# Peapack Gladstone Financial Corp: Form 10-Q for the period ended Mar 31, 2018

- Company: [Peapack Gladstone Financial Corp](/companies/pgc.md) (CIK 1050743)
- Form: 10-Q
- Filed: 2018-05-08
- Accepted by EDGAR: May 8, 2018, 09:12 ET
- Period: 2018-03-31
- Accession: 0001174947-18-000747
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1050743/000117494718000747/form10q-20199_pgfc.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1050743/000117494718000747/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $38.6m | us-gaap:Revenues |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $8.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $10.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.57 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.58 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 18,908,692 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $14.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $246.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-31 | $853.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Total assets | at 2018-03-31 | $4.34bn | us-gaap:Assets |
| Total liabilities | at 2018-03-31 | $3.91bn | us-gaap:Liabilities |
| Short-term borrowings | at 2018-03-31 | $216.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-03-31 | $422.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 55,110 characters.

### 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 view of future financial condition and results of operations, 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, 2017, 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 2018 and beyond;
- inability to successfully integrate wealth acquisitions;
- inability to successfully manage and/or fund 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 interest rate environment and/or highly competitive market;
- declines in values in our investment portfolio;
- higher than expected increases in our allowance for loan and lease losses;
- higher than expected increases in loan and lease 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.

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

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES:** Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2017 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 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 with the exception of the Company’s investment in a CRA investment fund which is classified as an equity security. In accordance with ASU 2016-01, “Financial Instruments” unrealized holding gains and losses are marked to market through the income statement.

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. No impairment charges were recognized in the three months ended March 31, 2018 and 2017.

**EXECUTIVE SUMMARY:** The following table presents certain key aspects of our performance for the three months ended March 31, 2018 and 2017.

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

| Results of Operations: | Three Months Ended March 31, 2018 | 2017 | Change 2018 vs 2017 |
| --- | ---: | ---: | ---: |
| Net interest income | $28,393 | $25,591 | $2,802 |
| Provision for loan and lease losses | 1,250 | 1,600 | (350) |
| Net interest income after provision |  |  |  |
| for loan and lease losses | 27,143 | 23,991 | 3,152 |
| Wealth management fee income | 8,367 | 4,818 | 3,549 |
| Other income | 1,848 | 2,201 | (353) |
| Operating expense | 23,337 | 19,304 | 4,033 |
| Income before income tax expense | 14,021 | 11,706 | 2,315 |
| Income tax expense | 3,214 | 3,724 | (510) |
| Net income | $10,807 | $7,982 | $2,825 |
| Total revenue (Net interest income plus wealth |  |  |  |
| management fee income and other income) | $38,608 | $32,610 | $5,998 |
| Diluted earnings per share | $0.57 | $0.46 | $0.11 |
| Diluted average shares outstanding | 18,908,692 | 17,438,907 | 1,469,785 |
| Return on average assets annualized (ROAA) | 1.01% | 0.82% | 0.19% |
| Return on average equity |  |  |  |
| annualized (ROAE) | 10.54 | 9.62 | 0.92 |

| Selected Balance Sheet Ratios: | March 31, 2018 | December 31, 2017 | Change 2018 vs 2017 |
| --- | ---: | ---: | ---: |
| Total capital (Tier I + II) to risk-weighted assets | 15.32% | 14.84% | 0.48% |
| Tier I leverage ratio | 9.46 | 9.04 | 0.42 |
| Loans to deposits | 104.40 | 100.16 | 4.24 |
| Allowance for loan and lease losses to total |  |  |  |
| loans | 1.02 | 0.98 | 0.04 |
| Allowance for loan and lease losses to |  |  |  |
| nonperforming loans | 283.13 | 269.33 | 13.80 |
| Nonperforming loans to total loans | 0.36 | 0.37 | (0.01) |

For the first quarter of 2018, the Company recorded net income of $10.8 million compared to $8.0 million for the same quarter of 2017. For the three months ended March 31, 2018 and 2017, diluted earnings per share were $0.57 and $0.46, respectively. Annualized return on average assets was 1.01 percent and annualized return on average equity was 10.54 percent for the first quarter of 2018, compared to 0.82 percent and 9.62 percent, respectively, for the same quarter of 2017.

The first quarter of 2018, when compared to the first quarter of 2017, reflected: increased net interest income (partially due to increased loan balances and higher yields on loans); greater wealth management fee income (partially due to the acquisitions of MCM and Quadrant in August and November 2017, respectively); and a reduced provision for loan and lease losses (due to low charge-off levels and lower loan growth within the 2018 quarter). These positive effects were partially offset by higher operating expenses in the 2018 first quarter (partially due to operating expenses related to MCM, Quadrant, and Peapack Capital, the Bank’s Equipment Finance subsidiary, which began operations in May 2017).

**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, 2017 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, 2017 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements.”

### 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, 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 March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net interest income | $28,771 | $25,831 |
| Interest rate spread | 2.53% | 2.55% |
| Net interest margin | 2.76 | 2.71 |

Net interest income, on a fully tax-equivalent basis for the three months ended March 31, 2018 grew $2.9 million, or 11 percent, from the three months ended March 31, 2017. The growth in net interest income for the first quarter of 2018 was due to increases in the average balance and yield on the Company’s interest-earning assets, especially commercial and industrial (C&I) loans, which typically have higher yields. This increase was partially offset by increases in the average balance of interest-bearing liabilities and the Company’s cost of funds. The March 2018 quarter also included approximately $433 thousand of prepayment premiums received on the prepayment of certain multifamily loans as compared to $515 thousand for the March 2017 quarter. The increase in net interest margin for the first quarter of 2018 was due to the effect of the increased market rates on our adjustable rate assets, partially offset by an increase in our cost of deposits and lower prepayment penalties. Net interest margin was also negatively affected during the first quarter of 2018 due to the subordinated debt issuance of $35.0 million in December 2017.

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

*(In thousands)*

|  | For the Three Months Ended March 31, 2018 | March 31, 2017 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $11,642 | $64,831 |
| Residential mortgage loans originated for sale | 7,672 | 3,115 |
| Total residential mortgage loans | 19,314 | 67,946 |
| Commercial real estate loans | 34,385 | 33,216 |
| Multifamily properties | 21,000 | 47,125 |
| Commercial and industrial (C&I) loans (A) (B) | 118,425 | 128,130 |
| Small business association | 4,270 | 1,700 |
| Wealth Lines of Credit (A) | 19,238 | 7,200 |
| Total commercial loans | 197,318 | 217,371 |
| Installment loans | 1,350 | 2,146 |
| Home equity lines of credit (A) | 2,497 | 6,973 |
| Total loans closed | $220,479 | $294,436 |

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

(B) Includes Equipment Finance leases and loans.

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

At March 31, 2018, December 31, 2017 and March 31, 2017, the Bank had a concentration in commercial real estate (“CRE”) 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 | March 31, 2018 | December 31, 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: |
| total regulatory capital of the Bank | 271% | 286% | 359% |
| Non-owner occupied commercial real estate loans |  |  |  |
| as a percent of total regulatory capital of the Bank | 175 | 180 | 193 |
| Total CRE concentration | 446% | 466% | 552% |

The Bank believes it addresses the key elements in the risk management framework laid out by its regulators for the effective management of CRE concentration risks.

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

### Average Balance Sheet

Unaudited

Three Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | March 31, 2018 Average Balance | Income/ Expense | Yield | March 31, 2017 Average Balance | Income/ Expense | Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $339,556 | $1,925 | 2.27% | $289,237 | $1,504 | 2.08% |
| Tax-exempt (1) (2) | 24,304 | 198 | 3.26 | 27,152 | 199 | 2.93 |
| Loans (2) (3): |  |  |  |  |  |  |
| Residential mortgages | 574,400 | 4,731 | 3.29 | 544,854 | 4,473 | 3.28 |
| Commercial mortgages | 2,013,128 | 18,407 | 3.66 | 2,035,304 | 17,732 | 3.48 |
| Commercial | 969,496 | 10,487 | 4.33 | 648,266 | 6,380 | 3.94 |
| Commercial construction | — | — | — | 390 | 4 | 4.10 |
| Installment | 81,762 | 670 | 3.28 | 69,415 | 501 | 2.89 |
| Home equity | 65,158 | 660 | 4.05 | 66,311 | 557 | 3.36 |
| Other | 455 | 11 | 9.67 | 514 | 11 | 8.56 |
| Total loans | 3,704,399 | 34,966 | 3.78 | 3,365,054 | 29,658 | 3.53 |
| Federal funds sold | 101 | — | 0.25 | 101 | — | 0.25 |
| Interest-earning deposits | 99,471 | 357 | 1.44 | 137,589 | 264 | 0.77 |
| Total interest-earning assets | 4,167,831 | 37,446 | 3.59% | 3,819,133 | 31,625 | 3.31% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 4,686 |  |  | 21,615 |  |  |
| Allowance for loan and lease losses | (37,076) |  |  | (32,913) |  |  |
| Premises and equipment | 29,256 |  |  | 30,279 |  |  |
| Other assets | 99,541 |  |  | 73,467 |  |  |
| Total noninterest-earning assets | 96,407 |  |  | 92,448 |  |  |
| Total assets | $4,264,238 |  |  | $3,911,581 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $1,143,152 | $1,757 | 0.61% | $1,029,012 | $862 | 0.34% |
| Money markets | 1,033,937 | 1,946 | 0.75 | 1,068,552 | 934 | 0.35 |
| Savings | 121,065 | 16 | 0.05 | 120,623 | 16 | 0.05 |
| Certificates of deposit - retail | 555,564 | 2,149 | 1.55 | 448,844 | 1,570 | 1.40 |
| Subtotal interest-bearing deposits | 2,853,718 | 5,868 | 0.82 | 2,667,031 | 3,382 | 0.51 |
| Interest-bearing demand - brokered | 180,000 | 680 | 1.51 | 180,000 | 720 | 1.60 |
| Certificates of deposit - brokered | 72,601 | 429 | 2.36 | 93,733 | 491 | 2.10 |
| Total interest-bearing deposits | 3,106,319 | 6,977 | 0.90 | 2,940,764 | 4,593 | 0.62 |
| FHLB advances and borrowings | 86,458 | 370 | 1.71 | 60,123 | 303 | 2.02 |
| Capital lease obligation | 8,963 | 107 | 4.78 | 9,605 | 115 | 4.79 |
| Subordinated debt | 83,043 | 1,221 | 5.88 | 48,775 | 783 | 6.42 |
| Total interest-bearing liabilities | 3,284,783 | 8,675 | 1.06% | 3,059,267 | 5,794 | 0.76% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 539,882 |  |  | 501,183 |  |  |
| Accrued expenses and |  |  |  |  |  |  |
| other liabilities | 29,358 |  |  | 19,151 |  |  |
| Total noninterest-bearing liabilities | 569,240 |  |  | 520,334 |  |  |
| Shareholders’ equity | 410,215 |  |  | 331,980 |  |  |
| Total liabilities and |  |  |  |  |  |  |
| shareholders’ equity | $4,264,238 |  |  | $3,911,581 |  |  |
| Net interest income |  |  |  |  |  |  |
| (tax-equivalent basis) |  | 28,771 |  |  | 25,831 |  |
| Net interest spread |  |  | 2.53% |  |  | 2.55% |
| Net interest margin (4) |  |  | 2.76% |  |  | 2.71% |
| Tax equivalent adjustment |  | (378) |  |  | (240) |  |
| Net interest income |  | $28,393 |  |  | $25,591 |  |

(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 at March 31, 2018 and a 35 percent federal tax rate at March 31, 2017.

(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.

49

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 March 31, 2018 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $254 | $166 | $420 |
| Loans | 3,550 | 1,758 | 5,308 |
| Interest-earning deposits | (88) | 181 | 93 |
| Total interest income | $3,716 | $2,105 | $5,821 |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $70 | $825 | $895 |
| Money market | (21) | 1,033 | 1,012 |
| Certificates of deposit - retail | 409 | 170 | 579 |
| Certificates of deposit - brokered | (120) | 58 | (62) |
| Interest bearing demand brokered | 1 | (41) | (40) |
| Borrowed funds | 66 | 1 | 67 |
| Capital lease obligation | (8) | — | (8) |
| Subordinated debt | 504 | (66) | 438 |
| Total interest expense | $901 | $1,980 | $2,881 |
| Net interest income | $2,815 | $125 | $2,940 |

Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $37.4 million for the first quarter of 2018 compared to $31.6 million for the same quarter of 2017, reflecting an increase of $5.8 million, or 18 percent. Average interest-earning assets totaled $4.17 billion for the first quarter of 2018, an increase of $348.7 million, or 9 percent, from the same period of 2017. The average balance of the commercial loan portfolio increased $321.2 million, or 50 percent, from the first quarter of 2017, to $969.5 million for the first quarter of 2018. The increase in this portfolio was attributed to: the addition of seasoned bankers including 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 private banking offices. This increase was partially offset by a decrease in the average balance of the commercial mortgage portfolio (which includes multifamily mortgage loans) of $22.2 million, or 1 percent, to $2.01 billion for the first quarter of 2018 when compared to the same period in 2017. The Company has managed its multifamily portfolio to limit growth (multifamily portfolio has declined from both December 31, 2017 and March 31, 2017, respectively), while it has been focused on the origination of strong commercial real estate credits. The average balance of investments totaled $363.9 million for the first quarter of 2018 compared to $316.4 million for the same 2017 quarter reflecting an increase of $47.5 million, or 15 percent. This increase coincides with the Company’s desire to increase liquid portfolios.

For the quarters ended March 31, 2018 and 2017, the average rates earned on interest-earning assets were 3.59 percent and 3.31 percent, respectively, an increase of 28 basis points. The increase in the overall yield was principally due to the benefit from the increased market rates on adjustable rate assets during the second half of 2017 and the first quarter of 2018.

For the first quarter of 2018, total interest-bearing deposits averaged $3.11 billion, an increase of $165.6 million, or 6 percent, from the average balance for the same period of 2017. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand, but including reciprocal funds discussed below) has come from: an increase in retail deposits from our branch network; 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 90 basis points and 62 basis points for the first quarters of 2018 and 2017, respectively, an increase of 28 basis points. The increase in the average rate paid on deposits was principally due to growth in higher costing certificates of deposit and competitive pressures in attracting new deposits.

For the first quarters of 2018 and 2017, average borrowings totaled $86.5 million and $60.1 million, respectively, an increase of $26.3 million during the first quarter of 2018 when compared to the same period of 2017. The increase was principally due to an increase in overnight borrowings used to fund loans, the maturity of FHLB advances and the maturity of $66.1 million of listing service deposits - the Company has chosen not to participate in listing service programs at this time, so maturing listing service deposits are not replaced with new listing service deposits.

The Company is a participant in the Reich & Tang Demand Deposit Marketplace (“DDM”) program and Promontory. 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 $372.3 million for the quarter ended March 31, 2018 and $397.4 million for the quarter ended March 31, 2017.

Brokered deposits were $180.0 million for the first quarters of both 2017 and 2018. The brokered deposits are at 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 December 2017, the Company issued $35.0 million of subordinated debt ($34.1 million net of issuance costs) bearing interest at an annual rate of 4.75 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2027 or earlier redemption. 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 quarter of 2018, the subordinated debt balance averaged $83.0 million compared to $48.8 million from the same period in 2017.

**INVESTMENT SECURITIES:** Investment securities are purchased, sold and/or maintained as a part of the Company’s overall balance sheet management and in response to interest rate risk management strategies, changes in interest rates, liquidity needs, prepayment speeds and/or other factors. Investment securities available for sale 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. Trading securities are carried at fair value, with unrealized gains and losses recorded in non-interest income.

At March 31, 2018, the Company had investment securities available for sale with a fair value of $342.6 million compared with $327.6 million at December 31, 2017. Net unrealized losses (net of income tax) of $4.3 million and $1.8 million were included in shareholders’ equity at March 31, 2018 and December 31, 2017, respectively.

The Company has one equity security (a CRA investment security) with a fair value of $4.7 million at March 31, 2018. The Company recorded a $78 thousand unrealized loss in securities losses, net on the Consolidated Statements of Income for the three months ended March 31, 2018. Such security has been owned for years for CRA purposes, but under Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments”, equity securities now require a quarterly mark to market through the income statement.

The carrying value of investment securities available for sale as of March 31, 2018 and December 31, 2017 are shown below:

*(In thousands)*

| U.S. treasury and U.S. government- | March 31, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| sponsored agencies | $66,876 | $43,701 |
| Mortgage-backed securities-residential |  |  |
| (principally U.S. government-sponsored |  |  |
| entities) | 240,840 | 243,116 |
| SBA pool securities | 4,995 | 5,205 |
| State and political subdivisions | 23,886 | 24,868 |
| Corporate bond | 3,069 | 3,082 |
| Single-issuer trust preferred security | 2,887 | 2,837 |
| CRA investment fund (1) | — | 4,824 |
| Total | $342,553 | $327,633 |

(1) Reclassified to trading security at March 31, 2018 in accordance with ASU 2016-01, “Financial Instruments”.

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of March 31, 2018:

|  |  | 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- | $9,944 | $9,168 | $47,764 | $— | $66,876 |
| sponsored agencies | 1.25% | 2.02% | 2.61% | —% | 2.33% |
| Mortgage-backed securities- | $136 | $14,061 | $15,503 | $211,140 | $240,840 |
| residential (1) | 3.02% | 1.96% | 1.94% | 2.37% | 2.32% |
| SBA pool securities | $— | $— | $— | $4,995 | $4,995 |
|  | —% | —% | —% | 1.70% | 1.70% |
| State and political subdivisions (2) | $7,805 | $10,303 | $2,437 | $3,341 | $23,886 |
|  | 1.62% | 2.50% | 2.59% | 2.52% | 2.23% |
| Corporate bond | $— | $— | $3,069 | $— | $3,069 |
|  | —% | —% | 5.25% | —% | 5.25% |
| Single-issuer trust preferred security (1) | $— | $— | $2,887 | $— | $2,887 |
|  | —% | —% | 2.58% | —% | 2.58% |
| **Total** | $17,885 | $33,532 | $71,660 | $219,476 | $342,553 |
|  | 1.42% | 2.14% | 2.57% | 2.36% | 2.33% |

(1) Shown using stated final maturity.

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

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

*(In thousands)*

|  | Three Months Ended March 31, 2018 | 2017 | Change 2018 vs 2017 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $831 | $771 | $60 |
| Gain on sale of loans (mortgage banking) | 94 | 47 | 47 |
| Bank owned life insurance | 336 | 322 | 14 |
| Fee income related to loan level, |  |  |  |
| back-to-back swaps | 252 | 456 | (204) |
| Gain on sale of SBA loans | 31 | 155 | (124) |
| Securities losses | (78) | — | (78) |
| Other income | 382 | 450 | (68) |
| Total other income | $1,848 | $2,201 | $(353) |

For the quarter ended March 31, 2018, income from the sale of newly originated residential mortgage loans was $94 thousand compared to $47 thousand for the same period in 2017. These increases were a result of higher volume of residential mortgage loans originated for sale in the three months ended March 31, 2018 compared to the three months ended March 31, 2017, as a result of increased activity.

The first quarter of 2018 included $252 thousand of loan level, back-to-back swap income compared to $456 thousand in the same quarter of 2017. The program utilizes mirror interest rate swaps, one with the customer and one 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.

The first quarter of 2018 included $31 thousand of income related to the Company’s SBA lending and sale program compared to $155 thousand for the same quarter in 2017.

Income from the SWAP and SBA programs are not linear from quarter to quarter, as some quarters will be higher than others.

The Company recorded a $78 thousand mark to market loss on its equity security investment in the first quarter of 2018 as a result of the adoption of Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments”. There were no securities gains in the three months ended March 31, 2018 and 2017.

Other income was $382 thousand for the quarter ended March 31, 2018 compared to $450 thousand for the same quarter in 2017. The decrease in other income was primarily due a decrease in letter of credit fees of $76 thousand during the three months ended March 31, 2018.

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

*(In thousands)*

|  | Three Months Ended March 31, 2018 | 2017 | Change 2018 vs 2017 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $14,579 | $11,913 | $2,666 |
| Premises and equipment | 3,270 | 2,816 | 454 |
| FDIC assessment | 580 | 686 | (106) |
| Other Operating Expenses: |  |  |  |
| Wealth management division |  |  |  |
| other expense | 702 | 702 | — |
| Professional and legal fees | 1,114 | 862 | 252 |
| Loan expense | 97 | 201 | (104) |
| Telephone | 284 | 243 | 41 |
| Advertising | 311 | 163 | 148 |
| Postage | 130 | 104 | 26 |
| Other | 2,270 | 1,614 | 656 |
| Total operating expenses | $23,337 | $19,304 | $4,033 |

The Company’s total operating expenses were $23.3 million for the quarter ended March 31, 2018 compared to $19.3 million in the same 2017 quarter, reflecting a net increase of $4.0 million, or 21 percent.

Compensation and benefits expense increased to $14.6 million in the first quarter of 2018 from $11.9 million in the same period in 2017, an increase of $2.7 million, or 22 percent. The increase was partially due to strategic hiring, normal salary increases and increased bonus/incentive accruals associated with the Company’s performance. Additionally, the acquisitions of MCM in August 2017 and Quadrant in November 2017 and the hiring of a team of experienced bankers to focus on equipment financing in April 2017 contributed to the increase in the first quarter of 2018.

For the three months ended March 31, 2018, premises and equipment expense was $3.3 million compared to $2.8 million for the three months ended March 31, 2017, an increase of $454 thousand. The increase over the same period in 2017 was due to the Company’s growth through acquisition of two wealth management firms and the equipment finance team. This growth resulted in increased computer hardware and software expenses, as well as occupancy expenses.

Total operating expenses for the March 2018 quarter were $4.91 million compared to $3.89 million for the March 2017 quarter. The March 2018 quarter included expenses related to the Equipment Finance business, Murphy Capital, and Quadrant. Further, when compared to the March 2017 quarter, the March 2018 quarter included increased advertising and marketing expenses relating to various target marketing campaigns.

**PRIVATE WEALTH MANAGEMENT DIVISION:** This division includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services including services as trustee for pension and profit sharing plans; and other financial planning and advisory services. Officers from the Private Wealth Management Division are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, at private banking locations in Morristown, Princeton and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware, in Greenville, Delaware, MCM, in Gladstone, New Jersey and Quadrant in Fairfield, New Jersey.

The following table presents certain key aspects of the Bank’s Private Wealth Management Division performance for the quarters ended March 31, 2018 and 2017.

#### Index

*(In thousands)*

|  | At or For Three Months Ended March 31, 2018 | 2017 | 2018 vs 2017 |
| --- | ---: | ---: | ---: |
| Total fee income | $8,367 | $4,818 | $3,549 |
| Compensation and benefits (included |  |  |  |
| in Operating Expenses above) | 4,248 | 2,599 | 1,649 |
| Other operating expense (included) |  |  |  |
| in Operating Expenses above) | 2,679 | 2,152 | 527 |
| Assets under management and/or administration |  |  |  |
| (market value in billions) | $5.6 billion | $3.8 billion |  |

The market value of the assets under management and/or administration (“AUM”) of the Private Wealth Management Division was $5.6 billion at March 31, 2018, reflecting an increase of 47 percent from $3.8 billion at March 31, 2017. The increase in AUM was due to acquisitions of two registered investment advisory firms (“RIA”) and organic growth. Effective August 1, 2017, the Bank acquired MCM, an RIA, based in Gladstone, NJ. MCM contributed approximately $850 million of AUM at the time of acquisition. Effective November 1, 2017, the Bank acquired Quadrant, an RIA, based in Fairfield, NJ, which contributed approximately $460 million of AUM at the time of acquisition. Organic growth, which includes equity market appreciation, contributed an additional $500 million in AUM.

In the March 2018 quarter, the Private Wealth Management Division generated $8.4 million in fee income compared to $4.8 million for the March 2017 quarter, reflecting a 74 percent increase. The growth in fee income was due to several factors, including the acquisitions noted above, as well as continued new business 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 all business lines. The Company has expanded its wealth management team and will continue to grow and expand organically and through acquisition.

Operating expenses relative to the Private Wealth Management Division reflected increases due to the MCM and Quadrant acquisitions, overall growth in the business, new hires and select third party expenditures incurred. 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 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 March 31, 2018 | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: | ---: | ---: |
| and still accruing | $— | $— | $— | $— | $— |
| Nonaccrual loans | 13,314 | 13,530 | 15,367 | 15,643 | 11,494 |
| Other real estate owned | 2,090 | 2,090 | 137 | 373 | 671 |
| Total nonperforming assets | $15,404 | $15,620 | $15,504 | $16,016 | $12,165 |
| Performing TDRs | $7,888 | $9,514 | $9,658 | $9,725 | $15,030 |
| Loans past due 30 through 89 |  |  |  |  |  |
| days and still accruing | $674 | $246 | $589 | $1,232 | $622 |
| Classified loans | $55,945 | $41,706 | $44,170 | $43,608 | $43,002 |
| Impaired loans | $21,223 | $23,065 | $25,046 | $25,294 | $26,546 |
| Nonperforming loans as a % of |  |  |  |  |  |
| total loans (1) | 0.36% | 0.37% | 0.42% | 0.43% | 0.33% |
| Nonperforming assets as a % of |  |  |  |  |  |
| total assets (1) | 0.36% | 0.37% | 0.37% | 0.38% | 0.31% |
| Nonperforming assets as a % of |  |  |  |  |  |
| total loans plus other real |  |  |  |  |  |
| estate owned (1) | 0.41% | 0.42% | 0.42% | 0.44% | 0.35% |

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

**PROVISION FOR LOAN AND LEASE LOSSES**: The provision for loan and lease losses was $1.3 million and $1.6 million for the first quarters of 2018 and 2017, respectively. The amount of the loan loss provision and the level of the allowance for loan and lease losses are based upon several factors including Management’s evaluation of probable losses inherent in the portfolio, after consideration of appraised collateral values, financial condition and past credit history of the borrowers, 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 and lease losses.

The decrease in the provision for loan losses to $1.3 million in the first quarter of 2018 was due to slower loan growth. Also during first quarter of 2018, Management reevaluated the qualitative factors for multifamily loan types and as a result of the evaluation, changed certain allocations as appropriate.

The allowance for loan and lease losses was $37.7 million as of March 31, 2018, compared to $36.4 million at December 31, 2017. As a percentage of loans, the allowance for loan and lease losses was 1.02 percent as of March 31, 2018, and 0.98 percent as of December 31, 2017. The specific reserves on impaired loans were $374 thousand at March 31, 2018 compared to $522 thousand as of December 31, 2017. Total impaired loans were $21.2 million and $23.1 million as of March 31, 2018 and December 31, 2017, respectively. The general component of the allowance increased from $35.9 million at December 31, 2017 to $37.3 million at March 31, 2018, due principally to the downgrade of two commercial loans during the first quarter of 2018.

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

*(In thousands)*

| Allowance for loan and lease losses: | March 31, 2018 | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Beginning of period | $36,440 | $35,915 | $35,751 | $33,610 | $32,208 |
| Provision for loan and lease losses | 1,250 | 1,650 | 400 | 2,200 | 1,600 |
| Charge-offs/(recoveries), net | 6 | (1,125) | (236) | (59) | (198) |
| End of period | $37,696 | $36,440 | $35,915 | $35,751 | $33,610 |
| Allowance for loan and lease losses as a % of total loans | 1.02% | 0.98% | 0.98% | 0.98% | 0.98% |
| Allowance for loan and lease losses as a % of non-performing loans | 283.13% | 269.33% | 233.72% | 228.54% | 292.41% |

**INCOME TAXES:** For the first quarter of 2018 and 2017 income tax expense as a percentage of pre-tax income was 22.9 percent and 31.8 percent, respectively. The decrease in the effective tax rate was a result of the Tax Cuts and Jobs Act which reduced the Federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018.

The Company’s effective rate in both quarters was positively affected by the adoption of ASU 2016-09. The March 2018 quarter included a $362 thousand reduction in income taxes, while the March 2017 quarter included a $662 thousand reduction in income taxes, both associated with the vesting of restricted stock under ASU 2016-09.

**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 three months ended March 31, 2018 was benefitted by net income of $10.8 million and by $10.6 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 1 capital (as defined) to average assets (as defined). At March 31, 2018 and December 31, 2017, 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 regulatory capital amounts and ratios are presented in the following table:

*(Dollars in thousands)*

| As of March 31, 2018: 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) | $504,592 | 14.81% | $340,712 | 10.00% | $272,570 | 8.00% | $336,453 | 9.88% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 466,896 | 13.70 | 272,570 | 8.00 | 204,427 | 6.00 | 268,311 | 7.88 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 466,894 | 13.70 | 221,463 | 6.50 | 153,321 | 4.50 | 217,204 | 6.38 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 466,896 | 11.00 | 212,132 | 5.00 | 169,706 | 4.00 | 169,706 | 4.00 |
| As of December 31, 2017: |  |  |  |  |  |  |  |  |
| Total capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | $485,252 | 14.34% | $338,327 | 10.00% | $270,662 | 8.00% | 312,953 | 9.25% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 448,812 | 13.27 | 270,662 | 8.00 | 202,996 | 6.00 | 245,287 | 7.25 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 448,810 | 13.27 | 219,913 | 6.50 | 152,247 | 4.50 | 194,538 | 5.75 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 448,812 | 10.61 | 211,523 | 5.00 | 169,219 | 4.00 | 169,219 | 4.00 |

(A) See footnote on following table

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

*(Dollars in thousands)*

| As of March 31, 2018: 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) | $522,273 | 15.32% | $N/A | N/A% | $272,797 | 8.00% | $336,733 | 9.88% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 401,498 | 11.77 | N/A | N/A | 204,597 | 6.00 | 268,534 | 7.88 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 401,496 | 11.77 | N/A | N/A | 153,448 | 4.50 | 217,385 | 6.38 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 401,498 | 9.46 | N/A | N/A | 169,813 | 4.00 | 169,813 | 4.00 |
| As of December 31, 2017: |  |  |  |  |  |  |  |  |
| Total capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | $502,334 | 14.84% | $N/A | N/A% | $270,866 | 8.00% | $313,189 | 9.25% |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 382,870 | 11.31 | N/A | N/A | 203,149 | 6.00 | 245,472 | 7.25 |
| Common equity tier I |  |  |  |  |  |  |  |  |
| (to risk-weighted assets) | 382,868 | 11.31 | N/A | N/A | 152,362 | 4.50 | 194,685 | 5.75 |
| Tier I capital |  |  |  |  |  |  |  |  |
| (to average assets) | 382,870 | 9.04 | N/A | N/A | 169,318 | 4.00 | 169,318 | 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 $48.7 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.

In addition, on December 12, 2017, the Company issued $35 million in aggregate principal amount of Fixed-to-Floating Subordinated Notes due December 15, 2027 (the “Notes”). 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. The Reinvestment Plan provided $10.6 million of capital to the Company in the first quarter of 2018. Voluntary share purchases in the Dividend 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 of the share purchases in the March 2018 quarter were from authorized but unissued shares.

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 April 24, 2018, the Board of Directors declared a regular cash dividend of $0.05 per share payable on May 22, 2018 to shareholders of record on May 8, 2018.

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 on 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 and securities 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 $153.5 million at March 31, 2018. In addition, the Company had $342.6 million in securities designated as available for sale at March 31, 2018. 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 $259.0 million as of March 31, 2018 were pledged to secure public funds and for other purposes required or permitted by law. In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities.

A further source of liquidity is secured borrowing capacity. At March 31, 2018, unused borrowing commitments totaled $1.1 billion from the FHLB and $839 million from the Federal Reserve Bank of New York.

During the first quarter of 2018, the Company experienced net deposit outflows of $146 million, $66 million of which, however, was due to the maturity of listing service deposits - the Company has chosen not to participate in listing service programs at this time, so maturing listing service deposits are not replaced with new listing service deposits. The majority of the remaining net deposit outflows (of $80 million) were concentrated in a small number of larger depositors, who remain clients of the Company.

Brokered interest-bearing demand (“overnight”) deposits were $180.0 million at March 31, 2018. 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, 2018, the Company has transacted pay fixed, receive floating interest rate swaps totaling $180.0 million in notional amount.

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

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

## Market risk

As filed, 6,961 characters.

**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 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 may 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, especially longer-term residential 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 March 31, 2018.

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 March 31, 2018, $333.2 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 loan prepayment, deposit beta and decay, and interest rate assumptions, which management believes to be reasonable as of March 31, 2018. 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 March 31, 2018.

In an immediate and sustained 200 basis point increase in market rates at March 31, 2018, net interest income for year 1 would increase approximately 2.3 percent, when compared to a flat interest rate scenario. In year 2 this sensitivity improves to an increase of 6.7 percent, when compared to a flat interest rate scenario.

In an immediate and sustained 100 basis point decrease in market rates at March 31, 2018, net interest income would decline approximately 3.2 percent for year 1 and 5.7 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, 2018.

*(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 | $589,243 | $(5,280) | (0.89)% | 14.27% | 45 |
| +100 | 593,655 | (868) | (0.15) | 14.08 | 26 |
| Flat interest rates | 594,523 | — | — | 13.82 | — |
| -100 | 580,275 | (14,248) | (2.40) | 13.24 | (58) |

(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.

## Controls and procedures

As filed, 2,537 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 March 31, 2018 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, 246 characters.

There were no material changes in the Corporation’s risk factors during the three months ended March 31, 2018 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, 2017.

Filed May 8, 2018.
Source: SEC EDGAR, the filing index for accession 0001174947-18-000747. Last ingested by Listed: Nov 6, 2026, 13:09 ET. No prices; not investment advice.