UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the Quarter Ended March 31, 2014

OR

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

For the transition period from to

Commission File No. 001-16197

PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

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

500 Hills Drive, Suite 300
Bedminster, New Jersey 07921-1538
(Address of principal executive offices, including zip code)

(908)234-0700
(Registrant’s telephone number, including area code)

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

Yes ý      No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý      No ¨.

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

Large accelerated filer ¨	Accelerated filer ý
Non-accelerated filer (do not check if a smaller reporting company) ¨	Smaller reporting company ¨

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

Number of shares of Common Stock outstanding as of May 1, 2014:

12,033,953

1

PEAPACK-GLADSTONE FINANCIAL CORPORATION

PART 1 FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)
	Consolidated Statements of Condition at March 31, 2014 and December 31, 2013	Page 3
	Consolidated Statements of Income for the three months ended March 31, 2014 and 2013	Page 4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013	Page 5
	Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2014	Page 6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	Page 7
	Notes to Consolidated Financial Statements	Page 8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 32
Item 3	Quantitative and Qualitative Disclosures about Market Risk	Page 46
Item 4	Controls and Procedures	Page 46

PART 2 OTHER INFORMATION

Item 1A	Risk Factors	Page 46
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	Page 46
Item 6	Exhibits	Page 47

2

Item 1. Financial Statements (Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION

(Dollars in thousands)

	(unaudited)			(audited)
	March 31,			December 31,
	2014			2013
ASSETS
Cash and due from banks	$	6,373		$	6,534
Federal funds sold		101			101
Interest-earning deposits		95,059			28,512
Total cash and cash equivalents		101,533			35,147
Securities available for sale		248,070			268,447
FHLB and FRB stock, at cost		12,765			10,032
Loans held for sale, at fair value		1,769			2,001
Loans held for sale, at lower of cost or fair value		51,184			—
Loans		1,763,400			1,574,201
Less: Allowance for loan losses		16,587			15,373
Net loans		1,746,813			1,558,828
Premises and equipment		31,087			28,990
Other real estate owned		2,062			1,941
Accrued interest receivable		4,788			4,086
Bank owned life insurance		32,065			31,882
Deferred tax assets, net		9,366			9,762
Other assets		9,983			15,832
TOTAL ASSETS	$	2,251,485		$	1,966,948
LIABILITIES
Deposits:
Noninterest-bearing demand deposits	$	350,987		$	356,119
Interest-bearing deposits:
Interest-bearing deposits checking		407,127			378,340
Savings		119,750			115,785
Money market accounts		660,691			630,173
Certificates of deposit $100,000 and over		58,090			61,128
Certificates of deposit less than $100,000		93,640			90,705
Certificates of deposit - Brokered		65,000			5,000
Subtotal deposits		1,755,285			1,637,250
Interest-bearing demand – Brokered		138,011			10,000
Total deposits		1,893,296			1,647,250
Overnight borrowings with Federal Home Loan Bank		79,400			54,900
Federal Home Loan Bank advances		83,692			74,692
Capital lease obligation		9,917			8,754
Accrued expenses and other liabilities		9,308			10,695
TOTAL LIABILITIES		2,075,613			1,796,291
SHAREHOLDERS’ EQUITY
Common stock (no par value; stated value $0.83 per share; authorized 21,000,000
shares; issued shares, 12,441,091 at March 31, 2014 and 12,196,695
at December 31, 2013; outstanding shares, 12,032,913 at March 31, 2014
and 11,788,517 at December 31, 2013		10,351			10,148
Surplus		142,687			140,699
Treasury stock at cost, 408,178 shares at March 31, 2014 and
December 31, 2013		(8,988	)		(8,988	)
Retained earnings		31,216			28,775
Accumulated other comprehensive income, net of income tax		606			23
TOTAL SHAREHOLDERS EQUITY		175,872			170,657
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	2,251,485		$	1,966,948

See accompanying notes to consolidated financial statements

3

. PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended
	March 31,
	2014		2013
INTEREST INCOME
Interest and fee on loans	$	15,662	$	11,714
Interest on securities available for sale:
Taxable		1,061		1,277
Tax-exempt		204		197
Interest on loans held for sale		10		196
Interest-earning deposits		12		48
Total interest income		16,949		13,432
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts		483		307
Interest on certificates of deposit over $100,000		152		215
Interest on other time deposits		234		285
Interest on borrowed funds		390		92
Interest on capital lease obligation		119		106
Total interest expense		1,378		1,005
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES		15,571		12,427
Provision for loan losses		1,325		850
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		14,246		11,577
OTHER INCOME
Wealth management fee income		3,754		3,368
Service charges and fees		694		676
Bank owned life insurance		266		272
Gain on loans held for sale at fair value (Mortgage banking)		112		470
Gain on loans held for sale at lower of cost or
fair value		—		522
Other income		71		7
Securities gains, net		98		289
Total other income		4,995		5,604
OPERATING EXPENSES
Salaries and employee benefits		8,848		7,079
Premises and equipment		2,438		2,304
Other operating expense		3,053		2,910
Total operating expenses		14,339		12,293
INCOME BEFORE INCOME TAX EXPENSE		4,902		4,888
Income tax expense		1,871		1,995
NET INCOME		3,031		2,893
EARNINGS PER COMMON SHARE
Basic	$	0.26	$	0.33
Diluted	$	0.26	$	0.32
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic		11,606,933		8,870,559
Diluted		11,710,940		8,917,180

See accompanying notes to consolidated financial statements

4

PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2014			2013
Net income	$	3,031		$	2,893
Other comprehensive income/(loss):
Unrealized gains/(losses) on available for sale securities:
Unrealized holding gains/(losses) arising
during the period		1,082			(718	)
Less: Reclassification adjustment for net gains
included in net income		98			289
		984			(1,007	)
Tax effect		(401	)		412
Total other comprehensive income/(loss)		583			(595	)
Total comprehensive income	$	3,614		$	2,298

See accompanying notes to consolidated financial statements

5

PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Three Months Ended March 31, 2014

												Accumulated
												Other
(In thousands, except	Common					Treasury			Retained			Comprehensive
per share data)	Stock		Surplus			Stock			Earnings			Income		Total
Balance at January 1, 2014
11,788,517 common shares
outstanding	$	10,148	$	140,699		$	(8,988	)	$	28,775		$	23	$	170,657
Net income										3,031					3,031
Net change in accumulated
other comprehensive
income/(loss)													583		583
Issuance of restricted stock
137,612 shares		114		(114	)										—
Amortization of restricted stock				281											281
Cash dividends declared on
common stock
($0.05 per share)										(590	)				(590	)
Common stock option expense				52											52
Common stock options
exercised and related tax
benefits, 5,885 shares		5		67											72
Sales of shares (Dividend
Reinvestment Program),
97,118 shares		81		1,635											1,716
Issuance of shares for
Profit Sharing Plan
3,781 shares		3		67											70
Balance at March 31, 2014
12,032,913 common shares
outstanding	$	10,351	$	142,687		$	(8,988	)	$	31,216		$	606	$	175,872

See accompanying notes to consolidated financial statements

6

PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2014			2013
OPERATING ACTIVITIES:
Net income:	$	3,031		$	2,893
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		727			731
Amortization of premium and accretion of discount on securities, net		379			519
Amortization of restricted stock		281			83
Provision of loan losses		1,325			850
Provision for OREO losses		100			—
Provision for deferred taxes		(5	)		(494	)
Stock-based compensation		52			85
Gains on securities, available for sale		(98	)		(289	)
Loans originated for sale at fair value		(8,780	)		(27,231	)
Proceeds from sales of loans at fair value		9,124			32,334
Gains on loans held for sale at fair value		(112	)		(470	)
Gains on loans held for sale at lower of cost or fair value		—			(522	)
Gains on sale of other real estate owned		—			(9	)
Gains on disposal of fixed assets		(9	)		—
Increase in cash surrender value of life insurance, net		(183	)		(195	)
(Increase)/Decrease in accrued interest receivable		(702	)		96
Decrease in other assets		5,849			2,828
(Decrease)/Increase in accrued expenses and other liabilities		(1,456	)		389
NET CASH (USED IN)/ PROVIDED BY OPERATING ACTIVITIES		9,523			11,598
INVESTING ACTIVITIES:
Maturities of securities available for sale		23,867			21,047
Call of securities available for sale		—			115
Sales of securities available for sale		18,616			15,293
Purchase of securities available for sale, including FHLB and FRB stock		(24,136	)		(16,665	)
Proceeds from sales of loans held for sale at lower of cost or fair value		—			14,271
Net increase in loans		(240,715	)		(30,308	)
Sales of other real estate owned		—			187
Purchase of premises and equipment		(1,592	)		(130	)
Disposal of premises and equipment		9			—
NET CASH (USED IN)/ PROVIDED BY INVESTING ACTIVITIES		(223,951	)		3,810
FINANCING ACTIVITIES:
Net increase/(decrease) in deposits		246,046			(35,323	)
Net increase in overnight borrowings		24,500			—
Net increase in other borrowings		9,000			—
Repayments of Federal Home Loan Bank advances		—			(119	)
Cash dividends paid on common stock		(590	)		(447	)
Exercise of Stock Options		72			2
Sales of shares (DRIP Program)		1,716			528
Purchase of shares for Profit Sharing Plan		70			—
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES		280,814			(35,359	)
Net increase/(decrease) in cash and cash equivalents		66,386			(19,951	)
Cash and cash equivalents at beginning of period		35,147			119,228
Cash and cash equivalents at end of period	$	101,533		$	99,277

See accompanying notes to consolidated financial statements

7

PEAPACK-GLADSTONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Certain information and footnote disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the period ended December 31, 2013 for Peapack-Gladstone Financial Corporation (the “Corporation” or the “Company”). In the opinion of the Management of the Corporation, the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments necessary to present fairly the financial position as of March 31, 2014 and the results of operations for the three months ended March 31, 2014 and 2013 and cash flows for the three months ended March 31, 2014 and 2013.

Principles of Consolidation and Organization: The Corporation considers that all adjustments necessary for a fair presentation of the statement of the financial position and results of operations in accordance with U.S. generally accepted accounting principles for these periods have been made. Results for such interim periods are not necessarily indicative of results for a full year.

The consolidated financial statements of Peapack-Gladstone Financial Corporation (the “Corporation”) are prepared on the accrual basis and include the accounts of the Corporation and its wholly-owned subsidiary, Peapack-Gladstone Bank (the “Bank”). The consolidated statements also include the Bank’s wholly-owned subsidiary, PGB Trust & Investments of Delaware. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements.

Securities: All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

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

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

Loans Held for Sale: Mortgage loans originated with the intent to sell in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged in earnings.

8

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

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

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

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

The majority of the Corporation’s loans are secured by real estate in the New Jersey and New York area.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when Management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in Management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component of the allowance relates to loans that are individually classified as impaired.

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

9

All loans are individually evaluated for impairment when loans are classified as substandard by Management. If a loan is considered impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral less estimated disposition costs if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment while they are performing assets. If and when a residential mortgage is placed on nonaccrual status and in the process of collection, such as through a foreclosure action, then they are evaluated for impairment on an individual basis and the loan is reported, net, at the fair value of the collateral less estimated disposition costs.

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

The general component of the allowance covers non-impaired loans and is based primarily on the Bank’s historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation on a weighted average basis over the previous three years. This actual loss experience is adjusted by other qualitative factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

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

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

Home Equity Lines of Credit. The Bank provides revolving lines of credit against one to four family residences within or near its primary geographic market. Primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, such as the Prime Rate, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate value could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

10

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

Multifamily Loans. The Bank provides mortgage loans for multifamily properties (i.e. buildings which have five or more residential units) in New Jersey, Pennsylvania and New York. Multifamily loans are expected to be repaid from the cash flow of the underlying property so the collective amount of rents must be sufficient to cover all operating expense, maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to repay the loan. Certain markets, such as New York City, are rent regulated, and as such, feature rents that are considered to be below market rates. Generally, rent regulated properties are characterized by relatively stable occupancy levels and longer term tenants. As a loan asset class for many banks, multifamily loans have experienced much lower historical loss rates compared to other types of commercial lending.

Commercial Real Estate Loans. The Bank provides mortgage loans for commercial real estate that is either owner occupied or managed as an investment property (non-owner occupied). Principal types of investment commercial real estate properties include retail, office buildings, mixed use, medical facilities, industrial and other. The terms and conditions of all commercial mortgage loans are tailored to the specific attributes of the borrower and any guarantors as well as the nature of the property and loan purpose. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to various industry or economic conditions.

Commercial and Industrial Loans. The Bank provides lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory and equipment. Commercial and industrial loans are typically repaid first by the cash flow generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. Factors that may influence a business’s profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial and industrial loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain.

Commercial Construction. The Bank has substantially wound down its commercial construction lending activity given the current economic environment. New construction loans would be considered only to experienced and reputable local builders and developers that have the capital and liquidity to carry a project to completion and stabilization. Construction loans are considered riskier than commercial financing on improved and established commercial real estate. The risk of potential loss increases if the original cost estimates or time to complete are significantly underestimated.

11

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

Stock-Based Compensation: The Corporation’s Stock Incentive Plans allow the granting of shares of the Corporation’s common stock as incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights to directors, officers, employees and independent contractors of the Corporation and its Subsidiaries. The options granted under these plans are exercisable at a price equal to the fair value of common stock on the date of grant and expire not more than ten years after the date of grant. Stock options may vest during a period of up to five years after the date of grant.

For the three months ended March 31, 2014 and 2013, the Corporation recorded total compensation cost for stock options of $52 thousand and $85 thousand respectively, with a recognized tax benefit of $5 thousand and $15 thousand for the quarters ended March 31, 2014 and 2013, respectively. There was approximately $527 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Corporation’s stock incentive plans at March 31, 2014. That cost is expected to be recognized over a weighted average period of 1.2 years.

For the Corporation’s stock option plans, changes in options outstanding during the three months ended March 31, 2014 were as follows:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise		Contractual		Value
	Options			Price		Term		(In thousands)
Balance, January 1, 2014		652,179			21.30
Granted during 2014		6,200			18.82
Exercised during 2014		(5,885	)		12.28
Expired during 2014		(258,648	)		27.56
Forfeited during 2014		(10,276	)		13.16
Balance, March 31, 2014		383,570			17.39		5.97		526
Vested and expected to vest (1)		347,483			17.81		5.97		696
Exercisable at March 31, 2014		262,137			19.11		5.01		71
(1)     Does not include shares which are not expected to vest as a result of anticipated forfeitures.

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the first quarter of 2014 and the exercise price, multiplied by the number of in-the-money options). The Corporation’s closing stock price on March 31, 2014 was $22.00.

12

For the first quarter of 2014, the per share weighted-average fair value of stock options granted was $7.49 compared to $5.19 for the same quarter of 2013 using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Three months Ended
	March 31,
	2014			2013
Dividend Yield		1.01	%		1.34	%
Expected volatility		40	%		39	%
Expected life		7 years			7 years
Risk-free interest rate		2.15	%		1.10	%

The Corporation also awards restricted stock to certain executives and certain key employees. In March 2014, the Corporation issued 137,612 restricted stock awards, at a fair value equal to the market price of the Corporation’s common stock at the date of grant. The awards may vest fully during a period of up to three years after the date of award. In addition, awards granted in 2013 and prior years, vest in varying terms between three and five years. In December 2013, the Corporation granted restricted stock awards to the CEO, CFO and COO, of which 50 percent vest in five years. The vesting of the other 50 percent is dependent on the Corporation meeting certain performance criteria. At December 31, 2013 and March 31, 2014, the Corporation believes that these targets would be met within a five-year period so 100 percent of these awards are being expensed over a five-year period. For the three months ended March 31, 2014 and 2013, the Corporation recorded total compensation cost for restricted shares of $281thousand and $83 thousand, respectively. As of March 31, 2014, there was approximately $5.6million of unrecognized compensation cost related to non-vested restricted stock awards granted under the Corporation’s stock incentive plans, which is expected to be recognized over a weighted average period of 4.2 years.

Changes in non-vested, restricted common shares for 2014 were as follows:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Balance, January 1, 2014		253,540			15.95
Granted during 2014		137,612			19.47
Vested during 2014		(36,755	)		18.94
Balance, March 31, 2014		354,397			17.01

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

13

	Three Months Ended
	March 31,
(In thousands, except per share data	2014		2013
Net income to common shareholders	$	3,031	$	2,893
Basic weighted-average common shares outstanding		11,606,933		8,870,559
Plus: common stock equivalents		104,007		46,621
Diluted weighted-average common shares outstanding		11,710,940		8,917,180
Net income per common share
Basic	$	0.26	$	0.33
Diluted		0.26		0.32

Stock options and restricted stock totaling 232,104 and 488,313 shares were not included in the computation of diluted earnings per share in the first quarters of 2014 and 2013, respectively, because they were considered antidilutive.

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

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

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

The Corporation is no longer subject to examination by the U.S. Federal tax authorities for years prior to 2010 or by New Jersey tax authorities for years prior to 2009.

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

Reclassification: Certain reclassifications may have been made in the prior periods’ financial statements in order to conform to the 2014 presentation.

2. INVESTMENT SECURITIES AVAILABLE FOR SALE

A summary of amortized cost and approximate fair value of securities available for sale included in the consolidated statements of condition as of March 31, 2014 and December 31, 2013 follows:

	March 31, 2014
			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. government-sponsored entities	$	15,988	$	—	$	(766	)	$	15,222
Mortgage-backed securities – residential		161,195		2,528		(674	)		163,049
State and political subdivisions		63,865		643		(9	)		64,499
Single-issuer trust preferred security		2,999		—		(599	)		2,400
CRA investment		3,000		—		(100	)		2,900
Total	$	247,047	$	3,171	$	(2,148	)	$	248,070

14

	December 31, 2013
			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
(In thousands)	Cost		Gains		Losses			Value
U.S. government-sponsored entities	$	15,986	$	—	$	(1,216	)	$	14,770
Mortgage-backed securities – residential		187,574		2,651		(1,145	)		189,080
State and political subdivisions		58,849		565		(71	)		59,343
Single-issuer trust preferred security		2,999		—		(629	)		2,370
CRA investment		3,000		—		(116	)		2,884
Total	$	268,408	$	3,216	$	(3,177	)	$	268,447

The following tables present the Corporation’s available for sale securities with continuous unrealized losses and the approximate fair value of these investments as of March 31, 2014 and December 31, 2013.

	March 31, 2014
	Duration of Unrecognized Loss
	Less Than 12 Months					12 Months or Longer					Total
	Approximate					Approximate					Approximate
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
(In thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government
sponsored entities	$	15,222	$	(766	)	$	—	$	—		$	15,222	$	(766	)
Mortgage-backed
securities-residential		48,240		(664	)		1,396		(10	)		49,636		(674	)
State and political
subdivisions		942		(9	)		—		—			942		(9	)
Single-issuer trust
Preferred security		—		—			2,400		(599	)		2,400		(599	)
CRA investment fund		2,900		(100	)		—		—			2,900		(100	)
Total	$	67,304	$	(1,539	)	$	3,796	$	(609	)	$	71,100	$	(2,148	)

	December 31, 2013
	Duration of Unrecognized Loss
	Less Than 12 Months					12 Months or Longer					Total
	Approximate					Approximate					Approximate
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
(In thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government
sponsored entities	$	14,770	$	(1,216	)	$	—	$	—		$	14,770	$	(1,216	)
Mortgage-backed
securities-residential		71,154		(1,142	)		84		(3	)		71,238		(1,145	)
State and political
subdivisions		5,589		(71	)		—		—			5,589		(71	)
Single-issuer trust
Preferred security		—		—			2,370		(629	)		2,370		(629	)
CRA investment fund		2,884		(116	)		—		—			2,884		(116	)
Total	$	94,397	$	(2,545	)	$	2,454	$	(632	)	$	96,851	$	(3,177	)

Management believes that the unrealized losses on investment securities available for sale are temporary and are due to interest rate fluctuations and/or volatile market conditions rather than the creditworthiness of the issuers. As of March 31, 2014, the Corporation does not intend to sell these securities nor is it likely that it will be required to sell the securities before their anticipated recovery; therefore, none of the securities in unrealized loss position were determined to be other-than-temporarily impaired.

At March 31, 2014, the unrealized loss on the single-issuer trust preferred security of $599 thousand is related to a debt security issued by a large bank holding company that has experienced declines in all its securities due to the turmoil in the financial markets and a merger. The security was downgraded to below investment grade by Moody’s and is currently rated Ba1. Management monitors the performance of the issuer on a quarterly basis to determine if there are any credit events that could result in deferral or default of the security. Management believes the depressed valuation is a result of the nature of the security, a trust preferred bond, and the bond’s very low yield. As Management does not intend to sell this security nor is it likely that it will be required to sell the security before its anticipated recovery, the security is not considered other-than-temporarily impaired at March 31, 2014.

15

3. LOANS

Loans outstanding, by general ledger classification, as of March 31, 2014 and December 31, 2013, consisted of the following:

			% of					% of
	March 31,		Totals			December 31,		Total
(In thousands)	2014		Loans			2013		Loans
Residential mortgage	$	481,850		27.33	%	$	532,911		33.85	%
Commercial mortgage		1,063,470		60.31			831,997		52.85
Commercial loans		143,389		8.13			131,795		8.37
Construction loans		6,075		0.34			5,893		0.38
Home equity lines of credit		45,820		2.60			47,905		3.04
Consumer loans, including fixed
rate home equity loans		20,945		1.19			21,852		1.39
Other loans		1,851		0.10			1,848		0.12
Total loans	$	1,763,400		100.00	%	$	1,574,201		100.00	%

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal call report codes. The following portfolio classes have been identified as of March 31, 2014 and December 31, 2013:

			% of					% of
	March 31,		Totals			December 31,		Total
(In thousands)	2014		Loans			2013		Loans
Primary residential mortgage	$	495,599		28.17	%	$	546,827		34.82	%
Home equity lines of credit		45,820		2.60			47,905		3.05
Junior lien loan on residence		12,755		0.73			13,114		0.84
Multifamily property		763,988		43.42			541,503		34.48
Owned-occupied commercial real estate		78,375		4.45			79,735		5.08
Investment commercial real estate		279,792		15.90			267,406		17.03
Commercial and industrial		61,933		3.52			51,638		3.29
Secured by farmland		194		0.01			197		.01
Agricultural production loans		175		0.01			—		N/A
Commercial construction loans		4,768		0.27			5,893		0.37
Consumer and other loans		16,098		0.92			16,212		1.03
Total loans	$	1,759,497		100.00	%	$	1,570,430		100.00	%
Net deferred fees		3,903					3,771
Total loans including net deferred costs	$	1,763,400				$	1,574,201

Not included in the above tables were $51.2 million of residential loans that were reclassified from loans held for investment to loans held for sale at March 31, 2014. $49.8 million of these loans were sold in April, 2014 and a gain on sale of approximately $450 thousand was recorded.

Included in the totals above for March 31, 2014 are $393 thousand of unamortized discount as compared to $396 thousand of unamortized discount for December 31, 2013.

16

The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan losses as of March 31, 2014 and December 31, 2013:

	March 31, 2014
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential
mortgage	$	4,219	$	130	$	491,380	$	2,332	$	495,599	$	2,462
Home equity lines
of credit		110		—		45,710		153		45,820		153
Junior lien loan
on residence		248		—		12,507		139		12,755		139
Multifamily
property		—		—		763,988		5,630		763,988		5,630
Owner-occupied
commercial
real estate		3,567		463		74,808		2,005		78,375		2,468
Investment
commercial
real estate		11,252		434		268,540		4,245		279,792		4,679
Commercial and
industrial		399		300		61,534		638		61,933		938
Secured by
farmland		—		—		194		3		194		3
Agricultural
production		—		—		175		2		175		2
Commercial
construction		—		—		4,768		44		4,768		44
Consumer and
Other		19		19		16,079		50		16,098		69
Total ALLL	$	19,814	$	1,346	$	1,739,683	$	15,241	$	1,759,497	$	16,587

	December 31, 2013
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential
mortgage	$	3,691	$	126	$	543,136	$	2,235	$	546,827	$	2,361
Home equity lines
of credit		111		—		47,794		181		47,905		181
Junior lien loan
on residence		260		—		12,854		156		13,114		156
Multifamily
property		—		—		541,503		4,003		541,503		4,003
Owner-occupied
commercial
real estate		3,250		464		76,485		2,099		79,735		2,563
Investment
commercial
real estate		9,949		741		257,457		4,342		267,406		5,083
Commercial and
industrial		470		309		51,168		516		51,638		825
Secured by
farmland		—		—		197		3		197		3
Agricultural
production		—		—		—		—		—		—
Commercial
construction		—		—		5,893		120		5,893		120
Consumer and
other		13		13		16,199		65		16,212		78
Total ALLL	$	17,744	$	1,653	$	1,552,686	$	13,720	$	1,570,430	$	15,373

17

Impaired loans include nonaccrual loans of $7.5 million at March 31, 2014 and $6.6 million at December 31, 2013. Impaired loans also include performing troubled debt restructured loans of $12.3 million at March 31, 2014 and $11.1 million at December 31, 2013. At March 31, 2014, the allowance allocated to troubled debt restructured loans totaled $1.3 million of which $730 thousand was allocated to nonaccrual loans. At December 31, 2013, the allowance allocated to troubled debt restructured loans totaled $1.6 million of which $720 thousand was allocated to nonaccrual loans. All accruing troubled debt restructured loans were paying in accordance with restructured terms as of March 31, 2014. The Corporation has not committed to lend additional amounts as of March 31, 2014 to customers with outstanding loans that are classified as loan restructurings.

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2014 and December 31, 2013:

	March 31, 2014
	Unpaid						Average		Interest
	Principal		Recorded		Specific		Impaired		Income
(In thousands)	Balance		Investment		Reserves		Loans		Recognized
With no related allowance recorded:
Primary residential mortgage	$	4,220	$	3,415	$	—	$	3,071	$	40
Owned-occupied commercial real estate		1,796		1,550		—		1,424		46
Investment commercial real estate		4,999		4,999		—		4,999		63
Commercial and industrial		99		99		—		159		7
Home equity lines of credit		111		110		—		111		3
Junior lien loan on residence		363		248		—		256		5
Total loans with no related allowance	$	11,588	$	10,421	$	—	$	10,020	$	164
With related allowance recorded:
Primary residential mortgage	$	804	$	804	$	130	$	617	$	6
Owned-occupied commercial real estate		2,169		2,017		464		2,044		15
Investment commercial real estate		6,253		6,253		433		4,964		62
Commercial and industrial		316		300		300		309		5
Consumer and other		19		19		19		12		1
Total loans with related allowance	$	9,561	$	9,393	$	1,346	$	7,946	$	89
Total loans individually evaluated for
impairment	$	21,149	$	19,814	$	1,346	$	17,966	$	253

	December 31, 2013
	Unpaid						Average		Interest
	Principal		Recorded		Specific		Impaired		Income
(In thousands)	Balance		Investment		Reserves		Loans		Recognized
With no related allowance recorded:
Primary residential mortgage	$	3,777	$	2,984	$	—	$	4,813	$	55
Owned-occupied commercial real estate		1,346		1,193		—		1,893		36
Investment commercial real estate		5,000		5,000		—		314		4
Commercial and industrial		176		161		—		121		4
Home equity lines of credit		111		111		—		119		5
Junior lien loan on residence		370		260		—		312		5
Total loans with no related allowance	$	10,780	$	9,709	$	—	$	7,572	$	109
With related allowance recorded:
Primary residential mortgage	$	707	$	707	$	126	$	636	$	29
Owned-occupied commercial real estate		2,190		2,057		464		2,100		16
Investment commercial real estate		4,949		4,949		741		4,949		618
Commercial and industrial		323		309		309		269		4
Junior lien loan on residence		—		—		—		—		—
Consumer and other		13		13		13		—		—
Total loans with related allowance	$	8,182	$	8,035	$	1,653	$	7,954	$	667
Total loans individually evaluated for
impairment	$	18,962	$	17,744	$	1,653	$	15,526	$	776

The Corporation did not recognize any income on nonaccruing impaired loans for the three months ended March 31, 2014 and 2013.

18

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2014 and December 31, 2013:

	March 31, 2014
			Loans Past Due
			Over 90 Days
			And Still
			Accruing
(In thousands)	Nonaccrual		Interest
Primary residential mortgage	$	3,177	$	—
Home equity lines of credit		110		—
Junior lien loan on residence		248		—
Owned-occupied commercial real estate		3,567		—
Commercial and industrial		353		—
Consumer and other		18
Total	$	7,473	$	—

	December 31, 2013
			Loans Past Due
			Over 90 Days
			And Still
			Accruing
(In thousands)	Nonaccrual		Interest
Primary residential mortgage	$	2,641	$	—
Home equity lines of credit		111		—
Junior lien loan on residence		260		—
Multifamily property		—		—
Owned-occupied commercial real estate		3,250		—
Investment commercial real estate		—		—
Commercial and industrial		355		—
Consumer and other		13		—
Total	$	6,630	$	—

The following tables present the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013 by class of loans, excluding nonaccrual loans:

	March 31, 2014
	30-59			60-89		Greater Than
	Days			Days		90 Days		Total
(In thousands)	Past Due			Past Due		Past Due		Past Due
Primary residential mortgage	$	1,851		$	—	$	—	$	1,851
Home equity lines of credit		192			—		—		192
Owner-occupied commercial real estate		3			—		—		3
Investment commercial real estate		2,524	(A)		—		—		2,524
Construction		184			250		—		434
Consumer and other loans		23			—		—		23
Total	$	4,777		$	250	$	—	$	5,027

19

	December 31, 2013
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	1,443	$	677	$	—	$	2,120
Home equity lines of credit		12		—		—		12
Owned-occupied commercial real estate		703		—		—		703
Investment commercial real estate		118		—		—		118
Total	$	2,276	$	677	$	—	$	2,953

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. The risk rating analysis of loans is performed (i) when the loan is initially underwritten, (ii) annually for loans in excess of $500,000, (iii) on a random quarterly basis from either internal reviews with the Senior Credit Officer or externally through an independent loan review firm, or (iv) whenever Management otherwise identifies a potentially negative trend or issue relating to a borrower. In addition, for all loan types, the Corporation evaluates credit quality based on the aging status of the loan, which was previously presented.

The Corporation uses the following definitions for risk ratings:

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

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

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

20

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of March 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	487,151	$	2,949	$	5,499	$	—
Home equity lines of credit		45,710		—		110		—
Junior lien loan on residence		12,507		—		248		—
Multifamily property		761,224		1,917		847		—
Farmland		194		—		—		—
Owned-occupied commercial real estate		69,353		582		8,440		—
Investment commercial real estate		248,545		11,983		19,264		—
Agricultural production loans		175		—		—		—
Commercial and industrial		61,511		23		399		—
Commercial construction		4,518		250		—		—
Consumer and other loans		15,830		—		268		—
Total	$	1,706,718	$	17,704	$	35,075	$	—

As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	540,609	$	1,510	$	4,708	$	—
Home equity lines of credit		47,794		—		111		—
Junior lien loan on residence		12,854		—		260		—
Multifamily property		540,993		510		—		—
Owned-occupied commercial real estate		70,218		619		8,898		—
Investment commercial real estate		238,722		9,573		19,111		—
Commercial and industrial		51,144		23		471		—
Secured by farmland		197		—		—		—
Commercial construction		4,340		1,553		—		—
Consumer and other loans		15,106		837		269		—
Total	$	1,521,977	$	14,625	$	33,828	$	—

At March 31, 2014, $19.8 million of substandard and special mention loans were also considered impaired as compared to December 31, 2013, when $17.7 million were also impaired.

21

The activity in the allowance for loan losses for the three months ended March 31, 2014 is summarized below:

	January 1,										March 31,
	2014										2014
	Beginning										Ending
(In thousands)	ALLL		Charge-offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	2,361	$	(20	)	$	—	$	121		$	2,462
Home equity lines of credit		181		—			—		(28	)		153
Junior lien loan on residence		156		(1	)		23		(39	)		139
Multifamily property		4,003		—			—		1,627			5,630
Owned-occupied commercial real estate		2,563		(72	)		—		(23	)		2,468
Investment commercial real estate		5,083		—			2		(406	)		4,679
Agricultural production loans		—		—			—		2			2
Commercial and industrial		825		(58	)		14		157			938
Secured by farmland		3		—			—		—			3
Commercial construction		120		—			—		(76	)		44
Consumer and other loans		78		(2	)		3		(10	)		69
Total ALLL	$	15,373	$	(153	)	$	42	$	1,325		$	16,587

The activity in the allowance for loan losses for the three months ended March 31, 2013 is summarized below:

	January 1,										March 31,
	2013										2013
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	3,047	$	(63	)	$	12	$	344		$	3,340
Home equity lines of credit		267		—			—		(7	)		260
Junior lien loan on residence		314		(295	)		7		37			63
Multifamily property		1,305		—			11		246			1,562
Owner-occupied commercial real estate		2,509		—			19		(100	)		2,428
Investment commercial real estate		4,155		—			6		111			4,272
Agricultural production loans		—		—			—		—			—
Commercial and industrial		803		(15	)		10		349			1,147
Secured by farmland		3		—			—		—			3
Commercial construction		240		—			1		(127	)		114
Consumer and other loans		92		(2	)		3		(3	)		90
Total ALLL	$	12,735	$	(375	)	$	69	$	850		$	13,279

Troubled Debt Restructurings:

The Corporation has allocated $598 thousand and $913 thousand of specific reserves, on accruing TDR’s, to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2014 and December 31, 2013, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three month period ending March 31, 2014 and 2013, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

22

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2014:

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	193	$	193
Investment commercial real estate		1		1,304		1,304
Total		2	$	1,497	$	1,497

The identification of the troubled debt restructured loans did not have a significant impact on the allowance for loan losses. The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2013:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Primary residential mortgage		2	$	322	$	322
Total		2	$	322	$	322

There were no loans that were modified as troubled debt restructurings for which there was a payment default, within twelve months of modification, during the three months ended March 31, 2014.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default, within twelve months of modification, during the three month period ended March 31, 2013:

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Owner occupied commercial real estate		1	$	406
Commercial and industrial		1		270
Total		2	$	676

The defaults that occurred during the three months ended March 31, 2014 and 2013 did not have a significant impact on the allowance for loan losses.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy. At the time a loan is restructured, the Bank performs a full re-underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the troubled debt restructuring. At a minimum, six months of contractual payments would need to be made on a restructured loan before returning a loan to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status, if it meets the requirements of ASC 310-40-50-2.

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4. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of New York (FHLB) totaled $83.7 million and $74.7 million at March 31, 2014 and December 31, 2013, respectively, with a weighted average interest rate of 1.78 percent and 1.80 percent, respectively.

At March 31, 2014 advances totaling $71.7 million with a weighted average rate of 1.57 percent have fixed maturity dates. The fixed rate advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $463.3 million at March 31, 2014.

Also at March 31, 2014, the Corporation had $12.0 million in variable rate advances, with a weighted average interest rate of 3.01 percent, that are noncallable for two or three years and then callable quarterly with final maturities of ten years from the original date of the advance. All of these advances are beyond their initial noncallable periods. These advances are secured by pledges of investment securities totaling $13.1 million at March 31, 2014.

The final maturity dates of the Federal Home Loan Bank advances and other borrowings are scheduled as follows:

(In thousands)
2014	$	—
2015		—
2016		21,897
2017		23,897
2018		34,898
Over 5 years		3,000
Total	$	83,692

At March 31, 2014 and December 31, 2013 there were overnight borrowings with the Federal Home Loan Bank of $79.4 million and $54.9 million, respectively.

5. BUSINESS SEGMENTS

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

Banking

The Banking segment includes lending and depository products and services, as well as various electronic banking services.

Private Wealth Management Division

Peapack-Gladstone Bank’s Private Wealth Management 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.

24

The following table presents the statements of income and total assets for the Corporation’s reportable segments for the three months ended March 31, 2014 and 2013.

	Three Months Ended March 31, 2014
(In thousands)	Banking		Wealth Management Division		Total
Net interest income	$	14,588	$	983	$	15,571
Noninterest income		1,190		3,805		4,995
Total income		15,778		4,788		20,566
Provision for loan losses		1,325		—		1,325
Salaries and benefits		7,015		1,833		8,848
Premises and equipment expense		2,269		169		2,438
Other noninterest expense		1,853		1,200		3,053
Total noninterest expense		12,462		3,202		15,664
Income before income tax expense		3,316		1,586		4,902
Income tax expense		1,266		605		1,871
Net income	$	2,050	$	981	$	3,031
Total assets for period end	$	2,240,297	$	11,188	$	2,251,485

	Three Months Ended March 31, 2013
(In thousands)	Banking		Wealth Management Division		Total
Net interest income	$	11,392	$	1,035	$	12,427
Noninterest income		2,088		3,516		5,604
Total income		13,480		4,551		18,031
Provision for loan losses		850		—		850
Salaries and benefits		5,790		1,289		7,079
Premises and equipment expense		2,157		147		2,304
Other noninterest expense		1,672		1,238		2,910
Total noninterest expense		10,469		2,674		13,143
Income before income tax expense		3,011		1,877		4,888
Income tax expense		1,229		766		1,995
Net income	$	1,782	$	1,111	$	2,893
Total assets for period end	$	1,633,949	$	1,383	$	1,635,332

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6. FAIR VALUE

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

Level 1:	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2:	Significant other observable inputs other that Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3:	Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing as asset or liability.

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

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

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

Loans Held for Sale, at Lower of Cost or Fair Value: The fair value of this category of loans held for sale is determined using the lower of recorded investment or estimated sale price based on investor commitments.

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

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Management. Once received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal, as well as, the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals on collateral dependent impaired loans and other real estate owned (consistent for all loan types) are obtained on an annual basis, unless a significant change in the market or other factors warrants a more frequent appraisal. On an annual basis, Management compares the actual selling price of any collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for other properties. The most recent analysis performed indicated that a discount up to 15 percent should be applied to appraisals on properties. The discount is determined based on the nature of the underlying properties, aging of appraisal and other factors. For each collateral dependent impaired loans we consider other factors, such as certain indices or other market information, as well as property specific circumstances to determine if an adjustment to the appraised value is needed. In situations where there is evidence of change in value, the Bank will determine if there is need for an adjustment to the specific reserve on the collateral dependent impaired loans. When the Bank applies an interim adjustment, it generally shows the adjustment as an incremental specific reserve against the loan until it has received the full updated appraisal. As of March 31, 2014, all collateral dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old.

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

Assets Measured on a Recurring Basis    

			Fair Value Measurements Using
			Quoted
			Prices in
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
(In thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale:
U.S. government-sponsored
entities	$	15,222	$	—	$	15,222	$	—
Mortgage-backed securities-
residential		163,049		—		163,049		—
State and political subdivisions		64,499		—		64,499		—
Single-Issuer Trust Preferred		2,400		—		2,400		—
CRA investment fund		2,900		2,900		—		—
Loans held for sale, at fair value		1,769		—		1,769		—
Total	$	249,839	$	2,900	$	246,939	$	—

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Assets Measured on a Recurring Basis  

			Fair Value Measurements Using
			Quoted
			Prices in
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
(In thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale:
U.S. government-sponsored
entities	$	14,770	$	—	$	14,770	$	—
Mortgage-backed securities-
residential		189,080		—		189,080		—
State and political subdivisions		59,343		—		59,343		—
Single-Issuer Trust Preferred		2,370		—		2,370		—
CRA investment fund		2,884		2,884		—		—
Loans held for sale, at fair value		2,001		—		2,001		—
Total	$	270,448	$	2,884	$	267,564	$	—

The Corporation has elected the fair value option for certain loans held for sale. These loans are intended for sale and the Corporation believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Corporation’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of March 31, 2014 and December 31, 2013.

Residential loans held for sale, at fair value, totaled $1.8 million and $2.0 million as of March 31, 2014 and December 31, 2013, respectively, and were determined to be Level 2.

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

	March 31, 2014		December 31, 2013
Residential loans contractual balance	$	1,745	$	1,975
Fair value adjustment		24		26
Total fair value of residential loans held for sale	$	1,769	$	2,001

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2014.

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

Assets Measured on a Non-Recurring Basis

			Fair Value Measurements Using
			Quoted
			Prices in
			Active
			Markets		Significant
			For		Other		Significant observable
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
(In thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Owner occupied commercial real estate	$	1,554	$	—	$	—	$	1,554
OREO		880		—		—		880
	December 31,
(In thousands)	2013
Assets:
Impaired loans:
Primary residential mortgage	$	85	$	—	$	—	$	85
Owner occupied commercial real estate		1,593		—		—		1,593
OREO		980		—		—		980

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $2.0 million, with a valuation allowance of $464 thousand at March 31, 2014.Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $2.1 million, with a valuation allowance of $471 thousand at December 31, 2013.

At both March 31, 2014 and December 31, 2013, OREO at fair value represents one commercial property. The Corporation recorded a valuation allowance of $100 thousand during the three months ended March 31, 2014 and the Corporation did not record a valuation allowance during the three months ended March 31, 2013

The carrying amounts and estimated fair values of financial instruments at March 31, 2014 are as follows:

			Fair Value Measurements at March 31, 2014 Using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	101,533	$	100,783	$	750	$	—	$	101,533
Securities available for sale		248,070		2,900		245,170		—		248,070
FHLB and FRB stock		12,765		—		—		—		N/A
Loans held for sale, at fair value		1,769		—		1,769		—		1,769
Loans held for sale, at lower of cost or
fair value		51,184		—		51,884		—		51,884
Loans, net of allowance for loan losses		1,746,813		—		—		1,717,161		1,717,161
Accrued interest receivable		4,788		—		757		4,031		4,788
Financial liabilities
Deposits	$	1,893,296	$	1,676,566	$	216,519	$	—	$	1,893,085
Overnight borrowings		79,400		—		79,400		—		79,400
Federal home loan bank advances		83,692		—		84,433		—		84,433
Accrued interest payable		372		60		312		—		372

29

The carrying amounts and estimated fair values of financial instruments at December 31, 2013 are as follows:

			Fair Value Measurements at December 31, 2013 Using
	Carrying
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	35,147	$	34,397	$	750	$	—	$	35,147
Securities available for sale		268,447		2,884		265,563		—		268,447
FHLB and FRB stock		10,032		—		—		—		N/A
Loans held for sale, at fair value		2,001		—		2,001		—		2,001
Loans, net of allowance for loan losses		1,558,828		—		—		1,528,937		1,528,937
Accrued interest receivable		4,086		—		817		3,269		4,086
Financial liabilities
Deposits	$	1,647,250	$	1,490,417	$	156,078	$	—	$	1,646,495
Overnight borrowings		54,900		—		54,900		—		54,900
Federal home loan bank advances		74,692		—		75,728		—		75,728
Accrued interes