PEAPACK GLADSTONE FINANCIAL CORP - Quarter Report: 2020 March (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 March 31, 2020

☐	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 May 1, 2020: 18,852,523

PEAPACK-GLADSTONE FINANCIAL CORPORATION

PART 1 FINANCIAL INFORMATION

Item 1	Financial Statements	3
	Consolidated Statements of Condition at March 31, 2020 and December 31, 2019	3
	Consolidated Statements of Income for the three months ended March 31, 2020 and 2019	4
	Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2020 and 2019	5
	Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	7
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4	Controls and Procedures	56

PART 2 OTHER INFORMATION

Item 1	Legal Proceedings	57
Item 1A	Risk Factors	57
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3	Defaults Upon Senior Securities	58
Item 4	Mine Safety Disclosures	58
Item 5	Other Information	58
Item 6	Exhibits	59

Item 1. Financial Statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

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

	(unaudited)			(audited)
	March 31,			December 31,
	2020			2019
ASSETS
Cash and due from banks	$	6,171		$	6,591
Federal funds sold		102			102
Interest-earning deposits		767,730			201,492
Total cash and cash equivalents		774,003			208,185
Securities available for sale		400,558			390,755
Equity security, at fair value		14,034			10,836
FHLB and FRB stock, at cost		40,871			24,068
Loans held for sale, at fair value		3,853			2,881
Loans held for sale, at lower of cost or fair value		4,122			14,667
Loans		4,408,005			4,394,137
Less: Allowance for loan and lease losses		63,783			43,676
Net loans		4,344,222			4,350,461
Premises and equipment		21,243			20,913
Other real estate owned		50			50
Accrued interest receivable		11,816			10,494
Bank owned life insurance		46,309			46,128
Goodwill		30,208			30,208
Other intangible assets		10,057			10,380
Finance lease right-of-use assets		4,891			5,078
Operating lease right-of-use assets		11,553			12,132
Other assets		113,668			45,643
TOTAL ASSETS	$	5,831,458		$	5,182,879
LIABILITIES
Deposits:
Noninterest-bearing demand deposits	$	581,085		$	529,281
Interest-bearing deposits:
Checking		1,680,452			1,510,363
Savings		112,668			112,652
Money market accounts		1,163,410			1,196,313
Certificates of deposit - retail		651,000			633,763
Certificates of deposit - listing service		38,895			47,430
Subtotal deposits		4,227,510			4,029,802
Interest-bearing demand - brokered		180,000			180,000
Certificates of deposit - brokered		33,723			33,709
Total deposits		4,441,233			4,243,511
Short-term borrowings		515,000			128,100
Federal Home Loan Bank advances		105,000			105,000
Finance lease liabilities		7,402			7,598
Operating lease liabilities		11,852			12,423
Subordinated debt, net		83,473			83,417
Deferred tax liabilities, net		28,462			26,151
Due to brokers, securities settlements		10,885			7,951
Accrued expenses and other liabilities		131,711			65,076
TOTAL LIABILITIES		5,335,018			4,679,227
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, 20,220,701 at March 31, 2020 and 20,074,766 at December 31, 2019; outstanding shares, 18,852,523 at March 31, 2020 and 18,926,810 at December 31, 2019		16,854			16,733
Surplus		320,269			319,375
Treasury stock at cost, 1,368,178 shares at March 31, 2020 and 1,147,956 shares at December 31, 2019		(36,477	)		(29,990	)
Retained earnings		199,453			199,029
Accumulated other comprehensive loss, net of income tax		(3,659	)		(1,495	)
TOTAL SHAREHOLDERS’ EQUITY		496,440			503,652
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	5,831,458		$	5,182,879

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019
INTEREST INCOME
Interest and fees on loans	$	42,305		$	40,512
Interest on investments:
Taxable		2,459			2,684
Tax-exempt		58			93
Interest on loans held for sale		21			4
Interest on interest-earning deposits		552			1,270
Total interest income		45,395			44,563
INTEREST EXPENSE
Interest on savings and interest-bearing deposit accounts		6,443			8,061
Interest on certificates of deposit		3,694			3,234
Interest on borrowed funds		1,012			834
Interest on finance lease liability		90			99
Interest on subordinated debt		1,223			1,224
Subtotal - interest expense		12,462			13,452
Interest on interest-bearing demand - brokered		923			739
Interest on certificates of deposits - brokered		263			365
Total interest expense		13,648			14,556
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES		31,747			30,007
Provision for loan and lease losses		20,000			100
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		11,747			29,907
OTHER INCOME
Wealth management fee income		9,955			9,174
Service charges and fees		816			816
Bank owned life insurance		328			338
Gains on loans held for sale at fair value (mortgage banking)		292			47
Loss on loans held for sale at lower of cost or fair value		(3	)		—
Fee income related to loan level, back-to-back swaps		1,418			270
Gain on sale of SBA loans		1,054			419
Other income		459			606
Securities gains, net		198			59
Total other income		14,517			11,729
OPERATING EXPENSES
Compensation and employee benefits		19,226			17,156
Premises and equipment		4,043			3,388
FDIC insurance expense		250			277
Other operating expense		4,716			4,894
Total operating expenses		28,235			25,715
(LOSS)/INCOME BEFORE INCOME TAX (BENEFIT)/EXPENSE		(1,971	)		15,921
Income tax (benefit)/expense		(3,344	)		4,496
NET INCOME	$	1,373		$	11,425

EARNINGS PER SHARE
Basic	$	0.07		$	0.59
Diluted	$	0.07		$	0.58
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic		18,858,343			19,350,452
Diluted		19,079,575			19,658,006

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019
Net income	$	1,373		$	11,425
Comprehensive income/(loss):
Unrealized gains/(losses) on available for sale securities:
Unrealized holding gains/(losses) arising during the period		5,799			2,288
		5,799			2,288

Tax effect		(1,412	)		(560	)
Net of tax		4,387			1,728

Unrealized gains/(losses) on cash flow hedges:
Unrealized holding gains/(losses) arising during the period		(8,878	)		(1,547	)
Reclassification adjustment for amounts included in net income		(71	)		(31	)
		(8,949	)		(1,578	)

Tax effect		2,398			466
Net of tax		(6,551	)		(1,112	)


Total other comprehensive income/(loss)		(2,164	)		616

Total comprehensive income/(loss)	$	(791	)	$	12,041

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Three Months Ended March 31, 2020 and March 31, 2019

															Accumulated
															Other
(In thousands, except share and	Preferred		Common						Treasury			Retained			Comprehensive
per share data)	Stock		Stock			Surplus			Stock			Earnings			Loss			Total
Balance at December 31, 2019 18,926,810 common shares outstanding	$	—	$	16,733		$	319,375		$	(29,990	)	$	199,029		$	(1,495	)	$	503,652
Net income		—		—			—			—			1,373			—			1,373
Comprehensive loss		—		—			—			—			—			(2,164	)		(2,164	)
Restricted stock units issued 150,084 shares		—		125			(125	)		—			—			—			—
Restricted stock units/awards repurchased on vesting to pay taxes, (37,106) shares		—		(31	)		(570	)		—			—			—			(601	)
Amortization of restricted stock awards/units		—		—			1,541			—			—			—			1,541
Cash dividends declared on common stock ($0.05 per share)		—		—			—			—			(949	)		—			(949	)
Share repurchase, (220,222) shares		—		—			—			(6,487	)		—			—			(6,487	)
Common stock options exercised, 5,600 shares		—		4			71			—			—			—			75
Exercise of warrants, 20,000 net of 13,469 shares used to exercise, 6,531 shares		—		6			(6	)		—			—			—			—
Issuance of common stock for acquisition 20,826 shares		—		17			(17	)		—			—			—			—
Balance at March 31, 2020 18,852,523 common shares outstanding	$	—	$	16,854		$	320,269		$	(36,477	)	$	199,453		$	(3,659	)	$	496,440

															Accumulated
															Other
(In thousands, except share and	Preferred		Common						Treasury			Retained			Comprehensive
per share data)	Stock		Stock			Surplus			Stock			Earnings			Loss			Total
Balance at December 31, 2018 19,337,662 common shares outstanding	$	—	$	16,459		$	309,088		$	(8,988	)	$	154,799		$	(2,345	)	$	469,013
Cumulative adjustment for Leases (ASU 842)		—		—			—			—			661			—			661
Balance at January 1, 2019, adjusted		—		16,459			309,088			(8,988	)		155,460			(2,345	)		469,674
Net income		—		—			—			—			11,425			—			11,425
Comprehensive income		—		—			—			—			—			616			616
Restricted stock units issued 129,362 shares		—		108			(108	)		—			—			—			—
Restricted stock units/awards repurchased on vesting to pay taxes, (35,335) shares		—		(30	)		(934	)		—			—			—			(964	)
Amortization of restricted stock awards/units		—		—			1,390			—			—			—			1,390
Cash dividends declared on common stock ($0.05 per share)		—		—			—			—			(967	)		—			(967	)
Common stock options exercised, 300 shares		—		1			3			—			—			—			4
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, 10,176 shares		—		8			286			—			—			—			294
Issuance of common stock for acquisition 307 shares		—		1			(1	)		—			—			—			—
Balance at March 31, 2019 19,445,363 common shares outstanding	$	—	$	16,549		$	309,722		$	(8,988	)	$	165,918		$	(1,729	)	$	481,472

See accompanying notes to consolidated financial statements

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2020			2019
OPERATING ACTIVITIES:
Net income	$	1,373		$	11,425
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		771			741
Amortization of premium and accretion of discount on securities, net		684			251
Amortization of restricted stock		1,541			1,390
Amortization of intangible assets		324			229
Amortization of subordinated debt costs		56			56
Provision for loan and lease losses		20,000			100
Deferred tax benefit		(3,520	)		(4,105	)
Stock-based compensation and employee stock purchase plan expense		41			45
Fair value adjustment for equity security		(198	)		(59	)
Loans originated for sale (1)		(30,247	)		(10,030	)
Proceeds from sales of loans held for sale (1)		31,095			9,298
Gain on loans held for sale (1)		(1,346	)		(466	)
Loss on loans held for sale at lower of cost or fair value		3			—
Increase in cash surrender value of life insurance, net		(181	)		(201	)
Increase in accrued interest receivable		(1,310	)		(874	)
(Increase)/decrease in other assets		(7,528	)		16,412
(Decrease)/increase in accrued expenses and other liabilities		(4,174	)		7,674
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,384			31,886
INVESTING ACTIVITIES:
Principal repayments, maturities and calls of securities available for sale		31,037			49,056
Redemptions of FHLB and FRB stock		12,072			135
Purchase of securities available for sale		(24,852	)		(53,483	)
Purchase of equity securities		(3,000	)		—
Purchase of FHLB and FRB stock		(28,875	)		(62	)
Proceeds from sales of loans held for sale at lower of cost or fair value		10,067			—
Net (increase)/decrease in loans, net of participations sold		(13,761	)		32,949
Purchase of premises and equipment		(914	)		(173	)
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES		(18,226	)		28,422
FINANCING ACTIVITIES:
Net increase in deposits		197,722			23,866
Net increase in short-term borrowings		386,900			—
Repayments of Federal Home Loan Bank advances		—			(3,000	)
Dividends paid on common stock		(949	)		(967	)
Exercise of Stock Options, net of stock swaps		75			4
Restricted stock repurchased on vesting to pay taxes		(601	)		(964	)
Issuance of shares for employee stock purchase plan		—			294
Purchase of treasury shares		(6,487	)		—
NET CASH PROVIDED BY FINANCING ACTIVITIES		576,660			19,233
Net increase in cash and cash equivalents		565,818			79,541
Cash and cash equivalents at beginning of period		208,185			160,773
Cash and cash equivalents at end of period	$	774,003		$	240,314
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	12,424		$	12,993
Income tax, net		206			265
Securities purchase settled in subsequent period		10,885			—

(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, 2019 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 March 31, 2020, the results of operations, comprehensive income, shareholders’ equity and cash flow statements for the three months ended March 31, 2020 and 2019. The results of operations for the three months ended March 31, 2020 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”) (formed in the second quarter of 2017)

•

Murphy Capital Management (“MCM”) (acquired in the third quarter of 2017)

•

Lassus Wherley and Associates (“Lassus Wherley”) (acquired in the third quarter of 2018)

•

Point View Wealth Management, Inc. (“Point View”) (acquired in the third quarter of 2019)

•

Peapack-Gladstone Mortgage Group, Inc. owns 99 percent of Peapack Ventures, LLC and 79 percent of Peapack-Gladstone Realty, Inc., a New Jersey real estate investment company

•

PGB Trust & Investments of Delaware owns one percent of Peapack Ventures, LLC

•

Peapack Ventures, LLC owns the remaining 21 percent of Peapack-Gladstone Realty, Inc.

While the following footnotes include the collective results of the Company, 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 the period presented. 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 Peapack Private, which includes asset management services to 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 Private includes: investment management services for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; and other financial planning and advisory services. This segment also includes the activity from the Delaware subsidiary, PGB Trust & Investments of Delaware, MCM, Lassus Wherley, and Point View. Wealth management 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).

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. The Company also has an investment in a CRA investment fund, which is classified as an equity security.

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 of New York and required to own a certain amount of FRB stock. FRB stock is carried at cost and classified as a restricted security. Dividends are reported as income.

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

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

U.S. Small Business Administration (SBA) loans originated with the intent to sell in the secondary market are carried at the lower of cost or fair value. SBA loans are generally sold with the servicing rights retained. Gains and losses on the sale of SBA loans are based on the difference between the selling price and the carrying value of the related loan sold. Total SBA loans serviced totaled $60.6 million and $51.9 million as of March 31, 2020 and December 31, 2019, respectively. SBA loans held for sale totaled $4.1 million and $4.6 million at March 31, 2020 and December 31, 2019, 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, New York and Pennsylvania.

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.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES“) Act, which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP.

The CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio.

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. As a result of the effects of the COVID-19 pandemic, the Company increased certain qualitative factors related to elevated levels of unemployment and approval loan deferral payment requests as businesses both locally and nationally have been shut down. The Company also considered qualitative factors related to 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 March 31, 2020 and December 31, 2019, 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 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 ROU 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.

The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures.

For the Company’s stock option plans, changes in options outstanding during the three months ended March 31, 2020 were as follows:

						Weighted
				Weighted		Average	Aggregate
				Average		Remaining	Intrinsic
	Number of			Exercise		Contractual	Value
	Options			Price		Term	(In thousands)
Balance, January 1, 2020		71,420		$	13.57
Exercised during 2020		(5,600	)		13.48
Expired during 2020		—			—
Forfeited during 2020		—			—
Balance, March 31, 2020		65,820		$	13.58	2.02 years	$	291
Vested and expected to vest		65,820		$	13.58	2.02 years	$	291
Exercisable at March 31, 2020		65,820		$	13.58	2.02 years	$	291

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 first quarter of 2020 and the exercise price, multiplied by the number of in-the-money options). The Company’s closing stock price on March 31, 2020 was $17.95.

There were no stock options granted during the three months ended March 31, 2020.

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 439,270 service-based restricted stock units granted during the first quarter of 2020.

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 130,832 performance-based restricted stock units granted in the first quarter of 2020.

Changes in non-vested shares dependent on performance criteria for the three months ended March 31, 2020 were as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance, January 1, 2020		90,768	$	30.60
Granted during 2020		130,832		13.44
Balance, March 31, 2020		221,600	$	20.47

Changes in service-based restricted stock awards/units for the three months ended March 31, 2020 were as follows:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Balance, January 1, 2020		432,728		$	29.65
Granted during 2020		439,270			13.65
Vested during 2020		(153,278	)		29.20
Forfeited during 2020		(8,349	)		31.22
Balance, March 31, 2020		710,371		$	19.83

As of March 31, 2020, there was $15.8 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 1.76 years. Stock compensation expense recorded for the first quarters of 2020 and 2019 totaled $1.5 million and $1.4 million, respectively.

Employee Stock Purchase Plan (“ESPP”): On April 22, 2014, the shareholders of the Company approved the 2014 ESPP. In July 2019, the Board appointed ESPP “Committee” revised the ESPP. The ESPP provides for the granting of purchase rights of up to 150,000 shares of Peapack-Gladstone Financial Corporation common stock. Subject to certain eligibility requirements and restrictions, the ESPP now provides for a single Offering Period of twelve months in duration, commencing on or about May 16 of each year. The last day of each Offering Period is May 15 of each year (or such other date as may be determined by the Board). Each participant in the Offering Period is granted an option to purchase a number of shares and may contribute between one percent and 15 percent of their compensation. At the end of each Offering Period on the purchase date, the number of shares to be purchased by the employee is determined by dividing the employee’s contributions accumulated during the Offering Period by the applicable purchase price. The purchase price is an amount equal to 85 percent of the closing market price of a share of common stock on the purchase date. Participation in the ESPP is entirely voluntary and employees can cancel their purchases at any time during the period without penalty. The fair value of each share purchase right is determined using the Black-Scholes option pricing model.

The Company recorded $41,000 and $45,000 of expense in salaries and employee benefits expense for the three months ended March 31, 2020 and 2019, respectively. Total shares issued under the ESPP during the first quarter of 2020 and 2019 were 0 and 10,176, 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
	March 31,
(Dollars in thousands, except per share data)	2020		2019
Net income available to common shareholders	$	1,373	$	11,425

Basic weighted-average shares outstanding		18,858,343		19,350,452
Plus: common stock equivalents		221,232		307,554
Diluted weighted-average shares outstanding		19,079,575		19,658,006
Net income per share
Basic	$	0.07	$	0.59
Diluted		0.07		0.58

Restricted stock units totaling 570,102 and 243,747 were not included in the computation of diluted earnings per share because they were anti-dilutive as of March 31, 2020 and 2019, respectively. Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the average market value for the periods presented.

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 2016 or by New Jersey tax authorities for years prior to 2015.

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/(Loss): Comprehensive income/(loss) 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.

Risks and Uncertainties: The COVID-19 pandemic has had a devastating effect on businesses both locally and nationally. As a result, Congress passed the CARES Act to provide fast and direct economic assistance to American workers, families and businesses. The CARES Act contains substantial tax and spending provisions including direct financial aid to American families, extensive emergency funding for hospitals and medical providers, and economic stimulus to significant impacted industry sectors.

The Company expects COVID-19 to have a significant impact on our operations but cannot determine or estimate the impact at this time. It is possible that estimates made in the Company’s consolidated financial statements could be materially and adversely impacted as a result of these conditions, including estimates regarding expected provision for loan and lease losses and impairment of goodwill.

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. As a result of the COVID-19 pandemic and the resulting effect on economic markets due to government shutdowns of businesses both locally and nationally, Management determined that the COVID-19 pandemic resulted in a triggering event and performed an interim evaluation to determine if a goodwill impairment test should be performed at March 31, 2020. Goodwill was primarily attributable to the Bank’s recent wealth acquisitions. Assets under management and/or administration (“AUM/AUA”) did decline by 14 percent to $6.4 billion at March 31, 2020 from $7.5 billion at December 31, 2019. The majority of the decline was attributable to market value decline in assets and not related to customer attrition. Based on our assessment, Management concluded that a goodwill impairment test was not required as of March 31, 2020.

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. Management determined that there was no impairment of intangible assets related to the events created by the COVID-19 pandemic.

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 March 31, 2020 and December 31, 2019 follows:

	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. treasuries	$	2,912	$	6	$	—		$	2,918
U.S government-sponsored agencies		29,962		122		—			30,084
Mortgage-backed securities–residential		344,814		7,459		(566	)		351,707
SBA pool securities		2,565		—		(12	)		2,553
State and political subdivisions		10,175		29		(2	)		10,202
Corporate bond		3,000		94		—			3,094
Total	$	393,428	$	7,710	$	(580	)	$	400,558

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. government-sponsored agencies	$	34,961	$	37	$	(214	)	$	34,784
Mortgage-backed securities–residential		337,489		2,365		(950	)		338,904
SBA pool securities		2,799		—		(15	)		2,784
State and political subdivisions		11,175		41		(1	)		11,215
Corporate bond		3,000		68		—			3,068
Total	$	389,424	$	2,511	$	(1,180	)	$	390,755

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 March 31, 2020 and December 31, 2019.

	March 31, 2020
	Duration of Unrealized Loss
	Less Than 12 Months					12 Months or Longer					Total
	Approximate					Approximate					Approximate
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities-residential	$	43,044	$	(280	)	$	20,532	$	(286	)	$	63,576	$	(566	)
SBA pool securities		—		—			2,553		(12	)		2,553		(12	)
State and political subdivisions		777		(2	)		—		—			777		(2	)
Total	$	43,821	$	(282	)	$	23,085	$	(298	)	$	66,906	$	(580	)

	December 31, 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	$	19,758	$	(214	)	$	—	$	—		$	19,758	$	(214	)
Mortgage-backed securities-residential		78,982		(382	)		69,142		(568	)		148,124		(950	)
SBA pool securities		—		—			2,784		(15	)		2,784		(15	)
State and political subdivisions		783		(1	)		—		—			783		(1	)
Total	$	99,523	$	(597	)	$	71,926	$	(583	)	$	171,449	$	(1,180	)

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 March 31, 2020, 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.

The Company has an investment in a CRA investment fund with a fair value of $14.0 million at March 31, 2020. The investment is classified as an equity security in our Consolidated Statements of Condition. This security had a gain of $198,000 for the three months ended March 31, 2020. This amount is included in securities gains/(losses), net on the Consolidated Statements of Income.

3. LOANS AND LEASES

Loans outstanding, excluding those held for sale, by general ledger classification, as of March 31, 2020 and December 31, 2019, consisted of the following:

			% of					% of
	March 31,		Totals			December 31,		Total
(Dollars in thousands)	2020		Loans			2019		Loans
Residential mortgage	$	528,210		11.98	%	$	549,138		12.50	%
Multifamily mortgage		1,203,487		27.30			1,210,003		27.54
Commercial mortgage		760,648		17.26			761,244		17.32
Commercial loans (including equipment financing)		1,803,158		40.90			1,756,477		39.97
Commercial construction		2,934		0.07			5,306		0.12
Home equity lines of credit		55,856		1.27			57,248		1.30
Consumer loans, including fixed rate home equity loans		53,365		1.21			54,372		1.24
Other loans		347		0.01			349		0.01
Total loans	$	4,408,005		100.00	%	$	4,394,137		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 March 31, 2020 and December 31, 2019:

			% of					% of
	March 31,		Totals			December 31,		Total
(Dollars in thousands)	2020		Loans			2019		Loans
Primary residential mortgage	$	557,053		12.65	%	$	578,306		13.17	%
Home equity lines of credit		55,856		1.27			57,248		1.30
Junior lien loan on residence		6,817		0.16			7,011		0.16
Multifamily property		1,203,487		27.33			1,210,003		27.56
Owner-occupied commercial real estate		251,293		5.71			249,419		5.68
Investment commercial real estate		1,092,294		24.81			1,095,182		24.95
Commercial and industrial		904,949		20.55			867,295		19.76
Lease financing		268,436		6.10			258,401		5.89
Farmland/agricultural production		2,725		0.06			3,043		0.07
Commercial construction loans		3,137		0.07			5,520		0.13
Consumer and other loans		56,998		1.29			58,213		1.33
Total loans	$	4,403,045		100.00	%	$	4,389,641		100.00	%
Net deferred costs		4,960					4,496
Total loans including net deferred costs	$	4,408,005				$	4,394,137

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 March 31, 2020 and December 31, 2019:

	March 31, 2020
	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	$	7,098	$	58	$	549,955	$	3,115	$	557,053	$	3,173
Home equity lines of credit		2		—		55,854		237		55,856		237
Junior lien loan on residence		15		—		6,802		23		6,817		23
Multifamily property		—		—		1,203,487		9,104		1,203,487		9,104
Owner-occupied commercial real estate		368		—		250,925		2,838		251,293		2,838
Investment commercial real estate		22,554		4,000		1,069,740		23,671		1,092,294		27,671
Commercial and industrial		6,332		2,284		898,617		14,840		904,949		17,124
Lease financing		—		—		268,436		3,141		268,436		3,141
Farmland/agricultural production		—		—		2,725		38		2,725		38
Commercial construction loans		—		—		3,137		40		3,137		40
Consumer and other loans		—		—		56,998		394		56,998		394
Total ALLL	$	36,369	$	6,342	$	4,366,676	$	57,441	$	4,403,045	$	63,783

	December 31, 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	$	6,890	$	215	$	571,416	$	1,875	$	578,306	$	2,090
Home equity lines of credit		3		—		57,245		128		57,248		128
Junior lien loan on residence		19		—		6,992		13		7,011		13
Multifamily property		—		—		1,210,003		6,037		1,210,003		6,037
Owner-occupied commercial real estate		379		—		249,040		2,064		249,419		2,064
Investment commercial real estate		22,605		1,000		1,072,577		14,988		1,095,182		15,988
Commercial and industrial		6,028		1,585		861,267		12,768		867,295		14,353
Lease financing		—		—		258,401		2,642		258,401		2,642
Farmland/agricultural production		—		—		3,043		38		3,043		38
Commercial construction loans		—		—		5,520		27		5,520		27
Consumer and other loans		—		—		58,213		296		58,213		296
Total ALLL	$	35,924	$	2,800	$	4,353,717	$	40,876	$	4,389,641	$	43,676

Impaired loans include nonaccrual loans of $29.3 million at March 31, 2020 and $28.9 million at December 31, 2019. Impaired loans also include performing TDR loans of $2.4 million at March 31, 2020 and $2.4 million at December 31, 2019. At March 31,2020, the allowance allocated to TDR loans totaled $6.3 million, of which all but $58,000 was allocated to nonaccrual loans. At December 31, 2019, the allowance allocated to TDR loans totaled $2.8 million, of which $2.7 million was allocated to nonaccrual loans. All accruing TDR loans were paying in accordance with restructured terms as of March 31, 2020. The Company has not committed to lend additional amounts as of March 31, 2020 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 March 31, 2020 and December 31, 2019 (The average impaired loans on the following tables represent year to date impaired loans.):

	March 31, 2020
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	7,643	$	6,436	$	—	$	6,303
Owner-occupied commercial real estate		443		368		—		370
Investment commercial real estate		9,632		8,108		—		8,118
Home equity lines of credit		5		2		—		2
Junior lien loan on residence		90		15		—		18
Commercial and industrial		391		391		—		146
Total loans with no related allowance	$	18,204	$	15,320	$	—	$	14,957
With related allowance recorded:
Primary residential mortgage	$	662	$	662	$	58	$	664
Investment commercial real estate		15,064		14,446		4,000		14,453
Commercial and industrial		6,229		5,941		2,284		5,970
Total loans with related allowance	$	21,955	$	21,049	$	6,342	$	21,087
Total loans individually evaluated for impairment	$	40,159	$	36,369	$	6,342	$	36,044

	December 31, 2019
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	7,310	$	6,071	$	—	$	7,186
Owner-occupied commercial real estate		450		379		—		1,099
Investment commercial real estate		9,663		8,138		—		14,115
Home equity lines of credit		5		3		—		77
Junior lien loan on residence		92		19		—		29
Total loans with no related allowance	$	17,520	$	14,610	$	—	$	22,506
With related allowance recorded:
Primary residential mortgage	$	819	$	819	$	215	$	1,011
Investment commercial real estate		15,064		14,467		1,000		4,832
Commercial and industrial		6,229		6,028		1,585		3,685
Total loans with related allowance	$	22,112	$	21,314	$	2,800	$	9,528
Total loans individually evaluated for impairment	$	39,632	$	35,924	$	2,800	$	32,034

Interest income recognized on impaired loans for the quarters ended March 31, 2020 and 2019 was not material. The Company did not recognize any income on nonaccruing impaired loans for the three months ended March 31, 2020 and 2019.

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 March 31, 2020 and December 31, 2019:

	March 31, 2020
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	4,757	$	—
Home equity lines of credit		2		—
Junior lien loan on residence		15		—
Owner-occupied commercial real estate		368		—
Investment commercial real estate		17,899		—
Commercial and industrial		6,283		—
Total	$	29,324	$	—

	December 31, 2019
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	4,533	$	—
Home equity lines of credit		3		—
Junior lien loan on residence		19		—
Owner-occupied commercial real estate		379		—
Investment commercial real estate		17,919		—
Commercial and industrial		6,028		—
Total	$	28,881	$	—

The following tables present the aging of the recorded investment in past due loans as of March 31, 2020 and December 31, 2019 by class of loans, excluding nonaccrual loans:

	March 31, 2020
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	2,509	$	—	$	—	$	2,509
Home equity lines of credit		226		—		—		226
Owner-occupied commercial real estate		75		—		—		75
Investment commercial real estate		3,515		—		—		3,515
Commercial and industrial		1,935		—		—		1,935
Consumer and other loans		1		—		—		1
Total	$	8,261	$	—	$	—	$	8,261

	December 31, 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	$	1,264	$	—	$	—	$	1,264
Home equity lines of credit		80		—		—		80
Consumer and other loans		566		—		—		566
Total	$	1,910	$	—	$	—	$	1,910

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 March 31, 2020, 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	$	548,902	$	844	$	7,307	$	—
Home equity lines of credit		55,854		—		2		—
Junior lien loan on residence		6,802		—		15		—
Multifamily property		1,202,783		—		704		—
Owner-occupied commercial real estate		249,459		—		1,834		—
Investment commercial real estate		1,050,812		6,288		35,194		—
Commercial and industrial		885,059		6,008		13,882		—
Lease financing		268,436		—		—		—
Farmland/agricultural production		2,725		—		—		—
Commercial construction loans		3,055		82		—		—
Consumer and other loans		56,998		—		—		—
Total	$	4,330,885	$	13,222	$	58,938	$	—

As of December 31, 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	$	570,353	$	853	$	7,100	$	—
Home equity lines of credit		57,245		—		3		—
Junior lien loan on residence		6,992		—		19		—
Multifamily property		1,209,288		—		715		—
Owner-occupied commercial real estate		247,388		—		2,031		—
Investment commercial real estate		1,053,445		6,325		35,412		—
Commercial and industrial		847,285		6,382		13,628		—
Lease financing		258,401		—		—		—
Farmland/agricultural production		3,043		—		—		—
Commercial construction loans		5,437		83		—		—
Consumer and other loans		58,213		—		—		—
Total	$	4,317,090	$	13,643	$	58,908	$	—

At March 31, 2020, $36.4 million of substandard loans were also considered impaired, compared to December 31, 2019, when $35.9 million of substandard loans were also impaired.

The activity in the allowance for loan and lease losses for the three months ended March 31, 2020 is summarized below:

	January 1,									March 31,
	2020									2020
	Beginning							Provision		Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)		ALLL
Primary residential mortgage	$	2,090	$	—		$	77	$	1,006	$	3,173
Home equity lines of credit		128		—			3		106		237
Junior lien loan on residence		13		—			—		10		23
Multifamily property		6,037		—			—		3,067		9,104
Owner-occupied commercial real estate		2,064		—			—		774		2,838
Investment commercial real estate		15,988		—			31		11,652		27,671
Commercial and industrial		14,353		—			3		2,768		17,124
Lease financing		2,642		—			—		499		3,141
Farmland/agricultural production		38		—			—		—		38
Commercial construction loans		27		—			—		13		40
Consumer and other loans		296		(8	)		1		105		394
Total ALLL	$	43,676	$	(8	)	$	115	$	20,000	$	63,783

The activity in the allowance for loan and lease losses for the three months ended March 31, 2019 is summarized below:

	January 1,										March 31,
	2019										2019
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,506	$	—		$	42	$	(71	)	$	3,477
Home equity lines of credit		164		—			2		(14	)		152
Junior lien loan on residence		15		—			11		(11	)		15
Multifamily property		5,959		—			—		(191	)		5,768
Owner-occupied commercial real estate		2,614		—			—		(80	)		2,534
Investment commercial real estate		14,248		—			—		162			14,410
Commercial and industrial		9,839		—			4		342			10,185
Lease financing		1,772		—			—		31			1,803
Farmland/agricultural production		2		—			—		—			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		384		(11	)		1		(68	)		306
Total ALLL	$	38,504	$	(11	)	$	60	$	100		$	38,653

Troubled Debt Restructurings:

The Company has allocated $6.3 million and $2.8 million of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of March 31, 2020 and December 31, 2019, 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 the three-month period ended March 31, 2020:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	253	$	253
Commercial and industrial		1		48		48
Total		2	$	301	$	301

There were no loans modified as TDRs during the three-month period ended March 31, 2019.

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

The following table presents loans by class modified as TDRs that failed to comply with the modified terms in the twelve months following modification and resulted in a payment default at March 31, 2020:

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Primary residential mortgage		1	$	200
Total		1	$	200

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Investment commercial real estate		1	$	14,841
Total		1	$	14,841

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, over $250,000, totaled $225.6 million and $223.7 million at March 31, 2020 and December 31, 2019, respectively. The above totals exclude brokered certificates of deposit.

The following table sets forth the details of total deposits as of March 31, 2020 and December 31, 2019:

	March 31,				December 31,
	2020				2019
(Dollars in thousands)
Noninterest-bearing demand deposits	$	581,085	13.08	%	$	529,281	12.47	%
Interest-bearing checking⁽¹⁾		1,680,452	37.83			1,510,363	35.59
Savings		112,668	2.54			112,652	2.66
Money market		1,163,410	26.20			1,196,313	28.19
Certificates of deposit - retail		651,000	14.66			633,763	14.94
Certificates of deposit - listing service		38,895	0.88			47,430	1.12
Subtotal deposits		4,227,510	95.19			4,029,802	94.97
Interest-bearing demand - Brokered		180,000	4.05			180,000	4.24
Certificates of deposit - Brokered		33,723	0.76			33,709	0.79
Total deposits	$	4,441,233	100.00	%	$	4,243,511	100.00	%

(1)	Interest-bearing checking includes $569.4 million at March 31, 2020 and $423.8 million at December 31, 2019 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 March 31, 2020 are as follows:

(In thousands)
2020	$	366,756
2021		237,175
2022		53,539
2023		8,771
2024		29,239
Over 5 Years		28,138
Total	$	723,618

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 $105.0 million with a weighted average interest rate of 3.20 percent at both March 31, 2020 and December 31, 2019, respectively.

The advances had fixed maturity dates and were secured by blanket pledges of certain 1-4 family residential mortgages totaling $334.0 million, multifamily mortgages totaling $730.7 million and securities totaling $148.8 million at March 31, 2020, while at December 31, 2019, the fixed rate advances were secured by blanket pledges of certain 1-4 family residential mortgages totaling $347.5 million, multifamily mortgages totaling $773.1 million and securities totaling $154.3 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 two one-month FHLB advances totaling $515.0 million with a rate of 0.52 percent. One- FHLB advance for $15 million is part of an interest rate swap designated as a cash flow hedge. The cash flow hedge has a term of four years. The remaining $500.0 million FHLB advance was transacted in mid-March specifically to increase the Company’s balance sheet liquidity in the event of significant depositor withdrawals and/or significant borrower draws on existing unused credit line in the current environment. The borrowing was repaid on April 24, 2020. There were no overnight borrowings with the FHLB as of March 31, 2020 and December 31, 2019. At March 31, 2020 unused short-term overnight borrowing commitments totaled $1.1 billion from FHLB, $22.0 million from correspondent banks and $1.4 billion at the Federal Reserve Bank of New York.

6. BUSINESS SEGMENTS

The Company assesses its results among two operating segments, Banking and Peapack Private. 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

Peapack Private includes PGB Trust & Investments of Delaware, MCM, 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 Company’s reportable segments for the three months ended March 31, 2020 and 2019.

	Three Months Ended March 31, 2020
				Wealth
				Management
(In thousands)	Banking			Division		Total
Net interest income	$	30,409		$	1,338	$	31,747
Noninterest income		4,229			10,288		14,517
Total income		34,638			11,626		46,264

Provision for loan and lease losses		20,000			—		20,000
Compensation and employee benefits		13,207			6,019		19,226
Premises and equipment expense		3,421			622		4,043
FDIC insurance expense		250			—		250
Other operating expense		2,606			2,110		4,716
Total operating expense		39,484			8,751		48,235
Income before income tax (benefit)/expense		(4,846	)		2,875		(1,971	)
Income tax (benefit)/expense		(3,893	)		549		(3,344	)
Net income/(loss)	$	(953	)	$	2,326	$	1,373

Total assets at period end	$	5,734,495		$	96,963	$	5,831,458

	Three Months Ended March 31, 2019
			Wealth
			Management
(In thousands)	Banking		Division		Total
Net interest income	$	28,566	$	1,441	$	30,007
Noninterest income		2,279		9,450		11,729
Total income		30,845		10,891		41,736

Provision for loan and lease losses		100		—		100
Compensation and employee benefits		11,997		5,159		17,156
Premises and equipment expense		2,925		463		3,388
FDIC insurance expense		277		—		277
Other operating expense		2,758		2,136		4,894
Total operating expense		18,057		7,758		25,815
Income before income tax expense		12,788		3,133		15,921
Income tax expense		3,611		885		4,496
Net income	$	9,177	$	2,248	$	11,425

Total assets at period end	$	4,582,200	$	80,106	$	4,662,306

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 March 31, 2020.

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
	March 31,		Assets		Inputs		Inputs
(In thousands)	2020		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale:
U.S. treasuries	$	2,918	$	—	$	2,918	$	—
U.S. government-sponsored agencies		30,084		—		30,084		—
Mortgage-backed securities-residential		351,707		—		351,707		—
SBA pool securities		2,553		—		2,553		—
State and political subdivisions		10,202		—		10,202		—
Corporate bond		3,094		—		3,094		—
CRA investment fund		14,034		14,034		—		—
Loans held for sale, at fair value		3,853		—		3,853		—
Derivatives:
Loan level swaps		92,993		—		92,993		—
Total	$	511,438	$	14,034	$	497,404	$	—

Liabilities:
Derivatives:
Cash flow hedges	$	12,616	$	—	$	12,616	$	—
Loan level swaps		92,993		—		92,993		—
Total	$	105,609	$	—	$	105,609	$	—

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)	2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agencies	$	34,784	$	—	$	34,784	$	—
Mortgage-backed securities-residential		338,904		—		338,904		—
SBA pool securities		2,784		—		2,784		—
State and political subdivisions		11,215		—		11,215		—
Corporate bond		3,068		—		3,068		—
CRA investment fund		10,836		10,836		—		—
Loans held for sale, at fair value		2,881		—		2,881		—
Derivatives:
Cash flow hedges		121		—		121		—
Loan level swaps		32,381		—		32,381		—
Total	$	436,974	$	10,836	$	426,138	$	—

Liabilities:
Derivatives:
Cash flow hedges	$	3,788	$	—	$	3,788	$	—
Loan level swaps		32,381		—		32,381		—
Total	$	36,169	$	—	$	36,169	$	—

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 March 31, 2020 and December 31, 2019.

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

(In thousands)	March 31, 2020		December 31, 2019
Residential loans contractual balance	$	3,789	$	2,839
Fair value adjustment		64		42
Total fair value of residential loans held for sale	$	3,853	$	2,881

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2020.

The following tables summarize, 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

March 31,

Assets

Inputs

(In thousands)

2020

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans:

Investment commercial real estate

10,446

—

10,446

Fair Value Measurements Using

Quoted

Prices in

Active

Significant

Markets For

Other

Significant

Identical

Observable

Unobservable

December 31,

Assets

Inputs

(In thousands)

2019

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans:

Investment commercial real estate

13,467

—

13,467

The carrying amounts and estimated fair values of financial instruments at March 31, 2020 are as follows:

			Fair Value Measurements at March 31, 2020 using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	774,003	$	774,003	$	—	$	—	$	774,003
Securities available for sale		400,558		—		400,558		—		400,558
CRA investment fund		14,034		14,034		—		—		14,034
FHLB and FRB stock		40,871		—		—		—	N/A
Loans held for sale, at fair value		3,853		—		3,853		—		3,853
Loans held for sale, at lower of cost or fair value		4,122		—		4,535		—		4,535
Loans, net of allowance for loan and lease losses		4,344,222		—		—		4,674,834		4,674,834
Accrued interest receivable		11,816		—		1,589		10,227		11,816
Loan level swaps		92,993		—		92,993		—		92,993
Financial liabilities
Deposits	$	4,441,233	$	3,717,615	$	734,404	$	—	$	4,452,019
Short-term borrowings		515,000		—		515,000		—		515,000
Federal home loan bank advances		105,000		—		110,196		—		110,196
Subordinated debt		83,473		—		—		85,315		85,315
Accrued interest payable		3,434		82		2,131		1,221		3,434
Cash flow hedges		12,616		—		12,616		—		12,616
Loan level swap		92,993		—		92,993		—		92,993

The carrying amounts and estimated fair values of financial instruments at December 31, 2019 are as follows:

			Fair Value Measurements at December 31, 2019 using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	208,185	$	208,185	$	—	$	—	$	208,185
Securities available for sale		390,755		—		390,755		—		390,755
CRA investment fund		10,836		10,836		—		—		10,836
FHLB and FRB stock		24,068		—		—		—	N/A
Loans held for sale, at fair value		2,881		—		2,881		—		2,881
Loans held for sale, at lower of cost or fair value		14,667		—		15,126		—		15,126
Loans, net of allowance for loan and lease losses		4,350,461		—		—		4,268,481		4,268,481
Accrued interest receivable		10,494		—		1,361		9,133		10,494
Cash flow Hedges		121		—		121		—		121
Loan level swaps		32,381		—		32,381		—		32,381
Financial liabilities
Deposits	$	4,243,511	$	3,528,609	$	718,818	$	—	$	4,247,427
Short-term borrowings		128,100		—		128,100		—		128,100
Federal Home Loan Bank advances		105,000		—		108,354		—		108,354
Subordinated debt		83,417		—		—		86,536		86,536
Accrued interest payable		2,357		392		1,910		55		2,357
Cash flow hedges		3,788		—		3,788		—		3,788
Loan level swaps		32,381		—		32,381		—		32,381

8. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

	For the Three Months Ended March 31,
(In thousands)	2020		2019
Service charges on deposits
Overdraft fees	$	147	$	158
Interchange income		280		264
Other		389		394
Wealth management fees (a)		9,955		9,174
Other (b)		3,746		1,739
Total noninterest other income	$	14,517	$	11,729

(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 March 31,						For the Three Months Ended March 31,
(In thousands)	2020						2019
Revenue by Operating			Wealth						Wealth
Segment	Banking		Management		Total		Banking		Management		Total
Service charges on deposits
Overdraft fees	$	147	$	—	$	147	$	158	$	—	$	158
Interchange income		280		—		280		264		—		264
Other		389		—		389		394		—		394
Wealth management fees (a)		—		9,955		9,955		—		9,174		9,174
Other (b)		3,413		333		3,746		1,463		276		1,739
Total noninterest income	$	4,229	$	10,288	$	14,517	$	2,279	$	9,450	$	11,729

(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 $32 thousand for both the first quarters of 2020 and 2019.

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
	March 31,
(In thousands)	2020		2019
Professional and legal fees		974		1,124
Telephone		324		280
Advertising		340		359
Amortization of intangible assets		324		229
Other operating expenses		2,754		2,902
Total other operating expenses	$	4,716	$	4,894

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 March 31, 2020 and 2019:

							Amount			Other
							Reclassified			Comprehensive
				Other			From			Income/(Loss)
				Comprehensive			Accumulated			Three Months
	Balance at			Income/(Loss)			Other			Ended			Balance at
	January 1,			Before			Comprehensive			March 31,			March 31,
(In thousands)	2020			Reclassifications			Income/(Loss)			2020			2020
Net unrealized holding gain/(loss) on securities available for sale, net of tax	$	1,006		$	4,387			—		$	4,387		$	5,393

Gain/(loss) on cash flow hedges		(2,501	)		(6,499	)		(52	)		(6,551	)		(9,052	)

Accumulated other comprehensive loss, net of tax	$	(1,495	)	$	(2,112	)	$	(52	)	$	(2,164	)	$	(3,659	)

							Amount			Other
							Reclassified			Comprehensive
				Other			From			Income/(Loss)
				Comprehensive			Accumulated			Three Months
	Balance at			Income/(Loss)			Other			Ended			Balance at
	January 1,			Before			Comprehensive			March 31,			March 31,
(In thousands)	2019			Reclassifications			Income/(Loss)			2019			2019
Net unrealized holding gain/(loss) on securities available for sale, net of tax	$	(3,006	)	$	1,728		$	—		$	1,728		$	(1,278	)

Gain/(loss) on cash flow hedges		661			(1,090	)		(22	)		(1,112	)		(451	)

Accumulated other comprehensive loss, net of tax	$	(2,345	)	$	638		$	(22	)	$	616		$	(1,729	)

	Three Months Ended
	March 31,
(In thousands)	2020			2019			Affected Line Item in Income Statement
Unrealized gains on cash flow hedge derivatives:
Reclassification adjustment for amounts included in net income	$	(71	)	$	(31	)	Interest expense
Income tax expense		19			9		Income tax expense
Total reclassifications, net of tax	$	(52	)	$	(22	)

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 $270.0 million and $245.0 million as of March 31, 2020 and December 31, 2019, 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 March 31, 2020, 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 March 31, 2020 and December 31, 2019:

(Dollars in thousands)	March 31, 2020				December 31, 2019
Notional amount	$	270,000			$	245,000
Weighted average pay rate		1.94		%		2.05		%
Weighted average receive rate		1.47		%		1.83		%
Weighted average maturity		2.78		years		2.45		years
Unrealized gain/(loss), net	$	(12,616	)		$	(3,667	)

Number of contracts		13				12

Net interest income/(expense) recorded on these swap transactions totaled $(106,000) and $335,000 for the three months ended March 31, 2020 and 2019, respectively.

Cash Flow Hedges

The following table presents the net gain/(loss) recorded in accumulated other comprehensive income/(loss) and the consolidated financial statements relating to the cash flow derivative instruments for the three months ended March 31, 2020 and March 31, 2019:

	For the Three Months Ended March 31,
(In thousands)	2020			2019
Interest rate contracts
Gain/(loss) recognized in OCI (effective portion)	$	(8,878	)	$	(1,547	)
Gain/(loss) reclassified from OCI to interest expense		(71	)		(31	)
Gain/(loss) recognized in other non-interest expense (ineffective portion)		—			—

During the first quarter of 2020, the Company recognized an unrealized after-tax gain of $26,000 in accumulated other comprehensive income/(loss) related to the termination of three interest rate swaps designated as cash flow hedges. During the second quarter of 2019, the Company recognized an unrealized after-tax gain of $189,000 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 $71,000 and $31,000 for the three months ended March 31, 2020 and 2019, respectively, related to the amortization of the gain on the terminated interest rate swaps designated as cash flow hedges.

	March 31, 2020
	Notional		Fair
(In thousands)	Amount		Value
Interest rate swaps related to interest-bearing deposits and FHLB advances	$	270,000	$	(12,616	)
Total included in other assets		—		—
Total included in other liabilities		270,000		(12,616	)

	December 31, 2019
	Notional		Fair
(In thousands)	Amount		Value
Interest rate swaps related to interest-bearing deposits	$	245,000	$	(3,667	)
Total included in other assets		70,000		121
Total included in other liabilities		175,000		(3,788	)

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)	March 31, 2020			December 31, 2019
Notional amount	$	864,035		$	793,875
Fair value	$	92,993		$	32,381
Weighted average pay rates		4.03	%		4.12	%
Weighted average receive rates		2.76	%		3.54	%
Weighted average maturity		7.1	years		7.3	years

Number of contracts		98			91

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 March 31, 2020, the Company's operating lease ROU asset and operating lease liability totaled $11.6 million and $11.9 million, respectively. As of December 31, 2019, the Company's operating lease ROU asset and operating lease liability totaled $12.1 million and $12.4 million, respectively. A weighted average discount rate of 3.07% and 3.05% was used in the measurement of the ROU asset and lease liability as of March 31, 2020 and December 31, 2019, respectively.

The Company's leases have remaining lease terms between two months to 17 years, with a weighted average lease term of 6.18 years at March 31, 2020. The Company's leases had remaining lease terms between five months to 17 years, with a weighted average lease term of 6.33 years, at December 31, 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 $827,000 and $624,000 for the three months ended March 31, 2020 and 2019, respectively. The variable lease costs were $89,000 and $73,000 for the three months ended March 31, 2020 and 2019, respectively.

The following is a schedule of the Company's operating lease liabilities by contractual maturity as of March 31, 2020:

(In thousands)
2020	$	3,135
2021		2,449
2022		2,050
2023		1,577
2024		1,282
Thereafter		2,643
Total lease payments		13,136
Less: imputed interest		1,284
Total present value of lease payments	$	11,852

The following table shows the supplemental cash flow information related to the Company’s direct finance and operating leases for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended
(In thousands)	2020		2019
Right-of-use asset obtained in exchange for lease obligation	$	157	$	7,862
Operating cash flows from operating leases		728		567
Operating cash flows from direct finance leases		90		99
Financing cash flows from direct finance leases		187		187

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 $661,000.

In June 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. Due to the uncertainty created by the current environment under a provision provided by the CARES Act, the Company elected to delay the adoption of FASB’s new rule covering the CECL standard until the earlier of the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 13, 2020, related to the outbreak of COVID-19, or December 31, 2020. Once the delay provision has been terminated, adoption will be retroactive to January 1, 2020. The largest impact will be on lenders and the allowance for loan and lease losses (ALLL). The impact to the Company’s ALLL 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 ALLL 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. The Company expects to recognize a one-time cumulative-effect adjustment to our ALLL through retained earnings as of the January 1, 2020. 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date

loss exceeds the anticipated loss for the year. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is assessing ASU 2019-12 and its impact on its financial statements.

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, 2019, 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 2020 and beyond;

•

our inability to successfully integrate wealth management firm acquisitions;

•

our inability to manage our growth;

•

our inability to successfully integrate our expanded employee base;

•

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

•

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

•

declines in values in our investment portfolio;

•

higher than expected increases in loan and lease losses or in the level of nonperforming loans;

•

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, customers 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;

•

a 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 inability to retain key employees;

•

a reduction in demand 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.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

demand for our products and services may decline, making it difficult to grow assets and income;

•

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•

our allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

•

our wealth management revenues may decline with continuing market turmoil;

•

our cyber security risks are increased as the result of an increase in the number of employees working remotely; and

•

FDIC premiums may increase if the agency experience additional resolution costs.

Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking statements to conform the statement to actual results or change in the Company’s expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.

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, 2019 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/(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” unrealized holding gains and losses are marked to market through the income statement.

EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended March 31, 2020 and 2019.

	For the Three Months Ended March 31,						Change
(Dollars in thousands, except per share data)	2020 (1)			2019			2020 vs 2019
Results of Operations:
Net interest income	$	31,747		$	30,007		$	1,740
Provision for loan and lease losses (1)		20,000			100			19,900
Net interest income after provision for loan and lease losses		11,747			29,907			(18,160	)
Wealth management fee income (2)		9,955			9,174			781
Other income		4,562			2,555			2,007
Operating expense		28,235			25,715			2,520
(Loss)/Income before income tax (benefit)/expense		(1,971	)		15,921			(17,892	)
Income tax (benefit)/expense (3)		(3,344	)		4,496			(7,840	)
Net income	$	1,373		$	11,425		$	(10,052	)

Total revenue (Net interest income plus wealth management fee income and other income)	$	46,264		$	41,736		$	4,528

Diluted average shares outstanding		19,079,575			19,658,006			(578,431	)

Diluted earnings per share	$	0.07		$	0.58		$	(0.51	)

Return on average assets annualized (ROAA)		0.11	%		0.98	%		(0.87	)%
Return on average equity annualized (ROAE)		1.08			9.65			(8.57	)

	March 31,			December 31,			Change
	2020			2019			2020 vs 2019
Selected Balance Sheet Ratios:
Total capital (Tier I + II) to risk-weighted assets		13.91	%		14.20	%		(0.29	)%
Tier I leverage ratio		8.93			9.33			(0.40	)
Loans to deposits		99.25			103.55			(4.30	)
Allowance for loan and lease losses to total loans		1.45			0.99			0.46
Allowance for loan and lease losses to nonperforming loans		217.51			151.23			66.28
Nonperforming loans to total loans		0.67			0.66			0.01

(1)

The March 2020 quarter included a provision for loan and lease losses of $20.0 million. The increase in the provision for loan and lease losses was due primarily to the current environment created by the COVID-19 pandemic.

(2)

The March 2020 quarter included a full quarter of wealth management fee income and expense related to Point View Wealth Management, which was acquired effective September 1, 2019.

(3)

The March 2020 quarter included a $3.2 million tax benefit related to the carryback of tax net operating losses (“NOL”) to prior years when the Federal tax rate was 14% higher.

For the quarter ended March 31, 2020, the Company recorded revenue of $46.26 million, pretax loss of $1.97 million, net income of $1.37 million and diluted earnings per share of $0.07, compared to revenue of $41.74 million, pretax income of $15.92 million, net income of $11.43 million and diluted earnings per share of $0.58 for the same three-month period last year. The 2020 quarter included increased net interest income and non-interest income, which was offset by an increased provision for loan and lease losses and increased operating expenses (due in part to the wealth management firm acquired September 2019.) The increased provision for loan losses was due to increased qualitative factors associated with the increased unemployment rate and the level of loan payment deferral requests created by the COVID-19 pandemic and was driven principally by increased qualitative factors. In comparing the first quarter of 2020 to the first quarter of 2019, revenue increased by 11%. Net interest income benefitted from lower interest expense as the rates on our interest-bearing liabilities re-priced at a slightly faster rate than our interest-earning assets. Revenue was also positively affected by an increase in wealth management fee income due to growth in AUM/AUA from existing clients and the acquisition of Point View in September 2019, offset by the decrease in market value of the AUM/AUA over the quarter. Capital markets activity resulted in $2.76 million of revenue for the first quarter of 2020 or an increase of $2.0 million from $736,000 for the same period in 2019. Income from these programs are not linear each quarter, as some quarters will be higher than others.

COVID-19 Update: The COVID-19 pandemic has had a devastating effect on businesses both locally and nationally. As a result, Congress passed the CARES Act to provide fast and direct economic assistance to American workers, families and businesses. The CARES Act contains substantial tax and spending provisions including direct financial aid to American families, extensive emergency funding for hospitals and medical providers, and economic stimulus to significant impacted industry sectors. Below are some of the measures the Company has implemented in response to COVID-19.

The Company has an Incident Response Team comprised of senior and departmental leaders that meet frequently to monitor and address the ongoing developments and challenges presented by the COVID-19 pandemic. The following represent responses by Management as a result of COVID-19:

•

The Company’s branch offices remain open via drive-thru facilities, ATM access, and on-line banking;

•

Management has leveraged technology to support employees that are working remotely;

•

Retail client initiatives have been introduced including:

90-day or 180-day payment deferral period (the Company approved deferral requests relating to approximately $600 million or 14% of our portfolio as of April 22, 2020).

Waiving all late fees for April/May/June;

Not reporting payment deferrals or late payments to credit bureaus through June; and

Utilized the PPP to assist both clients and community organizations with funding needs related to the pandemic (processed over 2,000 applications with approximately $600 million of approved loans as of April 28, 2020).

The Company will continue to prudently extend credit to our clients. The Company expects COVID-19 to have a significant impact on our operations but cannot determine or estimate the impact at this time.

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, 2019 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, 2019 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 table summarize the Company’s net interest income and margin for the periods indicated:

	Three Months Ended						Three Months Ended
	March 31, 2020						March 31, 2019
(Dollars in thousands)	NII			NIM			NII		NIM
NII/NIM excluding the below	$	31,279			2.60	%	$	29,432		2.72	%
Prepayment premiums received on loan paydowns		525			0.05	%		432		0.04	%
Effect of maintaining excess interest earning cash		(57	)		-0.08	%		143		-0.06	%
NII/NIM as reported	$	31,747			2.57	%	$	30,007		2.70	%

Net interest income, on a fully tax-equivalent basis, increased $1.7 million, or 6 percent, for the first quarter of 2020 to $32.3 million from net interest income of $30.6 million for the same quarter in 2019. The net interest margin was 2.57 percent and 2.70 percent for the three months ended March 31, 2020 and 2019, respectively, a decrease of 13 basis points. The growth in net interest income for the three months ended March 31, 2020 was due to increases in the average balance of interest-earning assets

and a decrease in the average cost of interest-bearing liabilities. The increase in interest income was partially offset by increases in the average balance of interest-bearing liabilities for that same period offset by a decrease in the average yield on interest-earning assets. 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
	March 31,		March 31,
(In thousands)	2020		2019
Residential mortgage loans originated for portfolio	$	14,831	$	10,839
Residential mortgage loans originated for sale		19,391		3,090
Total residential mortgage loans		34,222		13,929

Commercial real estate loans		8,858		21,025
Multifamily properties		61,998		21,122
C&I loans (A) (B)		42,908		141,128
Small business administration		13,830		9,050
Wealth Lines of Credit (A)		3,250		7,380
Total commercial loans		130,844		199,705

Installment loans		256		558
Home equity lines of credit (A)		3,632		1,607
Total loans closed	$	168,954	$	215,799

(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 manages its origination levels in conjunction with anticipated paydowns and payoffs. 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 March 31, 2020, December 31, 2019 and March 31, 2019, 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:

	March 31,			December 31,			March 31,
	2020			2019			2019
Multifamily mortgage loans as a percent of total regulatory capital of the Bank		207	%		212	%		198	%

Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank		188			192			180

Total CRE concentration		395	%		404	%		378	%

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 table reflects the components of the average balance sheet and of net interest income for the periods indicated:

Average Balance Sheet

Unaudited

Three Months Ended

	March 31, 2020									March 31, 2019
	Average			Income/						Average			Income/
(Dollars in thousands)	Balance			Expense			Yield			Balance			Expense			Yield
ASSETS:
Interest-earning assets:
Investments:
Taxable (1)	$	411,806		$	2,459			2.39	%	$	387,566		$	2,684			2.77	%
Tax-exempt (1) (2)		10,534			131			4.97			17,345			210			4.84
Loans (2) (3):
Residential mortgages		535,114			4,576			3.42			571,637			4,895			3.43
Commercial mortgages		1,955,808			18,483			3.78			1,824,371			18,021			3.95
Commercial		1,758,137			18,593			4.23			1,379,585			16,750			4.86
Commercial construction		5,629			88			6.25			—			—			—
Installment		53,983			464			3.44			55,215			577			4.18
Home equity		55,654			614			4.41			60,421			766			5.07
Other		364			9			9.89			412			11			10.68
Total loans		4,364,689			42,827			3.92			3,891,641			41,020			4.22
Federal funds sold		102			—			0.25			101			—			0.25
Interest-earning deposits		251,566			552			0.88			237,251			1,270			2.14
Total interest-earning assets		5,038,697			45,969			3.65	%		4,533,904			45,184			3.99	%
Noninterest-earning assets:
Cash and due from banks		5,517									5,398
Allowance for loan and lease losses		(44,368	)								(38,948	)
Premises and equipment		21,145									21,467
Other assets		161,452									122,102
Total noninterest-earning assets		143,746									110,019
Total assets	$	5,182,443								$	4,643,923
LIABILITIES:
Interest-bearing deposits:
Checking	$	1,540,798		$	3,447			0.89	%	$	1,284,611		$	3,710			1.16	%
Money markets		1,192,049			2,981			1.00			1,208,004			4,335			1.44
Savings		110,905			15			0.05			114,003			16			0.06
Certificates of deposit - retail		698,019			3,694			2.12			607,178			3,234			2.13
Subtotal interest-bearing deposits		3,541,771			10,137			1.14			3,213,796			11,295			1.41
Interest-bearing demand - brokered		180,000			923			2.05			180,000			739			1.64
Certificates of deposit - brokered		33,715			263			3.12			56,154			365			2.60
Total interest-bearing deposits		3,755,486			11,323			1.21			3,449,950			12,399			1.44
FHLB advances and borrowings		183,398			1,012			2.21			105,900			834			3.15
Finance lease liabilities		7,475			90			4.82			8,244			99			4.80
Subordinated debt		83,439			1,223			5.86			83,213			1,224			5.88
Total interest-bearing liabilities		4,029,798			13,648			1.35	%		3,647,307			14,556			1.60	%
Noninterest-bearing liabilities:
Demand deposits		542,557									471,265
Accrued expenses and other liabilities		101,662									51,791
Total noninterest-bearing liabilities		644,219									523,056
Shareholders’ equity		508,426									473,560
Total liabilities and shareholders’ equity	$	5,182,443								$	4,643,923
Net interest income (tax-equivalent basis)					32,321									30,628
Net interest spread								2.30	%								2.39	%
Net interest margin (4)								2.57	%								2.70	%
Tax equivalent adjustment					(574	)								(621	)
Net interest income				$	31,747								$	30,007

(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 March 31, 2020
	Difference due to						Change In
	Change In:						Income/
(In Thousands):	Volume			Rate			Expense
ASSETS:
Investments	$	44		$	(348	)	$	(304	)
Loans		5,049			(3,242	)		1,807
Interest-earning deposits		73			(791	)		(718	)
Total interest income	$	5,166		$	(4,381	)	$	785
LIABILITIES:
Interest-bearing checking	$	711		$	(974	)	$	(263	)
Money market		(46	)		(1,308	)		(1,354	)
Savings		—			(1	)		(1	)
Certificates of deposit - retail		495			(35	)		460
Certificates of deposit - brokered		(1	)		185			184
Interest bearing demand brokered		(165	)		63			(102	)
Borrowed funds		169			9			178
Capital lease obligation		(9	)		—			(9	)
Subordinated debt		3			(4	)		(1	)
Total interest expense	$	1,157		$	(2,065	)	$	(908	)
Net interest income	$	4,009		$	(2,316	)	$	1,693

Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $46.0 million for the first quarter of 2020 compared to $45.2 million for the same quarter of 2019, reflecting an increase of $785 thousand, or 2 percent. Average interest-earning assets totaled $5.04 billion for the first quarter of 2020, an increase of $504.8 million, or 11 percent, from the same period of 2019. The average balance of the C&I loan portfolio increased $378.6 million, or 27 percent, from the first quarter of 2019, to $1.76 billion for the same quarter of 2020. The increase in this portfolio for the three months ended March 31, 2020 was attributed to: the addition of seasoned bankers including a new EVP, Head of Commercial Banking, in 2019 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. The average balance of the commercial mortgage portfolio (which includes multifamily mortgage loans) increased $131.4 million, or 7 percent, from the first quarter of 2019, to $1.96 billion for the same quarter of 2020. The increases in this portfolio were in anticipation of maturities in the portfolio in the latter part of 2020. These increases were partially offset by decreases in the average balance of the residential mortgage portfolio of $36.5 million, or 6 percent for the three months ended March 31, 2020, when compared to the same period in 2019. 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 $422.3 million for the first quarter of 2020 compared to $404.9 million for the same quarter of 2019, reflecting an increase of $17.4 million, or 4 percent. Interest-earning deposits totaled $251.6 million for the three months ended March 31, 2020 when compared to $237.3 million for the same period in 2019, reflecting an increase of $14.3 million or 6 percent. The increase in interest-earning deposits for the three months ended March 31, 2020 was primarily to increase the Company’s balance sheet liquidity in the event of significant depositor withdrawals and/or significant borrower draws on existing unused credit lines due to the current environment created by the COVID-19 pandemic.

For the quarters ended March 31, 2020 and 2019, the average yields earned on interest-earning assets were 3.65 percent and 3.99 percent, respectively, a decrease of 34 basis points. The decrease in average rates on loans for the period was due to a declining rate environment combined with the Federal Open Market Committee reduction of the target Federal Funds rate to 0 percent to 0.25 percent in March 2020 due to the economic disruption caused by COVID-19. With the transformation to a commercial bank balance sheet and business model, the Company’s interest rate sensitivity models indicate the Company is asset sensitive as of March 31, 2020, and that net interest income would improve in both a rising rate environment and a falling rate environment as our adjustable rate assets have little room to re-price in this low rate environment. In the short term we will most likely see a

decline in net interest income in the event of a change in interest rates as the full effect of rate decreases on our adjustable rate assets will occur at the beginning of the second quarter of 2020.

For the first quarter of 2020, the average balance of interest-bearing deposits was $3.76 billion, an increase of $305.5 million, or 9 percent, from the average balance for the same period of 2019. The $328.0 million, or 10 percent growth in the average balance of 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 was partially offset by a decline of $8.5 million in the average balance 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 1.21 percent and 1.44 percent for the first quarters of 2020 and 2019, respectively, a decrease of 23 basis points. The decrease in the average rate paid on deposits was principally due to repricing of our deposit base to align with the recent Fed rate decreases.

For the first quarter of 2020, the average balance of borrowings was $183.4 million, an increase of $77.5 million when compared to the same period in 2019. The increase in borrowings was principally due to a $500.0 million one-month FHLB advance entered into in March 2020 to increase the Company’s balance sheet liquidity in the event of significant depositor withdrawals and/or significant borrower draws on existing unused credit lines in the current environment. As of late April, client deposits continued to increase, and borrower draws on unused lines were minimal, and the Company repaid the borrowing.

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 $478.2 million for the three months ended March 31, 2020 compared to $433.7 million for the three months ended March 31, 2019.

The average balance of brokered interest-bearing demand deposits was $180.0 million for both the three months ended March 31, 2020 and 2019, respectively. The Company has transacted $180.0 million of interest rate swaps against these deposits 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 March 31, 2020, the Company had investment securities available for sale with a fair value of $400.6 million compared with $390.8 million at December 31, 2019. A net unrealized gain (net of income tax) of $5.4 million and a net unrealized gain (net of income tax) of $1.0 million were included in shareholders’ equity at March 31, 2020 and December 31, 2019, respectively.

The Company has one equity security (a CRA investment security) with a fair value of $14.0 million at March 31, 2020 compared with $10.8 million at December 31, 2019, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded a $198,000 unrealized gain on the Consolidated Statements of Income for the three months ended March 31, 2020 as compared to an unrealized loss of $59,000 for the three months ended March 31, 2019.

The carrying value of investment securities available for sale as of March 31, 2020 and December 31, 2019 are shown below:

	March 31,		December 31,
(In thousands)	2020		2019
U.S. treasuries	$	2,918	$	—
U.S. government-sponsored agencies		30,084		34,784
Mortgage-backed securities-residential (principally U.S. government-sponsored entities)		351,707		338,904
SBA pool securities		2,553		2,784
State and political subdivisions		10,202		11,215
Corporate bond		3,094		3,068
Total	$	400,558	$	390,755

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of March 31, 2020:

				After 1			After 5
				But			But			After
	Within			Within			Within			10
(Dollars in thousands)	1 Year			5 Years			10 Years			Years			Total
U.S. treasuries	$	2,918		$	—		$	—		$	—		$	2,918
		0.38	%		—			—			—			0.38	%
U.S. government-sponsored agencies	$	—		$	5,003		$	25,081		$	—		$	30,084
		—			1.82	%		2.94	%		—			2.76	%
Mortgage-backed securities-residential (1)	$	987		$	11,708		$	41,035		$	297,977		$	351,707
		4.86	%		1.90	%		2.14	%		2.04	%		2.05	%
SBA pool securities	$	—		$	—		$	579		$	1,974		$	2,553
		—			—			1.92	%		1.94	%		1.94	%
State and political subdivisions (2)	$	1,559		$	8,069		$	574		$	—		$	10,202
		2.58	%		2.63	%		4.72	%		—			2.74	%
Corporate bond	$	—		$	—		$	3,094		$	—		$	3,094
		—			—			5.25	%		—			5.25	%
Total	$	5,464		$	24,780		$	70,363		$	299,951		$	400,558
		1.82	%		2.13	%		2.59	%		2.03	%		2.13	%

(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 three months ended March 31, 2020 was $251.7 million compared to $223.7 million for the year ended December 31, 2019. The increase represented excess cash as deposit and borrowing 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 March 31,					Change
(In thousands)	2020			2019		2020 vs 2019
Service charges and fees	$	816		$	816	$	—
Bank owned life insurance		328			338		(10	)
Gain on sale of loans (mortgage banking)		292			47		245
Loss on loans held for sale at lower of cost or fair value		(3	)		—		(3	)
Fee income related to loan level, back-to-back swaps		1,418			270		1,148
Gain on sale of SBA loans		1,054			419		635
Other income		459			606		(147	)
Securities gains		198			59		139
Total other income	$	4,562		$	2,555	$	2,007

The Company recorded total other income, excluding wealth management fee income, of $4.6 million for the first quarter of 2020, reflecting an increase of $2.0 million, or 79 percent, compared to the same period in 2019. The increase for the three months ended March 31, 2020 was primarily attributable to capital markets activity (mortgage banking income, fee income related to loan level, back-to-back swaps, and gain on the sale of SBA loans), which increased by $2.0 million as compared to the first quarter of 2019.

For the quarter ended March 31, 2020, income from the sale of newly originated residential mortgage loans was $292,000 compared to $47,000 for the same period in 2019. Such income is a result of the volume of residential mortgage loans originated for sale in the respective periods.

The first quarter of 2020 included $1.4 million of loan level, back-to-back swap income compared to $270,000 in the same quarter of 2019. 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 first quarter of 2020 included $1.1 million of income, on sales of $11.4 million, related to the Company’s SBA lending and sale program compared to $419,000 of income, on sales of $4.2 million, for the same quarter in 2019.

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 $198,000 and $59,000 mark to market gain on its equity security investment for the three months ended March 31, 2020 and 2019, respectively.

Other income was $459,000 for the quarter ended March 31, 2020 compared to $606,000 for the same quarter in 2019. The decrease in other income was primarily due to decreased commercial lending fees, particularly unused credit line fees, income related to our corporate advisory program, and loan servicing income.

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

	For the Three Months Ended March 31,				Change
(In thousands)	2020		2019		2020 vs 2019
Compensation and employee benefits	$	19,226	$	17,156	$	2,070
Premises and equipment		4,043		3,388		655
FDIC assessment		250		277		(27	)
Other Operating Expenses:
Professional and legal fees		974		1,124		(150	)
Telephone		324		280		44
Advertising		340		359		(19	)
Amortization of intangible assets		324		229		95
Other		2,754		2,902		(148	)
Total operating expenses	$	28,235	$	25,715	$	2,520

Increased operating expenses in the three-month period ended March 31, 2020 was principally attributable to: an increase in compensation and employee benefits of $2.1 million to $19.2 million for the first quarter of 2020, which includes expenses

related to the Point View acquisition completed on September 1, 2019; additional premises and equipment expenses, which includes expenses related to Point View; ongoing operating expenses including amortization of intangibles; hiring in line with the Company’s strategic plan; and normal salary increases. Further, the March 2020 quarter included increased medical insurance costs when compared to the March 2019 quarter.

PEAPACK PRIVATE: This division includes: investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian, and other financial planning, tax preparation and advisory services. Officers from Peapack Private are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, at private banking locations in Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware in Greenville, Delaware, MCM, in Gladstone, 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/AUA”) of the Peapack Private Wealth Management Division was $6.4 billion at March 31, 2020, reflecting a 14% decline. Changes in the market value of the Company’s AUM/AUA are approximately 75% correlated to the changes in value of the S&P index, which declined approximately 20% from December 31, 2019 to March 31, 2020.

In the March 2020 quarter, Peapack Private generated $10.0 million in fee income compared to $9.2 million for the March 2019 quarter, reflecting a 9 percent increase. The growth in fee income was partially due to the acquisition of Point View on September 1, 2019. The fees for the first quarter of 2020 has been negatively impacted by declines in the market value of the Company’s Assets Under Management (AUM) / Assets Under Administration (AUA) as a result of declines in the equity markets created by the COVID-19 pandemic.

Operating expenses relative to Peapack Private reflected increases due to overall growth in the business, new hires and select third party expenditures. The three months ended March 31, 2020 also includes a full quarter of expense from Point View. 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
	March 31,			December 31,			September 30,			June 30,			March 31,
(Dollars in thousands)	2020			2019			2019			2019			2019
Loans past due over 90 days and still accruing	$	—		$	—		$	—		$	—		$	—
Nonaccrual loans		29,324			28,881			29,383			31,150			24,892
Other real estate owned		50			50			336			—			—
Total nonperforming assets	$	29,374		$	28,931		$	29,719		$	31,150		$	24,892

Performing TDRs	$	2,389		$	2,357		$	2,527		$	3,772		$	4,274

Loans past due 30 through 89 days and still accruing (1)	$	8,261		$	1,910		$	6,333		$	432		$	2,492

Classified loans	$	58,938		$	58,908		$	53,882		$	56,135		$	51,306

Impaired loans	$	36,369		$	35,924		$	36,627		$	34,941		$	29,185

Nonperforming loans as a % of total loans (2)		0.67	%		0.66	%		0.71	%		0.77	%		0.64	%
Nonperforming assets as a % of total assets (2)		0.50	%		0.56	%		0.60	%		0.64	%		0.53	%
Nonperforming assets as a % of total loans plus other real estate owned (2)		0.67	%		0.66	%		0.71	%		0.77	%		0.64	%

(1)

Includes a non-owner occupied CRE loan with a balance of $3.5 million at March 31, 2020. This loan was brought fully current in early April. The $6.3 million at September 30, 2019 included one $4.3 million commercial real estate loan that was in process of a rate modification (not a TDR modification). The loan was brought 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 $20.0 million and $100,000 for the first quarters of 2020 and 2019, respectively. The increased provision for loan losses in the March 2020 quarter is primarily was due to the current environment created by the COVID-19 pandemic which led to increased qualitative factors when calculating the allowance for loan losses. The Company’s provision for loan and lease losses and the level of the allowance for loan and lease losses also reflect several other 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, and the composition of the loan portfolio. 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 increased provision for loan and lease losses in the March 2020 quarter was primarily due to the current environment created by the COVID-19 pandemic and was driven principally by increased qualitative factors. The increase in qualitative factors was primarily related to elevated levels of unemployment and approved loan deferral requests. For additional details, see the provision for loan and lease losses table below.

The allowance for loan and lease losses was $63.8 million as of March 31, 2020, compared to $43.7 million at December 31, 2019. As a percentage of loans, the allowance for loan and lease losses was 1.45 percent at March 31, 2020 and 0.99 percent at December 31, 2019. The specific reserves recorded on impaired loans were $3.7 million at March 31, 2020 compared to $2.8 million as of December 31, 2019. Specific reserves at March 31, 2020 were primarily related to a $2.2 million reserve associated with a casual dining commercial banking relationship and a $4.0 million reserve on a senior living facility relationship. Total impaired loans were $36.4 million and $35.9 million as of March 31, 2020 and December 31, 2019, respectively. The general component of the allowance increased from $40.9 million at December 31, 2019 to $57.4 million at March 31, 2020 due to the reasons noted above.

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

	March 31,			December 31,			September 30,			June 30,			March 31,
(Dollars in thousands)	2020			2019			2019			2019			2019
Allowance for loan and lease losses:
Beginning of period	$	43,676		$	41,580		$	39,791		$	38,653		$	38,504
Provision for loan and lease losses		20,000			1,950			800			1,150			100
Recoveries/(charge-offs), net		107			146			989			(12	)		49
End of period	$	63,783		$	43,676		$	41,580		$	39,791		$	38,653

Allowance for loan and lease losses as a % of total loans		1.447	%		0.994	%		1.000	%		0.988	%		0.992	%

General allowance for loan and lease losses as a % of total loans		1.303	%		0.930	%		0.934	%		0.957	%		0.985	%

Allowance for loan and lease losses as a % of non-performing loans		217.51	%		151.23	%		141.51	%		127.74	%		155.28	%

The following table details the Company’s provision for loan and lease losses for the quarter ended March 31, 2020:

			Percentage
(Dollars in thousands)			of Total Loans
Allowance for loan and lease losses at January 1, 2020	$	43,676		0.99	%
Net recoveries		107
Provision for loan and lease losses:
Additional reserves associated with current criticized and classified credits		3,700
Based on qualitative factors related to higher unemployment rate, approved loan deferral payment requests		15,987
Based on loan growth and migration		313
Provision for loan and lease losses	$	20,000

Allowance for loan and lease losses at March 31, 2020	$	63,783		1.44	%

INCOME TAXES: Income tax benefit for the three months ended March 31, 2020 was $3.3 million as compared to income tax expense of $4.5 million for the same period in 2019. The income tax benefit was principally as a result of a $3.2 million Federal income tax benefit that resulted from a tax net operating loss (“NOL”) carryback. The Company had a $23 million NOL for tax purposes in 2018 (when the Federal tax rate was 21%) resulting from accelerated tax depreciation. Under the CARES Act, the Company was allowed to carry this NOL back to a period when the Federal tax rate was 35%, generating a permanent tax benefit.

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 and was in place for 2019. The surtax adjusted to 1.5 percent for 2020 and will continue into 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.

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 was benefitted by net income of $1.4 million for the three months ended March 31, 2020, which was offset by the purchase of shares through the Company’s stock repurchase program. Early in the quarter, the Company purchased 220,222 shares, at an average price of $29.45, for a total cost of $6.5 million.

The Company employs quarterly capital stress testing – adverse case and severely adverse case. In the December 31, 2019 severely, adverse case, no growth scenario, the Bank remains well capitalized over a two-year stress period. With a Pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period.

Quantitative measures established by regulation to ensure capital adequacy require the Company and 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 March 31, 2020 and December 31, 2019, 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 Community Bank Leverage Ratio (“CBLR”) at 9 percent, effective January 1, 2020. Under the CAREs Act, the Community Bank Leverage Ratio was temporarily lowered to 8 percent. The Bank did not opt into the CBLR and will continue to comply with the requirements under Basel III. The Bank’s leverage ratio was 10.28 percent at March 31, 2020.

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 March 31, 2020:
Total capital (to risk-weighted assets)	$	581,025		13.58	%	$	427,709		10.00	%	$	342,168		8.00	%	$	449,095		10.50	%

Tier I capital (to risk-weighted assets)		527,434		12.33			342,168		8.00			256,626		6.00			363,553		8.50

Common equity tier I (to risk-weighted assets)		527,433		12.33			278,011		6.50			192,469		4.50			299,397		7.00

Tier I capital (to average assets)		527,434		10.28			256,589		5.00			205,271		4.00			205,271		4.00

As of December 31, 2019:
Total capital (to risk-weighted assets)	$	571,509		13.76	%	$	415,487		10.00	%	$	332,389		8.00	%	$	436,261		10.50	%

Tier I capital (to risk-weighted assets)		527,833		12.70			332,389		8.00			249,292		6.00			353,164		8.50

Common equity tier I (to risk-weighted assets)		527,832		12.70			270,066		6.50			186,969		4.50			290,841		7.00

Tier I capital (to average assets)		527,833		10.63			248,252		5.00			198,602		4.00			198,602		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 March 31, 2020:
Total capital (to risk-weighted assets)	$	595,770		13.91	%	N/A	N/A	$	342,593		8.00	%	$	449,654		10.50	%

Tier I capital (to risk-weighted assets)		458,640		10.71		N/A	N/A		256,945		6.00			364,005		8.50

Common equity tier I (to risk-weighted assets)		458,639		10.71		N/A	N/A		192,709		4.50			299,769		7.00

Tier I capital (to average assets)		458,640		8.93		N/A	N/A		205,474		4.00			205,474		4.00

As of December 31, 2019:
Total capital (to risk-weighted assets)	$	590,614		14.20	%	N/A	N/A	$	332,783		8.00	%	$	436,778		10.50	%

Tier I capital (to risk-weighted assets)		463,521		11.14		N/A	N/A		249,587		6.00			353,582		8.50

Common equity tier I (to risk-weighted assets)		463,520		11.14		N/A	N/A		187,190		4.50			291,185		7.00

Tier I capital (to average assets)		463,521		9.33		N/A	N/A		198,792		4.00			198,792		4.00

(A)

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 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. All shares purchased during the quarter ended March 31, 2020 were in the open market.

On April 28, 2020, the Board of Directors declared a regular cash dividend of $0.05 per share payable on May 27, 2020 to shareholders of record on May 12, 2020.

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 $774.0 million at March 31, 2020. In addition, the Company had $400.6 million in securities designated as available for sale at March 31, 2020. 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 $352.0 million as of March 31, 2020 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.

For the quarter ended March 31, 2020, the Company’s balance sheet liquidity was funded by increased client deposits of $197.7 million and a $500.0 million one-month borrowing from the Federal Home Loan Bank. The borrowing was transacted in mid-March specifically to increase the Company’s balance sheet liquidity in the event of significant depositor withdrawals and/or significant borrower draws on existing unused credit lines in the current environment. As of late April, client deposits continued to increase, and borrower draws on unused lines were minimal, and the Company repaid the borrowing on April 24, 2020.

The Company approved loans of approximately $600 million under the PPP. The Federal Reserve has supplied a source of liquidity for the PPP to participating financial institutions through the Paycheck Protection Program Liquidity Facility (PPPLF) which extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The Company will be utilizing this facility to fund its PPP loans.

As of March 31, 2020, in addition to the $1.2 billion of balance sheet liquidity, the Company also had approximately $1.75 billion of secured funding available from the Federal Home Loan Bank, of which $620 million was drawn as of March 31, 2020. Additionally, the Company also had $1.4 billion of secured funding available from the Federal Reserve Discount Window, none of which was drawn.

Brokered interest-bearing demand (“overnight”) deposits were $180.0 million at March 31, 2020. 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 March 31, 2020, the Company had transacted pay fixed, receive floating interest rate swaps totaling $270.0 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. The Company believes it has sufficient liquidity given the current environment created by the COVID-19 pandemic.

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 the 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 $270.0 million as of March 31, 2020.

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 March 31, 2020, $864.1 million of notional value in swaps were executed and outstanding with borrowers under this program.

As noted above, the 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 March 31, 2020. 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 March 31, 2020.

In an immediate and sustained 200 basis point increase in market rates at March 31, 2020, net interest income for year 1 would increase approximately 11.0 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 16.2 percent, when compared to a flat interest rate scenario.

In an immediate and sustained 100 basis point decrease in market rates at March 31, 2020, net interest income would increase approximately 3.4 percent for year 1 and 2.9 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 March 31, 2020.

	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	$	623,901	$	69,184			12.47	%		10.96	%		145
+100		594,158		39,441			7.11			10.31			80
Flat interest rates		554,717		—			—			9.51			—
-100		484,486		(70,231	)		(12.66	)		8.29			(122	)

(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 March 31, 2020, and that net interest income would improve in a both rising rate environment and 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 March 31, 2020 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

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment and the stock market, and in particular, bank stocks, have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

demand for our products and services may decline, making it difficult to grow assets and income;

•

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

•

our cyber security risks are increased as the result of an increase in the number of employees working remotely;

•

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

•

Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

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

	Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs		Total Number of Shares Withheld (1)		Average Price Paid Per Share		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans Or Programs (2)
January 1, 2020 -
January 31, 2020		—		—	$	—	$	6,826,882
February 1, 2020 -
February 29, 2020		144,211		308		30.34	$	2,356,341
March 1, 2020 -
March 31, 2020		76,011		36,798		23.97	$	—
Total		220,222		37,106	$	27.54

(1)

Represents shares withheld to satisfy tax withholding obligations upon the exercise of stock options and vesting of restricted stock awards/units.

(2)

On July 25, 2019, the Company announced the adoption of its Share Repurchase program which authorized the repurchase of up to 960,000 shares. The repurchased shares plan does not include normal treasury activity such as purchases to fund the dividend reinvestment, employee stock purchase and equity compensation plans. The Company completed the Share Repurchase program in the first quarter of 2020.

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: May 11, 2020	By:	/s/ Douglas L. Kennedy
		Douglas L. Kennedy
		President and Chief Executive Officer
		(Principal Executive Officer)

DATE: May 11, 2020	By:	/s/ Jeffrey J. Carfora
		Jeffrey J. Carfora
		Senior Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

DATE: May 11, 2020	By:	/s/ Francesco S. Rossi
		Francesco S. Rossi
		Chief Accounting Officer
		(Principal Accounting Officer)