PEAPACK GLADSTONE FINANCIAL CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-16197

PEAPACK-GLADSTONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


New Jersey	22-3537895
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

500 Hills Drive, Suite 300

Bedminster, New Jersey 07921-0700

(Address of principal executive offices, including zip code)

(908) 234-0700

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

PGC

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of Common Stock outstanding as of November 1, 2019: 19,045,098

PEAPACK-GLADSTONE FINANCIAL CORPORATION

PART 1 FINANCIAL INFORMATION

Item 1	Financial Statements	3
	Consolidated Statements of Condition at September 30, 2019 and December 31, 2018	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018	5
	Consolidated Statement of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	8
	Notes to Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3	Quantitative and Qualitative Disclosures about Market Risk	61
Item 4	Controls and Procedures	63

PART 2 OTHER INFORMATION

Item 1	Legal Proceedings	64
Item 1A	Risk Factors	64
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3	Defaults Upon Senior Securities	64
Item 4	Mine Safety Disclosures	64
Item 5	Other Information	64
Item 6	Exhibits	65

Item 1. Financial Statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

(Dollars in thousands, except share and per share data)

	(unaudited)			(audited)
	September 30,			December 31,
	2019			2018
ASSETS
Cash and due from banks	$	5,770		$	5,914
Federal funds sold		101			101
Interest-earning deposits		221,242			154,758
Total cash and cash equivalents		227,113			160,773
Securities available for sale		349,989			377,936
Equity security, at fair value		7,881			4,719
FHLB and FRB stock, at cost		21,403			18,533
Loans held for sale, at fair value		1,756			1,576
Loans held for sale, at lower of cost or fair value		5,937			3,542
Loans		4,159,912			3,927,931
Less: Allowance for loan and lease losses		41,580			38,504
Net loans		4,118,332			3,889,427
Premises and equipment		20,898			27,408
Other real estate owned		336			—
Accrued interest receivable		11,759			10,814
Bank owned life insurance		45,940			45,353
Goodwill		33,817			24,417
Other intangible assets		7,294			7,982
Finance lease right-of-use assets		5,265			—
Operating lease right-of-use assets		10,328			—
Other assets		57,361			45,378
TOTAL ASSETS	$	4,925,409		$	4,617,858
LIABILITIES
Deposits:
Noninterest-bearing demand deposits	$	544,464		$	463,926
Interest-bearing deposits:
Checking		1,352,471			1,247,305
Savings		115,448			114,674
Money market accounts		1,196,188			1,243,369
Certificates of deposit - retail		583,425			510,724
Certificates of deposit - listing service		55,664			79,195
Subtotal deposits		3,847,660			3,659,193
Interest-bearing demand - brokered		180,000			180,000
Certificates of deposit - brokered		33,696			56,147
Total deposits		4,061,356			3,895,340
Short-term borrowings		67,000			—
Federal Home Loan Bank advances		105,000			108,000
Finance lease liabilities		7,793			8,362
Operating lease liabilities		10,619			—
Subordinated debt, net		83,361			83,193
Deferred tax liabilities, net		19,498			16,029
Accrued expenses and other liabilities		75,432			37,921
TOTAL LIABILITIES		4,430,059			4,148,845
SHAREHOLDERS’ EQUITY
Preferred stock (no par value; authorized 500,000 shares; liquidation preference of $1,000 per share)		—			—
Common stock (no par value; stated value $0.83 per share; authorized 42,000,000 shares; issued shares, 20,003,272 at September 30, 2019 and 19,745,840 at December 31, 2018; outstanding shares, 18,999,241 at September 30, 2019 and 19,337,662 at December 31, 2018		16,673			16,459
Surplus		318,463			309,088
Treasury stock at cost, 1,004,031 shares at September 30, 2019 and 408,178 at December 31, 2018		(25,705	)		(8,988	)
Retained earnings		187,748			154,799
Accumulated other comprehensive loss, net of income tax		(1,829	)		(2,345	)
TOTAL SHAREHOLDERS’ EQUITY		495,350			469,013
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	4,925,409		$	4,617,858

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

See accompanying notes to consolidated financial statements

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
INTEREST INCOME
Interest and fees on loans	$	42,006		$	37,250		$	123,113		$	109,019
Interest on investments:
Taxable		2,477			2,385			7,800			6,382
Tax-exempt		73			98			257			306
Interest on loans held for sale		30			12			47			28
Interest on interest-earning deposits		1,362			418			3,897			1,170
Total interest income		45,948			40,163			135,114			116,905
INTEREST EXPENSE
Interest on savings and interest-bearing deposit accounts		8,710			5,922			25,325			14,057
Interest on certificates of deposit		3,781			2,545			10,476			7,024
Interest on borrowed funds		886			1,038			2,558			2,563
Interest on finance lease liability		94			103			290			316
Interest on subordinated debt		1,224			1,223			3,671			3,665
Subtotal - interest expense		14,695			10,831			42,320			27,625
Interest on interest-bearing demand - brokered		901			796			2,476			2,280
Interest on certificates of deposits - brokered		267			394			958			1,222
Total interest expense		15,863			12,021			45,754			31,127
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES		30,085			28,142			89,360			85,778
Provision for loan and lease losses		800			500			2,050			2,050
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		29,285			27,642			87,310			83,728
OTHER INCOME
Wealth management fee income		9,501			8,200			28,243			24,693
Service charges and fees		882			860			2,595			2,564
Bank owned life insurance		332			349			996			1,030
Gains on loans held for sale at fair value (mortgage banking)		198			87			377			260
Loss on loans held for sale at lower of cost or fair value		(6	)		—			(6	)		—
Fee income related to loan level, back-to-back swaps		2,349			854			3,340			2,006
Gain on sale of SBA loans		224			514			1,216			1,359
Other income		902			444			2,248			1,465
Securities gains/(losses), net		34			(325	)		162			(439	)
Total other income		14,416			10,983			39,171			32,938
OPERATING EXPENSES
Compensation and employee benefits		17,476			16,025			52,175			46,430
Premises and equipment		3,849			3,399			10,837			10,075
FDIC insurance (credit)/expense		(277	)		593			277			1,798
Other operating expense		5,211			4,267			14,858			14,259
Total operating expenses		26,259			24,284			78,147			72,562
INCOME BEFORE INCOME TAX EXPENSE		17,442			14,341			48,334			44,104
Income tax expense		5,216			3,617			13,133			10,663
NET INCOME	$	12,226		$	10,724		$	35,201		$	33,441

EARNINGS PER SHARE
Basic	$	0.63		$	0.56		$	1.82		$	1.77
Diluted	$	0.63		$	0.56		$	1.81		$	1.75
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic		19,314,666			19,053,849			19,370,627			18,865,982
Diluted		19,484,905			19,240,098			19,496,721			19,066,986

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net income	$	12,226		$	10,724		$	35,201		$	33,441
Comprehensive income:
Unrealized gains/(losses) on available for sale securities:
Unrealized holding gains/(losses) arising during the period		769			(1,576	)		5,928			(5,163	)
Reclassification adjustment for amounts included in net income		—			288			—			288
		769			(1,288	)		5,928			(4,875	)

Tax effect		(186	)		315			(1,441	)		1,150
Net of tax		583			(973	)		4,487			(3,725	)

Unrealized gains on cash flow hedges:
Unrealized holding gains/(losses) arising during the period		(1,084	)		843			(5,540	)		2,412
Reclassification adjustment for amounts included in net income		(80	)		(31	)		(142	)		(93	)
		(1,164	)		812			(5,682	)		2,319

Tax effect		356			(298	)		1,711			(722	)
Net of tax		(808	)		514			(3,971	)		1,597


Total other comprehensive income/(loss)		(225	)		(459	)		516			(2,128	)

Total comprehensive income	$	12,001		$	10,265		$	35,717		$	31,313

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Three Months Ended September 30, 2019 and September 30, 2018

															Accumulated
															Other
(In thousands, except	Preferred		Common						Treasury			Retained			Comprehensive
per share data)	Stock		Stock			Surplus			Stock			Earnings			Loss			Total
Balance at July 1, 2019 19,456,312 common shares outstanding	$	—	$	16,557		$	311,428		$	(8,988	)	$	176,495		$	(1,604	)	$	493,888
Net income		—		—			—			—			12,226			—			12,226
Comprehensive loss		—		—			—			—			—			(225	)		(225	)
Amortization of restricted stock awards/units		—		—			1,509			—			—			—			1,509
Cash dividends declared on common stock ($0.05 per share)		—		—			—			—			(973	)		—			(973	)
Share repurchase, (595,853) shares		—		—			—			(16,717	)		—			—			(16,717	)
Common stock options exercised, 140 shares		—		—			1			—			—			—			1
Issuance of common stock for acquisition 138,642 shares		—		116			5,525			—			—			—			5,641
Balance at September 30, 2019 18,999,241 common shares outstanding	$	—	$	16,673		$	318,463		$	(25,705	)	$	187,748		$	(1,829	)	$	495,350

															Accumulated
															Other
(In thousands, except	Preferred		Common						Treasury			Retained			Comprehensive
per share data)	Stock		Stock			Surplus			Stock			Earnings			Loss			Total
Balance at July 1, 2018 19,007,312 common shares outstanding	$	—	$	16,183		$	297,318		$	(8,988	)	$	135,260		$	(2,754	)	$	437,019
Net income		—		—			—			—			10,724			—			10,724
Comprehensive loss		—		—			—			—			—			(459	)		(459	)
Restricted stock units issued 5,292 shares		—		4			(4	)		—			—			—			—
Restricted stock units/awards repurchased on vesting to pay taxes, (668) shares		—		(1	)		(22	)		—			—			—			(23	)
Amortization of restricted stock awards/units		—		—			1,172			—			—			—			1,172
Cash dividends declared on common stock ($0.05 per share)		—		—			—			—			(950	)		—			(950	)
Common stock options exercised, 6,600 shares		—		5			90			—			—			—			95
Sales of shares (Dividend Reinvestment Program), 75,000 shares		—		63			2,079			—			—			—			2,142
Issuance of shares for Employee Stock Purchase Plan, 6,704 shares		—		6			216			—			—			—			222
Issuance of common stock for acquisition 103,487 shares		—		87			4,404			—			—			—			4,491
Balance at September 30, 2018 19,203,727 common shares outstanding	$	—	$	16,347		$	305,253		$	(8,988	)	$	145,034		$	(3,213	)	$	454,433

Nine Months Ended September 30, 2019 and September 30, 2018

															Accumulated
															Other
(In thousands, except	Preferred		Common						Treasury			Retained			Comprehensive
per share data)	Stock		Stock			Surplus			Stock			Earnings			Loss			Total
Balance at January 1, 2019 19,337,662 common shares outstanding	$	—	$	16,459		$	309,088		$	(8,988	)	$	154,799		$	(2,345	)	$	469,013
Net income		—		—			—			—			35,201			—			35,201
Comprehensive income		—		—			—			—			—			516			516
Cumulative adjustment for leases (ASC 842)		—		—			—			—			661			—			661
Restricted stock units issued 131,141 shares		—		109			(109	)		—			—			—			—
Restricted stock units/awards repurchased on vesting to pay taxes, (35,949) shares		—		(30	)		(951	)		—			—			—			(981	)
Amortization of restricted stock awards/units		—		—			4,374			—			—			—			4,374
Cash dividends declared on common stock ($0.15 per share)		—		—			—			—			(2,913	)		—			(2,913	)
Share repurchase, (595,853) shares		—		—			—			(16,717	)		—			—			(16,717	)
Common stock options exercised, 1,660 shares		—		1			22			—			—			—			23
Exercise of warrants, 7,109 net of 4,218 shares used to exercise, 2,891 shares		—		2			(2	)		—			—			—			—
Issuance of shares for Employee Stock Purchase Plan, 18,740 shares		—		15			517			—			—			—			532
Issuance of common stock for acquisition 138,949 shares		—		117			5,524			—			—			—			5,641
Balance at September 30, 2019 18,999,241 common shares outstanding	$	—	$	16,673		$	318,463		$	(25,705	)	$	187,748		$	(1,829	)	$	495,350

															Accumulated
															Other
(In thousands, except	Preferred		Common						Treasury			Retained			Comprehensive
per share data)	Stock		Stock			Surplus			Stock			Earnings			Loss			Total
Balance at January 1, 2018 18,619,634 common shares outstanding	$	—	$	15,858		$	283,552		$	(8,988	)	$	114,468		$	(1,212	)	$	403,678
Net income		—		—			—			—			33,441			—			33,441
Comprehensive loss		—		—			—			—			—			(2,128	)		(2,128	)
Cumulative adjustment for equity security (ASU 2016-01)		—		—			—			—			(127	)		127			—
Restricted stock units issued 90,534 shares		—		75			(75	)		—			—			—			—
Restricted stock awards forfeitures (94,034) shares		—		(78	)		78			—			—			—			—
Restricted stock units/awards repurchased on vesting to pay taxes, (41,125) shares		—		(34	)		(1,392	)		—			—			—			(1,426	)
Amortization of restricted stock awards/units		—		—			3,302			—			—			—			3,302
Cash dividends declared on common stock ($0.15 per share)		—		—			—			—			(2,748	)		—			(2,748	)
Common stock options exercised, 17,283, net of 2,374 used to exercise, 14,909 shares		—		14			183			—			—			—			197
Sales of shares (Dividend Reinvestment Program), 467,302 shares		—		389			14,486			—			—			—			14,875
Issuance of shares for Employee Stock Purchase Plan, 22,194 shares		—		19			732			—			—			—			751
Issuance of common stock for acquisition 124,313 shares		—		104			4,387			—			—			—			4,491
Balance at September 30, 2018 19,203,727 common shares outstanding	$	—	$	16,347		$	305,253		$	(8,988	)	$	145,034		$	(3,213	)	$	454,433

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES:
Net income	$	35,201		$	33,441
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,342			2,349
Amortization of premium and accretion of discount on securities, net		1,165			1,093
Amortization of restricted stock		4,374			3,302
Amortization of intangible assets		688			540
Amortization of subordinated debt costs		168			114
Provision for loan and lease losses		2,050			2,050
Provision for OREO losses		—			232
Deferred tax expense		3,719			3,626
Stock-based compensation and employee stock purchase plan expense		117			143
Fair value adjustment for equity security		(162	)		151
Loss on sale of securities, available for sale, net		—			288
Loans originated for sale (1)		(40,561	)		(35,442	)
Proceeds from sales of loans held for sale (1)		42,188			37,562
Gain on loans held for sale (1)		(1,593	)		(1,619	)
Loss on loans held for sale at lower of cost or fair value		6			—
Loss on OREO sold		—			32
Cash surrender value of life insurance, net		(587	)		(595	)
Increase in accrued interest receivable		(945	)		(1,397	)
Decrease in other assets		9,681			4,141
Increase in accrued expenses and other liabilities		9,292			7,405
NET CASH PROVIDED BY OPERATING ACTIVITIES		67,143			57,416
INVESTING ACTIVITIES:
Principal repayments, maturities and calls of securities available for sale		170,247			56,242
Redemptions of FHLB and FRB stock		361			71,309
Proceeds from sales of securities available for sale		—			19,542
Purchase of securities available for sale		(140,537	)		(127,835	)
Purchase of FHLB and FRB stock		(3,231	)		(79,492	)
Proceeds from sales of loans held for sale at lower of cost or fair value		(6	)		—
Net increase in loans, net of participations sold		(233,900	)		(98,989	)
Sale of other real estate owned		—			1,730
Purchase of premises and equipment		(1,097	)		(747	)
Purchase of wealth management company		(2,600	)		(3,500	)
NET CASH USED IN INVESTING ACTIVITIES		(210,763	)		(161,740	)
FINANCING ACTIVITIES:
Net increase/(decrease) in deposits		166,016			(39,060	)
Net increase in overnight borrowings		52,000			95,190
Proceeds from Federal Home Loan Bank long term advances		—			70,000
Proceeds from Federal Home Loan Bank short term advances		15,000			—
Repayments of Federal Home Loan Bank advances		(3,000	)		(23,898	)
Dividends paid on common stock		(2,913	)		(2,748	)
Exercise of Stock Options, net of stock swaps		23			197
Restricted stock repurchased on vesting to pay taxes		(981	)		(1,426	)
Sales of common shares (Dividend Reinvestment Program)		—			14,875
Issuance of shares for employee stock purchase plan		532			751
Purchase of treasury shares		(16,717	)		—
NET CASH PROVIDED BY FINANCING ACTIVITIES		209,960			113,881
Net increase in cash and cash equivalents		66,340			9,557
Cash and cash equivalents at beginning of period		160,773			113,447
Cash and cash equivalents at end of period	$	227,113		$	123,004
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	44,497		$	28,614
Income tax, net		1,047			2,569
Transfer of loans to other real estate owned		336			—
Acquisition goodwill		9,400			11,000

(1)	Includes mortgage loans originated with the intent to sell which are carried at fair value. In addition, this includes the guaranteed portion of SBA loans which are carried at the lower of cost or fair value.

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Certain information and footnote disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018 for Peapack-Gladstone Financial Corporation (the “Corporation” or the “Company”). In the opinion of the management of the Corporation, the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2019, the results of operations, comprehensive income and shareholders’ equity for the three and nine months ended September 30, 2019 and 2018, and cash flow statements for the nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any future period.

Principles of Consolidation and Organization: The consolidated financial statements of the Company are prepared on the accrual basis and include the accounts of the Company and its wholly-owned subsidiary, Peapack-Gladstone Bank (the “Bank”). The consolidated financial statements also include the Bank’s wholly-owned subsidiaries, PGB Trust & Investments of Delaware, Peapack Capital Corporation (“PCC”), Murphy Capital Management (“MCM”), Quadrant Capital Management (“Quadrant”), Lassus Wherley & Associates (“Lassus Wherley”) (acquired in the third quarter of 2018), Point View Wealth Management (“Point View”) (acquired in the third quarter of 2019), Peapack-Gladstone Mortgage Group, Inc. and Peapack-Gladstone Mortgage Group’s wholly-owned subsidiary, PG Investment Company of Delaware, Inc. and its wholly-owned subsidiary, Peapack-Gladstone Realty, Inc., a New Jersey real estate investment company. While the following footnotes include the collective results of the Company and the Bank and their subsidiaries, these footnotes primarily reflect the Bank’s and its subsidiaries’ activities. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements.

Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing the financial statements, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statement of condition and revenues and expenses for that period. Actual results could differ from those estimates.

Segment Information: The Company’s business is conducted through two business segments: its banking subsidiary, which involves the delivery of loan and deposit products to customers, and the Peapack Private Wealth Management Division, which includes asset management services provided for individuals and institutions. Management uses certain methodologies to allocate income and expense to the business segments.

The Banking segment includes commercial (includes C&I and equipment financing), commercial real estate, multifamily, residential and consumer lending activities; treasury management services; C&I advisory services; escrow management; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support services.

Peapack-Gladstone Bank’s Private Wealth Management Division includes: investment management services 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. This segment also includes the activity from the Delaware subsidiary, PGB Trust and Investments of Delaware, MCM, Quadrant, Lassus Wherley, and Point View. Wealth management fees are primarily earned based upon assets under management and/or administration (“AUM”) and are generally assessed on a monthly or quarterly basis on a tiered fee schedule based on the market value of AUM at the end of the period.

Cash and Cash Equivalents: For purposes of the statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits and federal funds sold. Generally, federal funds are sold for one-day periods. Cash equivalents are of original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with original maturities of 90 days or less.

Interest-Earning Deposits in Other Financial Institutions: Interest-earning deposits in other financial institutions mature within one year and are carried at cost.

Securities: All debt securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income/(loss), net of tax, with the exception of the Company’s investment in a CRA investment fund, which is classified as an equity security. In accordance with ASU 2016-01, “Financial Instruments” (adopted January 1, 2018), unrealized holding gains and losses on equity securities are marked to market through the income statement.

Interest income includes amortization of purchase premiums and discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated, and premiums on callable debt securities, which are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which is recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock, based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

The Bank is also a member of the Federal Reserve Bank System and required to own a certain amount of FRB stock. FRB stock is carried at cost and classified as a restricted security. Both cash and stock dividends are reported as income.

Loans Held for Sale: Mortgage loans originated with the intent to sell in the secondary market are carried at fair value, as determined by outstanding commitments from investors.

Mortgage loans held for sale are generally sold with servicing rights released; therefore, no servicing rights are recorded. Gains and losses on sales of mortgage loans, shown as gain on sale of loans on the income statement, are based on the difference between the selling price and the carrying value of the related loan sold.

U.S. Small Business Administration (SBA) loans originated with the intent to sell the guaranteed portion in the secondary market are carried at the lower of cost or fair value. SBA loans are generally sold with the servicing rights retained. Total SBA loans serviced totaled $45.6 million and $35.1 million as of September 30, 2019 and December 31, 2018, respectively. SBA loans held for sale totaled $943 thousand and $1.2 million at September 30, 2019 and December 31, 2018, respectively.

Loans originated with the intent to hold and subsequently transferred to loans held for sale are carried at the lower of cost or fair value. These are loans that the Company no longer has the intent to hold for the foreseeable future.

Loans: Loans that Management has the intent and ability to hold for the foreseeable future or until maturity are stated at the principal amount outstanding. Interest on loans is recognized based upon the principal amount outstanding. Loans are stated at face value, less purchased premium and discounts and net deferred fees. Loan origination fees and certain direct loan origination costs are deferred and recognized on a level-yield method, over the life of the loan as an adjustment to the loan’s yield. The definition of recorded investment in loans includes accrued interest receivable and deferred fees/cost, however, for the Company’s loan disclosures, accrued interest and deferred fees/cost were excluded as the impact was not material.

Loans are considered past due when they are not paid within 30 days in accordance with contractual terms. The accrual of income on loans, including impaired loans, is discontinued if, in the opinion of Management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days unless the asset is both well secured and in the process of collection. All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Payments received on nonaccrual loans are recorded as principal payments. A nonaccrual loan is returned to accrual status only when interest and principal payments are brought current and future payments are reasonably assured, generally when the Bank receives contractual payments for a minimum of six consecutive months. Commercial loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Consumer loans are generally charged off after they become 120 days past due. Subsequent payments are credited to income only if collection of principal is not in doubt. If principal and interest payments are brought contractually current and future

collectability is reasonably assured, loans may be returned to accrual status. Nonaccrual mortgage loans are generally charged off to the extent that the value of the underlying collateral does not cover the outstanding principal balance. The majority of the Company’s loans are secured by real estate in New Jersey and New York.

Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a valuation allowance for credit losses that is Management’s estimate of probable losses in the loan portfolio. The process to determine reserves utilizes analytic tools and Management judgment and is reviewed on a quarterly basis. When Management is reasonably certain that a loan balance is not fully collectable, an impairment analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the size and composition of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans via a specific reserve, but the entire allowance is available for any loan that, in Management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component of the allowance relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Loans are individually evaluated for impairment when they are classified as substandard by Management. If a loan is considered impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or if repayment is expected solely from the underlying collateral, the loan principal balance is compared to the fair value of collateral less estimated disposition costs to determine the need, if any, for a charge off.

A troubled debt restructuring (“TDR”) is a modified loan with concessions made by the lender to a borrower who is experiencing financial difficulty. TDRs are impaired and are generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral, less estimated disposition costs. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.

The general component of the allowance covers non-impaired loans and is based primarily on the Company’s historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experience by the Company on a weighted average basis over the previous three years. This actual loss experience is adjusted by other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staffing and experience; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. For loans that are graded as non-impaired, the Company allocates a higher general reserve percentage than pass-rated loans using a multiple that is calculated annually through a migration analysis. At both September 30, 2019 and December 31, 2018, the multiple was 2.25 times for non-impaired special mention loans and 3.5 times for non-impaired substandard loans.

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on Federal call report codes, which are based on collateral or purpose. The following portfolio classes have been identified:

Primary Residential Mortgages. The Bank originates one to four family residential mortgage loans in the Tri-State area (New York, New Jersey and Connecticut), Pennsylvania and Florida. Loans are secured by first liens on the primary residence or investment property. Primary risk characteristics associated with residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.

Home Equity Lines of Credit. The Bank provides revolving lines of credit against one to four family residences in the Tri-State area. Primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, 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 loss exposure for the Bank.

Junior Lien Loan on Residence. The Bank provides junior lien loans (“JLL”) against one to four family properties in the Tri-State area. JLLs can be either in the form of an amortizing home equity loan or a revolving home equity line of credit. These loans are subordinate to a first mortgage which may be from another lending institution. Primary risk characteristics associated with JLLs typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.

Multifamily and Commercial Real Estate Loans. The Bank provides mortgage loans for multifamily properties (i.e. buildings which have five or more residential units) and other commercial real estate that is either owner occupied or managed as an investment property (non-owner occupied) in the Tri-State area and Pennsylvania. Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Some properties are considered “mixed use” as they are a combination of building types, such as a building with retail space on the ground floor and either residential apartments or office suites on the upper floors. Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and its ability to repay the loan. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.

Commercial and Industrial Loans. The Bank provides lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment as well as the stock of a company, if privately held. Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. 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, these loans often include commercial real estate as collateral to strengthen the Bank’s position and the Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance.

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

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

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

Consumer and Other. These are loans to individuals for household, family and other personal expenditures as well as obligations of states and political subdivisions in the U.S. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments. 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.

Leases: At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding right-of-use (“ROU”) asset and operating lease liability are recorded in separate line items on the statement of condition. A ROU asset represents the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made.

If the rate implicit in the lease is not readily determinable, the incremental collateralized borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s statement of condition, but rather, lease expense is recognized over the lease term on a straight-line basis. The Company’s lease agreements may include options to extend or terminate the lease. The Company’s decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. The Company maintains certain property and equipment under direct financing and operating leases. Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space and are classified as operating leases. The Company has two existing finance leases (previously classified as a capital lease and included in premises and equipment on our statement of condition at December 31, 2018) for the Company’s administration building and one branch location. Topic 842 did not materially impact the accounting for these capital leases.

The ROU asset is measured at the amount of the lease liability adjusted for lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the ROU asset. Operating lease expense consists of: a single lease cost allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the right-of-use-asset.

There are no terms or conditions related to residual value guarantees and no restrictions or covenants that would impact the Company’s ability to pay dividends or to incur additional financial obligations.

Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For cash flow hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value in the statement of condition, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminated,

a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Stock-Based Compensation: The Company’s 2006 Long-Term Stock Incentive Plan and 2012 Long-Term Stock Incentive Plan allow the granting of shares of the Company’s common stock as incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors, officers and employees of the Company and its subsidiaries. The options granted under these plans are, in general, exercisable not earlier than one year after the date of grant, at a price equal to the fair value of common stock on the date of grant and expire not more than ten years after the date of grant. Stock options may vest during a period of up to five years after the date of grant. Some options granted to officers at or above the senior vice president level were immediately exercisable at the date of grant. The Company has a policy of using authorized but unissued shares to satisfy option exercises.

Upon adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures.

For the Company’s stock option plans, changes in options outstanding during the nine months ended September 30, 2019 were as follows:

						Weighted
				Weighted		Average	Aggregate
				Average		Remaining	Intrinsic
	Number of			Exercise		Contractual	Value
	Options			Price		Term	(In thousands)
Balance, January 1, 2019		91,310		$	13.63
Exercised during 2019		(1,660	)		14.26
Expired during 2019		(930	)		20.73
Forfeited during 2019		(20,000	)		13.07
Balance, September 30, 2019		68,720		$	13.68	2.08 years	$	986
Vested and expected to vest		68,720		$	13.68	2.08 years	$	986
Exercisable at September 30, 2019		68,720		$	13.68	2.08 years	$	986

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2019 and the exercise price, multiplied by the number of in-the-money options). The Company’s closing stock price on September 30, 2019 was $28.03.

There were no stock options granted during the three or nine months ended September 30, 2019.

The Company has previously granted performance-based and service-based restricted stock awards/units. Service-based awards/units vest ratably over a three or five-year period. There were no service-based restricted stock units granted during the third quarter of 2019.

The performance-based awards are dependent upon the Company meeting certain performance criteria and, to the extent the performance criteria are met, will cliff vest at the end of the performance period which is generally three years. There were no performance-based restricted stock units granted in the third quarter of 2019.

Changes in non-vested shares dependent on performance criteria for the nine months ended September 30, 2019 were as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance, January 1, 2019		42,998	$	35.33
Granted during 2019		47,770		26.34
Balance, September 30, 2019		90,768	$	30.60

Changes in service-based restricted stock awards/units for the nine months ended September 30, 2019 were as follows:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Balance, January 1, 2019		366,541		$	30.64
Granted during 2019		223,396			26.51
Vested during 2019		(140,178	)		27.44
Forfeited during 2019		(4,146	)		31.53
Balance, September 30, 2019		445,613		$	29.57

As of September 30, 2019, there was $29 thousand of total unrecognized compensation cost related to service-based awards. That cost is expected to be recognized over a weighted average period of 0.21 years. As of September 30, 2019, there was $11.2 million of total unrecognized compensation cost related to service-based and performance-based units. That cost is expected to be recognized over a weighted average period of 1.21 years. Stock compensation expense recorded for the third quarters of 2019 and 2018 totaled $1.5 million and $1.1 million, respectively. Stock compensation expense recorded for the nine months ended September 30, 2019 and 2018 totaled $4.4 million and $3.5 million, respectively.

Employee Stock Purchase Plan (“ESPP”): In 2014, the shareholders of the Company approved the ESPP. The ESPP provides for the granting of rights to purchase up to 150,000 shares of Corporation common stock. Subject to certain eligibility requirements and restrictions, the ESPP originally allowed employees to purchase shares during four three-month offering periods (“Offering Period”). An amendment to the ESPP plan has changed the Offering Period to one twelve-month period to commence in the third quarter of 2019 with the next purchase occurring in May 2020. Each participant in the Offering Period is granted an option to purchase a number of shares and may contribute between 1% and 15% of their compensation. At the end of the Offering Period on the purchase date, the number of shares to be purchased by the employee is determined by dividing the employee’s contributions accumulated during the Offering Period by the applicable purchase price. The purchase price is an amount equal to 85% of the closing market price of a share of Company common stock on the purchase date. Participation in the ESPP is entirely voluntary and employees can cancel their purchases at any time during the Offering Period without penalty. The fair value of each purchase right is determined using the Black-Scholes option pricing model.

The Company recorded $41 thousand and $31 thousand of expense in salaries and employee benefits expense for the three months ended September 30, 2019 and 2018, respectively, related to the ESPP. Total shares issued under the ESPP during the third quarter of 2018 was 6,704. No shares were issued under the ESPP during the third quarter of 2019.

The Company recorded $117 thousand and $143 thousand of expense in salaries and employee benefits expense for the nine months ended September 30, 2019 and 2018, respectively, related to the ESPP. Total shares issued under the ESPP for the nine months ended September 30, 2019 and 2018 were 18,740 and 22,194, respectively.

Earnings per share – Basic and Diluted: The following is a reconciliation of the calculation of basic and diluted earnings per share. Basic net income per share is calculated by dividing net income available to shareholders by the weighted average shares outstanding during the reporting period. Diluted net income per share is computed similarly to that of basic net income per share, except that the denominator is increased to include the number of additional shares that would have been outstanding utilizing the Treasury Stock Method if all shares underlying potentially dilutive stock options were issued and all restricted stock, stock warrants or restricted stock units were to vest during the reporting period.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2019		2018		2019		2018
Net income available to common shareholders	$	12,226	$	10,724	$	35,201	$	33,441

Basic weighted-average shares outstanding		19,314,666		19,053,849		19,370,627		18,865,982
Plus: common stock equivalents		170,239		186,249		126,094		201,004
Diluted weighted-average shares outstanding		19,484,905		19,240,098		19,496,721		19,066,986
Net income per share
Basic	$	0.63	$	0.56	$	1.82	$	1.77
Diluted		0.63		0.56		1.81		1.75

For the three and nine months ended September 30, 2019, stock options and restricted stock units totaling 27,497 and 277,677 were not included in the computation of diluted earnings per share because they were antidilutive. For the nine months ended September 30, 2018, stock options and restricted stock units totaling 219,733 were not included in the computation of diluted

earnings per share because they were antidilutive. There were no antidilutive options for the three months ended September 30, 2018.

Income Taxes: The Company files a consolidated Federal income tax return. Separate state income tax returns are filed for each subsidiary based on current laws and regulations.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on the enacted tax rates. Such tax assets and liabilities are adjusted for the effect of a change in tax rates in the period of enactment.

The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company is no longer subject to examination by the U.S. Federal tax authorities for years prior to 2015 or by New Jersey tax authorities for years prior to 2014.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements.

Restrictions on Cash: A large portion of cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Comprehensive Income: Comprehensive income consists of net income and the change during the period in the Company’s net unrealized gains or losses on securities available for sale and unrealized gains and losses on cash flow hedge, net of tax, less adjustments for realized gains and losses.

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

Goodwill and Other Intangible Assets: Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree (if any), over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected September 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill and assembled workforce are the intangible assets with an indefinite life on our balance sheet.

Other intangible assets, which primarily consist of customer relationship intangible assets arising from acquisition, are amortized on an accelerated basis over their estimated useful lives, which range from 5 to 15 years.

2. INVESTMENT SECURITIES AVAILABLE FOR SALE

A summary of amortized cost and approximate fair value of investment securities available for sale included in the consolidated statements of condition as of September 30, 2019 and December 31, 2018 follows:

	September 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. government-sponsored agencies	$	34,986	$	78	$	(17	)	$	35,047
Mortgage-backed securities –residential		294,800		2,599		(770	)		296,629
SBA pool securities		3,071		—		(14	)		3,057
State and political subdivisions		12,178		31		(13	)		12,196
Corporate bond		3,000		60		—			3,060
Total	$	348,035	$	2,768	$	(814	)	$	349,989

	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. government-sponsored agencies	$	102,915	$	82	$	(984	)	$	102,013
Mortgage-backed securities – residential		254,383		418		(3,439	)		251,362
SBA pool securities		3,883		—		(44	)		3,839
State and political subdivisions		17,729		27		(146	)		17,610
Corporate bond		3,000		112		—			3,112
Total	$	381,910	$	639	$	(4,613	)	$	377,936

The following tables present the Company’s available for sale securities in a continuous unrealized loss position and the approximate fair value of these investments as of September 30, 2019 and December 31, 2018.

	September 30, 2019
	Duration of Unrealized Loss
	Less Than 12 Months					12 Months or Longer					Total
	Approximate					Approximate					Approximate
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government-sponsored agencies	$	9,981	$	(17	)	$	—	$	—		$	9,981	$	(17	)
Mortgage-backed securities-residential		34,091		(79	)		76,218		(691	)		110,309		(770	)
SBA pool securities		—		—			3,057		(14	)		3,057		(14	)
State and political subdivisions		5,117		(13	)		—		—			5,117		(13	)
Total	$	49,189	$	(109	)	$	79,275	$	(705	)	$	128,464	$	(814	)

	December 31, 2018
	Duration of Unrealized Loss
	Less Than 12 Months					12 Months or Longer					Total
	Approximate					Approximate					Approximate
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government-sponsored agencies	$	18,840	$	(103	)	$	33,600	$	(881	)	$	52,440	$	(984	)
Mortgage-backed securities-residential		51,697		(303	)		136,130		(3,136	)		187,827		(3,439	)
SBA pool securities		—		—			3,839		(44	)		3,839		(44	)
State and political subdivisions		421		(1	)		7,274		(145	)		7,695		(146	)
Total	$	70,958	$	(407	)	$	180,843	$	(4,206	)	$	251,801	$	(4,613	)

Management believes that the unrealized losses on investment securities available for sale are temporary and are due to interest rate fluctuations and/or volatile market conditions rather than the credit worthiness of the issuers. As of September 30, 2019, the

Company does not intend to sell these securities nor is it likely that it will be required to sell the securities before their anticipated recovery; therefore, none of the securities in an unrealized loss position were determined to be other-than-temporarily impaired.

During the first quarter of 2018, the Company adopted ASU 2016-01 “Financial Instruments” which resulted in the reclassification of the Company’s investment in the CRA investment fund from available for sale to an equity security. This security had a gain of $34 thousand and $162 thousand for the three and nine months ended September 30, 2019, respectively. This amount is included in securities gains/(losses) on the Consolidated Statements of Income.

3. LOANS AND LEASES

Loans outstanding, excluding those held for sale, by general ledger classification, as of September 30, 2019 and December 31, 2018, consisted of the following:

			% of					% of
	September 30,		Totals			December 31,		Total
(Dollars in thousands)	2019		Loans			2018		Loans
Residential mortgage	$	559,787		13.46	%	$	571,570		14.55	%
Multifamily mortgage		1,197,093		28.78			1,135,805		28.92
Commercial mortgage		721,261		17.34			702,165		17.88
Commercial loans (including equipment financing)		1,564,784		37.62			1,397,057		35.57
Commercial construction		4,355		0.10			—		—
Home equity lines of credit		58,423		1.40			62,191		1.58
Consumer loans, including fixed rate home equity loans		53,829		1.29			58,678		1.49
Other loans		380		0.01			465		0.01
Total loans	$	4,159,912		100.00	%	$	3,927,931		100.00	%

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal Call Report codes. The following portfolio classes have been identified as of September 30, 2019 and December 31, 2018:

			% of					% of
	September 30,		Totals			December 31,		Total
(Dollars in thousands)	2019		Loans			2018		Loans
Primary residential mortgage	$	586,404		14.11	%	$	600,891		15.31	%
Home equity lines of credit		58,425		1.41			62,191		1.58
Junior lien loan on residence		7,063		0.17			7,418		0.19
Multifamily property		1,197,093		28.80			1,135,805		28.94
Owner-occupied commercial real estate		258,563		6.22			261,193		6.65
Investment commercial real estate		1,044,730		25.14			1,001,918		25.53
Commercial and industrial		704,726		16.96			616,838		15.72
Lease financing		233,918		5.63			172,643		4.40
Farmland/agricultural production		3,059		0.07			149		0.01
Commercial construction loans		4,579		0.11			86		0.01
Consumer and other loans		57,271		1.38			65,180		1.66
Total loans	$	4,155,831		100.00	%	$	3,924,312		100.00	%
Net deferred costs		4,081					3,619
Total loans including net deferred costs	$	4,159,912				$	3,927,931

The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan and lease losses (ALLL) as of September 30, 2019 and December 31, 2018:

	September 30, 2019
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	7,238	$	237	$	579,166	$	2,252	$	586,404	$	2,489
Home equity lines of credit		3		—		58,422		145		58,425		145
Junior lien loan on residence		24		—		7,039		15		7,063		15
Multifamily property		—		—		1,197,093		6,235		1,197,093		6,235
Owner-occupied commercial real estate		395		—		258,168		2,272		258,563		2,272
Investment commercial real estate		22,676		1,000		1,022,054		14,745		1,044,730		15,745
Commercial and industrial		6,291		1,500		698,435		10,405		704,726		11,905
Lease financing		—		—		233,918		2,396		233,918		2,396
Farmland/agricultural production		—		—		3,059		39		3,059		39
Commercial construction loans		—		—		4,579		24		4,579		24
Consumer and other loans		—		—		57,271		315		57,271		315
Total ALLL	$	36,627	$	2,737	$	4,119,204	$	38,843	$	4,155,831	$	41,580

	December 31, 2018
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	9,518	$	262	$	591,373	$	3,244	$	600,891	$	3,506
Home equity lines of credit		255		—		61,936		164		62,191		164
Junior lien loan on residence		36		—		7,382		15		7,418		15
Multifamily property		1,262		—		1,134,543		5,959		1,135,805		5,959
Owner-occupied commercial real estate		1,574		—		259,619		2,614		261,193		2,614
Investment commercial real estate		18,655		—		983,263		14,248		1,001,918		14,248
Commercial and industrial		—		—		616,838		9,839		616,838		9,839
Lease financing		—		—		172,643		1,772		172,643		1,772
Farmland/agricultural production		—		—		149		2		149		2
Commercial construction loans		—		—		86		1		86		1
Consumer and other loans		—		—		65,180		384		65,180		384
Total ALLL	$	31,300	$	262	$	3,893,012	$	38,242	$	3,924,312	$	38,504

Impaired loans include nonaccrual loans of $29.4 million at September 30, 2019 and $25.7 million at December 31, 2018. Impaired loans also include performing TDR loans of $2.5 million at September 30, 2019 and $4.3 million at December 31, 2018. At September 30, 2019, the allowance allocated to TDR loans totaled $1.2 million, all of which was allocated to nonaccrual loans. At December 31, 2018, the allowance allocated to TDR loans totaled $262 thousand, of which $161 thousand was allocated to nonaccrual loans. All accruing TDR loans were paying in accordance with restructured terms as of September 30, 2019. The Company has not committed to lend additional amounts as of September 30, 2019 to customers with outstanding loans that are classified as TDR loans.

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2019 and December 31, 2018 (The average impaired loans on the following tables represent year to date impaired loans.):

	September 30, 2019
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	7,456	$	6,255	$	—	$	7,528
Owner-occupied commercial real estate		461		395		—		1,337
Investment commercial real estate		9,694		8,169		—		16,103
Home equity lines of credit		5		3		—		101
Junior lien loan on residence		95		24		—		32
Total loans with no related allowance	$	17,711	$	14,846	$	—	$	25,101
With related allowance recorded:
Primary residential mortgage	$	983	$	983	$	237	$	1,074
Investment commercial real estate		15,064		14,507		1,000		1,612
Commercial and industrial		6,397		6,291		1,500		2,856
Total loans with related allowance	$	22,444	$	21,781	$	2,737	$	5,542
Total loans individually evaluated for Impairment	$	40,155	$	36,627	$	2,737	$	30,643

	December 31, 2018
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	9,789	$	8,502	$	—	$	8,042
Owner-occupied commercial real estate		2,741		1,574		—		2,025
Investment commercial real estate		20,179		18,655		—		13,999
Home equity lines of credit		257		255		—		123
Junior lien loan on residence		102		36		—		45
Multifamily property		1,262		1,262		—		105
Total loans with no related allowance	$	34,330	$	30,284	$	—	$	24,339
With related allowance recorded:
Primary residential mortgage	$	1,016	$	1,016	$	262	$	1,144
Total loans with related allowance	$	1,016	$	1,016	$	262	$	1,144
Total loans individually evaluated for impairment	$	35,346	$	31,300	$	262	$	25,483

Interest income recognized on impaired loans for the quarters ended September 30, 2019 and 2018 was not material. The Company did not recognize any income on nonaccruing impaired loans for the three and nine months ended September 30, 2019 and 2018.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2019 and December 31, 2018:

	September 30, 2019
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	4,710	$	—
Home equity lines of credit		3		—
Junior lien loan on residence		24		—
Owner-occupied commercial real estate		395		—
Investment commercial real estate		17,960		—
Commercial and industrial		6,291		—
Total	$	29,383	$	—

	December 31, 2018
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	5,215	$	—
Home equity lines of credit		235		—
Junior lien loan on residence		36		—
Owner-occupied commercial real estate		1,574		—
Investment commercial real estate		18,655		—
Total	$	25,715	$	—

The following tables present the aging of the recorded investment in past due loans as of September 30, 2019 and December 31, 2018 by class of loans, excluding nonaccrual loans:

	September 30, 2019
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	1,335	$	—	$	—	$	1,335
Home equity lines of credit		258		—	$	—	$	258
Owner-occupied commercial real estate		4,313		—		—		4,313
Commercial and industrial		342		85		—		427
Total	$	6,248	$	85	$	—	$	6,333

	December 31, 2018
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	606	$	491	$	—	$	1,097
Consumer and other loans		2		—		—		2
Total	$	608	$	491	$	—	$	1,099

Credit Quality Indicators:

The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

In addition, the Bank has engaged an independent loan review firm to validate risk ratings and to ensure compliance with our policies and procedures. This review of the following types of loans is performed quarterly:

•

A majority of relationships or new lending to existing relationships greater than $1,000,000;

•

All criticized and classified rated borrowers with relationship exposure of more than $500,000;

•

A random sample of borrowers with relationships less than $1,000,000;

•

All leveraged loans of $1,000,000 or greater;

•

At least two borrowing relationships managed by each commercial banker;

•

Any new Regulation “O” loan commitments over $1,000,000;

•

No borrower with commitments of less than $250,000;

•

Any other credits requested by Bank senior management or a member of the Board of Directors and any borrower for which the reviewer determines a review is warranted based upon knowledge of the portfolio, local events, industry stresses, etc.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

Loans that are considered to be impaired are individually evaluated for potential loss and allowance adequacy. Loans not deemed impaired are collectively evaluated for potential loss and allowance adequacy.

As of September 30, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	578,247	$	861	$	7,296	$	—
Home equity lines of credit		58,422		—		3		—
Junior lien loan on residence		7,039		—		24		—
Multifamily property		1,196,366		—		727		—
Owner-occupied commercial real estate		253,475		—		5,088		—
Investment commercial real estate		998,506		12,740		33,484		—
Commercial and industrial		689,281		8,185		7,260		—
Lease financing		233,918		—		—		—
Farmland/agricultural production		3,059		—		—		—
Commercial construction loans		4,495		84		—		—
Consumer and other loans		57,271		—		—		—
Total	$	4,080,079	$	21,870	$	53,882	$	—

As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	590,372	$	943	$	9,576	$	—
Home equity lines of credit		61,936		—		255		—
Junior lien loan on residence		7,382		—		36		—
Multifamily property		1,130,926		3,263		1,616		—
Owner-occupied commercial real estate		255,417		249		5,527		—
Investment commercial real estate		948,300		20,756		32,862		—
Commercial and industrial		608,262		417		8,159		—
Lease financing		172,643		—		—		—
Farmland/agricultural production		149		—		—		—
Commercial construction loans		—		86		—		—
Consumer and other loans		64,946		—		234		—
Total	$	3,840,333	$	25,714	$	58,265	$	—

At September 30, 2019, $36.6 million of substandard loans were also considered impaired, compared to December 31, 2018, when $31.2 million of substandard loans were also impaired.

The activity in the allowance for loan and lease losses for the three months ended September 30, 2019 is summarized below:

	July 1,										September 30,
	2019										2019
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,057	$	—		$	—	$	(568	)	$	2,489
Home equity lines of credit		155		—			3		(13	)		145
Junior lien loan on residence		15		—			—		—			15
Multifamily property		5,744		—			—		491			6,235
Owner-occupied commercial real estate		2,497		—			996		(1,221	)		2,272
Investment commercial real estate		14,650		—			—		1,095			15,745
Commercial and industrial		11,463		—			4		438			11,905
Lease financing		1,888		—			—		508			2,396
Farmland/agricultural production		2		—			—		37			39
Commercial construction loans		1		—			—		23			24
Consumer and other loans		319		(15	)		1		10			315
Total ALLL	$	39,791	$	(15	)	$	1,004	$	800		$	41,580

The activity in the allowance for loan and lease losses for the three months ended September 30, 2018 is summarized below:

	July 1,										September 30,
	2018										2018
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,382	$	(10	)	$	—	$	(240	)	$	4,132
Home equity lines of credit		190		—			3		4			197
Junior lien loan on residence		17		—			6		(7	)		16
Multifamily property		8,259		—			—		(604	)		7,655
Owner-occupied commercial real estate		2,525		—			—		(138	)		2,387
Investment commercial real estate		13,659		(1,335	)		4		463			12,791
Commercial and industrial		7,356		—			85		744			8,185
Lease financing		1,311		—			—		238			1,549
Farmland/agricultural production		2		—			—		—			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		364		(27	)		1		40			378
Total ALLL	$	38,066	$	(1,372	)	$	99	$	500		$	37,293

The activity in the allowance for loan and lease losses for the nine months ended September 30, 2019 is summarized below:

	January 1,										September 30,
	2019										2019
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,506	$	(80	)	$	51	$	(988	)	$	2,489
Home equity lines of credit		164		—			8		(27	)		145
Junior lien loan on residence		15		—			11		(11	)		15
Multifamily property		5,959		—			—		276			6,235
Owner-occupied commercial real estate		2,614		—			1,060		(1,402	)		2,272
Investment commercial real estate		14,248		—			—		1,497			15,745
Commercial and industrial		9,839		—			13		2,053			11,905
Lease financing		1,772		—			—		624			2,396
Farmland/agricultural production		2		—			—		37			39
Commercial construction loans		1		—			—		23			24
Consumer and other loans		384		(40	)		3		(32	)		315
Total ALLL	$	38,504	$	(120	)	$	1,146	$	2,050		$	41,580

The activity in the allowance for loan and lease losses for the nine months ended September 30, 2018 is summarized below:

	January 1,										September 30,
	2018										2018
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,085	$	(87	)	$	139	$	(5	)	$	4,132
Home equity lines of credit		221		—			7		(31	)		197
Junior lien loan on residence		12		—			61		(57	)		16
Multifamily property		10,007		—			—		(2,352	)		7,655
Owner-occupied commercial real estate		2,385		(64	)		66		—			2,387
Investment commercial real estate		11,933		(1,335	)		4		2,189			12,791
Commercial and industrial		6,563		(46	)		107		1,561			8,185
Lease financing		884		—			—		665			1,549
Farmland/agricultural production		—		—			—		2			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		349		(52	)		3		78			378
Total ALLL	$	36,440	$	(1,584	)	$	387	$	2,050		$	37,293

Troubled Debt Restructurings:

The Company has allocated $1.2 million and $262 thousand of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of September 30, 2019 and December 31, 2018, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

The terms of certain loans were modified as TDRs when one or a combination of the following occurred: a reduction of the stated interest rate of the loan; the maturity date was extended; or some other modification or extension occurred which would not be readily available in the market.

The following table presents loans by class modified as TDRs during both the three and nine-month periods ended September 30, 2019:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	341	$	341
Total		1	$	341	$	341

The following table presents loans by class modified as TDRs during the three-month period ended September 30, 2018:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	766	$	766
Total		1	$	766	$	766

The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2018:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	766	$	766
Investment commercial real estate		1		15,351		15,351
Total		2	$	16,117	$	16,117

The identification of the TDRs did not have a significant impact on the allowance for loan and lease losses.

There were no loans that were modified as TDRs for which there was a payment default within twelve months of modification, during the three and nine months ended September 30, 2019 and September 30, 2018.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans may include one or more of the following: (1) a reduction of the stated interest rate of the loan to a rate that is lower than the current market rate for new debt with similar risk; (2) an extension of an interest only period for a predetermined period of time; (3) an extension of the maturity date; or (4) an extension of the amortization period over which future payments will be computed. At the time a loan is restructured, the Bank performs a full re-underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the TDR. At a minimum, six consecutive months of contractual payments would need to be made on a restructured loan before returning it to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status if it meets the requirements of ASC 310-40-50-2.

4. DEPOSITS

Certificates of deposit, excluding brokered certificates of deposit over $250,000, totaled $192.8 million and $160.3 million at September 30, 2019 and December 31, 2018, respectively.

The following table sets forth the details of total deposits as of September 30, 2019 and December 31, 2018:

	September 30,				December 31,
	2019				2018
(Dollars in thousands)
Noninterest-bearing demand deposits	$	544,464	13.41	%	$	463,926	11.91	%
Interest-bearing checking⁽¹⁾		1,352,471	33.30			1,247,305	32.02
Savings		115,448	2.84			114,674	2.94
Money market		1,196,188	29.45			1,243,369	31.92
Certificates of deposit - retail		583,425	14.37			510,724	13.12
Certificates of deposit - listing service		55,664	1.37			79,195	2.03
Subtotal deposits		3,847,660	94.74			3,659,193	93.94
Interest-bearing demand - Brokered		180,000	4.43			180,000	4.62
Certificates of deposit - Brokered		33,696	0.83			56,147	1.44
Total deposits	$	4,061,356	100.00	%	$	3,895,340	100.00	%

(1)	Interest-bearing checking includes $448.9 million at September 30, 2019 and $434.5 million at December 31, 2018 of reciprocal balances in the Reich & Tang or Promontory Demand Deposit Marketplace program.

The scheduled maturities of certificates of deposit, including brokered certificates of deposit, as of September 30, 2019 are as follows:

(In thousands)
2019	$	122,857
2020		362,340
2021		85,520
2022		39,525
2023		11,426
Over 5 Years		51,117
Total	$	672,785

5. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Advances from the FHLB totaled $105.0 million with a weighted average interest rate of 3.20 percent and $108.0 million with a weighted average interest rate of 3.17 percent at September 30, 2019 and December 31, 2018, respectively.

At September 30, 2019, advances totaling $105.0 million with a weighted average interest rate of 3.20 percent had fixed maturity dates. The fixed maturity date advances at December 31, 2018 totaled $108.0 million with a weighted average interest rate of 3.17 percent. The advances were secured by blanket pledges of certain 1-4 family residential mortgages totaling $351.6 million, multifamily mortgages totaling $726.2 million and securities totaling $102.9 million at September 30, 2019, while at December 31, 2018, the fixed rate advances were secured by blanket pledges of certain 1-4 family residential mortgages totaling $496.1 million, multifamily mortgages totaling $1.0 billion and securities totaling $58.5 million.

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

(In thousands)
2021	$	60,000
2022		20,000
2023		25,000
Total	$	105,000

Short-term borrowings consisted of overnight borrowings with the FHLB of $52.0 million with a rate of 2.10 percent and a one-month FHLB advance of $15.0 million with a rate of 2.25 percent. The one-month FHLB advance is part of an interest rate swap designated as a cash flow hedge. The cash flow hedge has a term of four years. There were no overnight borrowings with the FHLB as of December 31, 2018. At September 30, 2019, unused short-term overnight borrowing commitments totaled $1.3 billion from FHLB, $22.0 million from correspondent banks and $1.5 billion at the Federal Reserve Bank of New York.

6. BUSINESS SEGMENTS

The Corporation assesses its results among two operating segments, Banking and Peapack-Gladstone Bank’s Private Wealth Management Division. Management uses certain methodologies to allocate income and expense to the business segments. A funds transfer pricing methodology is used to assign interest income and interest expense. Certain indirect expenses are allocated to segments. These include support unit expenses such as technology and operations and other support functions. Taxes are allocated to each segment based on the effective rate for the period shown.

Banking

The Banking segment includes commercial (includes C&I and equipment finance), commercial real estate, multifamily, residential and consumer lending activities; treasury management services; C&I advisory services; escrow management; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support and sales.

Peapack Private Wealth Management Division

Peapack-Gladstone Bank’s Private Wealth Management Division, including PGB Trust & Investments of Delaware, MCM, Quadrant, Lassus Wherley and Point View, 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.

The following tables present the statements of income and total assets for the Corporation’s reportable segments for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30, 2019
				Wealth
				Management
(In thousands)	Banking			Division		Total
Net interest income	$	28,836		$	1,249	$	30,085
Noninterest income		4,561			9,855		14,416
Total income		33,397			11,104		44,501

Provision for loan and lease losses		800			—		800
Compensation and benefits		11,776			5,700		17,476
Premises and equipment expense		3,294			555		3,849
FDIC expense		(277	)		—		(277	)
Other noninterest expense		2,985			2,226		5,211
Total noninterest expense		18,578			8,481		27,059
Income before income tax expense		14,819			2,623		17,442
Income tax expense		4,399			817		5,216
Net income	$	10,420		$	1,806	$	12,226

	Three Months Ended September 30, 2018
			Wealth
			Management
(In thousands)	Banking		Division		Total
Net interest income	$	27,032	$	1,110	$	28,142
Noninterest income		2,570		8,413		10,983
Total income		29,602		9,523		39,125

Provision for loan and lease losses		500		—		500
Compensation and benefits		11,257		4,768		16,025
Premises and equipment expense		2,967		432		3,399
FDIC Expense		593		—		593
Other noninterest expense		2,348		1,919		4,267
Total noninterest expense		17,665		7,119		24,784
Income before income tax expense		11,937		2,404		14,341
Income tax expense		3,002		615		3,617
Net income	$	8,935	$	1,789	$	10,724

	Nine Months Ended September 30, 2019
			Wealth
			Management
(In thousands)	Banking		Division		Total
Net interest income	$	85,336	$	4,024	$	89,360
Noninterest income		9,991		29,180		39,171
Total income		95,327		33,204		128,531

Provision for loan and lease losses		2,050		—		2,050
Compensation and benefits		36,458		15,717		52,175
Premises and equipment expense		9,265		1,572		10,837
FDIC expense		277		—		277
Other noninterest expense		8,296		6,562		14,858
Total noninterest expense		56,346		23,851		80,197
Income before income tax expense		38,981		9,353		48,334
Income tax expense		10,592		2,541		13,133
Net income	$	28,389	$	6,812	$	35,201

Total assets at period end	$	4,840,002	$	85,407	$	4,925,409

	Nine Months Ended September 30, 2018
			Wealth
			Management
(In thousands)	Banking		Division		Total
Net interest income	$	81,833	$	3,945	$	85,778
Noninterest income		7,550		25,388		32,938
Total income		89,383		29,333		118,716

Provision for loan and lease losses		2,050		—		2,050
Compensation and benefits		33,520		12,910		46,430
Premises and equipment expense		8,788		1,287		10,075
FDIC Expense		1,798		—		1,798
Other noninterest expense		8,300		5,959		14,259
Total noninterest expense		54,456		20,156		74,612
Income before income tax expense		34,927		9,177		44,104
Income tax expense		8,444		2,219		10,663
Net income	$	26,483	$	6,958	$	33,441

Total assets at period end	$	4,367,950	$	67,759	$	4,435,709

7. FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:

Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Loans Held for Sale, at Fair Value: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan and lease losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less estimated costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Management. Once received, a third party conducts a review of the appraisal for compliance with the Uniform Standards of Professional Appraisal Practice and appropriate analysis methods for the type of property. Subsequently, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals on collateral dependent impaired loans and other real estate owned (consistent for all loan types) are obtained on an annual basis, unless a significant change in the market or other factors warrants a more frequent appraisal. On an annual basis, Management compares the actual selling price of any collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for other properties. The most recent analysis performed indicated that a discount up to 15 percent should be applied to appraisals on properties. The discount is determined based on the nature of the underlying properties, aging of appraisals and other factors. For each collateral-dependent impaired loan, we consider other factors, such as certain indices or other market information, as well as property specific circumstances to determine if an adjustment to the appraised value is needed. In situations where there is evidence of change in value, the Bank will determine if there is a need for an adjustment to the specific reserve on the collateral dependent impaired loans. When the Bank applies an interim adjustment, it generally shows the adjustment as an incremental specific reserve against the loan until it has received the full updated appraisal. All collateral-dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old or in the process of obtaining an appraisal as of September 30, 2019.

The following table summarizes, for the periods indicated, assets measured at fair value on a recurring basis, including financial assets for which the Corporation has elected the fair value option:

Assets Measured on a Recurring Basis

			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets For		Other		Significant
			Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
(In thousands)	2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale:
U.S. government-sponsored agencies	$	35,047	$	—	$	35,047	$	—
Mortgage-backed securities-residential		296,629		—		296,629		—
SBA pool securities		3,057		—		3,057		—
State and political subdivisions		12,196		—		12,196		—
Corporate bond		3,060		—		3,060		—
CRA investment fund		7,881		7,881		—		—
Loans held for sale, at fair value		1,756		—		1,756		—
Derivatives:
Cash flow hedges		56		—		56		—
Loan level swaps		43,023		—		43,023		—
Total	$	402,705	$	7,881	$	394,824	$	—

Liabilities:
Derivatives:
Cash flow hedges	$	4,996	$	—	$	4,996	$	—
Loan level swaps		43,023		—		43,023		—
Total	$	48,019	$	—	$	48,019	$	—

Assets Measured on a Recurring Basis

			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets For		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
(In thousands)	2018		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agencies	$	102,013	$	—	$	102,013	$	—
Mortgage-backed securities-residential		251,362		—		251,362		—
SBA pool securities		3,839		—		3,839		—
State and political subdivisions		17,610		—		17,610		—
Corporate bond		3,112		—		3,112		—
CRA investment fund		4,719		4,719		—		—
Loans held for sale, at fair value		1,576		—		1,576		—
Derivatives:
Cash flow hedges		1,657		—		1,657		—
Loan level swaps		9,689		—		9,689		—
Total	$	395,577	$	4,719	$	390,858	$	—

Liabilities:
Derivatives:
Cash flow hedges	$	849	$	—	$	849	$	—
Loan level swaps		9,689		—		9,689		—
Total	$	10,538	$	—	$	10,538	$	—

The Company has elected the fair value option for certain loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of September 30, 2019 and December 31, 2018.

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

(In thousands)	September 30, 2019		December 31, 2018
Residential loans contractual balance	$	1,730	$	1,552
Fair value adjustment		26		24
Total fair value of residential loans held for sale	$	1,756	$	1,576

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2019.

The following table summarizes, for the periods indicated, assets measured at fair value on a non-recurring basis:

Fair Value Measurements Using

Quoted

Prices in

Active

Significant

Markets For

Other

Significant

Identical

Observable

Unobservable

September 30,

Assets

Inputs

(In thousands)

2019

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans:

Investment commercial real estate

14,507

—

14,507

There were no loans measured for impairment using the fair value of collateral as December 31, 2018.

The carrying amounts and estimated fair values of financial instruments at September 30, 2019 are as follows:

			Fair Value Measurements at September 30, 2019 using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	227,113	$	227,113	$	—	$	—	$	227,113
Securities available for sale		349,989		—		349,989		—		349,989
CRA investment fund		7,881		7,881		—		—		7,881
FHLB and FRB stock		21,403		—		—		—	N/A
Loans held for sale, at fair value		1,756		—		1,756		—		1,756
Loans held for sale, at lower of cost or fair value		5,937		—		5,994		—		5,994
Loans, net of allowance for loan and lease losses		4,118,332		—		—		4,235,028		4,235,028
Accrued interest receivable		11,759		—		1,580		10,179		11,759
Cash flow hedges		56		—		56		—		56
Loan level swaps		43,023		—		43,023		—		43,023
Financial liabilities
Deposits	$	4,061,356	$	3,388,571	$	677,069	$	—	$	4,065,640
Short-term borrowings		67,000		—		67,000		—		67,000
Federal home loan bank advances		105,000		—		108,600		—		108,600
Subordinated debt		83,361		—		—		83,568		83,568
Accrued interest payable		3,661		444		1,996		1,221		3,661
Cash flow hedges		4,996		—		4,996		—		4,996
Loan level swap		43,023		—		43,023		—		43,023

The carrying amounts and estimated fair values of financial instruments at December 31, 2018 are as follows:

			Fair Value Measurements at December 31, 2018 using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	160,773	$	160,773	$	—	$	—	$	160,773
Securities available for sale		377,936		—		377,936		—		377,936
CRA investment fund		4,719		4,719		—		—		4,719
FHLB and FRB stock		18,533		—		—		—	N/A
Loans held for sale, at fair value		1,576		—		1,576		—		1,576
Loans held for sale, at lower of cost or fair value		3,542		—		3,654		—		3,654
Loans, net of allowance for loan and lease losses		3,889,427		—		—		3,852,004		3,852,004
Accrued interest receivable		10,814		—		1,875		8,939		10,814
Cash flow Hedges		1,657		—		1,657		—		1,657
Loan level swaps		9,689		—		9,689		—		9,689
Financial liabilities
Deposits	$	3,895,340	$	3,249,274	$	640,997	$	—	$	3,890,271
Federal home loan bank advances		108,000		—		108,950		—		108,950
Subordinated debt		83,193		—		—		82,207		82,207
Accrued interest payable		2,868		331		2,482		55		2,868
Cash flow hedges		849		—		849		—		849
Loan level swaps		9,689		—		9,689		—		9,689

8. REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized as noninterest income.

The following table presents the sources of noninterest income for the periods indicated:

	For the Three Months Ended September 30,
(In thousands)	2019		2018
Service charges on deposits
Overdraft fees	$	176	$	179
Interchange income		323		305
Other		383		376
Wealth management fees (a)		9,501		8,200
Other (b)		4,033		1,923
Total noninterest other income	$	14,416	$	10,983

	For the Nine Months Ended September 30,
(In thousands)	2019		2018
Service charges on deposits
Overdraft fees	$	500	$	543
Interchange income		909		921
Other		1,186		1,100
Wealth management fees (a)		28,243		24,693
Other (a)		8,333		5,681
Total noninterest other income	$	39,171	$	32,938

(a)	Includes investment brokerage fees.

(b)	All of the other category is outside the scope of ASC 606.

The following table presents the sources of noninterest income by operating segment for the periods indicated:

	For the Three Months Ended September 30,						For the Three Months Ended September 30,
	2019						2018
(In thousands)			Wealth						Wealth
Revenue by Operating Segment	Banking		Management		Total		Banking		Management		Total
Service charges on deposits
Overdraft fees	$	176	$	—	$	176	$	179	$	—	$	179
Interchange income		323		—		323		305		—		305
Other		383		—		383		376		—		376
Wealth management fees (a)		—		9,501		9,501		—		8,200		8,200
Other (b)		3,679		354		4,033		1,710		213		1,923
Total noninterest income	$	4,561	$	9,855	$	14,416	$	2,570	$	8,413	$	10,983

	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
(In thousands)	2019						2018
Revenue by Operating			Wealth						Wealth
Segment	Banking		Management		Total		Banking		Management		Total
Service charges on deposits
Overdraft fees	$	500	$	—	$	500	$	543	$	—	$	543
Interchange income		909		—		909		921		—		921
Other		1,186		—		1,186		1,100		—		1,100
Wealth management fees (a)		—		28,243		28,243		—		24,693		24,693
Other (a)		7,396		937		8,333		4,986		695		5,681
Total noninterest income	$	9,991	$	29,180	$	39,171	$	7,550	$	25,388	$	32,938

(a)	Includes investment brokerage fees.

(b)	All of the other category is outside the scope of ASC 606.

A description of the Company’s revenue streams accounted for under ASC 606 follows:

Service charges on deposit accounts: The Company earns fees from its deposits customers for transaction-based, account maintenance, and overdraft fees. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange income: The Company earns interchange fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented gross of cardholder rewards. Cardholder rewards are included in other expenses in the statement of income. Cardholder rewards reduced interchange income by $37 thousand for both the third quarters of 2019 and 2018, respectively. Cardholder rewards reduced interchange income by $105 thousand and $100 thousand for the nine months ended September 30, 2019 and 2018, respectively.

Wealth management fees (gross): The Company earns wealth management fees from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of AUM at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (i.e. trade date).

Investment brokerage fees (net): The Company earns fees from investment brokerage services provided to its customers by a third-party service provider. The Company receives commissions from the third-party service provider twice a month based upon customer activity for the month. The fees are recognized monthly and a receivable is recorded until commissions are generally paid by the 15^th of the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers, investment brokerage fees are presented net of related costs.

Gains/(losses) on sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.

Other: All of the other income items are outside the scope of ASC 606.

9. OTHER OPERATING EXPENSES

The following table presents the major components of other operating expenses for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Professional and legal fees		1,228		1,195		3,320		3,487
Telephone		346		275		1,003		830
Advertising		337		248		1,105		973
Amortization of intangible assets		229		180		688		540
Provision for ORE		—		28		—		232
Other operating expenses		3,071		2,341		8,742		8,197
Total other operating expenses	$	5,211	$	4,267	$	14,858	$	14,259

10. ACCUMULATED OTHER COMPREHENSIVE (LOSS)/INCOME

The following is a summary of the accumulated other comprehensive income/(loss) balances, net of tax, for the three months ended September 30, 2019 and 2018:

							Amount			Other
							Reclassified			Comprehensive
				Other			From			Income/(Loss)
				Comprehensive			Accumulated			Three Months
	Balance at			Income/(Loss)			Other			Ended			Balance at
	July 1,			Before			Comprehensive			September 30,			September 30,
(In thousands)	2019			Reclassifications			Income/(Loss)			2019			2019
Net unrealized holding gain/(loss) on securities available for sale, net of tax	$	898		$	583			—		$	583		$	1,481

Gain/(loss) on cash flow hedges		(2,502	)		(752	)		(56	)		(808	)		(3,310	)

Accumulated other comprehensive loss, net of tax	$	(1,604	)	$	(169	)	$	(56	)	$	(225	)	$	(1,829	)

							Amount			Other
							Reclassified			Comprehensive
				Other			From			Income/(Loss)
				Comprehensive			Accumulated			Three Months
	Balance at			Income/(Loss)			Other			Ended			Balance at
	July 1,			Before			Comprehensive			September 30,			September 30,
(In thousands)	2018			Reclassifications			Income/(Loss)			2018			2018
Net unrealized holding gain/(loss) on securities available for sale, net of tax	$	(4,839	)	$	(1,191	)	$	218		$	(973	)	$	(5,812	)

Gain/(loss) on cash flow hedges		2,085			534			(20	)		514			2,599

Accumulated other comprehensive loss, net of tax	$	(2,754	)	$	(657	)	$	198		$	(459	)	$	(3,213	)

The following represents the reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2019 and 2018:

	Three Months Ended
	September 30,
(In thousands)	2019			2018			Affected Line Item in Income Statement
Unrealized gains on securities available for sale:
Reclassification adjustment for amounts included in net income	$	—		$	288		Securities losses, net
Income tax expense		—			(70	)	Income tax expense
Total reclassifications, net of tax	$	—		$	218
Unrealized gains on cash flow hedge derivatives:
Reclassification adjustment for amounts included in net income	$	(80	)	$	(31	)	Interest expense
Income tax expense		24			11		Income tax expense
Total reclassifications, net of tax	$	(56	)	$	(20	)

The following is a summary of the accumulated other comprehensive (loss)/income balances, net of tax, for the nine months ended September 30, 2019 and 2018:

							Amount			Other
							Reclassified			Comprehensive
				Other			From			Income/(Loss)
				Comprehensive			Accumulated			Nine Months
	Balance at			Income/(Loss)			Other			Ended			Balance at
	January 1,			Before			Comprehensive			September 30,			September 30,
(In thousands)	2019			Reclassifications			Income/(Loss)			2019			2019
Net unrealized holding gain/(loss) on securities available for sale, net of tax	$	(3,006	)	$	4,487		$	—		$	4,487		$	1,481

Gain/(loss) on cash flow hedges		661			(3,872	)		(99	)		(3,971	)		(3,310	)

Accumulated other comprehensive loss, net of tax	$	(2,345	)	$	615		$	(99	)	$	516		$	(1,829	)

									Amount			Other
									Reclassified			Comprehensive
				Cumulative		Other			From			Income/(Loss)
				Adjustment		Comprehensive			Accumulated			Nine Months
	Balance at			For Equity		Income/(Loss)			Other			Ended			Balance at
	January 1,			Security		Before			Comprehensive			September 30,			September 30,
(In thousands)	2018			(ASU 2016-1)		Reclassifications			Income/(Loss)			2018			2018
Net unrealized holding gain/(loss) on securities available for sale, net of tax	$	(2,214	)	$	127	$	(3,943	)	$	218		$	(3,725	)	$	(5,812	)

Gain/(loss) on cash flow hedges		1,002			—		1,661			(64	)		1,597			2,599

Accumulated other comprehensive loss, net of tax	$	(1,212	)	$	127	$	(2,282	)	$	154		$	(2,128	)	$	(3,213	)

The following represents the reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2019 and 2018:

	Nine Months Ended
	September 30,
(In thousands)	2019			2018			Affected Line Item in Income
Unrealized gains on securities available for sale:
Reclassification adjustment for amounts included in net income	$	—		$	288		Securities losses, net
Income tax expense		—			(70	)	Income tax expense
Total reclassifications, net of tax	$	—		$	218
Unrealized gains on cash flow hedge derivatives:
Reclassification adjustment for amounts included in net income	$	(142	)	$	(93	)	Interest expense
Income tax expense		43			29		Income tax expense
Total reclassifications, net of tax	$	(99	)	$	(64	)

11. DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with a notional amount of $245.0 million and $230.0 million as of September 30, 2019 and December 31, 2018, respectively, were designated as cash flow hedges of certain interest-bearing deposits and FHLB advances. On a quarterly basis, the Company performs a qualitative hedge effectiveness assessment.

This assessment takes into consideration any adverse developments related to the counterparty’s risk of default and any negative events or circumstances that affect the factors that originally enabled the Company to assess that it could reasonably support, qualitatively, an expectation that the hedging relationship was and will continue to be highly effective. As of September 30, 2019, there were no events or market conditions that would result in hedge ineffectiveness. The aggregate fair value of the swaps is recorded in other assets/liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.

The following table presents information about the interest rate swaps designated as cash flow hedges as of September 30, 2019 and December 31, 2018:

(Dollars in thousands)	September 30, 2019				December 31, 2018
Notional amount	$	245,000			$	230,000
Weighted average pay rate		2.00		%		2.04	%
Weighted average receive rate		2.25		%		2.33	%
Weighted average maturity		2.71		years		2.65	years
Unrealized (loss)/gain, net	$	(4,940	)		$	808

Number of contracts		12				11

Net interest income recorded on these swap transactions totaled $289 thousand and $915 thousand for the three and nine months ended September 30, 2019, respectively, and is reported as a component of interest expense. Net interest income recorded on these swap transactions totaled $124 thousand and $137 thousand for the three and nine months ended September 30, 2018, respectively, and is reported as a component of interest expense.

Cash Flow Hedges

The following table presents the net gain recorded in accumulated other comprehensive (loss)/income and the consolidated financial statements relating to the cash flow derivative instruments for the three and nine months ended September 30, 2019 and September 30, 2018:

	For the Three Months Ended September 30,
(In thousands)	2019			2018
Interest rate contracts
Amount of (loss)/gain recognized in OCI	$	(808	)	$	514
Amount of gain reclassified from OCI to interest expense		56			20

	For the Nine Months Ended September 30,
(In thousands)	2019			2018
Interest rate contracts
Amount of (loss)/gain recognized in OCI (effective portion)	$	(3,971	)	$	1,597
Amount of gain reclassified from OCI to interest expense		99			64

During the first quarter of 2018, the Company recognized an unrealized after-tax gain of $220 thousand in accumulated other comprehensive income/(loss) related to the termination of two interest rate swaps designated as cash flow hedges. The gain is being amortized into earnings over the remaining life of the terminated swaps. During the second quarter of 2019, the Company recognized an unrealized after-tax gain of $189 thousand in accumulated other comprehensive income/(loss) related to the termination of four interest rate swaps designated as cash flow hedges. These gains are being amortized into earnings over the remaining life of the terminated swaps. The Company recognized pre-tax interest income of $81 thousand and $142 thousand for the three and nine months ended September 30, 2019 related to the amortization of the gain on the terminated interest rate swaps designated as cash flow hedges.

	September 30, 2019
	Notional		Fair
(In thousands)	Amount		Value
Interest rate swaps related to interest-bearing deposits	$	245,000	$	(4,940	)
Total included in other assets		55,000		56
Total included in other liabilities		190,000		(4,996	)

	December 31, 2018
	Notional		Fair
(In thousands)	Amount		Value
Interest rate swaps related to interest-bearing deposits	$	230,000	$	808
Total included in other assets		130,000		1,657
Total included in other liabilities		100,000		(849	)

Derivatives Not Designated as Accounting Hedges: The Company offers facility specific / loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution / swap counterparty (loan level / back to back swap program). The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting (“standalone derivatives”). The notional amount of the swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual contracts. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions.

Information about these swaps is as follows:

(Dollars in thousands)	September 30, 2019			December 31, 2018
Notional amount	$	668,849		$	558,690
Fair value	$	43,023		$	9,689
Weighted average pay rates		4.23	%		4.44	%
Weighted average receive rates		3.80	%		4.24	%
Weighted average maturity		7.3	years		7.1	years

Number of contracts		80			67

12. SUBORDINATED DEBT

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

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

During December 2017, the Company issued $35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2017 Notes”) to certain institutional investors. The 2017 Notes are non-callable for five years, have a stated maturity of December 15, 2027, and bear interest at a fixed rate of 4.75% per year until December 15, 2022. From December 16, 2022 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $875 thousand and are being amortized to maturity.

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

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

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

13. LEASES

On January 1, 2019, the Company adopted FASB issued ASU No. 2016-02, “Leases” (Topic 842), which establishes a right of use model that requires a lessee to record a ROU asset and a lease liability for all leases with terms longer than 12 months. The Company adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted.

The Company maintains certain property and equipment under direct financing and operating leases. Upon adoption of the new lease guidance, on January 1, 2019, the Company recorded a ROU asset and corresponding lease liability of $7.9 million and $8.2 million, respectively, on the consolidated statement of condition. As of September 30, 2019, the Company's operating lease ROU asset and operating lease liability totaled $10.3 million and $10.6 million, respectively. A weighted average discount rate of 3.36% was used in the measurement of the ROU asset and lease liability as of September 30, 2019.

The Company's leases have remaining lease terms between three months to 18 years, with a weighted average lease term of 5.92 years at September 30, 2019. The Company’s lease agreements may include options to extend or terminate the lease. The Company’s decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal.

Total operating lease costs were $756 thousand and $2.1 million for the three and nine months ended September 30, 2019, respectively. The variable lease costs were $83 thousand and $238 thousand for the three and nine months ended September 30, 2019, respectively.

The following is a schedule of the Company's operating lease liabilities by contractual maturity as of September 30, 2019:

(In thousands)
2019	$	2,796
2020		2,424
2021		1,613
2022		1,362
2023		919
Thereafter		1,915
Total lease payments		11,029
Less: imputed interest		410
Total present value of lease payments	$	10,619

The following table shows the supplemental cash flow information related to the Company’s direct finance and operating leases for the nine months ended September 30, 2019:

(In thousands)
Right-of-use asset obtained in exchange for lease obligation
Operating cash flows from operating leases	$	1,844
Operating cash flows from direct finance leases	$	290
Financing cash flows from direct finance leases	$	561

14. ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The ASU requires additional qualitative and

quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) Targeted Improvements” which allows entities adopting ASU No. 2016-02 to choose an additional transition method, under which an entity to initially applies the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendment in this update becomes effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company has elected the transition method permitted by ASU No. 2018-11 under which an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. Upon adoption of the new lease guidance on January 1, 2019, the Company recorded a lease liability of approximately $8.2 million, a right-of-use-asset of approximately $7.9 million and a cumulative effect adjustment to retained earnings of $661 thousand.

On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU replaces the incurred loss model with an expected loss model, referred to as “current expected credit loss” (CECL) model. It will change estimates for credit losses related to financial assets measured at amortized cost, including loans receivable, held-to-maturity (HTM) debt securities and certain other contracts. The largest impact will be on lenders and the allowance for loan and lease losses (ALLL). ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The impact to the Company’s ALL has not yet been calculated. The Company has reviewed the potential impact to our securities portfolio, which primarily consists of U.S. government sponsored entities, mortgage-backed securities and municipal securities which have no history of credit loss and have strong credit ratings. The Company does not expect the standard to have a material impact on its financial statements as it relates to the Company’s securities portfolio. The Company has formed a CECL committee comprised of finance, accounting, and credit members. The Company has evaluated and selected a third-party firm to assist in the development of a CECL program, selected portfolio segmentations, loss methodologies and the probability of default/loss given default model to assist in the calculation of the allowance for loan and lease losses in preparation for the change to the expected loss model. The Company continues to work towards implementing the accounting, reporting and governance processes required under the new standard and expect to complete the model implementation and validation by the end of the fourth quarter of 2019. The Company expects to recognize a one-time cumulative-effect adjustment to our allowance for loan and lease losses through retained earnings as of the beginning of the first reporting period in which the new standard is effective. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our consolidated financial condition or results of operations.

In May 2017, the FASB issued ASU 2017-09: “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1.) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2.) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3.) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update. The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The revised guidance is effective for all companies for fiscal years beginning after December 15, 2019, and interim periods within those years. Companies are permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The revised guidance is not expected to impact our financial statement disclosures.

15. ACQUISITIONS

Effective September 1, 2019, the Company closed the previously announced acquisition of Point View. The acquisition is consistent with the Company’s strategy to grow its wealth management business both organically and through strategic acquisitions. The purchase price included equity of $5.6 million as well as cash. The Company is still in the process of evaluating the final purchase accounting allocation. Any adjustment resulting from the evaluation is not expected to be material. In accordance with FASB ASC 805-10 (Subtopic 25-15), the Company has up to one year from date of acquisition to complete this assessment. This acquisition contributed to the increase in the Company’s goodwill during the quarter ended September 30, 2019.

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q may contain 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 results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2018, in addition to/which include the following:

•

our inability to successfully grow our business and implement our strategic plan, including an inability to generate revenues to offset the increased personnel and other costs related to the strategic plan;

•

the impact of anticipated higher operating expenses in 2019 and beyond;

•

our inability to successfully integrate wealth management firm acquisitions;

•

our inability to manage our growth;

•

our inability to successfully integrate our expanded employee base;

•

an unexpected decline in the economy, in particular in our New Jersey and New York market areas;

•

competitive pricing pressure including deposit, loan, and trading commission rates;

•

declines in our net interest margin caused by the interest rate environment and/or our highly competitive market;

•

declines in values in our investment portfolio;

•

higher than expected increases in our allowance for loan and lease losses;

•

higher than expected increases in the level of nonperforming 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;

•

our inability to execute upon new business initiatives;

•

our lack of liquidity to fund our various cash obligations;

•

reduction in our lower-cost funding sources;

•

our inability to adapt to technological changes;

•

claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;

•

our ability to retain key employees;

•

demands for loans and deposits in our market areas;

•

adverse changes in securities markets;

•

changes in accounting policies and practices;

•

effects related to a prolonged shutdown of the federal government which could impact SBA and other government lending programs; and

•

other unexpected material adverse changes in our operations or earnings.

Except as required by law, the Company assumes no responsibility to update such forward-looking statements in the future. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2018 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 higher degree of complexity and requires Management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

The provision for loan and lease losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses the best information available, the level of the allowance for loan 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 make 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 in New Jersey and, to a lesser extent, New York City. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for loan 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.

The Company accounts for its debt securities in accordance with “Accounting Standards Codification (“ASC”) 320, “Investments - Debt Securities” and its equity security in accordance with ASC 321, “Investments – Equity Securities”. All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax, with the exception of the Company’s investment in a CRA investment fund which is classified as an equity security. In accordance with ASU 2016-01, “Financial Instruments” unrealized holding gains and losses are marked to market through the income statement.

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. No impairment charges were recognized for the nine months ended September 30, 2019 and 2018.

EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended September 30, 2019 and 2018.

	For the Three Months Ended September 30,						Change
(Dollars in thousands, except per share data)	2019 (1)			2018			2019 vs 2018
Results of Operations:
Net interest income	$	30,085		$	28,142		$	1,943
Provision for loan and lease losses		800			500			300
Net interest income after provision for loan and lease losses		29,285			27,642			1,643
Wealth management fee income		9,501			8,200			1,301
Other income		4,915			2,783			2,132
Operating expense		26,259			24,284			1,975
Income before income tax expense		17,442			14,341			3,101
Income tax expense		5,216			3,617			1,599
Net income	$	12,226		$	10,724		$	1,502

Total revenue (Net interest income plus wealth management fee income and other income)	$	44,501		$	39,125		$	5,376

Diluted average shares outstanding		19,484,905			19,240,098			244,807

Diluted earnings per share	$	0.63		$	0.56		$	0.07

Effective tax rate		29.90	%		25.22	%		4.68	%
Return on average assets annualized (ROAA)		1.00			0.99			0.01
Return on average equity annualized (ROAE)		9.87			9.68			0.19

(1)

The September 2019 quarter included a full quarter of wealth management fee income and expense related to Lassus Wherley, which was acquired effective September 1, 2018, and includes one month of wealth management fee income and expense related to Point View Wealth Management, which was acquired effective September 1, 2019.

The following table presents certain key aspects of our performance for the nine months ended September 30, 2019 and 2018.

	For the Nine Months Ended September 30,						Change
(Dollars in thousands, except per share data)	2019 (1)			2018			2019 vs 2018
Results of Operations:
Net interest income	$	89,360		$	85,778		$	3,582
Provision for loan and lease losses		2,050			2,050			-
Net interest income after provision for loan and lease losses		87,310			83,728			3,582
Wealth management fee income		28,243			24,693			3,550
Other income		10,928			8,245			2,683
Operating expense		78,147			72,562			5,585
Income before income tax expense		48,334			44,104			4,230
Income tax expense		13,133			10,663			2,470
Net income	$	35,201		$	33,441		$	1,760

Total revenue (Net interest income plus wealth management fee income and other income)	$	128,531		$	118,716		$	9,815

Diluted average shares outstanding		19,496,721			19,066,986			429,735

Diluted earnings per share	$	1.81		$	1.75		$	0.06

Effective tax rate		27.17	%		24.18	%		2.99	%
Return on average assets annualized (ROAA)		0.99			1.04			(0.05	)
Return on average equity annualized (ROAE)		9.67			10.43			(0.76	)

(1)

The nine months ended September 30, 2019 included a full nine months of wealth management fee income and expense related to Lassus Wherley, which was acquired effective September 1, 2018, and includes one month of wealth management fee income and expense related to Point View Wealth Management, which was acquired effective September 1, 2019

	September 30,			December 31,			Change
	2019			2018			2019 vs 2018
Selected Balance Sheet Ratios:
Total capital (Tier I + II) to risk-weighted assets		14.31	%		15.03	%		(0.72	)%
Tier I leverage ratio		9.43			9.82			(0.39	)
Loans to deposits		102.43			100.84			1.59
Allowance for loan and lease losses to total loans		1.00			0.98			0.02
Allowance for loan and lease losses to nonperforming loans		141.51			149.73			(8.22	)
Nonperforming loans to total loans		0.71			0.65			0.06

For the quarter ended September 30, 2019, the Company recorded revenue of $44.51 million, pretax income of $17.45 million, net income of $12.23 million and diluted earnings per share of $0.63, compared to $39.12 million, $14.34 million, $10.72 million and $0.56 for the same three-month period last year. The 2019 quarter included increased net interest income and non-interest income, partially offset by an increased provision for loan and lease losses (due to loan growth) and increased operating expenses. In comparing the third quarter of 2019 to the third quarter of 2018, revenue increased 14% and pretax income increased 22%, reflecting favorable operating leverage during the period. For the same periods net income increased 14% and EPS increased 13%. The lower growth in net income relative to pre-tax income was due to a higher effective tax rate in 2019, caused by changes in NJ State tax law.

For the nine months ended September 30, 2019, the Company recorded total revenue of $128.53 million, pretax income of $48.33 million, net income of $35.20 million and diluted earnings per share of $1.81, compared to $118.71 million, $44.10 million, $33.44 million and $1.75, respectively, for the nine months ended September 30, 2018, reflecting increases of 8% in revenue and 10% in pretax income, reflecting favorable operating leverage. Net income and EPS only increased 5% and 3%, respectively, (lower than the growth in pretax income) due to the increase in the effective tax rate in 2019. The effective tax rate was 27.17%

for nine months of 2019 compared to 24.17% for the nine months of 2018; the increase was caused by changes in NJ State tax law.

CONTRACTUAL OBLIGATIONS: For a discussion of our contractual obligations, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations.”

OFF-BALANCE SHEET ARRANGEMENTS: For a discussion of our off-balance sheet arrangements, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements.”

EARNINGS ANALYSIS

NET INTEREST INCOME (“NII”) / NET INTEREST MARGIN (“NIM”) / AVERAGE BALANCE SHEET:

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans, 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 earning assets and the average cost of interest-bearing liabilities (“net interest spread”) and the relative amounts of earning assets and interest-bearing liabilities. Net interest margin is calculated as net interest income annualized 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.

The following tables summarize the Company’s net interest income and margin for the periods indicated:

	Three Months Ended						Three Months Ended
	September 30, 2019						September 30, 2018
(Dollars in thousands)	NII			NIM			NII		NIM
NII/NIM excluding the below	$	29,896			2.67	%	$	27,804		2.66	%
Prepayment premiums received on loan paydowns		236			0.02	%		338		0.03	%
Effect of maintaining excess interest earning cash during 2019		(47	)		-0.09	%		0		0.00	%
NII/NIM as reported	$	30,085			2.60	%	$	28,142		2.69	%

	Nine Months Ended						Nine Months Ended
	September 30, 2019						September 30, 2018
	NII			NIM			NII		NIM
NII/NIM excluding the below	$	88,762			2.70	%	$	83,949		2.70	%
Prepayment premiums received on loan paydowns		914			0.03	%		1,508		0.04	%
Effect of maintaining excess interest earning cash during 2019		(316	)		-0.08	%		0		0.00	%
Material fees recognized on full paydowns of C&I loans		0			0.00	%		321		0.01	%
NII/NIM as reported	$	89,360			2.65	%	$	85,778		2.75	%

Net interest income, on a fully tax-equivalent basis, increased $2.2 million, or 8 percent, for the third quarter of 2019 to $30.8 million from net interest income of $28.5 million for the same quarter in 2018. The net interest margin was 2.60 percent and 2.69 percent for the three months ended September 30, 2019 and 2018, respectively, a decrease of 9 basis points. Net interest income, on a fully tax-equivalent basis, increased $4.4 million, or 5 percent, for the first nine months ended September 30, 2019 to $91.3 million from net interest income of $86.9 million for the same period in 2018. The net interest margin was 2.65 percent and 2.75 percent for the nine months ended September 30, 2019 and 2018, respectively, a decrease of 10 basis points. The growth in net interest income for both the three and nine months ended September 30, 2019 was due to increases in the average balance and yield on the Company’s interest-earning assets, especially the average balance of C&I loans, which typically have higher yields. The increase in interest income was partially offset by increases in interest-bearing liabilities and the Company’s cost of funds for those same periods. The Company continues to be impacted by competitive pressures in attracting new loans and deposits, as well as retaining deposits.

The following table summarizes the loans that the Company closed during the periods indicated:

	For the Three Months Ended
	September 30,		September 30,
(In thousands)	2019		2018
Residential mortgage loans originated for portfolio	$	19,073	$	14,412
Residential mortgage loans originated for sale		15,846		6,717
Total residential mortgage loans		34,919		21,129

Commercial real estate loans		43,414		23,950
Multifamily properties		77,138		12,328
C&I loans (A) (B)		228,903		133,973
Small business administration		3,510		4,800
Wealth Lines of Credit (A)		6,980		6,100
Total commercial loans		359,945		181,151

Installment loans		362		1,634
Home equity lines of credit (A)		5,631		10,273
Total loans closed	$	400,857	$	214,187

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

(B)	Includes equipment finance leases and loans.

	For the Nine Months Ended
	September 30,		September 30,
(In thousands)	2019		2018
Residential mortgage loans originated for portfolio	$	51,910	$	48,271
Residential mortgage loans originated for sale		28,721		20,877
Total residential mortgage loans		80,631		69,148

Commercial real estate loans		98,643		79,115
Multifamily properties		156,864		38,071
C&I loans (A) (B)		513,975		390,203
Small business administration		16,300		19,810
Wealth Lines of Credit (A)		21,085		36,898
Total commercial loans		806,867		564,097

Installment loans		2,417		4,020
Home equity lines of credit (A)		10,864		17,861
Total loans closed	$	900,779	$	655,126

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

(B)	Includes equipment finance leases and loans.

The Company has managed its balance sheet such that multifamily and 1-4 family residential loans declined as a percentage of the overall loan portfolio and C&I loans became a larger percentage of the overall loan portfolio.

At September 30, 2019, December 31, 2018 and September 30, 2018, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance.

The following table presents such concentration levels at the following periods:

	September 30,			December 31,			September 30,
	2019			2018			2018
Multifamily mortgage loans as a percent of total regulatory capital of the Bank		208	%		209	%		245	%

Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank		182			185			171

Total CRE concentration		390	%		394	%		416	%

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.

The following tables reflect the components of the average balance sheet and of net interest income for the periods indicated:

Average Balance Sheet

Unaudited

Three Months Ended

	September 30, 2019									September 30, 2018
	Average			Income/						Average			Income/
(Dollars in thousands)	Balance			Expense			Yield			Balance			Expense			Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (1)	$	393,386		$	2,477			2.52	%	$	367,955		$	2,385			2.59	%
Tax-exempt (1) (2)		13,497			165			4.89			19,201			179			3.73
Loans (2) (3):
Residential mortgages		567,097			4,811			3.39			563,066			4,671			3.32
Commercial mortgages		1,856,216			17,870			3.85			1,960,801			18,488			3.77
Commercial		1,530,131			18,605			4.86			1,109,492			13,055			4.71
Commercial construction		2,619			51			7.79			—			—			—
Installment		53,891			560			4.16			72,246			674			3.73
Home equity		58,573			736			5.03			58,082			682			4.70
Other		396			11			11.11			439			11			10.02
Total loans		4,068,923			42,644			4.19			3,764,126			37,581			3.99
Federal funds sold		101			—			0.25			101			—			0.25
Interest-earning deposits		256,865			1,362			2.12			95,014			418			1.76
Total interest-earning assets		4,732,772			46,648			3.94	%		4,246,397			40,563			3.82	%
Noninterest-earning assets:
Cash and due from banks		5,628									5,141
Allowance for loan and lease losses		(40,806	)								(38,473	)
Premises and equipment		21,121									28,216
Other assets		151,265									103,422
Total noninterest-earning assets		137,208									98,306
Total assets	$	4,869,980								$	4,344,703
LIABILITIES:
Interest-bearing deposits:
Checking	$	1,410,837		$	4,467			1.27	%	$	1,148,921		$	2,644			0.92	%
Money markets		1,184,589			4,227			1.43			1,065,338			3,261			1.22
Savings		113,961			16			0.06			118,996			17			0.06
Certificates of deposit - retail		649,393			3,781			2.33			538,985			2,545			1.89
Subtotal interest-bearing deposits		3,358,780			12,491			1.49			2,872,240			8,467			1.18
Interest-bearing demand - brokered		180,000			901			2.00			180,000			796			1.77
Certificates of deposit - brokered		33,688			267			3.17			61,192			394			2.58
Total interest-bearing deposits		3,572,468			13,659			1.53			3,113,432			9,657			1.24
FHLB advances and borrowings		114,584			886			3.09			167,153			1,038			2.48
Finance lease liabilities		7,866			94			4.78			8,614			103			4.78
Subordinated debt		83,329			1,224			5.88			83,115			1,223			5.89
Total interest-bearing liabilities		3,778,247			15,863			1.68	%		3,372,314			12,021			1.43	%
Noninterest-bearing liabilities:
Demand deposits		512,497									495,163
Accrued expenses and other liabilities		83,554									33,943
Total noninterest-bearing liabilities		596,051									529,106
Shareholders’ equity		495,682									443,283
Total liabilities and shareholders’ equity	$	4,869,980								$	4,344,703
Net interest income (tax-equivalent basis)					30,785									28,542
Net interest spread								2.26	%								2.39	%
Net interest margin (4)								2.60	%								2.69	%
Tax equivalent adjustment					(700	)								(400	)
Net interest income				$	30,085								$	28,142

(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 tax rate.

(3)

Loans are stated net of unearned income and include nonaccrual loans.

(4)

Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

Average Balance Sheet

Unaudited

Nine Months Ended

	September 30, 2019									September 30, 2018
	Average			Income/						Average			Income/
(Dollars in thousands)	Balance			Expense			Yield			Balance			Expense			Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (1)	$	391,032		$	7,800			2.66	%	$	356,453		$	6,382			2.39	%
Tax-exempt (1) (2)		15,904			581			4.87			21,365			558			3.48
Loans (2) (3):
Residential mortgages		568,902			14,541			3.41			566,600			14,110			3.32
Commercial mortgages		1,822,341			53,472			3.91			1,986,497			55,868			3.75
Commercial		1,442,827			52,659			4.87			1,042,609			35,938			4.60
Commercial construction		883			51			7.70			—			—			—
Installment		54,552			1,722			4.21			75,279			1,979			3.51
Home equity		60,695			2,319			5.09			61,964			2,028			4.36
Other		394			32			10.83			448			34			10.12
Total loans		3,950,594			124,796			4.21			3,733,397			109,957			3.93
Federal funds sold		101			—			0.25			101			—			0.25
Interest-earning deposits		245,153			3,897			2.12			96,402			1,170			1.62
Total interest-earning assets		4,602,784			137,074			3.97	%		4,207,718			118,067			3.74	%
Noninterest-earning assets:
Cash and due from banks		5,436									4,831
Allowance for loan and lease losses		(39,638	)								(37,947	)
Premises and equipment		21,253									28,722
Other assets		133,830									100,867
Total noninterest-earning assets		120,881									96,473
Total assets	$	4,723,665								$	4,304,191
LIABILITIES:
Interest-bearing deposits:
Checking	$	1,321,248		$	12,299			1.24	%	$	1,121,748		$	6,369			0.76	%
Money markets		1,196,778			12,978			1.45			1,033,313			7,639			0.99
Savings		113,552			48			0.06			121,176			49			0.05
Certificates of deposit - retail		622,509			10,476			2.24			550,101			7,024			1.70
Subtotal interest-bearing deposits		3,254,087			35,801			1.47			2,826,338			21,081			0.99
Interest-bearing demand - brokered		180,000			2,476			1.83			180,000			2,280			1.69
Certificates of deposit - brokered		45,412			958			2.81			65,677			1,222			2.48
Total interest-bearing deposits		3,479,499			39,235			1.50			3,072,015			24,583			1.07
FHLB advances and borrowings		108,526			2,558			3.14			158,612			2,563			2.15
Finance lease liabilities		8,052			290			4.80			8,789			316			4.79
Subordinated debt		83,272			3,671			5.88			83,086			3,665			5.88
Total interest-bearing liabilities		3,679,349			45,754			1.66	%		3,322,502			31,127			1.25	%
Noninterest-bearing liabilities:
Demand deposits		494,023									523,620
Accrued expenses and other liabilities		64,806									30,533
Total noninterest-bearing liabilities		558,829									554,153
Shareholders’ equity		485,487									427,536
Total liabilities and shareholders’ equity	$	4,723,665								$	4,304,191
Net interest income (tax-equivalent basis)					91,320									86,940
Net interest spread								2.31	%								2.49	%
Net interest margin (4)								2.65	%								2.75	%
Tax equivalent adjustment					(1,960	)								(1,162	)
Net interest income				$	89,360								$	85,778

(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 tax rate.

(3)

Loans are stated net of unearned income and include nonaccrual loans.

(4)

Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

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

	For the Three Months Ended September 30, 2019
	Difference due to						Change In
	Change In:						Income/
(In Thousands):	Volume			Rate			Expense
ASSETS:
Investments	$	44		$	34		$	78
Loans		3,934			1,129			5,063
Interest-earning deposits		842			102			944
Total interest income	$	4,820		$	1,265		$	6,085
LIABILITIES:
Interest-bearing checking	$	749		$	1,074		$	1,823
Money market		458			508			966
Savings		(1	)		—			(1	)
Certificates of deposit - retail		585			651			1,236
Certificates of deposit - brokered		(204	)		77			(127	)
Interest bearing demand brokered		1			104			105
Borrowed funds		(196	)		44			(152	)
Capital lease obligation		(9	)		—			(9	)
Subordinated debt		3			(2	)		1
Total interest expense	$	1,386		$	2,456		$	3,842
Net interest income	$	3,434		$	(1,191	)	$	2,243

	For the Nine Months Ended September 30, 2019
	Difference due to						Change In
	Change In:						Income/
(In Thousands):	Volume			Rate			Expense
ASSETS:
Investments	$	372		$	1,069		$	1,441
Loans		8,998			5,841			14,839
Interest-earning deposits		2,272			455			2,727
Total interest income	$	11,642		$	7,365		$	19,007
LIABILITIES:
Interest-bearing checking	$	1,587		$	4,343		$	5,930
Money market		1,898			3,441			5,339
Savings		(11	)		10			(1	)
Certificates of deposit - retail		1,011			2,441			3,452
Certificates of deposit - brokered		(412	)		148			(264	)
Interest bearing demand brokered		—			196			196
Borrowed funds		(341	)		336			(5	)
Capital lease obligation		(25	)		(1	)		(26	)
Subordinated debt		6			—			6
Total interest expense	$	3,713		$	10,914		$	14,627
Net interest income	$	7,929		$	(3,549	)	$	4,380

Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $46.6 million for the third quarter of 2019 compared to $40.6 million for the same quarter of 2018, reflecting an increase of $6.1 million, or 15 percent. Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $137.1 million for the nine months ended September 30, 2019 compared to $118.1 million for the same quarter of 2018, reflecting an increase of $19.0 million, or 16 percent. Average interest-earning assets totaled $4.73 billion for the third quarter of 2019, an increase of $486.4 million, or 11 percent, from the same period of 2018. The average balance of the C&I loan portfolio increased $420.6 million, or 38 percent, from the third quarter of 2018, to $1.53 billion for the same quarter of 2019. Average interest-earning assets totaled $4.60 billion for the nine months

ended September 30, 2019, an increase of $395.1 million, or 9 percent, from the same period of 2018. The average balance of the C&I loan portfolio increased $400.2 million, or 38 percent, to $1.44 billion for the nine months ended September 30, 2019 as compared to $1.04 billion the same period in 2018. The increase in this portfolio for both the three and nine months ended September 30, 2019 was attributed to: the addition of seasoned bankers including a new EVP, Head of Commercial Banking, and an equipment finance team in 2017; a continued focus on client service and value-added aspects of the lending process; and a continued focus on markets outside of the immediate branch service area, including markets around the Teaneck and Princeton, New Jersey private banking offices. These increases were partially offset by decreases in the average balance of the commercial mortgage portfolio (which includes multifamily mortgage loans) of $104.6 million, or 5 percent, and $164.2 million, or 8 percent to $1.86 billion and $1.82 billion for the three and nine months ended September 30, 2019, respectively, when compared to the same periods in 2018. The Company continued to manage its balance sheet such that lower yielding, primarily fixed rate multifamily loans declined as a percentage of the overall loan portfolio and higher yielding, primarily floating rate or short duration C&I loans became a larger percentage of the overall loan portfolio. The average balance of investment securities totaled $406.9 million for the third quarter of 2019 compared to $387.2 million for the same quarter of 2018 reflecting an increase of $19.7 million, or 5 percent. The average balance of investment securities totaled $406.9 million for the nine months ended September 30, 2019 as compared to $377.8 million for the same period of 2018 reflecting an increase of $29.1 million, or 8 percent. Interest-earning deposits totaled $256.9 million for the three months ended September 30, 2019 when compared to $95.0 million for the same period in 2018 reflecting an increase of $161.9 million or 170 percent. Interest-earning deposits increased to $245.2 million for the nine months ended September 30, 2019 when compared to $96.4 million for the same period in 2018 reflecting an increase of $148.8 million or 154 percent. The increase for the three and nine months ended September 30, 2019 was primarily due to the maintenance of greater liquidity balances held to fund future loan volume.

For the quarters ended September 30, 2019 and 2018, the average yields earned on interest-earning assets were 3.94 percent and 3.82 percent, respectively, an increase of 12 basis points. The nine months ended September 30, 2019 had an increase of 23 basis points on the average yields earned on interest-earning assets to 3.97 percent from 3.74 percent when compared to the same period of 2018. The increase in average rates on loans for both periods was due to an increase in market rates and a shift from lower yielding commercial mortgages into higher yielding commercial loans (C&I and equipment financings) and a sale of $131.3 million of multifamily mortgage loans during the fourth quarter of 2018.

For the third quarter of 2019, the average balance of interest-bearing deposits was $3.57 billion, an increase of $459.0 million, or 15 percent, from the average balance for the same period of 2018. Interest-bearing deposits totaled $3.48 billion for the nine months ended September 30, 2019, which is an increase of $407.5 million or 13 percent, from the same 2018 period. 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; and a full array of treasury management products that support core deposit growth. The growth is partially offset by a decline of $29.6 million of listing service deposits as the Company has chosen not to participate in such programs for the foreseeable future, so maturing listing service deposits are not replaced with new listing service deposits.

Average rates paid on total interest-bearing deposits were 1.53 percent and 1.24 percent for the third quarters of 2019 and 2018, respectively, an increase of 29 basis points. Average rates paid on total interest-bearing deposits were 1.50 percent and 1.07 percent for the nine months ended September 30, 2019 and 2018, respectively, an increase of 43 basis points. The increase in the average rate paid on deposits was principally due to growth in higher costing certificates of deposit and money market accounts and competitive pressures in attracting new deposits.

For the third quarter of 2019, the average balance of borrowings was $114.6 million, a decrease of $52.6 million when compared to the same period in 2018. For the nine months ended September 30, 2019, the average balance of borrowings was $108.5 million, a decrease of $50.1 million when compared to the same period in 2018. The decline in borrowings was due to a decrease in overnight borrowings as deposit gathering outpaced loan funding during the first half of 2019.

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. Such reciprocal deposit balances are included in the Company’s interest-bearing checking balances. The average balance of reciprocal deposits was $470.9 million and $447.0 million for the three and nine months ended September 30, 2019 compared to $413.2 million and $387.1 million for the three and nine months ended September 30, 2018.

The average balance of brokered interest-bearing demand deposits was $180.0 million for the three and nine months ended September 30, 2019 and 2018, respectively, and are matched to the Company’s existing $180.0 million of interest rate swaps, transacted previously as part of the Company’s interest rate risk management program.

INVESTMENT SECURITIES AVAILABLE FOR SALE: Investment securities available for sale are purchased, sold and/or maintained as a part of the Company’s overall balance sheet, liquidity and interest rate risk management strategies. 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 September 30, 2019, the Company had investment securities available for sale with a fair value of $350.0 million compared with $377.9 million at December 31, 2018. A net unrealized gain (net of income tax) of $1.5 million and a net unrealized loss (net of income tax) of $3.0 million were included in shareholders’ equity at September 30, 2019 and December 31, 2018, respectively.

The Company has one equity security (a CRA investment security) with a fair value of $7.9 million at September 30, 2019 compared with $4.7 million at December 31, 2018, which, under Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments”, requires a quarterly mark to market through the income statement effective January 1, 2018. As a result, the Company recorded a $162 thousand unrealized gain on the Consolidated Statements of Income for the nine months ended September 30, 2019 as compared to an unrealized loss of $151 thousand for the nine months ended September 30, 2018.

The carrying value of investment securities available for sale as of September 30, 2019 and December 31, 2018 are shown below:

	September 30,		December 31,
(In thousands)	2019		2018
U.S. treasury and U.S. government-sponsored agencies	$	35,047	$	102,013
Mortgage-backed securities-residential (principally U.S. government-sponsored entities)		296,629		251,362
SBA pool securities		3,057		3,839
State and political subdivisions		12,196		17,610
Corporate bond		3,060		3,112
Total	$	349,989	$	377,936

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of September 30, 2019:

				After 1			After 5
				But			But			After
	Within			Within			Within			10
(Dollars in thousands)	1 Year			5 Years			10 Years			Years			Total
U.S. treasury and U.S. government-sponsored agencies	$	—		$	9,981		$	25,066		$	—		$	35,047
		—			1.86	%		3.02	%		—			2.69	%
Mortgage-backed securities-residential (1)	$	974		$	2,226		$	21,022		$	272,407		$	296,629
		5.02	%		1.59	%		2.32	%		2.48	%		2.47	%
SBA pool securities	$	—		$	—		$	608		$	2,449		$	3,057
		—			—			2.40	%		2.44	%		2.43	%
State and political subdivisions (2)	$	1,581		$	7,336		$	2,313		$	966		$	12,196
		2.57	%		2.65	%		3.12	%		2.37	%		2.71	%
Corporate bond	$	—		$	—		$	3,060		$	—		$	3,060
		—			—			5.25	%		—			5.25	%
Total	$	2,555		$	19,543		$	52,069		$	275,822		$	349,989
		3.50	%		2.13	%		2.87	%		2.48	%		2.52	%

(1)	Shown using stated final maturity.

(2)	Yields presented on a fully tax-equivalent basis.

Federal funds sold and interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during the nine months ended September 30, 2019 was $245.3 million compared to $103.2 million for the year ended December 31, 2018. The increase represented excess cash as deposit growth and cash from maturing securities exceeded loan growth.

OTHER INCOME: The following table presents other income, excluding income from wealth management, which is summarized and discussed subsequently:

	For the Three Months Ended September 30,						Change
(In thousands)	2019			2018			2019 vs 2018
Service charges and fees	$	882		$	860		$	22
Bank owned life insurance		332			349			(17	)
Gain on sale of loans (mortgage banking)		198			87			111
Loss on loans held for sale at lower of cost or fair value		(6	)		—			(6	)
Fee income related to loan level, back-to-back swaps		2,349			854			1,495
Gain on sale of SBA loans		224			514			(290	)
Other income		902			444			458
Securities gains/(losses)		34			(325	)		359
Total other income	$	4,915		$	2,783		$	2,132

	For the Nine Months Ended September 30,						Change
(In thousands)	2019			2018			2019 vs 2018
Service charges and fees	$	2,595		$	2,564		$	31
Bank owned life insurance		996			1,030			(34	)
Gain on sale of loans (mortgage banking)		377			260			117
Loss on loans held for sale at lower of cost or fair value		(6	)		—			(6	)
Fee income related to loan level, back-to-back swaps		3,340			2,006			1,334
Gain on sale of SBA loans		1,216			1,359			(143	)
Other income		2,248			1,465			783
Securities gains/(losses)		162			(439	)		601
Total other income	$	10,928		$	8,245		$	2,683

For the quarter ended September 30, 2019, income from the sale of newly originated residential mortgage loans was $198 thousand compared to $87 thousand for the same period in 2018. For the nine months ended September 30, 2019 and 2018, income from the sale of newly originated residential mortgage loans was $377 thousand and $260 thousand, respectively. Such income is a result of the volume of residential mortgage loans originated for sale in the respective periods.

The third quarter of 2019 included $2.3 million of loan level, back-to-back swap income compared to $854 thousand in the same quarter of 2018. The nine months ended September 30, 2019 included $3.3 million of loan level, back-to-back swap income compared to $2.0 million for the same period of 2018. 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 third quarter of 2019 included $224 thousand of income, on sales of $2.2 million, related to the Company’s SBA lending and sale program compared to $514 thousand of income, on sales of $5.9 million, for the same quarter in 2018. The nine months ended September 30, 2019 included $1.2 million of income, on sales of $12.1 million, related to the Company’s SBA lending and sale program compared to $1.4 million of income, on sales of $14.4 million, for the same period in 2018.

Income from the back-to-back swap and SBA programs are dependent on volume, and thus are not linear from quarter to quarter, as some quarters will be higher than others.

The Company recorded a $34 thousand and $162 thousand mark to market gain on its equity security investment for the three and nine months ended September 30, 2019, respectively, compared to a $325 thousand and $439 thousand mark to market loss on its equity security investment for the three and nine months ended September 30, 2018, respectively, as a result of the adoption of Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments” on January 1, 2018.

Other income was $902 thousand for the quarter ended September 30, 2019 compared to $444 thousand for the same quarter in 2018. The nine months ended September 30, 2019 included $2.2 million in other income compared to $1.5 million for the same period of 2018. The increase in other income was primarily due to increased commercial lending fees, particularly unused and credit fees, as well as income related to our corporate advisory program for both the three and nine months ended September 30, 2019.

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

	For the Three Months Ended September 30,					Change
(In thousands)	2019			2018		2019 vs 2018
Compensation and employee benefits	$	17,476		$	16,025	$	1,451
Premises and equipment		3,849			3,399		450
FDIC assessment		(277	)		593		(870	)
Other Operating Expenses:
Professional and legal fees		1,228			1,195		33
Telephone		346			275		71
Advertising		337			248		89
Amortization of intangible assets		229			180		49
OREO		—			28		(28	)
Other		3,071			2,341		730
Total operating expenses	$	26,259		$	24,284	$	1,975

	For the Nine Months Ended September 30,				Change
(In thousands)	2019		2018		2019 vs 2018
Compensation and employee benefits	$	52,175	$	46,430	$	5,745
Premises and equipment		10,837		10,075		762
FDIC assessment		277		1,798		(1,521	)
Other Operating Expenses:
Professional and legal fees		3,320		3,487		(167	)
Telephone		1,003		830		173
Advertising		1,105		973		132
Amortization of intangible assets		688		540		148
OREO		—		232		(232	)
Other		8,742		8,197		545
Total operating expenses	$	78,147	$	72,562	$	5,585

Increased operating expenses in the three-month and nine-month periods ended September 30, 2019 were principally attributable to: an increase in compensation and employee benefits of $1.5 million to $17.5 million for the third quarter of 2019 and $5.7 million to $52.2 million for the nine months ended September 30, 2019, which includes expense related to the Lassus Wherley acquisition completed on September 1, 2018; Point View acquisition completed on September 1, 2019; ongoing operating expenses including amortization of intangibles; hiring in line with the Company’s strategic plan; and normal salary increases. These increases were partially offset by a decrease in FDIC expense, provision for OREO, and, for the nine month periods, professional and legal fees. The decrease in FDIC expense was due to the FDIC providing for a small bank assessment credit as the FDIC has met its reserve ratio.

PEAPACK PRIVATE WEALTH MANAGEMENT DIVISION: 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 the Peapack Private Wealth Management Division are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, at private banking locations in Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware in Greenville, Delaware, MCM, in Gladstone, New Jersey, Quadrant, in Fairfield, New Jersey, Lassus Wherley in New Providence, New Jersey and Bonita Springs, Florida and Point View, in Summit, New Jersey.

The market value of the assets under management and/or administration (“AUM”) of the Peapack Private Wealth Management Division was $7.0 billion at September 30, 2019, reflecting an increase of 21 percent from $5.8 billion at December 31, 2018. The increase in AUM was due to the acquisition of one registered investment advisory firm (“RIA”) and net organic growth. Effective September 1, 2019, the Bank acquired Point View, an RIA, based in Summit, NJ, which contributed approximately $350 million of AUM at the time of acquisition. Net organic growth and equity market appreciation, contributed an additional $859 million in AUM.

In the September 2019 quarter, the Peapack Private Wealth Management Division generated $9.5 million in fee income compared to $8.2 million for the September 2018 quarter, reflecting a 16 percent increase. For the nine months ended September 30, 2019,

the Peapack Private Wealth Management Division generated $28.2 million in fee income compared to $24.7 million for the same period in 2018, reflecting a 14 percent increase. The growth in fee income was due to the acquisition noted above, as well as continued new business, partially offset by normal levels of disbursements and outflows. The three and nine months ended September 30, 2019 also includes a full quarter and nine months of fee income from Lassus Wherley, which was acquired effective September 1, 2018.

Operating expenses relative to the Peapack Private Wealth Management Division reflected increases due to the Point View acquisition, overall growth in the business, new hires and select third party expenditures. The three months and nine months ended September 30, 2019 also includes a full quarter and nine months of expense from Lassus Wherley, which was acquired effective September 1, 2018. Remaining expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel. Generally, revenue and profitability related to the new personnel will lag expenses by several quarters.

The Peapack Private Wealth Management Division currently generates adequate revenue to support the salaries, benefits and other expenses of the 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 the Peapack Private Wealth Management Division should it be necessary.

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

The following table sets forth asset quality data on the dates indicated:

	As of
	September 30,			June 30,			March 31,			December 31,			September 30,
(Dollars in thousands)	2019			2019			2019			2018			2018
Loans past due over 90 days and still accruing	$	—		$	—		$	—		$	—		$	—
Nonaccrual loans		29,383			31,150			24,892			25,715			10,722
Other real estate owned		336			—			—			—			96
Total nonperforming assets	$	29,719		$	31,150		$	24,892		$	25,715		$	10,818

Performing TDRs	$	2,527		$	3,772		$	4,274		$	4,303		$	19,334

Loans past due 30 through 89 days and still accruing (1)	$	6,333		$	432		$	2,492		$	3,484		$	2,528

Classified loans	$	53,882		$	56,135		$	51,306		$	58,265		$	51,783

Impaired loans	$	36,627		$	34,941		$	29,185		$	31,300		$	31,345

Nonperforming loans as a % of total loans (2)		0.71	%		0.77	%		0.64	%		0.65	%		0.28	%
Nonperforming assets as a % of total assets (2)		0.60	%		0.64	%		0.53	%		0.56	%		0.24	%
Nonperforming assets as a % of total loans plus other real estate owned (2)		0.71	%		0.77	%		0.64	%		0.65	%		0.28	%

(1)	The $6.3 million at September 30, 2019 include one $4.3 million commercial real estate loan that was in process of a rate modification (not a TDR modification). The loan was brought fully current in early October 2019.

(2)	Nonperforming loans/assets do not include performing TDRs.

PROVISION FOR LOAN AND LEASE LOSSES: The provision for loan and lease losses was $800 thousand and $500 thousand for the third quarters of 2019 and 2018, respectively. The provision for loan losses was $2.1 million for both the nine months ended September 30, 2019 and 2018. The increase in the provision for loan and lease losses in the 2019 quarter was primarily due to the higher level of loan growth and $1.5 million of specific reserves allocated to two nonperforming loans, offset by a $1.0 million recovery resulting from the payoff of a nonperforming loan. The loan portfolio grew by $135.0 million during the third quarter of 2019 as compared to $76.0 million for the third quarter of 2018. The amount of the loan loss provision and the level of the allowance for loan and lease losses are based upon several factors including Management’s evaluation of probable losses inherent in the portfolio, after consideration of appraised collateral values, financial condition and past credit history of the borrowers, type of and amount of loan growth, asset quality metrics, net charge-off activity, as well as prevailing economic

conditions. Commercial credits generally carry a higher risk profile compared to some of the other credits, which is reflected in Management’s determination of the adequacy of the allowance for loan and lease losses.

The allowance for loan and lease losses was $41.6 million as of September 30, 2019, compared to $38.5 million at December 31, 2018. As a percentage of loans, the allowance for loan and lease losses was 1.00 percent for September 30, 2019 and 0.98 percent for December 31, 2018. The specific reserves on impaired loans were $2.7 million at September 30, 2019 compared to $262 thousand as of December 31, 2018. Specific reserves were primarily related to a $1.5 million reserve associated with a casual dining commercial banking relationship and a $1.0 million reserve on a senior living facility relationship noted above. Total impaired loans were $36.6 million and $31.3 million as of September 30, 2019 and December 31, 2018, respectively. The general component of the allowance increased from $38.2 million at December 31, 2018 to $38.8 million at September 30, 2019.

A summary of the allowance for loan and lease losses for the quarterly periods indicated follows:

	September 30,			June 30,			March 31,			December 31,			September 30,
(Dollars in thousands)	2019			2019			2019			2018			2018
Allowance for loan and lease losses:
Beginning of period	$	39,791		$	38,653		$	38,504		$	37,293		$	38,066
Provision for loan and lease losses		800			1,150			100			1,500			500
Recoveries/(charge-offs), net		989			(12	)		49			(289	)		(1,273	)
End of period	$	41,580		$	39,791		$	38,653		$	38,504		$	37,293

Allowance for loan and lease losses as a % of total loans		0.998	%		0.987	%		0.991	%		0.979	%		0.981	%

General allowance for loan and lease losses as a % of total loans		0.932	%		0.956	%		0.984	%		0.972	%		0.961	%

Allowance for loan and lease losses as a % of non-performing loans		141.51	%		127.74	%		155.28	%		149.73	%		347.82	%

INCOME TAXES: Income tax expense for the three months ended September 30, 2019 was $5.2 million as compared to $3.6 million for the same period in 2018. For the third quarters of 2019 and 2018, income tax expense as a percentage of pre-tax income was 29.9 percent and 25.2 percent, respectively. Income tax expense for the nine months ended September 30, 2019 was $13.1 million as compared to $10.7 million for the same period in 2018. For the first nine months of 2019 and 2018, income tax expense as a percentage of pre-tax income was 27.2 percent and 24.2 percent, respectively. The increase in income tax expense and the effective rate for the 2019 periods was primarily due to the changes in New Jersey tax law which included New Jersey surtax and combined reporting rules.

On July 1, 2018, the 2019 New Jersey Budget (“Budget”) was passed, which established a 2.5 percent surtax on businesses that have New Jersey allocated net income in excess of $1.0 million. The surtax was effective as of January 1, 2018 and will continue through 2019. The surtax will adjust to 1.5 percent for 2020 and 2021. In addition, effective for taxable years beginning on or after January 1, 2019, banks will be required to file combined reports of taxable income including their parent holding company. New Jersey requires entities to report their real estate investment trust, registered investment company and investment company on a separate entity basis. The Bank made an adjustment to income tax expense and deferred tax assets/liabilities in the third quarter of 2018 to reflect the new state tax rate, which became effective on January 1, 2018. The Company’s effective tax rate for the nine months ended September 30, 2018 was positively affected by the adoption of ASU 2016-09, as nine months ended September 30, 2018 included a $458 thousand reduction in income taxes.

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

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

Capital for the nine months ended September 30, 2019 was benefitted by net income of $35.2 million, as well as $5.6 million of shares issued in the Point View acquisition. These positive effects were partially offset by $16.7 million of capital spent on the Company’s stock repurchase program.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At September 30, 2019 and December 31, 2018, all of the Bank’s capital ratios remain above the levels required to be considered “well capitalized” and the Company’s capital ratios remain above regulatory requirements.

To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I and Tier I leverage ratios as set forth in the table.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are 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, effective January 1, 2020. The Bank’s leverage ratio was 11.08 percent at September 30, 2019.

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 September 30, 2019:
Total capital (to risk-weighted assets)	$	575,931		14.23	%	$	404,850		10.00	%	$	323,880		8.00	%	$	425,093		10.50	%

Tier I capital (to risk-weighted assets)		534,351		13.20			323,880		8.00			242,910		6.00			344,123		8.50

Common equity tier I (to risk-weighted assets)		534,349		13.20			263,153		6.50			182,183		4.50			283,395		7.00

Tier I capital (to average assets)		534,351		11.08			241,094		5.00			192,876		4.00			192,876		4.00

As of December 31, 2018:
Total capital (to risk-weighted assets)	$	543,008		14.59	%	$	372,186		10.00	%	$	297,749		8.00	%	$	367,533		9.88	%

Tier I capital (to risk-weighted assets)		504,504		13.56			297,749		8.00			223,311		6.00			293,096		7.88

Common equity tier I (to risk-weighted assets)		504,502		13.56			241,921		6.50			167,484		4.50			237,268		6.38

Tier I capital (to average assets)		504,504		11.32			222,912		5.00			178,330		4.00			178,330		4.00

(A)	See footnote on following table

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 September 30, 2019:
Total capital (to risk-weighted assets)	$	580,120		14.31	%	N/A	N/A	$	324,249		8.00	%	$	425,577		10.50	%

Tier I capital (to risk-weighted assets)		455,179		11.23		N/A	N/A		243,187		6.00			344,515		8.50

Common equity tier I (to risk-weighted assets)		455,177		11.23		N/A	N/A		182,390		4.50			283,718		7.00

Tier I capital (to average assets)		455,179		9.43		N/A	N/A		193,053		4.00			193,053		4.00

As of December 31, 2018:
Total capital (to risk-weighted assets)	$	559,937		15.03	%	N/A	N/A	$	298,047		8.00	%	$	367,902		9.88	%

Tier I capital (to risk-weighted assets)		438,240		11.76		N/A	N/A		223,535		6.00			293,390		7.88

Common equity tier I (to risk-weighted assets)		438,238		11.76		N/A	N/A		167,652		4.50			237,506		6.38

Tier I capital (to average assets)		438,240		9.82		N/A	N/A		178,473		4.00			178,473		4.00

(A)

As fully phased in on January 1, 2019, the Basel Rules require the Company and the Bank to maintain a 2.5% “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019.

The Company’s regulatory total risk-based capital ratio was benefitted by the $48.7 million (net) subordinated debt issuance that closed in June 2016. At that time, the Company down-streamed approximately $40.0 million of proceeds to the Bank as capital, benefitting all the Bank’s regulatory capital ratios.

In addition, on December 12, 2017, the Company issued $35.0 million in aggregate principal amount of Fixed-to-Floating Subordinated Notes due December 15, 2027. The Company down-streamed approximately $29.1 million of those proceeds to the Bank as capital.

The Dividend Reinvestment Plan of Peapack-Gladstone Financial Corporation, or the “Reinvestment Plan,” allows shareholders of the Company to purchase additional shares of common stock using cash dividends without payment of any brokerage commissions or other charges. Shareholders may also make voluntary cash payments of up to $200 thousand per quarter to purchase additional shares of common stock, which up to January 30, 2019 were purchased at a 3 percent discount to market. On January 30, 2019, the Company filed a Registration Statement on Form S-3 eliminating the feature in our “Reinvestment Plan” under which participants could purchase shares of our common stock through the Plan at a 3 percent discount to market price. 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.

The Company authorized a 5 percent (960,000 shares) stock repurchase program on July 25, 2019. During the third quarter of 2019, the Company purchased 595,853 shares for a total cost of $16.7 million under this program.

On October 24, 2019, the Board of Directors declared a regular cash dividend of $0.05 per share payable on November 22, 2019 to shareholders of record on November 7, 2019.

Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient capital to support its planned balance sheet 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 $227.1 million at September 30, 2019. In addition, the Company had $350.0 million in securities designated as available for sale at September 30, 2019. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. Securities available for sale with a fair value of $341.7 million as of September 30, 2019 were pledged to secure public funds and for other purposes required or permitted by law. In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities.

A further source of liquidity is secured borrowing capacity. At September 30, 2019, unused borrowing commitments totaled $1.3 billion from the FHLB and $1.5 billion from the Federal Reserve Bank of New York.

Customer deposits and capital increased by $188.5 million and $26.3 million, respectively, during the first nine months of 2019. These increases funded an increase in loans of $232.0 million.

Brokered interest-bearing demand (“overnight”) deposits were $180.0 million at September 30, 2019. The interest rate paid on these deposits allows the Bank to fund at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of September 30, 2019, the Company had transacted pay fixed, receive floating interest rate swaps totaling $245.0 million in notional amount.

The Company has a Board-approved Contingency Funding Plan in place. This plan provides a framework for managing adverse liquidity stress and contingent sources of liquidity. The Company conducts liquidity stress testing on a regular basis to ensure sufficient liquidity in a stressed environment.

Management believes the Company’s liquidity position and sources are adequate.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

•

Actively market C&I loans, which tend to have adjustable-rate features, and which generate customer relationships that can result in higher core deposit accounts;

•

Actively market equipment finance leases and loans, which tend to have shorter terms and higher interest rates than real estate lending;

•

Manage residential mortgage portfolio originations to adjustable-rate and/or shorter-term and/or “relationship” loans that result in core deposit and/or wealth management relationships;

•

Actively market core deposit relationships, which are generally longer duration liabilities;

•

Utilize medium to longer term certificates of deposit and/or wholesale borrowings to extend liability duration;

•

Utilize interest rate swaps to extend liability duration;

•

Utilize a loan level / back-to-back interest rate swap program, which converts a borrower’s fixed rate loan to adjustable rate for the Company;

•

Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;

•

Maintain adequate levels of capital; and

•

Utilize loan sales.

The interest rate swap program is administered by ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. In all of these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $245.0 million as of September 30, 2019.

In addition, the Company initiated a loan level / back-to-back swap program in support of its commercial lending business. Pursuant to this program, the Company extends a floating rate loan and executes a floating to fixed swap with the borrower. At the same time, the Company executes a third-party swap, the terms of which fully offset the fixed exposure and, result in a final floating rate exposure for the Company. As of September 30, 2019, $668.8 million of notional value in swaps were executed and outstanding with borrowers under this program.

As noted above, ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The models are based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The models incorporate certain prepayment and interest rate assumptions, which management believes to be reasonable as of September 30, 2019. The models assume changes in interest rates without any proactive change in the balance sheet by management. In the models, the forecasted shape of the yield curve remained static as of September 30, 2019.

In an immediate and sustained 200 basis point increase in market rates at September 30, 2019, net interest income for year 1 would increase approximately 6.9 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 14.2 percent, when compared to a flat interest rate scenario.

In an immediate and sustained 100 basis point decrease in market rates at September 30, 2019, net interest income would decline approximately 6.4 percent for year 1 and 10.1 percent for year 2, compared to a flat interest rate scenario.

The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at September 30, 2019.

	Estimated Increase/								EVPE as a Percentage of
(Dollars in thousands)	Decrease in EVPE								Present Value of Assets (2)
Change In
Interest
Rates	Estimated								EVPE			Increase/(Decrease)
(Basis Points)	EVPE (1)		Amount			Percent			Ratio (3)			(basis points)
+200	$	634,766	$	51,179			8.77	%		13.32	%		143
+100		614,975		31,388			5.38			12.71			82
Flat interest rates		583,587		—			—			11.89			—
-100		538,337		(45,250	)		(7.75	)		10.84			(105	)

(1)	EVPE is the discounted present value of expected cash flows from assets and liabilities.

(2)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(3)	EVPE ratio represents EVPE divided by the present value of assets.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk. Simulation modeling requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the modeling assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the information provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

The Company’s interest rate sensitivity models indicate the Company is asset sensitive as of September 30, 2019, and that net interest income would improve in a rising rate environment but decline in a falling rate environment. Over the past quarter, the Company has been managing its balance sheet to be closer to interest rate neutral.

ITEM 4. Controls and Procedures

The Corporation’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

The Corporation’s Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Corporation’s internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonable likely to materially affect, the Corporation’s internal control over financial reporting.

The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures of our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, control may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

There were no material changes in the Company’s risk factors during the nine months ended September 30, 2019 from the risk factors disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits


3	Articles of Incorporation and By-Laws:

	A. Certificate of Incorporation of the Registrant, as amended, incorporated herein by reference to Exhibit 3 of the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2009 (File No. 001-16197).

	B. By-Laws of the Registrant, incorporated herein by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on December 20, 2017 (File No. 001-16197).

31.1	Certification of Douglas L. Kennedy, Chief Executive Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).

31.2	Certification of Jeffrey J. Carfora, Chief Financial Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).

32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Douglas L. Kennedy, Chief Executive Officer of the Corporation and Jeffrey J. Carfora, Chief Financial Officer of the Corporation.

101	Interactive Data File

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PEAPACK-GLADSTONE FINANCIAL CORPORATION
	(Registrant)

DATE: November 6, 2019	By:	/s/ Douglas L. Kennedy
		Douglas L. Kennedy
		President and Chief Executive Officer

DATE: November 6, 2019	By:	/s/ Jeffrey J. Carfora
		Jeffrey J. Carfora
		Senior Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

DATE: November 6, 2019	By:	/s/ Francesco S. Rossi
		Francesco S. Rossi Chief Accounting Officer
		(Principal Accounting Officer)