,210 2.25
Subtotal interest-bearing deposits 3,278,092 46,496 1.42
Interest-bearing demand - brokered 180,000 3,457 1.92
Certificates of deposit - brokered 42,460 1,225 2.89
Total interest-bearing deposits 3,500,552 51,178 1.46
Borrowed funds 136,992 3,941 2.88
Finance lease liability 7,956 382 4.80
Subordinated debt 83,300 4,895 5.88
Total interest-bearing liabilities 3,728,800 60,396 1.62 %
Noninterest-bearing liabilities:
Demand deposits 505,486
Accrued expenses and other liabilities 73,601
Total noninterest-bearing liabilities 579,087
Shareholders' equity 488,810
Total liabilities and shareholders' equity $ 4,796,697
Net interest income $ 122,871
Net interest spread 2.31 %
Net interest margin (4) 2.63 %
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 21 percent
federal income tax rate.
3. Loans are stated net of unearned income and include nonaccrual loans.
4. Net interest income on an FTE basis as a percentage of total average
interest-earning assets.
30--------------------------------------------------------------------------------
The effect of volume and rate changes on net interest income (on an FTE basis) for the periods indicated are shown below:
Year Ended 2021 Compared with 2020 Year Ended 2020 Compared with 2019
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 $ 4,296 $ (1,682 ) $ 2,614 $ 2,038 $ (3,735 ) $ (1,697 )
Loans (1,588 ) (7,137 ) (8,725 ) 21,463 (32,061 ) (10,598 )
Federal funds sold - - - - - -
Interest-earning deposits (48 ) (375 ) (423 ) 2,652 (6,141 ) (3,489 )
Total interest income $ 2,660 $ (9,194 ) $ (6,534 ) $ 26,153 $ (41,937 ) $ (15,784 )
LIABILITIES:
Checking $ 703 $ (3,556 ) $ (2,853 ) $ 2,838 $ (11,348 ) $ (8,510 )
Money market 173 (3,476 ) (3,303 ) 286 (10,535 ) (10,249 )
Savings 12 - 12 11 (11 ) -
Certificates of deposit - retail (2,478 ) (4,940 ) (7,418 ) 498 (3,232 ) (2,734 )
Certificates of deposit - brokered 2 (5 ) (3 ) (271 ) 107 (164 )
Interest bearing demand brokered (862 ) (190 ) (1,052 ) (702 ) 18 (684 )
Borrowed funds (2,504 ) (999 ) (3,503 ) 464 (429 ) 35
Finance lease liability (42 ) (1 ) (43 ) (39 ) - (39 )
Subordinated debt 3,159 (1,138 ) 2,021 172 (75 ) 97
Total interest expense $ (1,837 ) $ (14,305 ) $ (16,142 ) $ 3,257 $ (25,505 ) $ (22,248 )
Net interest income $ 4,497 $ 5,111 $ 9,608 $ 22,896 $ (16,432 ) $ 6,464
2021 compared to 2020
Net interest income, on a fully tax-equivalent basis, grew $9.6 million , or 7
percent, in 2021 to $138.9 million from $129.3 million in 2020. The net interest
margin was 2.38 percent and 2.31 percent for the years ended December 31, 2021
and 2020, respectively, an increase of 7 basis points year over year. The growth
in net interest income and NIM for the year ended December 31, 2021 , when
compared to 2020 was due to the Bank strategically lowering its cost of
interest-bearing liabilities and a decline in the average balance of lower
yielding PPP loans. NIM also benefitted from the use of some of our excess
liquidity to purchase investment securities when compared to the 2020.
On a fully tax-equivalent basis, interest income on average interest-earning
assets decreased $6.5 million , or 4 percent, to $160.9 million in 2021 from
$167.5 million in 2020. Average interest-earning assets for the year ended
December 31, 2021 , totaled $5.84 billion compared to $5.59 billion for 2020, an
increase of $247.9 million or 4 percent. The increase in the average balance of
interest-earning assets for the year ended December 31, 2021 , reflected an
increase in the average balance of investment securities, partially offset by a
decline in the average balances of loans and interest-earning deposits. The
average rate earned on earning assets was 2.76 percent in 2021, compared to 3.00
percent in 2020, a decrease of 24 basis points. The decrease in average yields
on interest-earning assets for the year ended December 31, 2021 , was due to a
declining rate environment, which resulted in a decrease in the average yield on
our loan portfolio of 15 basis points. The average yield on interest-earning
assets was also affected by elevated levels of lower yielding investment
securities. The one-month LIBOR has declined by approximately 150 basis points
from the beginning of 2020. The Federal Open Market Committee also reduced the
target Federal Funds rate to 0 percent from 0.25 percent in March 2020 due to
the economic disruption caused by COVID-19. With the transformation to a
commercial bank balance sheet and business model, the Company's interest rate
sensitivity models indicate the Company is asset sensitive as of December 31,
2021 , and that net interest income would improve in a rising rate environment
but decline in a falling rate environment.
The increase in the average balance of interest-earning assets for the year
ended December 31, 2021 , as compared to 2020, reflects an increase in the
average balance of investments, offset by a slight decline in the average
balance of loans. Average loans declined slightly by $49.8 million to $4.52
billion driven by a decline in residential mortgages of $25.1 million to $503.6
million and commercial loans of $87.4 million to $1.88 billion . The decline in
the residential portfolio for the year ended December 31, 2021 was partially due
to the sale of $12.2 million of fixed-rate residential mortgage loans as part of
the Company's balance sheet management. The commercial loan decline was
primarily due to the forgiveness and
31
--------------------------------------------------------------------------------
sale of PPP loans, which declined $181.8 million to $13.8 million at December
31, 2021 . The declines in the residential and commercial loan portfolios were
partially offset by an increase of $74.1 million in commercial mortgages to
$2.03 billion . The increased multifamily production helped to offset loan
portfolio run-off and utilize excess liquidity.
The average balance of investment securities totaled $844.8 million for 2021
compared to $519.7 million for 2020, reflecting an increase of $325.0 million ,
or 63 percent. The increase in the average balance of investment securities was
due to the purchase of securities to maintain the size of the portfolio in
anticipation of maturities and to utilize excess liquidity.
The average balance of interest-earning deposits totaled $477.5 million for 2021
compared to $504.8 million for 2020, reflecting a decrease of $27.3 million or 5
percent. The decrease in the average balance of interest-earning deposits for
2021 was primarily due to the Company's deploying balance sheet liquidity to
fund multifamily loan originations and investment security purchases.
Average interest-bearing liabilities for the year ended December 31, 2021 ,
totaled $4.37 billion , an increase of $48.0 million , or 1 percent, from $4.32
billion for 2020. The average rate paid decreased 38 basis points to 0.50
percent for 2021 from 0.88 percent for 2020. The increase in the average balance
of interest-bearing liabilities was principally due to growth in customer
deposits (excluding brokered CDs and brokered interest-bearing demand but
including funds from reciprocal deposits) of $224.0 million for 2021 despite CDs
declining $170.8 million . The growth in customer deposits was primarily sourced
from our branch network and was due to a focus on providing high-touch client
service; new deposit relationships related to PPP; and a full array of treasury
management products that support core deposit growth. This growth was partially
offset by a decline of $47.0 million of brokered deposits.
Average rates paid on interest-bearing deposits for 2021 were 0.35 percent
compared to 0.74 percent for 2020, reflecting a decrease of 39 basis points. The
decrease in the average rate paid on deposits was principally due to repricing
of our deposit base to align with the recent Fed rate decreases as well as
allowing higher costing deposits to run-off.
The average balance of borrowings was $110.1 million for 2021 compared to $308.8
million during 2020, a decrease of $198.7 million . The decrease in the average
balance of borrowings was principally due to the Company's participation in the
Federal Reserve's Paycheck Protection Plan Lending Facility ("PPPLF"), which
decreased as PPP loans were forgiven as well as the Company's prepayment of
$105.0 million of FHLB advances during the fourth quarter of 2020 and $15.0
million during the second quarter of 2021. The average cost of borrowings
decreased 86 basis points for 2021 when compared to 2020 primarily due to the
prepayment of the FHLB borrowings, which had a weighted average cost of 3.20
percent.
In June 2021 , the Company redeemed $50.0 million of subordinated debt bearing
interest at an annual rate of 6.0 percent, issued in June 2016 that was set to
re-price to approximately 5.0 percent. In December 2020 , the Company issued
$100.0 million of subordinated debt ($98.2 million net of issuance costs)
bearing interest at an annual rate of 3.50 percent for the first five years, and
thereafter at an adjustable rate until maturity in December 2030 or earlier
redemption. 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.
INVESTMENT SECURITIES: Investment securities held to maturity are those
securities that the Company has both the ability and intent to hold to
maturity. These securities are carried at amortized cost. 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. Equity
securities are carried at fair value with unrealized gains and losses recorded
in non-interest income.
At December 31, 2021 , the Company had investment securities held to maturity
with a carrying cost of $108.7 million and an estimated fair value of $108.5
million . The Company did not have any investment securities held to maturity as
of December 31, 2020 .
At December 31, 2021 , the Company had investment securities available for sale
with an estimated fair value of $796.8 million compared with $622.7 million at
December 31, 2020 . The increase was due to purchases of U.S. government-
32
--------------------------------------------------------------------------------
sponsored securities with excess liquidity as deposits exceeded loan growth. A
net unrealized loss (net of income tax) of $9.9 million and a net unrealized
gain (net of income tax) of $5.5 million were included in shareholders' equity
at December 31, 2021 and 2020, respectively.
The Company had one equity security (a CRA investment security) with a fair
value of $14.7 million and $15.1 million at December 31, 2021 and 2020,
respectively. The Company recorded a $432,000 unrealized loss in securities
gains/losses, net on the Consolidated Statements of Income for the year ended
December 31, 2021 , as compared to a $281,000 unrealized gain for the year ended
December 31, 2020 related to the change in the market value of the equity
security.
The amortized cost and fair value of investment securities held to maturity and
available for sale at
2021 2020 2019
Amortized Estimated Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value Cost Fair Value
Investment securities - held to
maturity:
- $ - $ - $ -
Mortgage-backed
securities-residential (principally
U.S. government-sponsored entities) 68,680 68,478 - - - - Total investment securities - held to maturity$ 108,680 $ 108,460 $ - $ - $ - $ - Investment securities - available for sale: U.S. treasuries $ - $ - $
2,613
Mortgage-backed
securities-residential (principally
U.S. government-sponsored entities) 481,062 476,974
467,915 476,058 337,489 338,904
SBA pool securities 40,649 39,561
49,457 49,129 2,799 2,784
State and political subdivision 5,431 5,476
7,987 8,089 11,175 11,215
Corporate bond 2,500 2,521 3,000 3,029 3,000 3,068 Total investment securities - available for sale$ 809,687 $ 796,753 $
615,396
$ 918,367 $ 905,213 $ 615,396 $ 622,689 $ 389,424 $ 390,755 33
-------------------------------------------------------------------------------- The following table presents the contractual maturities and yields of debt securities held to maturity and available for sale as ofDecember 31, 2021 . The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities: After 1 After 5 But But After Within Within Within 10 (Dollars in thousands) 1 Year 5 Years 10 Years Years Total Investment securities - held to maturity:U.S. government-sponsored agencies $ -$ 15,000 $ 25,000 $ -$ 40,000 - % 1.35 % 1.64 % - % 1.53 % Mortgage-backed securities- $ - $ - $ -$ 68,680 $ 68,680 residential (1) - % - % - % 1.68 % 1.68 % Total investment securities - held to maturity $ -$ 15,000 $ 25,000 $ 68,680 $ 108,680 - % 1.35 % 1.64 % 1.68 % 1.63 % Investment securities - available for sale:U.S. government-sponsored agencies $ -$ 5,570 $ 121,286 $ 145,365 $ 272,221 - % 1.00 % 1.32 % 1.69 % 1.51 % Mortgage-backed securities-$ 25,167 $ 19,865 $ 42,764 $ 389,178 $ 476,974 residential (1) 1.25 % 2.38 % 1.66 % 1.47 % 1.51 % SBA pool securities $ - $ -$ 5,613 $ 33,948 $ 39,561 - % - % 2.04 % 1.20 % 1.32 % State and political subdivisions (2)$ 3,554 $ 1,922 $ - $ -$ 5,476 2.16 % 2.22 % - % - % 2.18 % Corporate bond $ - $ -$ 2,521 $ -$ 2,521 - % - % 3.00 % - % 3.00 % Total investment securities - available for sale$ 28,721 $ 27,357 $ 172,184
1.36 % 2.08 % 1.45 % 1.51 % 1.51 %
Total investment securities $ 28,721 $ 42,357 $ 197,184 $ 637,171 $ 905,433
1.36 % 1.83 % 1.48 % 1.53 % 1.53 %
(1) Shown using stated final maturity
(2) Yields presented on a fully tax-equivalent basis, using a 21 percent
federal income tax.
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 2021 was $477.5 million compared to
$504.8 million in 2020.
LOANS: The loan portfolio represents the largest portion of the Company's
interest-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 and Delaware . As of December 31,
2021 , 41 percent of the total loan portfolio was concentrated in C&I loans
(including equipment financing), 33 percent in multifamily loans and 14 percent
in commercial mortgages.
Total loans were $4.81 billion and $4.37 billion at December 31, 2021 and 2020,
respectively, an increase of $434.3 million , over the previous year. Multifamily
mortgage loans were $1.60 billion at December 31, 2021 , an increase of $468.9
million or 42 percent when compared to December 31, 2020 due to increased
originations. The Bank utilized its excess liquidity to fund multifamily
originations of $624.3 million in 2021 compared to $76.6 million in 2020. During
2021, commercial mortgages decreased $28.7 million due to increased paydowns
compared to 2020. Commercial loans, which includes equipment financing, totaled
$1.96 billion at December 31, 2021 . This was a slight increase when compared to
December 31, 2020 . This portfolio includes loans issued under the PPP, a program
under the CARES Act. The December 31, 2021 commercial loan balance included PPP
loans of $13.8 million compared to $195.6 million at December 31, 2020 .
In late 2015, the Company began originating 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
34
--------------------------------------------------------------------------------
start-up businesses. All SBA loans are underwritten and documented as prescribed
by the SBA. The Company generally sells the guaranteed portion of the SBA loans
in the secondary market, with the non-guaranteed portion held in the loan
portfolio. During 2021, the Bank sold $37.6 million of the guaranteed portion of
SBA loans into the secondary market. As of December 31, 2021 , the balance of the
non-guaranteed portion of SBA loans held on our balance sheet totaled $30.1
million and is included in commercial loans.
The following table presents the contractual repayments of the loan portfolio,
by loan type, at
After 5 But
Within After 1 But Within After
(In thousands) One Year Within 5 Years 15 Years 15 Years Total
Residential mortgage $ 82,668 $ 313,316 $ 82,491 $ 19,825 $ 498,300
Commercial mortgage (including
multifamily) 754,936 1,149,611 333,389 20,556 2,258,492
Commercial loans (including
equipment financing) 993,844 904,611 56,702 - 1,955,157
Commercial construction 13,482 - 6,562 - 20,044
Home equity lines of credit 40,593 210 - - 40,803
Consumer and other loans 28,170 4,959 731 65 33,925
Total loans $ 1,913,693 $ 2,372,707 $ 479,875 $ 40,446 $ 4,806,721
The following table presents the loans, by loan type, that have a fixed interest
rate and an adjustable interest rate due after one year at December 31, 2021 :
Fixed Adjustable
(In thousands) Interest Rate Interest Rate
Residential mortgage $ 216,624 $ 199,008
Commercial mortgage
(including multifamily) 149,894 1,353,662
Commercial loans 831,864 129,449
Commercial construction 6,562 -
Consumer loans 5,755 -
Home equity loans - 210
Total loans $ 1,210,699 $ 1,682,329 The Company has not made nor invested in subprime loans or "Alt-A" type mortgages.
The geographic breakdown of the multifamily portfolio, net of participated
multifamily loans, at
(Dollars in thousands) New York$ 802,231 51 % New Jersey 518,468 32 Pennsylvania 245,693 15 Delaware 29,474 2 Total Multifamily$ 1,595,866 100 % 35
--------------------------------------------------------------------------------
A further breakdown of the multifamily portfolio by county within each respective State is as follows:
New Jersey New York Pennsylvania Delaware
Essex County Bronx County Philadelphia New Castle
27 % 54 % County 100 %
County 60 %
Hudson County 26 Kings County 21 York County 12
Union County New York Lehigh County
16 County 17 12
Somerset All other NY Lycoming
County 7 counties 8 County 4
Morris County Lackawanna
6 County 3
Monmouth All other PA
County 4 counties 9
Passaic County 3
All other NJ
counties 11
Total 100 % Total 100 % Total 100 % Total 100 %
Principal types of owner occupied commercial real estate properties (by Call
Report code), included in commercial mortgage loans on the balance sheet, at
December 31, 2021 are:
(Dollars in thousands)
Office Buildings/Office Condominiums
45,806 18
Retail Buildings/Shopping Centers 26,554 11
Principal types of non-owner occupied commercial real estate properties (by Call Report code), atDecember 31, 2021 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
239,252 24
Office Buildings/Office Condominiums 92,335 9
Hotels and Hospitality 96,626 10
Industrial (including Warehouse) 81,985 8
Medical Offices 44,517 4
Mixed Use (Commercial/Residential) 42,684 4
Mixed Use (Retail/Office) 29,811 3
Other
AtDecember 31, 2021 and 2020, the Bank had a concentration in commercial real estate loans as defined by applicable regulatory guidance. The following table presents such concentration levels atDecember 31, 2021 and 2020: As of
2021 2020
Multifamily mortgage loans as a percent of total regulatory capital of the Bank 237%
188%
Non-owner occupied commercial real estate loans as a percent of
total regulatory capital of the Bank 149 168
Total CRE concentration 386% 356%
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.
36
--------------------------------------------------------------------------------
GOODWILL : At December 31, 2021 , goodwill totaled $36.2 million , an increase of
$3.1 million from $33.1 million at December 31, 2020 . The increase in goodwill
was due to the acquisition of Princeton Portfolio Strategies Group completed in
July 2021 . The Bank intends to continue to grow its wealth management business
through acquisition.
DEPOSITS: At December 31, 2021 and 2020, the Company reported total deposits of
$5.27 billion and $4.82 billion , an increase of $447.7 million , or 9 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 2021 increased $349.7
million , or 7 percent, over 2020 average levels to $5.06 billion . The Company
saw the largest dollar growth in noninterest-bearing demand and interest-bearing
checking balances. The growth in customer deposits (excluding brokered CDs and
brokered interest-bearing demand deposits, but including reciprocal funds
discussed below) has come from an increase in retail deposits from our branch
network; a focus on providing high-touch client service; new deposit
relationships related to our participation in the PPP; and a full array of
treasury management products that support core deposit growth. The Company has
also successfully focused on:
• Growth in deposits associated with its private banking activities, including
lending activities; and
• Business and personal core deposit generation, particularly
noninterest-bearing demand and checking.
The Company continues to maintain brokered interest-bearing demand deposits
matched to interest rate swaps, thereby extending their duration. 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
decreased to $85.0 million at December 31, 2021 from $110.0 million at the same
period in 2020. The Company ensures ample available collateralized liquidity as
a backup to these short-term brokered deposits. At December 31, 2021 , there were
$85.0 million of notional principal interest rate swaps matched to these
deposits for interest rate risk management purposes.
The following table sets forth information concerning the composition of the
Company's average balance of deposits and average interest rates paid for the
following years:
(Dollars in thousands) 2021 2020 2019
Noninterest-bearing demand $ 959,912 - % $ 787,191 - % $ 505,486 - %
Checking 2,078,658 0.21 1,742,846 0.42 1,342,901 1.18
Savings 146,210 0.05 120,780 0.05 113,312 0.06
Money markets 1,260,865 0.23 1,227,295 0.50 1,189,880 1.38
Certificates of deposit - retail
and listing
service 483,889 0.84 654,652 1.75 631,999 2.25
Interest-bearing
Demand - brokered 96,301 1.79 143,388 1.93 180,000 1.92
Certificates of deposit -
brokered 33,790 3.13 33,735 3.15 42,460 2.89
Total deposits $ 5,059,625 0.28 % $ 4,709,887 0.61 % $ 4,006,038 1.28 %
The Company is a participant in the Reich & Tang Demand Deposit Marketplace
("DDM") program and the Promontory Program. The Company uses these deposit sweep
services to place customer funds into interest-bearing demand (checking)
accounts issued by other participating banks. Customer funds are placed at one
or more participating banks to ensure that each deposit customer is eligible for
the full amount of FDIC insurance. As a program participant, the Company
receives reciprocal amounts of deposits from other participating
banks. Reciprocal deposits of $647.8 million , $652.5 million and $423.8 million
are included in the Company's interest-bearing checking deposits as of December
31, 2021 , 2020, and 2019, respectively.
At December 31, 2021 , the aggregate amount of deposits that exceeded the FDIC
insurance limit of $250,000 was $959.9 million . At December 31, 2021 , the
aggregate amount of uninsured time deposits (which are deposits in amounts
greater than $250,000 , which is the maximum amount for federal deposit
insurance) was $140.4 million . At December 31, 2021 , we had no deposits that
were uninsured for any reason other than being in excess of the maximum amount
for federal deposit insurance.
37
--------------------------------------------------------------------------------
The following table shows the maturity for certificates of deposit of
Three months or less$ 59,255 Over three months through six months 35,296 Over six months through twelve months 29,451 Over twelve months 16,410 Total$ 140,412 FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: As part of our overall funding and liquidity management program, from time to time we borrow from theFederal Home Loan Bank .
The Company did not have any overnight borrowings at
During the quarter endedJune 30, 2021 , the Company terminated an interest rate swap with a notional amount of$15.0 million that was tied to a one-month FHLB advance totaling$15.0 million . The Company prepaid$105.0 million of FHLB advances, which had a weighted-average interest rate of 3.20 percent resulting in a prepayment penalty of$4.8 million , during 2020. The repayment of the FHLB advances was expected to provide a benefit to interest expense greater than the prepayment penalty over the remaining life of the advances. The Company had no borrowings from the PPPLF atDecember 31, 2021 compared to$177.1 million atDecember 31, 2020 . The borrowings had a rate of 0.35 percent, primarily all of which had a two-year maturity. The Company utilized the PPPLF to fund PPP loan production.
At
SUBORDINATED DEBT: InJune 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 were non-callable for five years, had a stated maturity ofJune 30, 2026 , and bore interest at a fixed rate of 6.0 percent per year untilJune 30, 2021 . FromJune 30, 2021 to the maturity date or early redemption date, the interest rate would reset quarterly to a level equal to the then current three-month LIBOR rate plus 485 basis points, payable quarterly in arrears. During the second quarter of 2021, the Company used a portion of the proceeds from theDecember 2020 subordinated debt issuance to redeem the$50.0 million June 2016 issuance. The remaining net issuance costs of$648,000 were written-off during the quarter endedJune 30, 2021 . InDecember 2017 , the Company issued$35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the "2017 Notes") to certain institutional investors. The 2017 Notes are non-callable for five years, have a stated maturity ofDecember 15, 2027 , and bear interest at a fixed rate of 4.75 percent per year untilDecember 15, 2022 . FromDecember 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$875,000 and are being amortized to maturity. InDecember 2020 , the Company issued$100.0 million in aggregate principal amount of fixed to floating subordinated notes (the "2020 Notes") to certain institutional investors. The 2020 Notes are non-callable for five years, have a stated maturity ofDecember 22, 2030 , and bear interest at a fixed rate of 3.50 percent per year untilDecember 22, 2025 . FromDecember 23, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month SOFR plus 326 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled$1.9 million and are being amortized to maturity.
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 2020 Notes, the Company obtained ratings fromKroll Bond Rating Agency ("KBRA") and Moody's Investors Service ("Moody's"). KBRA assigned investment grade rating of BBB- and Moody's assigned investment grade rating of Baa3 for the 2020 Notes at the time of issuance. 38 -------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses was$61.7 million atDecember 31, 2021 compared to$67.3 million atDecember 31, 2020 . AtDecember 31, 2021 , the allowance for loan losses as a percentage of total loans outstanding was 1.28 percent compared to 1.54 percent atDecember 31, 2020 . The provision for loan losses was$6.5 million for 2021,$32.4 million for 2020 and$4.0 million for 2019. 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 type of 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 (
will lend in additional states. The Bank has developed a portfolio of
mortgage products that are used exclusively to attract or maintain wealth,
commercial or retail banking relationships. 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. Maximum loan-to-value ("LTV") is determined based on property
type and loan amount. On primary residences and second home properties, LTVs
range from a maximum of 80 percent for loan amounts to
customers to 75 percent for loan amounts to
customers. For investment properties, LTVs range from a maximum of 80
percent for loan amounts to
loan amounts to
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 680 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 marketinvestors. 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 credit report that
will determine total monthly debt obligations. The Bank uses an automated
valuation model on all lines up to
appraisal of the subject property on all applications exceeding
LTVs and combined LTVs are capped at 80 percent if the property type is a
primary residence. These loans may be subordinate to a first mortgage, which
may be from another lending institution. The Bank requires that the mortgage
securing the home equity line of credit be no lower than a second lien
position. All applications for home equity lines of credit adhere to
applicable underwriting standards and guidelines. 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 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.
39
--------------------------------------------------------------------------------
c) Junior
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
requires that the mortgage securing the JLL be no lower than a second lienposition. When reviewing the JLL application, the Bank collects detailed
verifiable information regarding income, assets, employment and a credit
report that determines total monthly debt obligations. The Bank uses an
automated valuation model on all JLLs up to
independent appraisal of the subject property on all applications exceeding
type is a primary residence. All applications for JLLs adhere to applicable
underwriting standards and guidelines. 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
portfolio was 44 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 1.49x. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and their ability to repay the loan. Certain markets, such as the Boroughs ofNew 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 58 percent atDecember 31, 2021 based on appraisals at the time of origination. The majority of all new originations have a ten-year maturity with a repricing of the interest rate after five years. Multifamily loan terms include prepayment penalties 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. Multifamily properties generally present a lower level of risk as compared to investment commercial real estate projects given that there are a larger number of tenants in the property. The repayment of loans secured by multifamily real estate is typically dependent upon the successful operation of the related real estate property. If the cash flows from the property are reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term), the borrower's ability to repay the loan may be impaired. 40 --------------------------------------------------------------------------------
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 generally requires 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 evaluates 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 with an initial fixed rate 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 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. 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 often requires more frequent reporting requirements from the borrower in order to better monitor its business performance.
g) Leasing and Equipment Finance.
subsidiary of the Bank, offers a range of finance solutions nationally. PCC
provides term loans and leases secured by assets financed for
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.
41
--------------------------------------------------------------------------------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
categorized in any of the previous mentioned loan segments. Consumer loans
generally have higher interest rates and shorter terms than residential
loans but tend to have higher credit risk due to the type of collateral
securing the loan or in some cases the absence of collateral.
Management believes that the underwriting guidelines previously described adequately address the primary risk characteristics. Further, the Bank has dedicated staff and resources to monitor and collect on any potentially problematic loans.
The provision for loan losses is based upon Management's review and evaluation of the size and composition of the loan portfolio, actual loan loss experience, level and trend of delinquencies and charge-offs, 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 theState of New Jersey and theNew York City metropolitan 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 or if the geographic areas serviced experience adverse economic conditions. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control. 42 -------------------------------------------------------------------------------- The following table presents the loan loss experience, by loan type, during the years endedDecember 31 : (Dollars in thousands) 2021 2020 2019 2018 2017 Average loans outstanding$ 4,494,473 $ 4,552,358 $ 4,035,603 $ 3,762,322 $ 3,564,362 Allowance for loan losses at beginning of year$ 67,309 $ 43,676 $ 38,504 $ 36,440 $ 32,208 Loans charged-off during the period: Residential mortgage 12 559 80 138 889 Commercial mortgage 7,137 1,485 - 1,632 734 Commercial 5,019 7,132 - 110 298 Home equity lines of credit - - - - 23 Consumer and other 80 27 55 68 77 Total loans charged-off 12,248 9,203 135 1,948 2,021 Recoveries during the period: Residential mortgage - 373 205 160 173 Commercial mortgage - 31 996 70 22 Commercial 66 17 92 218 141 Home equity lines of credit 85 11 10 10 62 Consumer and other 10 4 4 4 5 Total recoveries 161 436 1,307 462 403 Net charge-offs/(recoveries) 12,087 8,767 (1,172 ) 1,486 1,618 Provision charge to expense 6,475 32,400 4,000 3,550 5,850 Allowance for loan losses at end of year$ 61,697 $ 67,309 $
43,676
Ratios:
Allowance for loan losses/total loans (A) 1.28 % 1.54 % 0.99 % 0.98 % 0.98 % General allowance/total loans (A) 1.20 % 1.48 % 0.93 % 0.97 % 0.96 % Nonaccrual loans/total loans (A) 0.32 % 0.26 % 0.66 % 0.65 % 0.37 % Allowance for loan losses/ total nonperforming loans 396.18 % 589.91 % 151.23 % 149.73 % 269.33 % Net charge offs/average loans: Residential mortgage 0.00 % 0.00 % -0.01 % 0.00 % 0.02 % Commercial mortgage 0.16 % 0.03 % -0.02 % 0.04 % 0.02 % Commercial 0.11 % 0.16 % 0.00 % 0.00 % 0.01 % Home equity lines of credit 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Consumer and other 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total net charge offs/average loans 0.27 % 0.19 % -0.03 % 0.04 % 0.05 %
(A) The
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 ofDecember 31 , of the years indicated: % of % of % of % of % of Loan Loan Loan Loan Loan Category Category Category Category Category To Total To Total To Total To Total To Total (Dollars in thousands) 2021 Loans 2020 Loans 2019 Loans 2018 Loans 2017 Loans Residential$ 1,520 11.3$ 3,138 13.0$ 2,231 14.6$ 3,685 17.1$ 4,318 18.4 Commercial and other 59,962 87.8 63,892 86.0 41,149 84.1 34,435 81.2 31,773 78.9 Consumer and other 215 0.9 279 1.0 296 1.3 384 1.7 349 2.7 Total$ 61,697 100.0$ 67,309 100.0$ 43,676 100.0$ 38,504 100.0$ 36,440 100.0 The allowance for loan losses as ofDecember 31, 2021 totaled$61.7 million compared to$67.3 million atDecember 31, 2020 . The allowance for loan losses as a percentage of loans was 1.28 percent as ofDecember 31, 2021 and 1.54 percent as 43 -------------------------------------------------------------------------------- ofDecember 31, 2020 . The provision for loan losses for 2021 totaled$6.5 million compared with$32.4 million for 2020. The decreased provision for loan and lease losses primarily reflected the reduced qualitative factors when calculating the allowance for loan losses due to the improvement in the unemployment rate and a decrease in loan deferrals entered into during the COVID-19 pandemic from the prior year. The Company's provision for loan and lease losses (and its allowance for loan and leases losses) also reflect the Company's assessment of asset quality metrics, net loan decline, increased net charge-offs, and the composition of the loan portfolio. The Company believes that the allowance for loan losses as ofDecember 31, 2021 , represents a reasonable estimate for probable incurred losses in the portfolio at that date. EffectiveJanuary 1, 2022 , the Company adopted new accounting guidance, which requires the Company to estimate CECL. The Company is currently in the process of finalizing its implementation of controls and processes and performing model validation which could affect the final impact of the adoption of this standard. The portion of the allowance for loan losses allocated to loans collectively evaluated for impairment, commonly referred to as general reserves, was$57.5 million atDecember 31, 2021 and$64.6 million atDecember 31, 2020 . General reserves atDecember 31, 2021 represented 1.20 percent of loans collectively evaluated for impairment compared to 1.48 percent atDecember 31, 2020 . The specific reserves on impaired loans were$4.2 million atDecember 31, 2021 compared to$2.7 million atDecember 31, 2020 . Specific reserves were attributable to a$4.2 million reserve associated with one commercial real estate loan with a large retail component totaling$12.8 million atDecember 31, 2021 . The allowance for loan losses as a percentage of nonperforming loans decreased to 396.18 percent due to an increase in nonperforming loans partially offset by net charge-offs of$12.1 million . Nonperforming loans increased from$11.4 million to$15.6 million during the year. Nonperforming loans increased primarily due to the transfer of the large commercial real estate loan noted above. Nonperforming loans are specifically evaluated for impairment. Also, the Company commonly records partial charge-offs of the excess of the principal balance over the fair value, less estimated 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. The Company charged off$12.2 million on loans identified as collateral-dependent impaired loans during 2021, which included a$7.1 million charge-off of the specific reserve on the above mentioned commercial real estate loan compared to$6.0 million on loans during 2020.
ASSET QUALITY: The following table presents various asset quality data at the dates indicated. These tables do not include loans held for sale.
December 31,
(Dollars in thousands) 2021 2020 2019 2018 2017 Loans past due 30-89 days (1)$ 8,606 $ 5,053 $
1,910
Troubled debt restructured loans
still accruing interest $ - $ - $ - $ - $ - Nonaccrual loans (2) 15,573 11,410 28,881 25,715 13,530 Total nonperforming loans 15,573 11,410 28,881 25,715 13,530 Other real estate owned - 50 50 - 2,090 Total nonperforming assets$ 15,573 $ 11,460 $
28,931
Ratios:
Total nonperforming loans/total loans 0.32 % 0.26 % 0.66 % 0.65 % 0.37 %
Total nonperforming loans/total assets 0.26 0.19 0.56 0.56 0.32
Total nonperforming assets/total assets 0.26 0.19 0.56 0.56 0.37
44
--------------------------------------------------------------------------------
(1) Includes
administrative issues with the servicer and at the lessee/borrower at
December 31, 2021 . Payment was received in January.
(2) The increase in nonaccrual loans in 2021 was due to the one large CRE loan
with a retail component located in
loans for 2020 was due to the transfer of several commercial and
residential loans totaling
nonaccrual loans for 2019 and 2018 was due to the addition of one
healthcare real estate secured loan, totaling $14.5 million with a $1.0
million reserve, as of December 31, 2020 .
At
Loan Modifications: 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 CARES Act granted relief to borrowers that needed loan deferrals due to the impact of the COVID-19 pandemic. See Loan Modifications discussion below for details regarding the Company's treatment of loan deferrals in 2020 and 2021. The CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. The revised CARES Act extended TDR relief to loan modifications throughJanuary 1, 2022 . This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as ofDecember 31, 2019 and to loan modifications that defer or delay the payment of principal or interest or change the interest rate on the loan. InApril 2020 , federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not considered to be experiencing financial difficulty under ASC 310-40. Throughout 2020 and 2021, the Bank had modified 542 loans with a balance of$947.0 million resulting in the deferral of principal and/or interest for periods ranging from 90 to 180 days. The table below summarizes the outstanding deferrals as ofDecember 31, 2021 . All of these loans were performing in accordance with their terms prior to modifications and are in conformance with the CARES Act. Included in the table below is one loan totaling$12.8 million of loan level swaps. Details with respect to loan modifications are as follows: Post-Modification Outstanding Number of Recorded (Dollars in thousands) Loans Investment Primary residential mortgage 1 $ 145 Investment commercial real estate 1 12,750 Commercial and industrial 4 12,656 Total 6 $ 25,551 45
-------------------------------------------------------------------------------- The future performance of these loans, specifically beyond the term of the deferral, is uncertain. To recognize a credit allowance commensurate with the existing risk, the Company assigned qualitative factors for each of the above portfolio classes for allowance purposes.
TROUBLED DEBT RESTRUCTURINGS: The following table presents the troubled debt
restructured loans, by collateral type, at
December 31, Number of December 31, Number of
(Dollars in thousands) 2021 Relationships 2020 Relationships
Primary residential mortgage $ 1,468 9 $ 943 6
Junior lien loan on residence 18 1 - -
Commercial and industrial 2,089 2 3,304 5
Total $ 3,575 12 $ 4,247 11
At December 31, 2021 , there were $1.1 million of troubled debt restructured
loans included in nonaccrual loans compared to $4.0 million at December 31,
2020 . All troubled debt restructured loans are considered and included in
impaired loans at December 31, 2021 . There was no allowance allocated to
troubled debt restructured loans at December 31, 2021 . At December 31, 2020 , all
troubled debt restructured loans were considered and included in impaired loans
and had specific reserves of $3,000 .
Except as disclosed, the Company did not have any potential problem loans at
December 31, 2021 or December 31, 2020 that caused 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 $18.1 million and $16.2 million at December 31, 2021 and
2020, respectively. Impaired loans include nonaccrual loans of $15.6 million and
$11.4 million at December 31, 2021 and 2020, respectively. Impaired loans also
include accruing troubled debt restructuring loans of $2.5 million at December
31, 2021 and $201,000 at December 31, 2020 .
The following table presents impaired loans, by collateral type, at December 31,
2021 and 2020:
December 31, Number of December 31, Number of
(Dollars in thousands) 2021 Relationships 2020 Relationships
Primary residential mortgage $ 2,242 14 $ 1,490 11
Junior lien loan on residence 18 1 - -
Owner-occupied commercial real estate 458 2 807 3
Investment commercial real estate 12,750 1 4,593 1
Commercial and industrial 2,584 4 9,314 10
Total $ 18,052 22 $ 16,204 25
Specific reserves, included in the
allowance for loan losses $ 4,234 $ 2,703
CONTRACTUAL OBLIGATIONS: 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. The Company adopted the guidance in Topic 842 Leases effective
January 1, 2019 . See Note 1 to Notes to Consolidated Financial Statements for
further discussion.
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
46
--------------------------------------------------------------------------------
OFF-BALANCE SHEET ARRANGEMENTS: The following table shows the amounts and
expected maturities of significant commitments, consisting primarily of letters
of credit, as of
Less Than More Than
(In thousands) One Year 1-3 Years 3-5 Years 5 Years Total
Financial letters of credit $ 14,779 $ 249 $ - $ - $ 15,028
Performance letters of credit 3,117 627 - - 3,744
Interest rate lock
commitments-residential mortgages 28,964 - - - 28,964
Total letters of credit $ 46,860 $ 876 $ - $ - $ 47,736
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.
OTHER INCOME: The following table presents the major components of other income
(excluding income from our wealth management operations, which is discussed
separately):
Years Ended December 31, Change
(In thousands) 2021 2020 2019 2021 vs 2020 2020 vs 2019
Service charges and fees $ 3,697 $ 3,155 $ 3,488 $ 542 $ (333 )
Bank owned life insurance 1,696 1,273 1,321 423 (48 )
Loan fee income 1,646 1,339 1,734 307 (395 )
Gains on loans held for sale at
fair
value (mortgage banking) 2,194 3,266 721 (1,072 ) 2,545
Securities gains/(losses), net (432 ) 281 117
(713 ) 164
Fee income related to loan level,
back-to-back swaps - 1,620 5,799 (1,620 ) (4,179 ) Gains/(losses) on loans held for sale at
lower of cost or fair value 1,142 7,426 (10 )
(6,284 ) 7,436
Gain on sale of SBA loans 4,939 1,766 2,145 3,173 (379 )
Corporate advisory fee income 3,483 265 444
3,218 (179 )
Loss on swap termination (842 ) - - (842 ) -
Other income 1,733 508 574 1,225 (66 )
Total other income $ 19,256 $ 20,899 $ 16,333 $ (1,643 ) $ 4,566
2021 compared to 2020
The Company recorded total other income, excluding wealth management fee income,
of $19.3 million in 2021, reflecting a decrease of $1.6 million , or 8 percent,
compared to 2020 levels. The decrease for 2021 was primarily attributable to a
$7.4 million gain on sale of $355.0 million of PPP loans in 2020 partially
offset by an increase of $3.7 million in capital market activity (mortgage
banking income, fee income related to loan level, back-to-back swaps, corporate
advisory fee income and gain on sale of SBA loans).
Income from the sale of newly originated residential mortgages loans decreased
$1.1 million to $2.2 million for the year ended December 31, 2021 when compared
to $3.3 million for the same period in 2020. This decrease was a result of the
decreased volume of residential mortgage loans originated for sale during 2021
due to a slowdown in refinance and home purchase activity.
The Company did not record any fee income related to loan level, back-to-back
swaps during the twelve months ended December 31, 2021 compared to $1.6 million
in 2020. The decrease was a result of decreased demand for this product due to
the rate environment in 2021. The program provides a borrower with a degree of
interest rate protection on a variable rate loan, while still providing an
adjustable rate to the Company, thus helping to manage the Company's interest
rate risk, while contributing to income. The Company expects back-to-back swap
activity will continue to be minimal in the current rate environment.
The Company provides loans that are partially guaranteed by the SBA, to provide
working capital and/or finance 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
generally sells the guaranteed portion of the SBA
47
--------------------------------------------------------------------------------
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 2021 increased by $3.2
million to $4.9 million of income related to the Company's SBA lending and sale
program from $1.8 million in 2020. The 2021 period benefitted by certain changes
to SBA lending requirements, which included raising the SBA loan guaranty from
75 percent to 90 percent and eliminated the guaranty fee to both borrowers and
lenders through September 30, 2021 .
The Company recorded corporate advisory fee income of
Income from the back-to-back swap, corporate advisory fee income and SBA programs are dependent on volume, and thus are not linear from year to year, as some years will be higher than others.
During 2021 the Company recognized a loss on the termination of$842,000 for two interest rate swaps that had a notional value of$40 million with a weighted average cost of 1.50 percent.
The Company recorded
During the year endedDecember 31, 2021 , the Company recorded a$1.1 million gain on sale on the sale of$57 million of PPP loans to a third party to create additional capacity to process our strong loan pipeline.
Other income included
The twelve months ended
The remainder of the increase for the year endedDecember 31, 2021 when compared to 2020 was primarily due to an increase in commercial lending fees primarily unused credit line fees, loan servicing income and letter of credit fees. OPERATING EXPENSES: The following table presents the major components of operating expenses: Years Ended December 31, Change (In thousands) 2021 2020 2019 2021 vs 2020 2020 vs 2019 Compensation and employee benefits$ 81,864 $ 77,516 $ 70,129 $ 4,348 $ 7,387 Premises and equipment 17,165 16,377 14,735 788 1,642 FDIC assessment 2,071 1,975 277 96 1,698 Other operating expenses: Professional and legal fees 5,343 4,099 4,506 1,244 (407 ) Telephone 1,323 1,432 1,361 (109 ) 71 Advertising 1,288 1,631 1,363 (343 ) 268 Amortization of intangible assets 1,598 1,287 1,043 311 244 Branch restructure 228 488 - (260 ) 488 FHLB prepayment penalty - 4,784 - (4,784 ) 4,784 Valuation allowance loans held for sale - 4,425 - (4,425 ) 4,425 Swap valuation allowance 2,243 - - 2,243 - Write-off of subordinated debt costs 648 - - 648 - Other operating expenses 12,396 10,945 11,434 1,451 (489 ) Total operating expense$ 126,167 $ 124,959 $ 104,848 $ 1,208 $ 20,111 48
--------------------------------------------------------------------------------
2021 compared to 2020 Operating expenses totaled$126.2 million in 2021, compared to$125.0 million in 2020, reflecting an increase of$1.2 million , or 1 percent. Increased operating expenses in 2021 were principally attributable to: compensation and employee benefits increase of$4.3 million which includes expenses related to the Lucas andNoyes team lift outs completed inDecember 2020 ; expenses related to the acquisition of PPSG completed onJuly 1, 2021 ; hiring in line with the Company's strategic plan and normal salary increases; swap valuation allowance of$2.2 million , and$648,000 for the write-off of subordinated debt costs, which were partially offset by 2020 expenses of$4.4 million for valuation allowance for a loan held for sale;$4.8 million for the prepayment of FHLB advances;$278,000 for the closure of a retail branch; and$210,000 for the consolidation of two private banking locations. INCOME TAXES: Income tax expense for the year endedDecember 31, 2021 was$21.0 million as compared to$5.8 million for 2020. The effective tax rate for the year endedDecember 31, 2021 was 27.09 percent as compared to 18.16 percent for the year endedDecember 31, 2020 . During the first quarter of 2020, the Company recorded a$3.34 million tax benefit, principally due to a$3.2 million Federal income tax benefit that resulted from a tax NOL carryback. The Company had a$23.0 million operating loss for tax purposes in 2018 (when the Federal tax rate was 21 percent) resulting from accelerated tax depreciation. Under the CARES Act, the Company was allowed to carry this NOL back to a period when the Federal tax rate was 35 percent, generating a permanent tax benefit. CAPITAL RESOURCES: A solid capital base provides the Company with financial strength and the ability to support future growth 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 and bank holding companies. 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 2021 was benefitted by net income of$56.6 million partially offset by the purchase of shares of$28.6 million through the Company's stock repurchase program and a change in unrealized loss on securities, net of tax of$15.4 million . The Company employs quarterly capital stress testing - adverse case and severely adverse case. In the most recent completed stress test onSeptember 30, 2021 , under severely adverse case, no growth scenarios, the Bank remains well capitalized over a two-year stress period. With a Pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period. AtDecember 31, 2021 , the Company's GAAP capital as a percent of total assets was 8.99 percent. AtDecember 31, 2021 , the Company's regulatory leverage, common equity tier 1, tier 1 and total risk-based capital ratios were 8.29 percent, 10.62 percent, 10.62 percent and 14.64 percent, respectively. AtDecember 31, 2021 , the Bank's regulatory leverage, common equity tier 1, tier 1 and total risk-based capital ratios were 9.99 percent, 12.80 percent, 12.80 percent and 14.05 percent, respectively. The Company's and the Bank's regulatory capital ratios are all above the ratios to be considered well capitalized under regulatory guidance. As a result of the enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a "Community Bank Leverage Ratio" (the ratio of a bank's tangible equity capital to average total consolidated assets) for financial institutions with assets of less than$10 billion . A "qualifying community bank" that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered "well capitalized" under Prompt Corrective Action statutes. The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9 percent, effectiveJanuary 1, 2020 . Under the CARES Act, theCommunity Bank Leverage Ratio was temporarily lowered to 8 percent. The Bank did not opt into the CBLR and will continue to comply with the requirements under Basel III. The Bank's leverage ratio was 9.99 percent atDecember 31, 2021 . 49 --------------------------------------------------------------------------------
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 regulatory 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, 2021 :
Total capital
(to risk-weighted assets) $ 672,614 14.05 % $ 478,628 10.00 % $ 382,902 8.00 % $ 502,559 10.50 %
Tier I capital (to risk-weighted assets) 612,762 12.80 382,902 8.00 287,177 6.00
406,834 8.50
Common equity tier I
(to risk-weighted assets) 612,738 12.80 311,108 6.50 215,382 4.50 335,039 7.00
Tier I capital
(to average assets) 612,762 9.99 306,538 5.00 245,231 4.00 245,231 4.00
As of December 31, 2020 :
Total capital
(to risk-weighted assets) $ 600,478 14.81 % $ 405,587 10.00 % $ 324,469 8.00 % $ 425,866 10.50 %
Tier I capital (to risk-weighted assets) 549,575 13.55 324,469 8.00 243,352 6.00
344,749 8.50
Common equity tier I
(to risk-weighted assets) 549,540 13.55 263,631 6.50 182,514 4.50 283,911 7.00
Tier I capital
(to average assets) 549,575 9.71 283,083 5.00 226,466 4.00 226,466 4.00
50
--------------------------------------------------------------------------------
The Company's regulatory 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, 2021 :
Total capital
(to risk-weighted assets) $ 700,790 14.64 % N/A N/A $ 382,944 8.00 % $ 502,614 10.50 %
Tier I capital
(to risk-weighted assets) 508,231 10.62 N/A N/A 287,208 6.00 406,878 8.50
Common equity tier I
(to risk-weighted assets) 508,207 10.62 N/A N/A 215,406 4.50 335,076 7.00
Tier I capital
(to average assets) 508,231 8.29 N/A N/A 245,242 4.00 245,242 4.00
As of December 31, 2020 :
Total capital
(to risk-weighted assets) $ 716,210 17.67 % N/A N/A $ 324,322 8.00 % $ 425,673 10.50 %
Tier I capital
(to risk-weighted assets) 483,535 11.93 N/A N/A 243,242 6.00 344,592 8.50
Common equity tier I
(to risk-weighted assets) 483,500 11.93 N/A N/A 182,431 4.50 283,782 7.00
Tier I capital
(to average assets) 483,535 8.53 N/A N/A 226,624 4.00 226,624 4.00
(A) The Basel Rules require the Company and the Bank to maintain a 2.5 percent
"capital conservation buffer" on top of the minimum risk-weighted asset
ratios. The capital conservation buffer is designed to absorb losses during
periods of economic stress. Banking institutions with a ratio of (i) CET1
to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or(iii) total capital to risk-weighted assets above the respective minimum
but below the capital conservation buffer face constraints on dividends,
equity repurchases and discretionary bonus payments to executive officers
based on the amount of the shortfall.
The Dividend Reinvestment Plan ofPeapack-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$200,000 per quarter to purchase additional shares of common stock, which up toJanuary 30, 2019 were purchased at a three percent discount to market. OnJanuary 30, 2019 , the Company eliminated the three percent discount feature. Voluntary share purchases in the "Reinvestment Plan" can be filled from the Company's authorized but unissued shares and/or in the open market, at the discretion of the Company. All shares purchased through the Plan in both 2021 and 2020 were purchased in the open market. 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 for the immediate future. The Company continually assesses other potential sources of capital to support future growth. LIQUIDITY: Liquidity refers to an institution's ability to meet short-term requirements including funding of loans, deposit withdrawals and maturing obligations, as well as long-term obligations, including potential capital expenditures. The Company's liquidity risk management is intended to ensure the Company has adequate funding and liquidity to support its assets across a range of market environments and conditions, including stressed conditions. Principal sources of liquidity include cash, temporary investments, securities available for sale, customer deposit inflows, loan repayments and secured borrowings. Other liquidity sources include loan sales and loan participations.
Management actively monitors and manages the Company's liquidity position and
believes it is sufficient to meet future needs. Cash and cash equivalents,
including federal funds sold and interest-earning deposits, totaled
51
--------------------------------------------------------------------------------
December 31, 2021 . In addition, the Company had $796.8 million in securities
designated as available for sale at December 31, 2021 . These securities can be
sold, or used as collateral for borrowings, in response to liquidity concerns.
Available for sale and held to maturity securities with a carrying value of
$764.4 million and $108.7 million , as of December 31, 2021 , respectively, were
pledged to secure public funds and for other purposes required or permitted by
law. However, only $33.0 million of that total is actually encumbered. In
addition, the Company generates significant liquidity from scheduled and
unscheduled principal repayments of loans and mortgage-backed securities.
As of
Brokered interest-bearing demand ("overnight") deposits decreased $25.0 million
to $85.0 million at December 31, 2021 . The interest rate paid on these deposits
allows the Bank to fund operations at attractive rates and engage in interest
rate swaps to hedge its asset-liability interest rate risk. The Company ensures
ample available collateralized liquidity as a backup to these short-term
brokered deposits. As of December 31, 2021 , the Company has transacted pay
fixed, receive floating interest rate swaps totaling $230.0 million in notional
amount.
The Company has a Board-approved Contingency Funding Plan. 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. The Company believes it
has sufficient liquidity given the current environment created by the COVID-19
pandemic.
Peapack-Gladstone Financial Corporation is a separate legal entity from the Bank
and must provide for its own liquidity to pay dividends to its shareholders, to
repurchase shares of its common stock, and for other corporate purposes.
Peapack-Gladstone Financial Corporation's primary source of income is dividends
received from the Bank. The Bank's ability to pay dividends is governed by
applicable law. In December 2020 , the Company issued the 2020 Notes to certain
institutional investors and retained $98.2 million of proceeds. At December 31,
2021 , Peapack-Gladstone Financial Corporation (unconsolidated basis) had liquid
assets of $28.1 million .
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.
52
--------------------------------------------------------------------------------
PEAPACK PRIVATE: This division includes: investment management services provided
for individuals and institutions; personal trust services, including services as
executor, trustee, administrator, custodian and guardian, and other financial
planning, tax preparation and advisory services. Officers from Peapack Private
are available to provide wealth management, trust and investment services at the
Bank's headquarters in Bedminster , at private banking locations in Morristown ,
New Providence , Princeton , Red Bank , Summit and Teaneck, New Jersey and at the
Bank's subsidiaries, PGB Trust & Investments of Delaware in Greenville, Delaware
and Murphy Capital , in Bedminster, New Jersey .
The following table presents certain key aspects of the Peapack Private's
performance for the years ended
Years Ended December 31, Change
(In thousands) 2021 2020 2019 2021 vs 2020 2020 vs 2019
Total fee income $ 52,987 $ 40,861 $ 38,363 $ 12,126 $ 2,498
Compensation and benefits (included in
Operating Expenses section above) 24,894 23,472 21,204 1,422 2,268
Other operating expense (included in
Operating Expenses section above) 13,020 11,718 10,977 1,302 741
Assets under management and/or
administration (AUM) (market value) 11.1 billion 8.8 billion 7.5 billion
2021 compared to 2020
The market value of assets under management and/or administration ("AUM") at
December 31, 2021 and 2020 was $11.1 billion and $8.8 billion , respectively, an
increase of 26 percent. This includes assets held at the Bank at December 31,
2021 and 2020 of $275.6 million and $329.9 million , respectively. Effective
December 18, 2020 , the Bank completed the hires of the teams from Lucas, based
in Red Bank, New Jersey , and from Noyes , based in New Vernon, New Jersey , which
combined contributed approximately $400 million of AUM/AUA at the time of
acquisition. Effective July 1, 2021 , the Bank closed on the acquisition of
Princeton Portfolio Strategies Group ("PPSG"), a registered investment advisor
headquartered in Princeton, New Jersey , which contributed approximately $520
million of AUM/AUA at the time of acquisition.
Peapack Private management fees increased $12.1 million , or 30 percent, to $53.0
million for the year ended December 31, 2021 from $40.9 million in 2020. The
growth in fee income was due to several factors, including the acquisitions
noted above, new business, and positive market performance, partially offset by
normal levels of disbursements and outflows.
Peapack Private expenses increased to $37.9 million for the year ended December
31, 2021 from $35.2 million for 2020, an increase of $2.7 million , or 8 percent.
Other operating expenses increased $1.3 million , or 11 percent to $13.0 million
for the year ended 2021 when compared to 2020. Compensation and benefits expense
totaled $24.9 million and $23.5 million for the years ended December 31, 2021
and 2020, respectively, increasing $1.4 million or 6 percent. Operating expenses
relative to Peapack Private reflected increases due to overall growth in the
business, new hires and acquisitions. Remaining expenses are in line with the
Company's Strategic Plan, particularly the hiring of key management and
revenue-producing personnel.
Peapack Private currently generates adequate revenue to support the salaries,
benefits and other expenses of the wealth division and Management believes it
will continue to do so as the Company grows organically and/or by acquisition.
Management believes that the Bank generates adequate liquidity to support the
expenses of Peapack Private should it be necessary.
53--------------------------------------------------------------------------------
© Edgar Online, source
