# Peapack Gladstone Financial Corp: Form 10-Q for the period ended Jun 30, 2017

- Company: [Peapack Gladstone Financial Corp](/companies/pgc.md) (CIK 1050743)
- Form: 10-Q
- Filed: 2017-08-07
- Accepted by EDGAR: Aug 7, 2017, 09:45 ET
- Period: 2017-06-30
- Accession: 0001174947-17-001168
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1050743/000117494717001168/form10q-18462_pgfc.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1050743/000117494717001168/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-04-01 to 2017-06-30 | $35.1m | us-gaap:Revenues |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $67.8m | us-gaap:Revenues |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $6.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $12.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $4.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $8.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $7.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $15.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.45 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.92 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 17,756,390 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 17,588,816 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $1.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $1.7m | us-gaap:PaymentsOfDividendsCommonStock |
| Total assets | at 2017-06-30 | $4.17bn | us-gaap:Assets |
| Total liabilities | at 2017-06-30 | $3.81bn | us-gaap:Liabilities |
| Short-term borrowings | at 2017-06-30 | $87.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2017-06-30 | $356.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 76,227 characters.

### MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

### AND RESULTS OF OPERATIONS

**GENERAL:** This Quarterly Report on Form 10-Q, both in the following discussion and analysis and elsewhere contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management’s view of future interest income and net loans, Management’s confidence and strategies and Management’s expectations about new and existing programs and products, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, “will”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2016, in addition to/which include the following:

- inability to successfully grow our business and implement our strategic plan, including an inability to generate revenues to offset the increased personnel and other costs related to the strategic plan;
- the impact of anticipated higher operating expenses in 2017 and beyond;
- inability to successfully integrate wealth acquisitions;
- inability to manage our growth;
- inability to successfully integrate our expanded employee base;
- an unexpected decline in the economy, in particular in our New Jersey and New York market areas;
- declines in our net interest margin caused by the low interest rate environment and highly competitive market;
- declines in value in our investment portfolio;
- higher than expected increases in our allowance for loan losses;
- higher than expected increases in loan losses or in the level of nonperforming loans;
- unexpected changes in interest rates;
- an unexpected decline in real estate values within our market areas;
- legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and related regulations) subject us to additional regulatory oversight which may result in increased compliance costs;
- successful cyberattacks against our IT infrastructure and that of our IT providers;
- higher than expected FDIC insurance premiums;
- adverse weather conditions;
- inability to successfully generate new business in new geographic markets;
- inability to execute upon new business initiatives;
- lack of liquidity to fund our various cash obligations;
- reduction in our lower-cost funding sources;
- our inability to adapt to technological changes;
- claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters; and
- other unexpected material adverse changes in our operations or earnings.

The Company assumes no responsibility to update such forward-looking statements in the future even if experience shows that the indicated results or events will not be realized. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the 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, 2016, contains a summary of the Company’s significant accounting policies.

Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires Management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

The provision for loan losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey and, 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 losses and allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

The Company accounts for its securities in accordance with “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into Accounting Standards Codification (“ASC”) 320. All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. No impairment charges were recognized in the three or six months ended June 30, 2017 and 2016. For equity securities, the entire amount of impairment is recognized through earnings.

**EXECUTIVE SUMMARY:** The following table presents certain key aspects of our performance for the three months ended June 30, 2017 and 2016.

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

| Results of Operations: | Three Months Ended June 30, 2017 | 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Net interest income | $26,972 | $24,176 | $2,796 |
| Provision for loan losses | 2,200 | 2,200 | — |
| Net interest income after provision |  |  |  |
| for loan losses | 24,772 | 21,976 | 2,796 |
| Wealth management fee income | 5,086 | 4,899 | 187 |
| Other income | 3,085 | 2,549 | 536 |
| Operating expense | 20,095 | 18,775 | 1,320 |
| Income before income tax expense | 12,848 | 10,649 | 2,199 |
| Income tax expense | 4,908 | 4,085 | 823 |
| Net income | $7,940 | $6,564 | $1,376 |
| Total revenue (Net interest income |  |  |  |
| plus other income) | $35,143 | $31,624 | $3,519 |
| Diluted earnings per share | $0.45 | $0.40 | $0.05 |
| Diluted average shares outstanding | 17,756,390 | 16,341,975 | 1,414,415 |
| Return on average assets annualized (ROAA) | 0.79% | 0.73% | 0.06% |
| Return on average equity |  |  |  |
| annualized (ROAE) | 9.06 | 9.06 | — |

The following table presents certain key aspects of our performance for the six months ended June 30, 2017 and 2016.

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

| Results of Operations: | Six Months Ended June 30, 2017 | 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Net interest income | $52,563 | $47,586 | $4,977 |
| Provision for loan losses | 3,800 | 3,900 | (100) |
| Net interest income after provision |  |  |  |
| for loan losses | 48,763 | 43,686 | 5,077 |
| Wealth management fee income | 9,904 | 9,194 | 710 |
| Other income | 5,286 | 4,517 | 769 |
| Operating expense | 39,399 | 37,981 | 1,418 |
| Income before income tax expense | 24,554 | 19,416 | 5,138 |
| Income tax expense | 8,632 | 7,363 | 1,269 |
| Net income | $15,922 | $12,053 | $3,869 |
| Total revenue (Net interest income |  |  |  |
| plus other income) | $67,753 | $61,297 | $6,456 |
| Diluted earnings per share | $0.91 | $0.74 | $0.17 |
| Diluted average shares outstanding | 17,588,816 | 16,179,700 | 1,409,116 |
| Return on average assets annualized (ROAA) | 0.80% | 0.68% | 0.12% |
| Return on average equity |  |  |  |
| annualized (ROAE) | 9.33 | 8.45 | 0.88 |

48

#### Index

| Selected Balance Sheet Ratios: | June 30, 2017 | December 31, 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Total capital (Tier I + II) to risk-weighted assets | 13.24% | 13.25% | (0.01)% |
| Tier I leverage ratio | 8.82 | 8.35 | 0.47 |
| Loans to deposits | 102.31 | 97.08 | 5.23 |
| Allowance for loan losses to total |  |  |  |
| loans | 0.98 | 0.97 | 0.01 |
| Allowance for loan losses to |  |  |  |
| nonperforming loans | 228.54 | 285.94 | (57.40) |
| Nonperforming loans to total loans | 0.43 | 0.34 | 0.09 |

For the second quarter of 2017, the Company recorded net income of $7.9 million compared to $6.6 million for the same quarter of 2016. For the three months ended June 30, 2017 and 2016, diluted earnings per share were $0.45 and $0.40, respectively. Annualized return on average assets was 0.79 percent and annualized return on average equity was 9.06 percent for the second quarter of 2017, compared to 0.73 percent and 9.06 percent, respectively, for the same quarter of 2016.

For the six months ended June 30, 2017, the Company recorded net income of $15.9 million compared to $12.1 million for the same period of 2016. Diluted earnings per common share were $0.91 and $0.74 for the first six months of 2017 and 2016, respectively. Annualized return on average assets was 0.80 percent and annualized return on average common equity was 9.33 percent for the first six months of 2017, compared to 0.68 percent and 8.45 percent, respectively, for the six months ending June 30, 2016.

**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, 2016 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” which is incorporated herein by reference.

**OFF-BALANCE SHEET ARRANGEMENTS:** For a discussion of our off-balance sheet arrangements, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements” which is incorporated herein by reference.

### EARNINGS ANALYSIS

### NET INTEREST INCOME/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 to individuals and businesses, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank advances, subordinated debt and other borrowings. Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing liabilities (“Net Interest Spread”) and the relative amounts of earning assets and interest-bearing liabilities. The Company’s Net Interest Spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets.

The following table summarizes the Company’s net interest income and related spread and margin, on a fully tax-equivalent basis, for the periods indicated:

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net interest income | $27,240 | $24,410 |
| Interest rate spread | 2.59% | 2.65% |
| Net interest margin | 2.76 | 2.79 |

49

#### Index

*(Dollars in thousands)*

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net interest income | $53,071 | $48,024 |
| Interest rate spread | 2.57% | 2.68% |
| Net interest margin | 2.73 | 2.80 |

Net interest income, on a fully tax-equivalent basis, for the three months ended June 30, 2017, grew $2.8 million, or 12 percent, from the three months ended June 30, 2016. Net interest income on a fully tax equivalent basis for the six months ended June 30, 2017 increased $5.0 million, or 11 percent, when compared to the same period in 2016. This growth in both the three and six month periods is due to an increase in average loans, especially commercial (C&I) loans, partially offset by an increase of cost of funds, principally due to the issuance of subordinated debt in June 2016. Net interest spread and margin for the three and six months ending June 30, 2017 declined when compared to the same 2016 periods partially due to the continuing effect of low market yields, the effect of the subordinated debt issuance, the maintenance of higher liquidity, as well as competitive pressures in attracting new loans and deposits. The Company expects continued loan growth in this lower market rate and competitive environment.

The following table summarizes the Company’s loans closed for the periods indicated:

*(In thousands)*

|  | For the Three Months Ended June 30, 2017 | June 30, 2016 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $54,833 | $32,513 |
| Residential mortgage loans originated for sale | 6,491 | 20,221 |
| Total residential mortgage loans | 61,324 | 52,734 |
| Commercial real estate loans | 46,931 | 36,554 |
| Multifamily properties | 78,824 | 150,709 |
| Commercial (C & I) loans (A) | 158,476 | 61,309 |
| Small business association | 3,900 | 2,285 |
| Wealth Lines of Credit (A) | 14,905 | 785 |
| Total commercial loans | 303,036 | 251,642 |
| Installment loans | 2,075 | 1,077 |
| Home equity lines of credit (A) | 5,444 | 14,435 |
| Total loans closed | $371,879 | $319,888 |

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

*(In thousands)*

|  | For the Six Months Ended June 30, 2017 | June 30, 2016 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $119,664 | $50,260 |
| Residential mortgage loans originated for sale | 9,606 | 28,283 |
| Total residential mortgage loans | 129,270 | 78,543 |
| Commercial real estate loans | 80,147 | 45,893 |
| Multifamily properties | 125,949 | 258,744 |
| Commercial (C & I) loans (A) | 286,606 | 128,797 |
| Small business association | 5,600 | 3,340 |
| Wealth Lines of Credit (A) | 22,105 | 2,585 |
| Total commercial loans | 520,407 | 439,359 |
| Installment loans | 4,221 | 1,563 |
| Home equity lines of credit (A) | 12,417 | 18,039 |
| Total loans closed | $666,315 | $537,504 |

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

As the Company previously explained, it has continued to manage its balance sheet such that multifamily loans decline as a percentage of the overall loan portfolio and C&I loans become a larger percentage of the overall loan portfolio. The Company anticipated that this balance sheet management, however, may not be linear each quarter, and would rather be apparent over periods of time.

At June 30, 2017, December 31, 2016 and June 30, 2016, the Bank had a concentration in commercial real estate loans as defined by applicable regulatory guidance.

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

| Multifamily mortgage loans as a percent of | June 30, 2017 | December 31, 2016 | June 30, 2016 |
| --- | ---: | ---: | ---: |
| total regulatory capital of the Bank | 351% | 372% | 432% |
| Non-owner occupied commercial real estate loans |  |  |  |
| as a percent of total regulatory capital of the Bank | 201 | 192 | 178 |
| Total CRE concentration |  |  |  |
|  | 552% | 564% | 610% |

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.

To supplement its C&I lending programs, the Company announced that during April 2017 it had hired a team of experienced bankers to focus on equipment financing. The Company generally expects that revenue and profitability related to this new group will lag expenses by several quarters.

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

### Average Balance Sheet

Unaudited

Three Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | June 30, 2017 Average Balance | Income/ Expense | Yield | June 30, 2016 Average Balance | Income/ Expense | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $293,990 | $1,477 | 2.01% | $200,804 | $914 | 1.82% |
| Tax-exempt (1) (2) | 25,109 | 190 | 3.03 | 27,127 | 211 | 3.11 |
| Loans (2) (3): |  |  |  |  |  |  |
| Mortgages | 589,848 | 4,739 | 3.21 | 473,293 | 3,927 | 3.32 |
| Commercial mortgages | 2,085,623 | 18,653 | 3.58 | 2,047,112 | 17,830 | 3.48 |
| Commercial | 713,120 | 7,267 | 4.08 | 552,955 | 5,392 | 3.90 |
| Commercial construction | — | — | — | 1,305 | 13 | 3.98 |
| Installment | 71,364 | 554 | 3.11 | 63,158 | 420 | 2.66 |
| Home equity | 67,611 | 613 | 3.63 | 58,146 | 475 | 3.27 |
| Other | 481 | 11 | 9.15 | 462 | 11 | 9.52 |
| Total loans | 3,528,047 | 31,837 | 3.61 | 3,196,431 | 28,068 | 3.51 |
| Federal funds sold | 101 | — | 0.25 | 101 | — | 0.25 |
| Interest-earning deposits | 96,350 | 176 | 0.73 | 79,264 | 76 | 0.39 |
| Total interest-earning assets | 3,943,597 | 33,680 | 3.42% | 3,503,727 | 29,269 | 3.34% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 4,727 |  |  | 16,122 |  |  |
| Allowance for loan losses | (34,466) |  |  | (28,056) |  |  |
| Premises and equipment | 30,144 |  |  | 29,452 |  |  |
| Other assets | 76,747 |  |  | 88,907 |  |  |
| Total noninterest-earning assets | 77,152 |  |  | 106,425 |  |  |
| Total assets | $4,020,749 |  |  | $3,610,152 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $1,075,832 | $1,100 | 0.41% | $906,611 | $607 | 0.27% |
| Money markets | 1,051,095 | 1,204 | 0.46 | 818,453 | 602 | 0.29 |
| Savings | 121,299 | 16 | 0.05 | 120,094 | 17 | 0.06 |
| Certificates of deposit - retail | 457,528 | 1,650 | 1.44 | 450,675 | 1,545 | 1.37 |
| Subtotal interest-bearing deposits | 2,705,754 | 3,970 | 0.59 | 2,295,833 | 2,771 | 0.48 |
| Interest-bearing demand - brokered | 180,000 | 726 | 1.61 | 200,000 | 760 | 1.52 |
| Certificates of deposit - brokered | 92,719 | 493 | 2.13 | 93,642 | 496 | 2.12 |
| Total interest-bearing deposits | 2,978,473 | 5,189 | 0.70 | 2,589,475 | 4,027 | 0.62 |
| FHLB advances and borrowings | 77,457 | 354 | 1.83 | 222,667 | 573 | 1.03 |
| Capital lease obligation | 9,463 | 114 | 4.82 | 10,007 | 120 | 4.80 |
| Subordinated debt | 48,808 | 783 | 6.42 | 8,777 | 139 | 6.33 |
| Total interest-bearing liabilities | 3,114,201 | 6,440 | 0.83% | 2,830,926 | 4,859 | 0.69% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 534,339 |  |  | 464,074 |  |  |
| Accrued expenses and |  |  |  |  |  |  |
| other liabilities | 21,787 |  |  | 25,247 |  |  |
| Total noninterest-bearing liabilities | 556,126 |  |  | 489,321 |  |  |
| Shareholders’ equity | 350,422 |  |  | 289,905 |  |  |
| Total liabilities and |  |  |  |  |  |  |
| shareholders’ equity | $4,020,749 |  |  | $3,610,152 |  |  |
| Net interest income |  |  |  |  |  |  |
| (tax-equivalent basis) |  | 27,240 |  |  | 24,410 |  |
| Net interest spread |  |  | 2.59% |  |  | 2.65% |
| Net interest margin (4) |  |  | 2.76% |  |  | 2.79% |
| Tax equivalent adjustment |  | (268) |  |  | (234) |  |
| Net interest income |  | $26,972 |  |  | $24,176 |  |

(1) Average balances for available for sale securities are based on amortized cost.

(2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate.

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

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

53

### Average Balance Sheet

Unaudited

Six Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | June 30, 2017 Average Balance | Income/ Expense | Yield | June 30, 2016 Average Balance | Income/ Expense | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $291,627 | $2,981 | 2.04% | $200,192 | $1,840 | 1.84% |
| Tax-exempt (1) (2) | 26,125 | 389 | 2.98 | 25,586 | 411 | 3.21 |
| Loans (2) (3): |  |  |  |  |  |  |
| Mortgages | 567,475 | 9,212 | 3.25 | 469,895 | 7,745 | 3.30 |
| Commercial mortgages | 2,060,602 | 36,386 | 3.53 | 2,003,619 | 35,000 | 3.49 |
| Commercial | 680,872 | 13,646 | 4.01 | 539,426 | 10,492 | 3.89 |
| Commercial construction | 194 | 4 | 4.12 | 1,350 | 27 | 4.00 |
| Installment | 70,395 | 1,055 | 3.00 | 54,032 | 755 | 2.79 |
| Home equity | 66,965 | 1,169 | 3.49 | 55,601 | 915 | 3.29 |
| Other | 498 | 23 | 9.24 | 474 | 23 | 9.70 |
| Total loans | 3,447,001 | 61,495 | 3.57 | 3,124,397 | 54,957 | 3.52 |
| Federal funds sold | 101 | — | 0.25 | 101 | — | 0.24 |
| Interest-earning deposits | 116,856 | 440 | 0.75 | 78,583 | 163 | 0.42 |
| Total interest-earning assets | 3,881,710 | 65,305 | 3.36% | 3,428,859 | 57,371 | 3.35% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 13,125 |  |  | 15,862 |  |  |
| Allowance for loan losses | (33,694) |  |  | (27,319) |  |  |
| Premises and equipment | 30,211 |  |  | 29,726 |  |  |
| Other assets | 75,099 |  |  | 86,070 |  |  |
| Total noninterest-earning assets | 84,741 |  |  | 104,339 |  |  |
| Total assets | $3,966,451 |  |  | $3,533,198 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $1,052,551 | $1,961 | 0.37% | $894,554 | $1,178 | 0.26% |
| Money markets | 1,059,775 | 2,138 | 0.40 | 819,135 | 1,175 | 0.29 |
| Savings | 120,963 | 33 | 0.05 | 118,327 | 33 | 0.06 |
| Certificates of deposit - retail | 453,210 | 3,220 | 1.42 | 446,619 | 3,034 | 1.36 |
| Subtotal interest-bearing deposits | 2,686,499 | 7,352 | 0.55 | 2,278,635 | 5,420 | 0.48 |
| Interest-bearing demand - brokered | 180,000 | 1,446 | 1.61 | 200,000 | 1,501 | 1.50 |
| Certificates of deposit - brokered | 93,223 | 984 | 2.11 | 93,658 | 993 | 2.12 |
| Total interest-bearing deposits | 2,959,722 | 9,782 | 0.66 | 2,572,293 | 7,914 | 0.62 |
| FHLB advances and borrowings | 68,838 | 657 | 1.91 | 188,971 | 1,052 | 1.11 |
| Capital lease obligation | 9,534 | 229 | 4.80 | 10,074 | 242 | 4.80 |
| Subordinated debt | 48,792 | 1,566 | 6.42 | 4,388 | 139 | 6.34 |
| Total interest-bearing liabilities | 3,086,886 | 12,234 | 0.79% | 2,775,726 | 9,347 | 0.67% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 517,853 |  |  | 449,922 |  |  |
| Accrued expenses and |  |  |  |  |  |  |
| other liabilities | 20,460 |  |  | 22,373 |  |  |
| Total noninterest-bearing liabilities | 538,313 |  |  | 472,295 |  |  |
| Shareholders’ equity | 341,252 |  |  | 285,177 |  |  |
| Total liabilities and |  |  |  |  |  |  |
| shareholders’ equity | $3,966,451 |  |  | $3,533,198 |  |  |
| Net interest income |  |  |  |  |  |  |
| (tax-equivalent basis) |  | 53,071 |  |  | 48,024 |  |
| Net interest spread |  |  | 2.57% |  |  | 2.68% |
| Net interest margin (4) |  |  | 2.73% |  |  | 2.80% |
| Tax equivalent adjustment |  | (508) |  |  | (438) |  |
| Net interest income |  | $52,563 |  |  | $47,586 |  |

(1) Average balances for available for sale securities are based on amortized cost.

(2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate.

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

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

54

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

| (In Thousands): ASSETS: | Three Months Ended June 30, 2017 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $392 | $150 | $542 |
| Loans | 3,020 | 749 | 3,769 |
| Federal funds sold | — | — | — |
| Interest-earning deposits | 20 | 80 | 100 |
| Total interest income | $3,432 | $979 | $4,411 |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $40 | $452 | $492 |
| Money market | 250 | 353 | 603 |
| Savings | — | (1) | (1) |
| Certificates of deposit - retail | 26 | 79 | 105 |
| Certificates of deposit - brokered | (5) | 2 | (3) |
| Interest bearing demand brokered | (79) | 45 | (34) |
| Borrowed funds | (370) | 151 | (219) |
| Capital lease obligation | (6) | — | (6) |
| Subordinated debt | 642 | 2 | 644 |
| Total interest expense | $498 | $1,083 | $1,581 |
| Net interest income | $2,934 | $(104) | $2,830 |

| (In Thousands): ASSETS: | Six Months Ended June 30, 2017 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $831 | $288 | $1,119 |
| Loans | 5,812 | 726 | 6,538 |
| Federal funds sold | — | — | — |
| Interest-earning deposits | 106 | 171 | 277 |
| Total interest income | $6,749 | $1,185 | $7,934 |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $48 | $735 | $783 |
| Money market | 476 | 487 | 963 |
| Savings | 6 | (6) | — |
| Certificates of deposit - retail | 47 | 139 | 186 |
| Certificates of deposit - brokered | (9) | — | (9) |
| Interest bearing demand brokered | (159) | 104 | (55) |
| Borrowed funds | (633) | 238 | (395) |
| Capital lease obligation | (13) | — | (13) |
| Subordinated debt | 1,425 | 2 | 1,427 |
| Total interest expense | $1,188 | $1,699 | $2,887 |
| Net interest income | $5,561 | $(514) | $5,047 |

Interest income on earning assets, on a fully tax-equivalent basis, totaled $33.7 million for the second quarter of 2017 compared to $29.3 million for the same quarter of 2016, reflecting an increase of $4.4 million, or 15 percent. Average earning assets totaled $3.94 billion for the second quarter of 2017, an increase of $439.9 million, or 13 percent, from the same period of 2016. The average commercial loan portfolio increased $160.2 million or 29 percent, from the second quarter of 2016, averaging $713.1 million for the second quarter of 2017. The increase in this portfolio was attributed to the addition of seasoned banking professionals over the course of 2016; a continued concerted focus on the 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 private banking offices, as well as the New York City market. Additionally, the average commercial mortgage portfolio (which includes multifamily mortgage loans) increased $38.5 million, or 2 percent, to $2.09 billion for the second quarter of 2017 when compared to the same period in 2016. While the Company has managed its multifamily portfolio to basically no growth, it has been focused on the origination of strong commercial real estate credits. In addition, the Company has continued its focus on relationship based residential mortgage lending, and that portfolio has grown from an average of $473.3 million in the June 2016 quarter to $589.8 million average in the June 2017 quarter. Investments totaled $319.1 million for the second quarter of 2017 compared to $227.9 million for the same 2016 quarter reflecting an increase of $91.2 million, or 40 percent. This increase coincides with the Company’s desire to increase liquid portfolios.

For the quarters ended June 30, 2017 and 2016, the average rates earned on earning assets were 3.42 percent and 3.34 percent, respectively, an increase of 8 basis points. The increase in the overall yield was principally due to the benefit from the increased market rates on adjustable rate assets in the 2017 period partially offset by the maintenance of higher liquidity (investment securities and interest earning deposits) in the 2017 period when compared to 2016.

For the second quarter of 2017, total interest-bearing deposits averaged $2.98 billion, an increase of $389.0 million, or 15 percent, from the average balance for the same period of 2016. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand, but including reciprocal funds discussed below) has come from the addition of seasoned banking professionals over the course of 2016 and into 2017; an intense focus on providing high-touch client service; and a full array of treasury management products that support core deposit growth.

Average rates paid on total interest-bearing deposits were 70 basis points and 62 basis points for the second quarters of 2017 and 2016, respectively, an increase of 8 basis points. The increase in the average rate paid on deposits was principally due to growth in interest-bearing money market and checking accounts at slightly higher rates to ensure generation of new deposits in volumes sufficient to appropriately fund asset growth.

For the second quarters of 2017 and 2016, average borrowings totaled $77.5 million and $222.7 million, respectively, a decrease of $145.2 million during the second quarter of 2017 when compared to the same period of 2016. The decrease was principally due to scheduled maturities of FHLB advances along with reduced average overnight borrowings from the FHLB.

The Company is a participant in the Reich & Tang Demand Deposit Marketplace (“DDM”) 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. The DDM program is considered to be a source of brokered deposits for bank regulatory purposes. However, the Company considers these reciprocal deposit balances to be in-market customer deposits as distinguished from traditional out-of-market brokered deposits. Such reciprocal deposit balances are included in the Company’s interest-bearing checking balances. Reciprocal balances averaged $395.5 million for the June 30, 2017 quarter and $411.2 million for the June 30, 2016 quarter.

For the second quarter of 2017 total interest-bearing demand – brokered deposits decreased by $20.0 million when compared to the same quarter of 2016. This decrease is due to the management of the balance sheet to reduce such brokered deposits to the minimum level required to support the Company’s existing $180.0 million of interest rate swaps, transacted previously as part of the Company’s interest rate risk management program.

In June 2016, the Company issued $50.0 million of subordinated debt ($48.7 million net of issuance costs) bearing interest at an annual rate of 6 percent for the first five years, and thereafter at an adjustable rate and until maturity in June 2026 or earlier redemption. For the second quarter of 2017, the subordinated debt balance averaged $48.8 million compared to $8.8 million from the same period in 2016.

Interest income on earning assets, on a fully tax-equivalent basis increased by $7.9 million, or 14 percent, for the first six months of 2017 compared to the same period in 2016. For the six months ended June 30, 2017 average earning assets increased $452.9 million from $3.43 billion for the same period in 2016. For the six months ended June 30, 2017 the average commercial portfolio increased $141.4 million, or 26 percent, from the same period in 2016. This increase was due to the addition of highly regarded bankers with industry and capital markets expertise in 2016 and in the first half of 2017. For the six months ended June 30, 2017 the average commercial mortgage portfolio (which includes multifamily mortgage loans) increased $57.0 million to $2.06 billion from the same period in 2016. While the Company has managed its multifamily portfolio to basically no growth, it has been focused on the origination of strong commercial real estate credits. In addition, the Company has continued its focus on relationship based residential mortgage lending, and that portfolio has grown $97.6 million to an average of $567.5 million for the six months ended June 30, 2017 when compared to an average of $469.9 million from the same period in 2016.

For the six months ended June 30, 2017 and 2016, the average rates earned on earning assets was 3.36 percent and 3.35 percent, respectively, an increase of 1 basis point. The increase in average rates on commercial mortgages and loans was due to an increase in market rates during the first six months of 2017. This increase was partially offset by the maintenance of higher liquidity (investment securities and interest-earning deposits) for the first six months of 2017 when compared to the comparable 2016 period.

For the six months ended June 30, 2017 total interest-bearing deposits averaged $2.96 billion, increasing $387.4 million, or 15 percent, from the average balance for the same 2016 period. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand, but including reciprocal funds) was $407.9 million for the first half of 2017 when compared to the same period in 2016. This growth has come from the addition of seasoned banking professionals over the course of 2016 and has continued into the first six months of 2017; an intense focus on providing high-touch client service; and a full array of treasury management products that support core deposit growth. Reciprocal deposit balances are included in the Company’s interest-bearing checking balances. Reciprocal balances averaged $396.5 million for the six months ended June 30, 2017 and $426.3 million for the same 2016 period.

Average rates paid on interest-bearing deposits for the six months ended June 30, 2017 were 66 basis points compared to 62 basis points for the same period in 2016, reflecting an increase of 4 basis points. The increase in the average rate paid on deposits was principally due to competitive pressures in attracting new deposits in volumes sufficient to appropriately fund asset growth.

Average borrowings decreased by $120.1 million to $68.8 million for the six months ended June 30, 2017 when compared to the same 2016 period. The decrease was due to significant deposit growth to fund the Company’s loan growth.

As previously stated in June 2016, the Company issued $50.0 million of subordinated debt ($48.7 million net of issuance costs) bearing interest at an annual rate of 6 percent for the first five years, and thereafter at an adjustable rate and until maturity in June 2026 or earlier redemption. For the first half of 2017, the subordinated debt balance averaged $48.8 million compared to $4.4 million from the same period in 2016.

**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 management including liquidity and interest rate risk management strategies, and in response to changes in interest rates, liquidity needs, prepayment speeds and/or other factors. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders’ equity, net of income taxes. Realized gains and losses are recognized in income at the time the securities are sold.

At June 30, 2017, the Company had investment securities available for sale with a fair value of $315.2 million compared with $305.4 million at December 31, 2016. Net unrealized losses (net of income tax) of $572 thousand and $1.1 million were included in shareholders’ equity at June 30, 2017 and December 31, 2016, respectively.

The carrying value of investment securities available for sale as of June 30, 2017 and December 31, 2016 are shown below:

*(In thousands)*

| U.S. treasury and U.S. government- | June 30, 2017 | December 31, 2016 |
| --- | ---: | ---: |
| sponsored agencies | $26,559 | $21,517 |
| Mortgage-backed securities-residential |  |  |
| (principally U.S. government-sponsored |  |  |
| entities) | 242,503 | 237,617 |
| SBA pool securities | 6,369 | 6,713 |
| State and political subdivisions | 28,999 | 28,993 |
| Corporate bond | 3,094 | 3,113 |
| Single-issuer trust preferred security | 2,835 | 2,610 |
| CRA investment fund | 4,865 | 4,825 |
| Total | $315,224 | $305,388 |

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of June 30, 2017:

|  |  | After 1 But | After 5 But | After |  |
| --- | ---: | ---: | ---: | ---: | ---: |
|  | Within | Within | Within | 10 |  |
| (Dollars in thousands) | 1 Year | 5 Years | 10 Years | Years | Total |
| U.S. treasury and U.S. government- | $— | $9,968 | $16,591 | $— | $26,559 |
| sponsored agencies | —% | 1.25% | 2.05% | —% | 1.75% |
| Mortgage-backed securities- | $130 | $18,181 | $21,267 | $202,925 | $242,503 |
| residential (1) | 4.08% | 2.10% | 1.83% | 1.97% | 1.97% |
| SBA pool securities | $— | $— | $— | $6,369 | $6,369 |
|  | —% | —% | —% | 1.22% | 1.22% |
| State and political subdivisions (2) | $10,612 | $9,753 | $4,354 | $4,280 | $28,999 |
|  | 1.66% | 3.18% | 2.84% | 2.81% | 2.52% |
| Corporate bond | $— | $— | $3,094 | $— | $3,094 |
|  | —% | —% | 5.25% | —% | 5.25% |
| Single-issuer trust preferred security (1) | $— | $— | $2,835 | $— | $2,835 |
|  | —% | —% | 1.97% | —% | 1.97% |
| **Total** | $10,742 | $37,902 | $48,141 | $213,574 | $310,359 |
|  | 1.69% | 2.15% | 2.36% | 1.96% | 2.04% |

(1) Shown using stated final maturity.

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

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

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $815 | $818 | $(3) |
| Gain on sale of loans (mortgage banking) | 91 | 309 | (218) |
| Gain on sale of loans, at lower of |  |  |  |
| cost or fair value (Multifamily Loans) | — | 500 | (500) |
| Bank owned life insurance | 350 | 345 | 5 |
| Fee income related to loan level, |  |  |  |
| back-to-back swaps | 1,291 | — | 1,291 |
| Gain on sale of SBA loans | 142 | 212 | (70) |
| Securities gains | — | 18 | (18) |
| Other income | 396 | 347 | 49 |
| Total other income | $3,085 | $2,549 | $536 |

*(In thousands)*

|  | Six Months Ended June 30, 2017 | 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $1,586 | $1,625 | $(39) |
| Gain on sale of loans (mortgage banking) | 138 | 430 | (292) |
| Gain on sale of loans, at lower of |  |  |  |
| cost or fair value (Multifamily Loans) | — | 624 | (624) |
| Bank owned life insurance | 672 | 687 | (15) |
| Fee income related to loan level, |  |  |  |
| back-to-back swaps | 1,747 | 94 | 1,653 |
| Gain on sale of SBA loans | 297 | 259 | 38 |
| Securities gains | — | 119 | (119) |
| Other income | 846 | 679 | 167 |
| Total other income | $5,286 | $4,517 | $769 |

For the quarter ended June 30, 2017, income from the sale of newly originated residential mortgage loans was $91 thousand compared to $309 thousand for the same period in 2016. For the six months ended June 30, 2017 and 2016 income from the sale of newly originated residential mortgage loans was $138 thousand and $430 thousand, respectively. The decrease was a result of lower volume of residential mortgage loans originated for sale in the three and six months ended June 30, 2017 periods compared to the three and six months ended June 30, 2016, as a result of reduced refinance activity due principally to the higher market rate environment.

There were no securities gains in the three or six months ended June 30, 2017 compared to $18 thousand and $119 thousand for the three and six months ended June 30, 2016, respectively. Sales of securities have been generally employed to benefit interest rate risk, prepayment risk, and/or liquidity risk. Given the shorter duration of our investment portfolio and the interest rate environment, such sales will continue to be a very small component of the Company’s operations.

Gains on the sale of multifamily loans held for sale at the lower of cost or fair value was $500 thousand for the quarter ending June 30, 2016 and $624 thousand for the six months ended June 30, 2016. During the first quarter of 2016, the Company began selling whole multifamily loans in addition to multifamily loan participations. The Company manages its balance sheet such that multifamily loans decline as a percentage of the overall loan portfolio while commercial loans become a larger percentage of the overall loan portfolio. The Company anticipates that this balance sheet management, however, will likely not be linear each quarter, but will rather be apparent over periods of time. There were no multifamily loan sales for the three and six months ended June 30, 2017, as, without sales, the Company’s portfolio level remained at the Company’s targeted level. And, additionally, market demand for such product has declined somewhat due to the regulatory environment surrounding commercial real estate lending.

The second quarter of 2017 included $142 thousand of income related to the Company’s SBA lending and sale program compared to $212 thousand in the same quarter in 2016. The six months ended June 30, 2017 included $297 thousand of income related to the Company’s SBA lending and sale program compared to the $259 thousand for the same period in 2016. The SBA program was fully implemented during the March 2016 quarter and activity has grown since that period. This program is part of the Company’s normal ongoing operations.

The second quarter of 2017 included $1.3 million of loan level, back-to-back swap income. There was no loan level, back-to-back swap income in the second quarter of 2016. The six months ended June 30, 2017 included $1.7 million of loan level, back-to-back swap income compared to $94 thousand for the same period in 2016. The increase is due to several factors, including increased customer awareness of the possibility of rising market interest rates, as well as increased loan opportunities for the Company. The program utilizes mirror interest rate swaps, one directly with the customer and one directly with a well-established counterparty. This enables a customer to benefit from a fixed rate loan, while the Company records a floating rate loan. The program provides enhanced interest rate risk management, as well as the potential for fee income for the Company.

Other income was $396 thousand for the June 2017 quarter compared to $347 thousand for the same quarter in 2016. For the six months ended June 30, 2017 other income was $846 compared to $679 for the same 2016 period. The three and six months ended June 30, 2017 included increases in letter of credit fees and unused line of credit fees associated with the commercial lending business, when compared to the same 2016 periods.

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

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $12,751 | $11,100 | $1,651 |
| Premises and equipment | 3,033 | 2,742 | 291 |
| FDIC assessment | 602 | 1,581 | (979) |
| Other Operating Expenses: |  |  |  |
| Wealth management division |  |  |  |
| other expense | 630 | 481 | 149 |
| Professional and legal fees | 785 | 756 | 29 |
| Loan expense | 57 | 121 | (64) |
| Telephone | 256 | 235 | 21 |
| Advertising | 355 | 226 | 129 |
| Postage | 91 | 62 | 29 |
| Other | 1,535 | 1,471 | 64 |
| Total operating expenses | $20,095 | $18,775 | $1,320 |

*(In thousands)*

|  | Six Months Ended June 30, 2017 | 2016 | Change 2017 vs 2016 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $24,664 | $22,008 | $2,656 |
| Premises and equipment | 5,849 | 5,606 | 243 |
| FDIC assessment | 1,288 | 3,140 | (1,852) |
| Other Operating Expenses: |  |  |  |
| Wealth management division |  |  |  |
| other expense | 1,332 | 1,103 | 229 |
| Professional and legal fees | 1,647 | 1,742 | (95) |
| Loan expense | 258 | 233 | 25 |
| Telephone | 499 | 473 | 26 |
| Advertising | 518 | 370 | 148 |
| Postage | 195 | 169 | 26 |
| Other | 3,149 | 3,137 | 12 |
| Total operating expenses | $39,399 | $37,981 | $1,418 |

The Company’s total operating expenses were $20.1 million for the quarter ended June 30, 2017 compared to $18.8 million in the same 2016 quarter, reflecting a net increase of $1.3 million, or 7 percent. Total operating expense grew by $1.4 million to $39.4 million for the six months ending June 30, 2017 when compared to the same period in 2016, reflecting an increase of 4 percent.

Compensation and benefits expense increased to $12.8 million in the second quarter of 2017 from $11.1 million in the same period in 2016, an increase of $1.7 million, or 15 percent. The six months ended June 30, 2017 had compensation and benefits expense increasing to $24.7 million from $22.0 million for the same period in 2016. Both period increases were due to strategic hiring that was in line with the Company’s Plan, including staff associated with credit and risk management, normal salary increases and increased bonus/incentive accruals associated with the Company’s growth. In addition, the six person Equipment Finance Team joined the Company during the second quarter of 2017, further increasing compensation expense.

For the three months ended June 30, 2017, premises and equipment expense was $3.0 million compared to $2.7 million for the three months ended June 30, 2016, an increase of $291 thousand. For the six months ended June 30, 2017, premises and equipment expense was $5.8 million compared to $5.6 million for the six months ended June 30, 2016, an increase of $243 thousand. The increase over the same periods in 2016 was due to approximately $150 thousand of accelerated depreciation related to upgrades at the Company’s Headquarters.

For the three months ended June 30, 2017, FDIC insurance expense was $602 thousand compared to $1.6 million for the three months ended June 30, 2016, a decrease of $979 thousand. For the six months ended June 30, 2017, FDIC insurance expense decreased $1.9 million to $1.3 million when compared to the same period in 2016. Beginning July 1, 2016, the FDIC assessment system was revised. Revisions for “small institutions” (under $10 billion in assets) resulted in, among other things, the elimination of risk categories and utilization of a financial ratios method to determine assessment rates. The changes reduced the Company’s assessment rate by over 50%, when compared to the three and six months ended June 30, 2016.

**PRIVATE WEALTH MANAGEMENT DIVISION:** This division has served in the roles of executor and trustee while providing investment management, custodial, tax, retirement and financial services to its growing client base. Officers from the Private Wealth Management Division are available to provide trust and investment services at the Bank’s corporate headquarters in Bedminster, at private banking locations in Bedminster, Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiary, PGB Trust & Investments of Delaware, in Greenville, Delaware.

The following table presents certain key aspects of the Bank’s Private Wealth Management Division performance for the quarters ended June 30, 2017 and 2016.

*(In thousands)*

|  | At or For Three Months Ended June 30, 2017 | 2016 | Change 2017 v 2016 |
| --- | ---: | ---: | ---: |
| Total fee income | $5,086 | $4,899 | $187 |
| Compensation and benefits (included |  |  |  |
| in Operating Expenses above) | 2,265 | 2,310 | (45) |
| Other operating expense (included) |  |  |  |
| in Operating Expenses above) | 1,919 | 1,708 | 211 |

*(In thousands)*

|  | At or For Six Months Ended June 30, 2017 | 2016 | Change 2017 v 2016 |
| --- | ---: | ---: | ---: |
| Total fee income | $9,904 | $9,194 | $710 |
| Compensation and benefits (included |  |  |  |
| in Operating Expenses above) | 4,864 | 4,402 | 462 |
| Other operating expense (included) |  |  |  |
| in Operating Expenses above) | 4,071 | 3,515 | 556 |
| Assets under administration |  |  |  |
| (market value) | $3.9 billion | $3.4 billion |  |

The market value of the assets under administration (“AUA”) of the wealth management division was $3.9 billion at June 30, 2017, reflecting an increase of 15 percent from $3.4 billion at June 30, 2016.

In the June 2017 quarter, the wealth management division generated $5.1 million in fee income compared to $4.9 million for the June 2016 quarter, reflecting a 4 percent increase. For the six months ended June 30, 2017, the wealth management division generated $9.9 million in fee income compared to $9.2 million for the same period in 2016, reflecting an 8 percent increase. The growth in fee income was due to several factors, including net flows from solid new business results from existing and new clients, partially offset by normal levels of disbursements and outflows.

The Company continues to incorporate wealth management into conversations it has with the Company’s clients, across business lines. The Company has expanded its wealth management team and will continue to grow its team and expand its products, services, and advice delivered to clients.

While the “Operating Expenses” section above offers an overall discussion of the Corporation’s expenses, including the Private Wealth Management Division, operating expenses relative to the Private Wealth Management Division reflected increases due to overall growth in the business, several new hires, and select third party expenditures incurred in the 2017 period. Generally, revenue and profitability related to the new personnel will lag expenses by several quarters.

The Private Wealth Management Division currently generates adequate revenue to support the salaries, benefits and other expenses of the Division; however, Management believes that the Bank generates adequate liquidity to support the expenses of the 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 (dollars in thousands):

| Loans past due over 90 days | As of June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| and still accruing | $— | $— | $— | $— | $— |
| Nonaccrual loans | 15,643 | 11,494 | 11,264 | 10,840 | 8,049 |
| Other real estate owned | 373 | 671 | 534 | 534 | 767 |
| Total nonperforming assets | $16,016 | $12,165 | $11,798 | $11,374 | $8,816 |
| Performing TDRs | $9,725 | $15,030 | $17,784 | $18,078 | $18,570 |
| Loans past due 30 through 89 |  |  |  |  |  |
| days and still accruing | $1,232 | $622 | $1,356 | $8,238 | $6,576 |
| Classified loans | $43,608 | $43,002 | $45,798 | $49,627 | $51,084 |
| Impaired loans | $25,294 | $26,546 | $29,071 | $28,951 | $26,643 |
| Nonperforming loans (1) as a % of |  |  |  |  |  |
| total loans | 0.43% | 0.33% | 0.34% | 0.34% | 0.26% |
| Nonperforming assets (1) as a % of |  |  |  |  |  |
| total assets | 0.38% | 0.31% | 0.30% | 0.30% | 0.24% |
| Nonperforming assets (1) as a % of |  |  |  |  |  |
| total loans plus other real |  |  |  |  |  |
| estate owned | 0.44% | 0.35% | 0.36% | 0.35% | 0.28% |

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

The Company does not hold and has not made or invested in subprime loans or “Alt-A” type mortgages.

**PROVISION FOR LOAN LOSSES**: The provision for loan losses was $2.2 million for both the second quarters of 2017 and 2016. For the six months ended June 30, 2017 and 2016 the provision for loan losses was $3.8 million and $3.9 million, respectively. The amount of the loan loss provision and the level of the allowance for loan losses are based upon a number of factors including Management’s evaluation of probable losses inherent in the portfolio, after consideration of appraised collateral values, financial condition and past credit history of the borrowers, as well as prevailing economic conditions. Commercial credits generally carry a higher risk profile compared to some of the other credits, which is reflected in Management’s determination of the proper level of the allowance for loan losses.

The provision for loan losses of $2.2 million in the second quarter of 2017 was reflective of loan growth experienced by the Company, as well as greater qualitative factor allocations of the allowance to commercial loans and owner occupied commercial real estate loans which experienced a higher rate of growth in balances during the first six months of 2017. Originations of commercial loans and commercial real estate loans have increased, and these loans have historically carried a higher general reserve allocation than multifamily loans. In the second quarter of 2017, Management reevaluated the qualitative factors for multifamily loan types and as a result of the evaluation, changed certain allocations as appropriate.

The overall allowance for loan losses was $35.8 million as of June 30, 2017, compared to $32.2 million at December 31, 2016. As a percentage of loans, the allowance for loan losses was 0.98 percent as of June 30, 2017, and 0.97 percent as of December 31, 2016. The specific reserves on impaired loans have decreased to $715 thousand at June 30, 2017 compared to $824 thousand as of December 31, 2016. Total impaired loans were $25.3 million and $29.1 million as of June 30, 2017 and December 31, 2016, respectively. The general component of the allowance increased from $31.4 million at December 31, 2016 to $35.0 million at June 30, 2017, due principally to the loan growth and the greater qualitative factor allocations referenced previously.

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

*(In thousands)*

| Allowance for loan losses: | June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 30, 2016 | June 30, 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Beginning of period | $33,610 | $32,208 | $30,616 | $29,219 | $27,321 |
| Provision for loan losses | 2,200 | 1,600 | 1,500 | 2,100 | 2,200 |
| Charge-offs, net | (59) | (198) | 92 | (703) | (302) |
| End of period | $35,751 | $33,610 | $32,208 | $30,616 | $29,219 |
| Allowance for loan losses as |  |  |  |  |  |
| a % of total loans | 0.98% | 0.98% | 0.97% | 0.95% | 0.93% |
| Allowance for loan losses as |  |  |  |  |  |
| a % of nonperforming loans | 228.54% | 292.41% | 285.94% | 282.44% | 363.01% |

**INCOME TAXES:** For the second quarter of 2017 and 2016 income tax expense as a percentage of pre-tax income was 38.2 percent and 38.4 percent, respectively. For the six months ended June 30, 2017 and 2016 income tax expense as a percentage of pre-tax income was 35.2 percent and 37.9 percent, respectively. During the six months ended June 30, 2017, the Company adopted ASU 2016-9, “Compensation – Stock Compensation, Improvements to Employee Share-Based Payment Accounting”. As a result of this adoption, the Company recorded an income tax benefit of $662 thousand in the first quarter of 2017. The reduction in our effective tax rate for the six months ended June 30, 2017 was primarily due to the adoption of ASU 2016-9.

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

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

Capital for the six months ended June 30, 2017 was benefitted by net income of $15.9 million and by $16.5 million of voluntary share purchases by our shareholders under the Dividend Reinvestment Plan.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). At June 30, 2017 and December 31, 2016, 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.

The Bank’s actual capital amounts and ratios are presented in the following table:

*(Dollars in thousands)*

| As of June 30, 2017: Total capital | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| (to risk-weighted assets) | $427,994 | 12.91% | $331,573 | 10.00% | $265,259 | 8.00% | $306,705 | 9.250% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 392,243 | 11.83 | 265,259 | 8.00 | 198,944 | 6.00 | 240,391 | 7.250 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 392,240 | 11.83 | 215,523 | 6.50 | 149,208 | 4.50 | 190,655 | 5.750 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 392,243 | 9.76 | 200,889 | 5.00 | 160,711 | 4.00 | 160,711 | 4.00 |
| As of December 31, 2016: |  |  |  |  |  |  |  |  |
| Total capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | $392,305 | 12.87% | $304,758 | 10.00% | $243,806 | 8.00% | 262,854 | 8.625% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 360,097 | 11.82 | 243,806 | 8.00 | 182,855 | 6.00 | 201,902 | 6.625 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 360,094 | 11.82 | 198,093 | 6.50 | 137,141 | 4.50 | 156,188 | 5.125 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 360,097 | 9.31 | 193,430 | 5.00 | 154,744 | 4.00 | 154,744 | 4.00 |

65

The Company’s actual capital amounts and ratios are presented in the following table:

*(Dollars in thousands)*

| As of June 30, 2017: Total capital | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio |
| --- | ---: | ---: | --- | --- | ---: | ---: | ---: | ---: |
| (to risk-weighted assets) | $439,042 | 13.24% | $N/A | N/A% | $265,299 | 8.00% | $306,752 | 9.250% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 354,462 | 10.69 | N/A | N/A | 198,975 | 6.00 | 240,428 | 7.250 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 354,459 | 10.69 | N/A | N/A | 149,231 | 4.50 | 190,684 | 5.750 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 354,462 | 8.82 | N/A | N/A | 160,732 | 4.00 | 160,732 | 4.00 |
| As of December 31, 2016: |  |  |  |  |  |  |  |  |
| Total capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | $404,017 | 13.25% | $N/A | N/A% | $243,910 | 8.00% | 262,966 | 8.625% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 323,045 | 10.60 | N/A | N/A | 182,933 | 6.00 | 201,988 | 6.625 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 323,042 | 10.60 | N/A | N/A | 137,200 | 4.50 | 156,255 | 5.125 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 323,045 | 8.35 | N/A | N/A | 154,788 | 4.00 | 154,788 | 4.00 |

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

The Company’s regulatory total risk based capital ratio beginning June 30, 2016 was benefitted by the $49 million (net) subordinated debt issuance that closed in June 2016. At that time, the Company down-streamed approximately $40 million of those proceeds to the Bank as capital, benefitting all the Bank’s regulatory capital ratios.

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. The Reinvestment Plan provided $16.5 million of capital to the Company in the first six months of 2017 and we anticipate this program will provide a continuing source of capital.

The Company filed a shelf registration statement with the SEC in December 2016 that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, common stock, preferred stock and other non-equity securities not to exceed $100.0 million. The shelf registration provides the Company with flexibility in issuing capital instruments and more readily accessing the capital markets as needed to pursue future growth opportunities and ensure continued compliance with regulatory capital requirements.

As previously announced, on July 26, 2017, the Board of Directors declared a regular cash dividend of $0.05 per share payable on August 23, 2017 to shareholders of record on August 9, 2017.

Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient common equity to support its planned growth and expansion for the immediate future. The Company continually assesses other potential sources of capital 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 $93.8 million at June 30, 2017. In addition, the Company had $315.2 million in securities designated as available for sale at June 30, 2017. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities.

A further source of liquidity is borrowing capacity. At June 30, 2017, unused borrowing commitments totaled $1.1 billion from the FHLB, $695.6 million from the Federal Reserve Bank and $22.0 million from correspondent banks.

During the June 2017 quarter, the increase in loans of $224.4 million was primarily funded by customer deposit growth of $155.6 million, net (principally interest-bearing checking), increased capital of $15.9 million, decreased cash/cash equivalents of $25.1 million, and net increased other borrowings of $52.5 million.

Brokered interest-bearing demand (“overnight”) deposits stayed flat at $180.0 million at June 30, 2017. 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.

From a liquidity/funding perspective, such brokered deposits, are generally a more cost effective alternative than other borrowings and do not require use of pledged collateral, as secured wholesale borrowings do. From a balance sheet management perspective, the rate paid on these short term brokered deposits is used as the basis to transact longer term interest rate swaps, basically extending repricing generally to five years for asset matching / interest rate risk management purposes. As of June 30, 2017, the Company has transacted pay fixed, receive floating interest rate swaps totaling $180.0 million notional amount.

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

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

**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 have the ability to demonstrate balance sheet gaps and predict changes to net interest income and economic/market value of portfolio equity under various interest rate scenarios. In addition, these models, as well as ALCO processes and reporting, are subject to annual independent third-party review.

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

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

- Actively market commercial and industrial (C&I) loan originations, which tend to have adjustable rate features, and which generate customer relationships that can result in higher core deposit accounts;
- Actively market commercial mortgage loan originations, which tend to have shorter terms and higher interest rates than residential mortgage loans, and which generate customer relationships that can result in higher core deposit accounts;
- Manage growth in the residential mortgage portfolio to adjustable-rate and/or shorter-term and/or “relationship” loans that result in core deposit relationships;
- Actively market core deposit relationships, which are generally longer duration liabilities;
- Utilize medium to longer term certificates of deposit and/or wholesale borrowings to extend liability duration;
- Utilize interest rate swaps to extend liability duration;
- Utilize a loan level / back to back interest rate swap program, which converts a borrower’s fixed rate loan to adjustable rate for the Company;
- Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;
- Maintain adequate levels of capital; and
- Utilize loan sales and/or loan participations.

The interest rate swap program is administered by ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. In all of these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $180.0 million as of June 30, 2017.

In addition, during the second quarter of 2015, the Company initiated a loan level / back-to-back swap program in support of its commercial lending business. Pursuant to this program, the Company extends a floating rate loan and executes a floating to fixed swap with the borrower. At the same time, the Company executes a third party swap, the terms of which fully offset the fixed exposure and, result in a final floating rate exposure for the Company. As of June 30, 2017, $254.5 million of notional value in swaps were executed and outstanding with borrowers under this program.

As noted above, ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The model is based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The model incorporates certain prepayment and interest rate assumptions, which management believes to be reasonable as of June 30, 2017. The model assumes changes in interest rates without any proactive change in the balance sheet by management. In the model, the forecasted shape of the yield curve remained static as of June 30, 2017.

In an immediate and sustained 200 basis point increase in market rates at June 30, 2017, net interest income for year 1 would increase approximately 7.1 percent, when compared to a flat interest rate scenario. In year 2 this sensitivity improves to an increase of 10.2 percent, when compared to a flat interest rate scenario.

In an immediate and sustained 100 basis point decrease in market rates at June 30, 2017, net interest income would decline approximately 6.8 percent for year 1 and 8.1 percent for year 2, compared to a flat interest rate scenario.

The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at June 30, 2017.

*(Dollars in thousands)*

| Change In Interest Rates (Basis Points) | Estimated Increase/ Decrease in EVPE Estimated EVPE (1) | Amount | Percent | EVPE as a Percentage of Present Value of Assets (2) EVPE Ratio (3) | Increase/(Decrease) (basis points) |
| --- | ---: | ---: | ---: | ---: | ---: |
| +200 | $509,881 | $4,211 | 0.83% | 12.89% | 68 |
| +100 | 516,071 | 10,401 | 2.06 | 12.74 | 53 |
| Flat interest rates | 505,670 | — | — | 12.21 | — |
| -100 | 481,235 | (24,436) | (4.83) | 11.40 | (81) |

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

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

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

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

Model simulation results indicate the Company is slightly asset sensitive, which indicates the Company’s net interest income should improve slightly in a rising rate environment. Management believes the Company’s interest rate risk position is reasonable.

## Market risk

As filed, 238 characters.

There have been no material changes to information regarding quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year to the date of the most recent interim financial statements (June 30, 2017).

## Controls and procedures

As filed, 2,536 characters.

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 June 30, 2017 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 CEO and CFO, 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.

## Risk factors

As filed, 245 characters.

There were no material changes in the Corporation’s risk factors during the three months ended June 30, 2017 from the risk factors disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.

Filed Aug 7, 2017.
Source: SEC EDGAR, the filing index for accession 0001174947-17-001168. Last ingested by Listed: Nov 6, 2026, 13:09 ET. No prices; not investment advice.