# Peapack Gladstone Financial Corp: Form 10-Q for the period ended Sep 30, 2022

- Company: [Peapack Gladstone Financial Corp](/companies/pgc.md) (CIK 1050743)
- Form: 10-Q
- Filed: 2022-11-09
- Accepted by EDGAR: Nov 9, 2022, 09:51 ET
- Period: 2022-09-30
- Accession: 0000950170-22-023570
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1050743/000095017022023570/pgc-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1050743/000095017022023570/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $61.9m | us-gaap:Revenues |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $177.6m | us-gaap:Revenues |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $9.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $19.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $7.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $19.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $20.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $53.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $1.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $2.88 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $1.11 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $2.94 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 18,420,661 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 18,652,042 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $105.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $2.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $2.7m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $27.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2022-09-30 | $6.09bn | us-gaap:Assets |
| Total liabilities | at 2022-09-30 | $5.57bn | us-gaap:Liabilities |
| Short-term borrowings | at 2022-09-30 | $32.4m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-09-30 | $515.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 87,983 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 confidence and strategies and Management’s expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2021, in addition to/which include the following:

- inflation and changes in interest rates and potential effects from a recession, which may adversely impact our margins and yields, reduce the fair value of our financial instruments, reduce our loan originations and lead to higher operating costs;
- our ability to successfully grow our business and implement our strategic plan, including our ability to generate revenues to offset the increased personnel and other costs related to the strategic plan;
- the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the COVID-19 pandemic and variants thereof, and the significant and continuing impact that such pandemics may have on our growth, operations, earnings and asset quality;
- the impact of potentially higher operating expenses;
- our ability to successfully integrate wealth management firm acquisitions;
- our ability to manage our growth;
- our ability 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 and/or our ability to originate loans caused by the interest rate environment and/or our highly competitive market;
- declines in the value in our investment portfolio;
- impact from a pandemic event on our business, operations, customers, allowance for credit losses and capital levels;
- higher than expected increases in our allowance for credit losses;
- higher than expected increases in credit losses or in the level of delinquent, nonperforming, classified and criticized loans;
- decline in real estate values within our market areas;
- legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and related regulations) that may result in increased compliance costs;
- successful cyberattacks against our IT infrastructure and that of our IT and third-party providers;
- higher than expected FDIC insurance premiums;
- adverse weather conditions;
- the current or anticipated impact of military conflict, terrorism or other geopolitical events;
- our inability to successfully generate new business in new geographic markets;
- a reduction in our lower-cost funding sources;
- our inability to adapt to technological changes;
- claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;
- our inability to retain key employees;
- demands for loans and deposits in our market areas;
- adverse changes in securities markets;
- changes in accounting policies and practices; and
- other unexpected material adverse changes in our operations or earnings.

Moreover, our operations depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could hinder our ability to operate our business or execute our business strategy.

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

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES:** Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. 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, 2021 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 credit 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.

On January 1, 2022, the Company adopted ASU 2016-13 *(Topic 326),* which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for Management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and Management judgement and is reviewed on a quarterly basis. When Management is reasonably certain that a loan balance is not fully collectable, an analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of Management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in Management’s judgment, should be charged off.

Although Management uses the best information available, the level of the allowance for credit 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 credit losses. Such agencies may require the Company to make additional provisions for credit 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 credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

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

**EXECUTIVE SUMMARY:** The following table presents certain key aspects of our performance for the three months ended September 30, 2022 and 2021.

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

| Results of Operations: | For the Three Months Ended September 30, 2022 | 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Net interest income | $45,525 | $35,211 | $10,314 |
| Provision for credit losses (1) | 599 | 1,600 | (1,001) |
| Net interest income after provision for credit losses | 44,926 | 33,611 | 11,315 |
| Wealth management fee income | 12,943 | 13,860 | (917) |
| Other income (2) | 3,440 | 3,921 | (481) |
| Operating expense (3) | 33,560 | 32,185 | 1,375 |
| Income before income tax expense | 27,749 | 19,207 | 8,542 |
| Income tax expense | 7,623 | 5,036 | 2,587 |
| Net income | $20,126 | $14,171 | $5,955 |
| Total revenue (4) | $61,908 | $52,992 | $8,916 |
| Diluted average shares outstanding | 18,420,661 | 19,273,831 | (853,170) |
| Diluted earnings per share | $1.09 | $0.74 | $0.35 |
| Return on average assets annualized ("ROAA") | 1.30% | 0.95% | 0.35% |
| Return on average equity annualized ("ROAE") | 15.21 | 10.40 | 4.81 |

(1) Commencing on January 1, 2022, the allowance calculation is based on the CECL methodology. Prior to January 1, 2022, the calculation was based on the incurred loss methodology.

(2) The quarter ended September 30, 2022 and 2021 included a fair value adjustment on a CRA equity security of $571,000 and $70,000, respectively.

(3) The quarter ended September 2021 included $1.4 million of expense related to a swap valuation allowance.

(4) Total revenue equals net interest income plus wealth management fee income and other income.

The following table presents certain key aspects of our performance for the nine months ended September 30, 2022 and 2021.

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

| Results of Operations: | For the Nine Months Ended September 30, 2022 | 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Net interest income | $128,040 | $100,849 | $27,191 |
| Provision for loan and lease losses (1) | 4,423 | 2,725 | 1,698 |
| Net interest income after provision for loan and lease losses | 123,617 | 98,124 | 25,493 |
| Wealth management fee income (2) | 41,668 | 39,025 | 2,643 |
| Other income (3) | 7,937 | 14,254 | (6,317) |
| Operating expense (2) (4) | 100,388 | 94,463 | 5,925 |
| Income before income tax expense | 72,834 | 56,940 | 15,894 |
| Income tax expense | 19,167 | 15,173 | 3,994 |
| Net income | $53,667 | $41,767 | $11,900 |
| Total revenue (5) | $177,645 | $154,128 | $23,517 |
| Diluted average shares outstanding | 18,652,042 | 19,390,522 | (738,480) |
| Diluted earnings per share | $2.88 | $2.15 | $0.73 |
| Return on average assets annualized (ROAA) | 1.16% | 0.94% | 0.22% |
| Return on average equity annualized (ROAE) | 13.46 | 10.43 | 3.03 |

(1) Commencing on January 1, 2022, the allowance calculation is based on the CECL methodology. Prior to January 1, 2022, the calculation was based on the incurred loss methodology.

(2) The nine months ended September 30, 2022 included nine months of wealth management fee income and expense related to the July 2021 acquisition of Princeton Portfolio Strategies Group (“PPSG”) while the nine months ended September 30, 2021 included three months.

(3) The nine months ended September 30, 2022 included a $6.6 million loss on sale of securities associated with a balance sheet reposition executed in the first quarter of 2022, and a $1.7 million fair value adjustment on a CRA equity security. The nine months ended September 30, 2021 included a cost of $842,000 related to the termination of certain interest rate swaps; a $1.4 million gain on sale of loans held at lower of cost or fair value; $722,000 of income related to referral of PPP loans to a third party; $455,000 of additional bank-owned life insurance ("BOLI") income related to the receipt of life insurance proceeds; and a $293,000 fair value adjustment on a CRA equity security.

(4) Each of the nine months ended September 30, 2022 and 2021 included $1.5 million of severance expense related to certain staff reorganizations with several areas of the bank. The nine months ended September 30, 2021 included $648,000 of expense related to the redemption of subordinated debt and $1.4 million related to a swap valuation allowance.

(5) Total revenue equals net interest income plus wealth management fee income and other income.

| Selected Balance Sheet Ratios: | September 30, 2022 | December 31, 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Total capital (Tier I + II) to risk-weighted assets | 14.74% | 14.64% | 0.10% |
| Tier I leverage ratio | 8.70 | 8.29 | 0.41 |
| Loans to deposits | 97.70 | 91.28 | 6.42 |
| Allowance for credit losses to total loans | 1.15 | 1.28 | (0.13) |
| Allowance for credit losses to nonperforming loans | 379.57 | 396.18 | (16.61) |
| Nonperforming loans to total loans | 0.30 | 0.32 | (0.02) |

For the three months ended September 30, 2022, the Company recorded total revenue of $61.91million, pretax income of $27.75 million, net income of $20.13 million and diluted earnings per share of $1.09, compared to revenue of $52.99 million, pretax income of $19.21 million, net income of $14.17 million and diluted earnings per share of $0.74 for the same period last year. The third quarter of 2022 included increased net interest income driven by net interest margin expansion, partially offset by a decline in wealth management income and income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income), and increased operating expenses. Other income included a fair value adjustment on an equity security held for CRA investment purposes of $571,000 and $70,000 for the quarter ended September 30, 2022 and 2021, respectively. Operating expense for the third quarter of 2021 included $1.4 million of expense related to a swap valuation allowance.

For the nine months ended September 30, 2022, the Company recorded total revenue of $177.65 million, pretax income of $72.83 million, net income of $53.67 million and diluted earnings per share of $2.88, compared to revenue of $154.13 million, pretax income of $56.94 million, net income of $41.77 million and diluted earnings per share of $2.15 for the same period last year. The nine months ended September 30, 2022 included increased net interest income, wealth management income and income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income), partially offset by increased operating expenses. Fee income generated by capital markets activities totaled $8.30 million for the nine months ended September 30, 2022, an increase of $1.20 million from $7.10 million for the same period in 2021, of which $6.14 million was attributable to gains on sales of SBA loans compared to $3.95 million for the same period in 2021. The nine months ended September 30, 2022, benefitted from the addition of an SBA team hired by the Company in the fourth quarter of 2021. Income from these programs are not consistent each quarter. Other income included a fair value adjustment on an equity security held for CRA investment purposes of $1.7 million and $293,000 for the nine months ended September 30, 2022 and 2021, respectively. The nine months ended September 30, 2022 included a $6.6 million loss on sale of securities in other income and $1.5 million of severance expense in other expense related to certain staff reorganizations. Other income for the nine months ended September 30, 2021 included: a cost of $842,000 related to the termination of certain interest rate swaps; a $1.41 million gain on sale of loans held at lower of cost or fair value; $722,000 of income related to referral of PPP loans to a third party; and $455,000 of additional BOLI income related to the receipt of life insurance proceeds. Other expense for the nine months ended September 30, 2021 included $1.5 million of severance expense related to certain staff reorganizations; $648,000 of expense related to the redemption of subordinated debt; and $1.4 million of expense related to a swap valuation allowance.

**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, 2021 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”

### EARNINGS ANALYSIS

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

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank advances, subordinated debt and other borrowings. Net interest income is determined by the difference between the average yields earned on earning assets and the average cost of interest-bearing liabilities (“net interest spread”) and the relative amounts of earning assets and interest-bearing liabilities. Net interest margin is net interest income as a percent of total interest earning assets on an annualized basis. The Company’s net interest income, spread and margin are affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets.

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2022 NII | NIM | Three Months Ended September 30, 2021 NII | NIM |
| --- | ---: | ---: | ---: | ---: |
| NII/NIM excluding the below | $44,728 | 2.99% | $34,635 | 2.56% |
| Prepayment premiums received on loan paydowns | 305 | 0.02% | 325 | 0.02% |
| Effect of maintaining excess interest earning cash | 492 | -0.03% | (46) | -0.14% |
| Effect of PPP loans | — | 0.00% | 297 | -0.02% |
| NII/NIM as reported | $45,525 | 2.98% | $35,211 | 2.42% |

|  | Nine Months Ended September 30, 2022 NII | NIM | Nine Months Ended September 30, 2021 NII | NIM |
| --- | ---: | ---: | ---: | ---: |
| NII/NIM excluding the below | $126,643 | 2.84% | $97,655 | 2.53% |
| Prepayment premiums received on loan paydowns | 912 | 0.02% | 1,530 | 0.03% |
| Effect of maintaining excess interest earning cash | 485 | -0.03% | (365) | -0.17% |
| Effect of PPP loans | — | 0.00% | 2,029 | -0.04% |
| NII/NIM as reported | $128,040 | 2.83% | $100,849 | 2.35% |

NII, on a fully tax-equivalent basis, increased $10.5 million for the third quarter of 2022 to $45.9 million as compared to $35.4 million for the same quarter in 2021. The net interest margin for the third quarter of 2022 was 2.98 percent, which increased 56 basis points from 2.42 percent for the same 2021 period. The Company recorded net interest income, on a fully tax-equivalent basis, of $129.1 million for the nine months ended September 30, 2022, an increase of $27.5 million from $101.5 million for the same 2021 period. The net interest margin increased 48 basis points to 2.83 percent for the nine months ended September 30, 2022 from 2.35 percent for the same 2021 period. The increase in NIM for the three and nine months ended September 30, 2022, when compared to the same period in 2021 was primarily due the increase in yield on the average balance of interest-earning assets due to the current interest rate environment. Additionally, NII benefitted from the increase in average earning assets of $314.3 million and $319.2 million for the three and nine months ended September 30, 2022, respectively.

NIM also improved, as the Company executed a balance sheet reposition in the first quarter of 2022, whereby the Company added $250.0 million of multifamily loans, funded by the sale of $125.0 million of lower-yielding, like duration securities, and deposit growth. To manage a neutral overall duration effect on the balance sheet, thereby protecting the balance sheet against the impact of rising rates, we executed $100.0 million of forward starting five-year pay fixed swaps. The repositioning resulted in an attractive earn-back period on the loss on sale of securities, with future net interest margin improving by four basis points, with no impact to tangible capital or tangible book value per share.

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

*(In thousands)*

|  | For the Three Months Ended September 30, 2022 | September 30, 2021 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $17,885 | $36,845 |
| Residential mortgage loans originated for sale | 4,898 | 24,041 |
| Total residential mortgage loans | 22,783 | 60,886 |
| Commercial real estate loans | 7,320 | 14,944 |
| Multifamily | 4,000 | 120,716 |
| C&I loans (A) (B) | 251,249 | 143,121 |
| Small business administration | 5,682 | 11,570 |
| Wealth lines of credit (A) | 4,450 | 10,020 |
| Total commercial loans | 272,701 | 300,371 |
| Installment loans | 1,253 | 178 |
| Home equity lines of credit (A) | 5,614 | 2,535 |
| Total loans closed | $302,351 | $363,970 |

*(In thousands)*

|  | For the Nine Months Ended September 30, 2022 | September 30, 2021 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $94,604 | $89,742 |
| Residential mortgage loans originated for sale | 30,453 | 95,346 |
| Total residential mortgage loans | 125,057 | 185,088 |
| Commercial real estate loans | 46,855 | 65,550 |
| Multifamily | 344,214 | 461,545 |
| C&I loans (A) (B) | 727,079 | 413,547 |
| Small business administration (C) | 42,309 | 86,276 |
| Wealth lines of credit (A) | 26,425 | 15,695 |
| Total commercial loans | 1,186,882 | 1,042,613 |
| Installment loans | 1,484 | 266 |
| Home equity lines of credit (A) | 10,852 | 8,574 |
| Total loans closed | $1,324,275 | $1,236,541 |

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

(b) Includes equipment finance leases and loans.

(c) Includes PPP loans of $57 million for the nine months ended September 30, 2021.

At September 30, 2022, December 31, 2021 and September 30, 2021, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance as follows:

|  | September 30, 2022 | December 31, 2021 | September 30, 2021 |
| --- | ---: | ---: | ---: |
| Multifamily real estate loans as a percent of total regulatory capital of the Bank | 254% | 237% | 230% |
| Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank | 142 | 149 | 154 |
| Total CRE concentration | 396% | 386% | 384% |

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

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

### Average Balance Sheet

Unaudited

Three Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | September 30, 2022 Average Balance | Income/ Expense | Annualized Yield | September 30, 2021 Average Balance | Income/ Expense | Annualized Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $754,180 | $2,853 | 1.51% | $820,574 | $2,824 | 1.38% |
| Tax-exempt (1) (2) | 3,226 | 30 | 3.72 | 6,035 | 64 | 4.24 |
| Loans (2) (3): |  |  |  |  |  |  |
| Residential mortgages | 513,864 | 3,861 | 3.01 | 503,621 | 3,779 | 3.00 |
| Commercial mortgages | 2,510,616 | 23,121 | 3.68 | 2,133,259 | 16,114 | 3.02 |
| Commercial | 2,016,590 | 23,362 | 4.63 | 1,826,368 | 16,553 | 3.63 |
| Commercial construction | 12,073 | 143 | 4.74 | 24,596 | 198 | 3.22 |
| Installment | 38,338 | 399 | 4.16 | 32,219 | 245 | 3.04 |
| Home equity | 36,706 | 451 | 4.91 | 43,182 | 357 | 3.31 |
| Other | 263 | 7 | 10.65 | 252 | 5 | 7.94 |
| Total loans | 5,128,450 | 51,344 | 4.00 | 4,563,497 | 37,251 | 3.27 |
| Federal funds sold | — | — | — | — | — | — |
| Interest-earning deposits | 232,158 | 1,162 | 2.00 | 413,623 | 142 | 0.14 |
| Total interest-earning assets | 6,118,014 | 55,389 | 3.62% | 5,803,729 | 40,281 | 2.78% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 8,296 |  |  | 8,592 |  |  |
| Allowance for credit losses | (59,464) |  |  | (64,100) |  |  |
| Premises and equipment | 23,580 |  |  | 23,311 |  |  |
| Other assets | 97,583 |  |  | 201,287 |  |  |
| Total noninterest-earning assets | 69,995 |  |  | 169,090 |  |  |
| Total assets | $6,188,009 |  |  | $5,972,819 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $2,408,206 | $5,127 | 0.85% | $2,098,827 | $1,177 | 0.22% |
| Money markets | 1,237,975 | 1,557 | 0.50 | 1,257,760 | 683 | 0.22 |
| Savings | 168,281 | 5 | 0.01 | 152,759 | 20 | 0.05 |
| Certificates of deposit - retail | 391,340 | 791 | 0.81 | 461,917 | 836 | 0.72 |
| Subtotal interest-bearing deposits | 4,205,802 | 7,480 | 0.71 | 3,971,263 | 2,716 | 0.27 |
| Interest-bearing demand - brokered | 85,000 | 345 | 1.62 | 85,000 | 385 | 1.81 |
| Certificates of deposit - brokered | 25,968 | 210 | 3.23 | 33,796 | 266 | 3.15 |
| Total interest-bearing deposits | 4,316,770 | 8,035 | 0.74 | 4,090,059 | 3,367 | 0.33 |
| FHLB advances and borrowings | 3,810 | 29 | 3.04 | 64,332 | 57 | 0.35 |
| Finance lease liabilities | 5,106 | 61 | 4.78 | 6,147 | 74 | 4.82 |
| Subordinated debt | 132,874 | 1,363 | 4.10 | 132,588 | 1,358 | 4.10 |
| Total interest-bearing liabilities | 4,458,560 | 9,488 | 0.85% | 4,293,126 | 4,856 | 0.45% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 1,116,843 |  |  | 997,450 |  |  |
| Accrued expenses and other liabilities | 83,446 |  |  | 137,387 |  |  |
| Total noninterest-bearing liabilities | 1,200,289 |  |  | 1,134,837 |  |  |
| Shareholders’ equity | 529,160 |  |  | 544,856 |  |  |
| Total liabilities and shareholders’ equity | $6,188,009 |  |  | $5,972,819 |  |  |
| Net interest income (tax-equivalent basis) |  | $45,901 |  |  | $35,425 |  |
| Net interest spread |  |  | 2.77% |  |  | 2.33% |
| Net interest margin (4) |  |  | 2.98% |  |  | 2.42% |
| Tax equivalent adjustment |  | $(376) |  |  | $(214) |  |
| Net interest income |  | $45,525 |  |  | $35,211 |  |

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

(2) Interest income is presented on a tax-equivalent basis using a 21 percent federal tax rate.

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

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

### Average Balance Sheet

Unaudited

Nine Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | September 30, 2022 Average Balance | Income/ Expense | Annualized Yield | September 30, 2021 Average Balance | Income/ Expense | Annualized Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $818,411 | $9,995 | 1.63% | $822,262 | $8,473 | 1.37% |
| Tax-exempt (1) (2) | 4,035 | 117 | 3.87 | 6,961 | 243 | 4.65 |
| Loans (2) (3): |  |  |  |  |  |  |
| Residential mortgages | 511,999 | 11,148 | 2.90 | 501,276 | 11,559 | 3.07 |
| Commercial mortgages | 2,472,503 | 62,481 | 3.37 | 1,972,723 | 45,590 | 3.08 |
| Commercial | 2,016,533 | 60,911 | 4.03 | 1,900,231 | 49,992 | 3.51 |
| Commercial construction | 15,427 | 465 | 4.02 | 20,418 | 516 | 3.37 |
| Installment | 36,697 | 951 | 3.46 | 34,724 | 777 | 2.98 |
| Home equity | 38,324 | 1,106 | 3.85 | 45,672 | 1,133 | 3.31 |
| Other | 268 | 18 | 8.96 | 239 | 15 | 8.37 |
| Total loans | 5,091,751 | 137,080 | 3.59 | 4,475,283 | 109,582 | 3.26 |
| Federal funds sold | — | — | — | 64 | — | 0.13 |
| Interest-earning deposits | 174,833 | 1,505 | 1.15 | 465,287 | 367 | 0.11 |
| Total interest-earning assets | 6,089,030 | 148,697 | 3.26% | 5,769,857 | 118,665 | 2.74% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 8,491 |  |  | 10,018 |  |  |
| Allowance for loan and lease losses | (60,026) |  |  | (67,592) |  |  |
| Premises and equipment | 23,187 |  |  | 23,087 |  |  |
| Other assets | 119,908 |  |  | 203,344 |  |  |
| Total noninterest-earning assets | 91,560 |  |  | 168,857 |  |  |
| Total assets | $6,180,590 |  |  | $5,938,714 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $2,411,023 | $8,695 | 0.48% | $1,996,663 | $3,099 | 0.21% |
| Money markets | 1,255,341 | 2,675 | 0.28 | 1,250,933 | 2,204 | 0.23 |
| Savings | 162,675 | 15 | 0.01 | 144,066 | 55 | 0.05 |
| Certificates of deposit - retail | 409,442 | 2,048 | 0.67 | 494,255 | 3,333 | 0.90 |
| Subtotal interest-bearing deposits | 4,238,481 | 13,433 | 0.42 | 3,885,917 | 8,691 | 0.30 |
| Interest-bearing demand - brokered | 85,000 | 1,082 | 1.70 | 100,110 | 1,334 | 1.78 |
| Certificates of deposit - brokered | 31,058 | 732 | 3.14 | 33,783 | 791 | 3.12 |
| Total interest-bearing deposits | 4,354,539 | 15,247 | 0.47 | 4,019,810 | 10,816 | 0.36 |
| FHLB advances and borrowings | 20,876 | 103 | 0.66 | 138,448 | 448 | 0.43 |
| Finance lease liabilities | 5,389 | 193 | 4.78 | 6,376 | 229 | 4.79 |
| Subordinated debt | 132,803 | 4,090 | 4.11 | 165,053 | 5,650 | 4.56 |
| Total interest-bearing liabilities | 4,513,607 | 19,633 | 0.58% | 4,329,687 | 17,143 | 0.53% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 1,042,064 |  |  | 932,088 |  |  |
| Accrued expenses and other liabilities | 93,462 |  |  | 143,045 |  |  |
| Total noninterest-bearing liabilities | 1,135,526 |  |  | 1,075,133 |  |  |
| Shareholders’ equity | 531,457 |  |  | 533,894 |  |  |
| Total liabilities and shareholders’ equity | $6,180,590 |  |  | $5,938,714 |  |  |
| Net interest income (tax-equivalent basis) |  | $129,064 |  |  | $101,522 |  |
| Net interest spread |  |  | 2.68% |  |  | 2.21% |
| Net interest margin (4) |  |  | 2.83% |  |  | 2.35% |
| Tax equivalent adjustment |  | $(1,024) |  |  | $(673) |  |
| Net interest income |  | $128,040 |  |  | $100,849 |  |

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

(2) Interest income is presented on a tax-equivalent basis using a 21 percent federal tax rate.

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

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

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

| (In Thousands): ASSETS: | For the Three Months Ended September 30, 2022 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $(176) | $171 | $(5) |
| Loans | 4,854 | 9,239 | 14,093 |
| Interest-earning deposits | (91) | 1,111 | 1,020 |
| Total interest income | $4,587 | $10,521 | $15,108 |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $271 | $3,679 | $3,950 |
| Money market | 86 | 788 | 874 |
| Savings | — | (15) | (15) |
| Certificates of deposit - retail | (130) | 85 | (45) |
| Certificates of deposit - brokered | (63) | 7 | (56) |
| Interest bearing demand brokered | (2) | (38) | (40) |
| Borrowed funds | (465) | 437 | (28) |
| Capital lease obligation | (13) | — | (13) |
| Subordinated debt | 5 | — | 5 |
| Total interest expense | $(311) | $4,943 | $4,632 |
| Net interest income | $4,898 | $5,578 | $10,476 |

| (In Thousands): ASSETS: | For the Nine Months Ended September 30, 2022 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $8 | $1,388 | $1,396 |
| Loans | 15,472 | 12,026 | 27,498 |
| Interest-earning deposits | (380) | 1,518 | 1,138 |
| Total interest income | $15,100 | $14,932 | $30,032 |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $1,056 | $4,540 | $5,596 |
| Money market | 93 | 378 | 471 |
| Savings | 3 | (43) | (40) |
| Certificates of deposit - retail | (516) | (769) | (1,285) |
| Certificates of deposit - brokered | (64) | 5 | (59) |
| Interest bearing demand brokered | (194) | (58) | (252) |
| Borrowed funds | (647) | 302 | (345) |
| Capital lease obligation | (36) | — | (36) |
| Subordinated debt | (1,003) | (557) | (1,560) |
| Total interest expense | $(1,308) | $3,798 | $2,490 |
| Net interest income | $16,408 | $11,134 | $27,542 |

Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $55.4 million for the third quarter of 2022 compared to $40.3 million for the same period of 2021, reflecting an increase of $15.1 million, or 38 percent. Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $148.7 million for the nine months ended September 30, 2022 compared to $118.7 million for the same period of 2021, reflecting an increase of $30.0 million, or 25 percent. The increase for both the three and nine months compared to the prior periods reflected increases in the average balance and yield of interest-earning assets.

The average balance of interest-earning assets totaled $6.12 billion for the third quarter of 2022, an increase of $314.3 million, or 5 percent, from the same period of 2021. The average balance of interest-earning assets totaled $6.09 billion for the nine months ended September 30, 2022, an increase of $319.2 million, or 6 percent, from the same period of 2021.

The increase in interest-earning assets for the three months ended September 30, 2022 reflected growth in the average balance of loans of $565.0 million or 12 percent to $5.13 billion for the quarter ended September 30, 2022, from $4.56 billion for the same 2021 period. This increase was offset by a decline in the average balance of investments for the quarter ended September 30, 2022 of $69.2 million, or 8 percent, to $757.4 million as compared to $826.6 million for the same 2021 quarter. The increase in interest-earning assets for the nine months ended September 30, 2022 reflected growth in the average balance of loans of $616.5 million or 14 percent to $5.09 billion for the nine months ended September 30, 2022, from $4.48 billion for the same 2021 period. The increase in average interest-earnings assets for the three and nine months ended September 30, 2022 were partially offset by declines in the average balance of interest-earning deposits of $181.5 million to $232.2 million for the three months ended September 30, 2022 and $290.5 million to $174.8 million for the nine months ended September 30, 2022.

The growth in loans for both the three months and nine months ended September 30, 2022 was driven by growth in commercial mortgages as part of the Company’s balance sheet repositioning executed in the first quarter of 2022. Commercial mortgages grew by $377.4 million, or 18 percent, to $2.51 billion from $2.13 billion and commercial loans increased by $190.2 million or 10 percent, to $2.02 billion from $1.83 billion for the three months ended September 30, 2022. Commercial mortgages increased by $499.8 million, or 25 percent, to $2.47 billion for the nine months ended September 30, 2022 from $1.97 billion for the same period in 2021 coupled with growth in commercial loans of $116.3 million, or 6 percent to $2.02 billion.

The average balance of investments decreased $69.2 million or 8 percent for the quarter ended September 30, 2022, to $757.4 million from $826.6 million for the same three-month period in 2021. During the first quarter of 2022, the Company executed a balance sheet repositioning which included the sale of $125 million of investments at lower yields to partially fund like duration, higher yielding multifamily loans. The average balance of investments decreased slightly for the nine months ended September 30, 2022 to $822.4 million from $829.2 million for the same 2021 period, due partially to the investment sale and normal amortization of the portfolio.

For the third quarters of 2022 and 2021, the average yields earned on interest-earning assets were 3.62 percent and 2.78 percent, respectively, an increase of 84 basis points. The increase in yields on interest-earning assets was due to the increase in target Federal Funds of 150 basis points during the third quarter (300 basis points year-to-date), which resulted in an increase of 73 basis points on loans to 4.00 percent for the quarter ended September 30, 2022, compared to 3.27 percent for the same period of 2021. The yield on interest-earning deposits increased 186 basis points to 200 basis points for the quarter ended September 30, 2022 when compared to the same period in 2021. However, the balance of interest-bearing deposits significantly decreased, which helped to improve the average yield on interest-earning assets as the Bank utilized excess liquidity to originate loans and for security purchases during the latter half of 2021. With the transformation to a commercial bank balance sheet and business model, the Company is asset sensitive as of September 30, 2022, and therefore net interest income would improve in a rising rate environment but decline in a falling rate environment.

For the nine months ended September 30, 2022 and 2021, the average yields earned on interest-earning assets were 3.26 percent and 2.74 percent, respectively, an increase of 52 basis points. This was due to an increase of 33 basis points in loans to 3.59 percent for the nine months ended September 30, 2022, compared to 3.26 percent for the same period of 2021. The yield on interest-earning deposits increased 104 basis points to 115 basis points for the nine months ended September 30, 2022 when compared to the same period in 2021. However, the average balance of interest-bearing deposits significantly decreased, which helped to improve the average yield on interest-earning assets as the Bank utilized excess liquidity to originate loans and for security purchases during the latter half of 2021.

The average yield on total loans increased 73 basis points to 4.00 percent for the quarter ended September 30, 2022 when compared to 3.27 percent for the prior period was driven by an increase in yield on commercial loans of 100 basis points to 4.63 percent when compared to 3.63 percent for the same quarter of 2021, due to the increase in target Federal Funds of 150 basis points during the third quarter of 2022 (300 basis points year-to-date) given these loans are typically floating rates with short repricing periods. The increase in yield was also driven by an increase in yield on commercial mortgages which increased by 66 basis points to 3.68 percent for the quarter ended September 30, 2022 compared to 3.02 percent for the same 2021 quarter. The increase was due to the originations of loans with higher yields during the first nine months of 2022. In addition, 23 percent of our loan portfolio reprices within one month; 36 percent within three months and 46 percent within one year. The increases in the average balances of commercial loans and commercial mortgages were partially funded by the balance sheet repositioning completed in the first quarter of 2022 and the use of the Company’s liquidity, as seen by the decline in interest-earning deposits of $181.5 million during the third quarter of 2022.

The average yield earned on total loans increased by 33 basis points to 3.59 percent when compared to the same nine month period of 2021. This increase was primarily due to higher yields on commercial loans which were 4.03 percent for the nine months ended when compared to 3.51 percent for the same 2021 period due to the increase in target Fed Funds throughout 2022 given these loans are typically floating rates with short repricing periods. The increase was also driven by an increase in yield on commercial mortgages which increased by 29 basis points to 3.37 percent for the nine months ended September 30, 2022 when compared to 3.08 percent for the same period of 2021. The increase in the average yields was due to the originations of loans with higher yields. The increases in the average balances of commercial loans and commercial mortgages were partially funded by the balance sheet repositioning completed in the first quarter and the use of the Company’s liquidity, as seen by the decline in interest-earning deposits of $290.5 million during the nine months ended September 30, 2022.

During the quarter ended September 30, 2022 and 2021, the Company recorded a yield on investments of 1.52 percent and 1.40 percent, respectively.

For the nine months ended September 30, 2022 and 2021, the Company recorded a yield on investments of 1.64 percent and 1.40 percent, respectively. The increase in yield for the three and nine months ended September 30, 2022 was due to the Company strategically purchasing higher yielding investments during 2021 to maintain the size of the portfolio in anticipation of maturities and to utilize excess liquidity.

The average balance of interest-bearing liabilities totaled $4.46 billion for the third quarter of 2022, an increase of $165.4 million, or 4 percent, from the same period of 2021. The increase in interest-bearing liabilities reflected growth of interest-bearing deposits of $226.7 million, or 6 percent to $4.32 billion for the quarter ended September 30, 2022 from $4.09 billion for the same period of 2021, offset by decreases in the average balance of borrowings of $60.5 million, or 94 percent, to $3.8 million for the three months ended September 30, 2022 from $64.3 million for the same period of 2021.

The average balance of interest-bearing liabilities totaled $4.51 billion for the nine months ended September 30, 2022, an increase of $183.9 million, or 4 percent, from the same period of 2021. The increase of interest-bearing liabilities reflected growth of interest-bearing deposits of $334.7 million, or 8 percent, to $4.35 billion for the nine months ended September 30, 2022 from $4.02 billion for the same period of 2021, offset by decreases in the average balance of borrowings of $117.6 million or 85 percent to $20.9 million for the nine months ended September 30, 2022 from $138.4 million for the same period of 2021, and a decrease in the average balance of subordinated debt of $32.3 million or 20 percent to $132.8 million at September 30, 2022 from $165.1 million for the same 2021 period.

The increase in the average balance of interest-bearing deposits was due to the growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) of $234.5 million to $4.21 billion for the quarter ended September 30, 2022 when compared to $3.97 billion for the same period of 2021. The increase was due to: an increase in retail deposits from our branch network; an increase in interest-bearing checking deposits as maturing CDs shifted into these accounts; a focus on providing high-touch client service; new deposit relationships related to PPP; and a full array of treasury management products that support core deposit growth. This growth was partially offset by a decline of $7.8 million in the average balance of brokered deposits and $70.6 million in the average balance of retail CDs for the three months ended September 30, 2022, when compared to the same 2021 period.

The increase in the average balance of interest-bearing deposits was due to the growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) of $352.6 million to $4.24 billion for the nine months ended September 30, 2022 when compared to $3.89 billion for the same period of 2021. The increase was due to: an increase in retail deposits from our branch network; an increase in interest-bearing checking deposits as maturing CDs shifted into these accounts; a focus on providing high-touch client service; new deposit relationships related to PPP; and a full array of treasury management products that support core deposit growth. This growth was partially offset by a decline of $17.8 million in the average balance of brokered deposits and $84.8 million in the average balance of retail CDs for the nine months ended September 30, 2022, when compared to the same 2021 period.

The Company is a participant in the Reich & Tang Demand Deposit Marketplace (“DDM”) program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts issued by other participating banks. Customer funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances are included in the Company’s interest-bearing checking balances. The average balance of reciprocal deposits was $630.1 million and $711.6 million for the three months ended September 30, 2022 and 2021, respectively. The average balance of reciprocal deposits was $667.7 million and $725.4 million for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in borrowings for the three and nine months ended September 30, 2022 when compared to the 2021 periods was principally due to the Company’s participation in the Paycheck Protection Program Loan Facility in 2021 to fund PPP loan originations, which decreased due to PPP loan forgiveness that occurred during the latter part of 2021, offset by a slight increase in overnight borrowings.

In June 2021, the Company redeemed $50.0 million of subordinated debt bearing interest at an annual rate of 6.0 percent issued in June 2016 that was set to re-price to approximately 5.0 percent. In December 2020, the Company issued $100.0 million of subordinated debt ($98.2 million net of issuance costs) bearing interest at an annual rate of 3.50 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2025 or earlier redemption. 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.

For the quarters ended September 30, 2022 and 2021, the cost of interest-bearing liabilities was 85 basis points and 45 basis points, respectively, an increase of 40 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 41 basis points coupled with the balance increasing $226.7 million. Although the Federal Reserve raised the target Federal Funds rate 300 basis points, the Company has been able to maintain lower deposit rates as our high touch client service has provided a competitive advantage in the pricing of our deposit accounts. The cost of borrowings increased by 269 basis points to 3.04 percent for the quarter ended September 30, 2022 from 0.35 percent for the quarter ended September 30, 2021 due to the current interest rate environment.

For the nine months ended September 30, 2022 and 2021, the cost of interest-bearing liabilities was 58 basis points and 53 basis points, respectively, reflecting an increase of 5 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 11 basis points for the nine months ended September 30, 2022. Although the Federal Reserve raised the target Federal Funds rate 300 basis points, the Company has been able to maintain lower deposit rates as our high touch client service has provided a competitive advantage in the pricing of our deposit accounts. The cost of borrowings increased by 23 basis points to 66 basis points for the nine months ended September 30, 2022 due to the current rate environment. The average cost of interest-bearing liabilities was also effected by a decline in the cost of subordinated debt of 45 basis points to 4.11 percent.

**INVESTMENT SECURITIES:** Investment securities available for sale are purchased, sold and/or maintained as a part of the Company’s overall balance sheet, liquidity and interest rate risk management strategies, and in response to changes in interest rates, liquidity needs, prepayment speeds and/or other factors. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders’ equity, net of income taxes. Realized gains and losses are recognized in income at the time the securities are sold. Investment securities held to maturity are those securities that the Company has both the ability and intent to hold to maturity. These securities are carried at amortized cost. Equity securities are carried at fair value with unrealized gains and losses recorded in non-interest income.

At September 30, 2022, the Company had investment securities available for sale with a fair value of $497.9 million compared with $796.8 million at December 31, 2021. The decrease was due to the sale of residential mortgage-backed securities and U.S. government-sponsored agencies of $121.2 million associated with a balance sheet repositioning executed in first quarter of 2022. The decrease was also due to an increase in the unrealized loss due to the rising interest rate environment experienced during the first nine months of 2022. A net unrealized loss (net of income tax) of $82.6 million and of $9.9 million were included in shareholders’ equity at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, the Company had investment securities held to maturity with a carrying cost of $103.6 million and an estimated fair value of $87.9 million compared with a carrying cost of $108.7 million and an estimated fair value of $108.5 million at December 31, 2021.

The Company has one equity security (a CRA investment security) with a fair value of $13.0 million at September 30, 2022 compared with a fair value of $14.7 million at December 31, 2021, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded a $571,000 and $1.7 million unrealized loss on the Consolidated Statements of Income for the three and nine months ended September 30, 2022, respectively, as compared to an unrealized loss of $70,000 and $293,000 for the three and nine months ended September 30, 2021, respectively.

The carrying value of investment securities available for sale as of September 30, 2022 and December 31, 2021 are shown below:

*(In thousands)*

| Investment securities - available for sale: | September 30, 2022 Amortized Cost | Estimated Fair Value | December 31, 2021 Amortized Cost | Estimated Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. government-sponsored agencies | $244,770 | $189,410 | $280,045 | $272,221 |
| Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | 315,541 | 267,547 | 481,062 | 476,974 |
| SBA pool securities | 33,538 | 29,121 | 40,649 | 39,561 |
| State and political subdivisions | 2,613 | 2,584 | 5,431 | 5,476 |
| Corporate bond | 10,000 | 9,218 | 2,500 | 2,521 |
| Total investment securities - available for sale | $606,462 | $497,880 | $809,687 | $796,753 |
| Investment securities - held to maturity: |  |  |  |  |
| U.S. government-sponsored agencies | 40,000 | 35,131 | 40,000 | 39,982 |
| Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | 63,551 | 52,726 | 68,680 | 68,478 |
| Total investment securities - held to maturity | $103,551 | $87,857 | $108,680 | $108,460 |
| Total | $710,013 | $585,737 | $918,367 | $905,213 |

The following table presents the contractual maturities and yields of debt securities available for sale and held to maturity as of September 30, 2022. The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities:

|  |  | After 1 But | After 5 But | After |  |
| --- | ---: | ---: | ---: | ---: | ---: |
|  | **Within** | **Within** | **Within** | **10** |  |
| **(Dollars in thousands)** | **1 Year** | **5 Years** | **10 Years** | **Years** | **Total** |
| Investment securities - available for sale: |  |  |  |  |  |
| U.S. government-sponsored agencies | $— | $— | $111,935 | $77,475 | $189,410 |
|  | — | — | 1.39% | 1.79% | 1.56% |
| Mortgage-backed securities-residential (1) | 24,986 | 8,937 | 15,126 | 218,498 | 267,547 |
|  | 3.37% | 2.85% | 1.90% | 1.99% | 2.12% |
| SBA pool securities | — | — | 11,686 | 17,435 | 29,121 |
|  | — | — | 1.75% | 1.32% | 1.49% |
| State and political subdivisions (2) | 1,945 | 639 | — | — | 2,584 |
|  | 2.17% | 1.90% | — | — | 2.10% |
| Corporate bond | — | — | 9,218 | — | 9,218 |
|  | — | — | 4.81% | — | 4.81% |
| Total investments - available for sale | $26,931 | $9,576 | $147,965 | $313,408 | $497,880 |
|  | 3.28% | 2.79% | 1.65% | 1.90% | 1.90% |
| Investment securities - held to maturity: |  |  |  |  |  |
| U.S. government-sponsored agencies | — | 15,000 | 25,000 | — | 40,000 |
|  | — | 1.35% | 1.64% | — | 1.53% |
| Mortgage-backed securities-residential (1) | — | — | — | 63,551 | 63,551 |
|  | — | — | — | 1.77% | 1.77% |
| Total investments - held to maturity | $— | $15,000 | $25,000 | $63,551 | 103,551 |
|  | — | 1.35% | 1.64% | 1.77% | 1.68% |
| Total | $26,931 | $24,576 | $172,965 | $376,959 | $601,431 |
|  | 3.28% | 1.91% | 1.65% | 1.88% | 1.86% |

(1) Shown using stated final maturity.

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

Federal funds sold and interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during the three months ended September 30, 2022 was $232.2 million compared to $413.6 million for the quarter ended September 30, 2021. The decrease reflected the use of excess liquidity to fund asset growth.

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

*(In thousands)*

|  | For the Three Months Ended September 30, 2022 | 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $1,060 | $959 | $101 |
| Bank owned life insurance | 299 | 311 | (12) |
| Gain on sale of loans (mortgage banking) | 60 | 408 | (348) |
| Gain on loans held for sale at lower of cost or fair value | — | — | — |
| Fee income related to loan level, back-to-back swaps | — | — | — |
| Gain on sale of SBA loans | 622 | 1,569 | (947) |
| Corporate advisory fee income | 102 | 84 | 18 |
| Other income | 1,868 | 660 | 1,208 |
| Fair value adjustment for CRA equity security | (571) | (70) | (501) |
| Total other income (excluding wealth management income) | $3,440 | $3,921 | $(481) |

*(In thousands)*

|  | For the Nine Months Ended September 30, 2022 | 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $3,075 | $2,701 | $374 |
| Bank owned life insurance | 922 | 1,388 | (466) |
| Gain on sale of loans (mortgage banking) | 458 | 1,842 | (1,384) |
| Gain/(loss) on loans held for sale at lower of cost or fair value | — | 1,407 | (1,407) |
| Fee income related to loan level, back-to-back swaps | — | — | — |
| Gain on sale of SBA loans | 6,141 | 3,950 | 2,191 |
| Corporate advisory fee income | 1,696 | 1,303 | 393 |
| Loss on swap termination | — | (842) | 842 |
| Other income | 3,982 | 2,798 | 1,184 |
| Loss on securities sale, net | (6,609) | — | (6,609) |
| Fair value adjustment for CRA equity security | (1,728) | (293) | (1,435) |
| Total other income (excluding wealth management income) | $7,937 | $14,254 | $(6,317) |

The Company recorded total other income, excluding wealth management fee income, of $3.4 million for the third quarter of 2022 compared to $3.9 million for the same quarter of 2021. The Company recorded total other income, excluding wealth management fee income, of $7.9 million for the nine months ended September 30, 2022 compared to $14.3 million for the same 2021 period.

The Company provides loans that are partially guaranteed by the SBA, to provide working capital and/or financing the purchase of equipment, inventory or commercial real estate that could be used for start-up businesses. All SBA loans are underwritten and documented as prescribed by the SBA. The Company generally sells the guaranteed portion of the SBA loans in the secondary market, with the non-guaranteed portion of SBA loans held in the loan portfolio. The third quarter of 2022 included $622,000 of gains on sales of SBA loans, which represents a decrease of $947,000, or 60 percent compared to $1.6 million for the same quarter in 2021. Gains on sales of SBA loans for the nine months ended September 30, 2022 increased $2.2 million, or 55 percent, to $6.1 million from $4.0 million for the same 2021 period. 2022 activity has benefitted from the addition of an SBA team hired by the Company in the fourth quarter of 2021 offset slightly by market volatility, which has resulted in lower sale premiums.

The Company recorded corporate advisory fee income for the third quarter of 2022 of $102,000 compared to $84,000 for the same three-month period ended September 30, 2021. The nine months ended September 30, 2022 included $1.7 million of corporate advisory fee income compared to $1.3 million for the same 2021 period.

Income from the back-to-back swap, SBA programs, and corporate advisory fee income are dependent on volume, and thus are not consistent from quarter to quarter.

For the three months ended September 30, 2022, income from the sale of newly originated residential mortgage loans was $60,000 compared to $408,000 for the same quarter in 2021. Income from the sale of newly originated residential mortgage loans decreased $1.4 million from $1.8 million for the nine months ended September 30, 2021 to $458,000 for the same 2022 period. The decrease for the three and nine months ended September 30, 2022, was the result of the decreased volume of residential mortgage loans originated for sale due to a slowdown in refinancing and home purchase activity in the higher interest rate environment.

Other income for the three and nine months ended September 30, 2022 included unused commercial line fees of $818,000 and $1.5 million, respectively, compared to $163,000 and $476,000 for the same 2021 periods. Additionally, the three and nine months ended

September 2022 included income recorded by the Equipment Finance Division related to equipment transfers to lessees of $547,000 and $972,000, respectively, compared to none recorded in the prior periods.

During the three and nine months ended September 30, 2022, the Company recorded a $571,000 and $1.7 million loss on the fair value adjustment for CRA equity securities, respectively, compared to a loss of $70,000 and $293,000, respectively, for the same 2021 periods.

Other income for the nine months ended September 30, 2022, included a $6.6 million loss on securities due to the Company’s balance sheet repositioning, by selling lower yielding securities and replacing them with higher yielding like duration multifamily loans, executed during the first quarter. The Company repositioning has improved the NIM with no impact to tangible capital or tangible book value per share.

The nine months ended September 30, 2021 included $455,000 of additional income related to a net life insurance death benefit under the Company’s BOLI policies.

During the nine months ended September 30, 2021, the Company recorded a gain on sale of $1.1 million for the sale of $57 million of PPP loans to a third party.

Other income included $164,000 and $886,000 of income related to the referral of PPP loans for the three and nine months ended September 30, 2021, respectively.

During the nine months ended September 30, 2021, the Company recognized a loss on the termination of $842,000 for two interest rate swaps that had a notional value of $40 million with a weighted average cost of 1.50 percent.

The nine months ended September 30, 2021 included a gain on sale of an OREO property of $51,000.

The remainder of the increase for the three and nine months ended September 30, 2022, when compared to the same 2021 periods were primarily due to an increase in commercial lending fees primarily related to loan servicing income and letter of credit fees.

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

*(In thousands)*

|  | For the Three Months Ended September 30, 2022 | 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $22,656 | $19,859 | $2,797 |
| Premises and equipment | 4,534 | 4,459 | 75 |
| FDIC assessment | 510 | 555 | (45) |
| Other Operating Expenses: |  |  |  |
| Professional and legal fees | 1,180 | 1,565 | (385) |
| Telephone | 403 | 342 | 61 |
| Advertising | 574 | 386 | 188 |
| Amortization of intangible assets | 384 | 431 | (47) |
| Swap valuation allowance | — | 1,350 | (1,350) |
| Other | 3,319 | 3,238 | 81 |
| Total operating expenses | $33,560 | $32,185 | $1,375 |

63

*(In thousands)*

|  | For the Nine Months Ended September 30, 2022 | 2021 | Change 2022 vs 2021 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $66,987 | $61,759 | $5,228 |
| Premises and equipment | 13,821 | 12,646 | 1,175 |
| FDIC assessment | 1,484 | 1,669 | (185) |
| Other Operating Expenses: |  |  |  |
| Professional and legal fees | 3,630 | 4,007 | (377) |
| Telephone | 1,085 | 988 | 97 |
| Advertising | 1,545 | 1,004 | 541 |
| Amortization of intangible assets | 1,204 | 1,167 | 37 |
| Branch restructure | 372 | 228 | 144 |
| Write-off of subordinated debt costs | — | 648 | (648) |
| Swap valuation allowance | 673 | 1,350 | (677) |
| Other | 9,587 | 8,997 | 590 |
| Total operating expenses | $100,388 | $94,463 | $5,925 |

Operating expenses totaled $33.6 million for the three months ended September 30, 2022, compared to $32.2 million for the same 2021 period, reflecting an increase of $1.4 million or 4 percent. Operating expenses for the nine months ended September 30, 2022 increased $5.9 million or 6 percent to $100.4 million compared to $94.5 million for the same 2021 period. The increased operating expenses for the three and nine months ended September 30, 2022 were principally attributable to: increased corporate and health insurance costs; hiring in line with the Company’s strategic plan; and normal salary increases, which were partially offset by decreased FDIC expense. The nine months ended September 30, 2022 included nine months of expense associated with the acquisition of PPSG completed in July 2021 compared to three months for the prior year period. The nine months ended September 30, 2022 included $372,000 of expense associated with the consolidation of private banking offices. The nine months ended September 30, 2022 included a swap valuation allowance of $673,000. Both the three and nine months ended September 30, 2021 included a swap valuation expense of $1.4 million. Both the nine months ended September 30, 2021 and 2022 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank. The nine months ended September 30, 2021 included accelerated expense of $648,000 related to the redemption of subordinated debt.

**PEAPACK PRIVATE:** This division includes: investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; and other financial planning, tax preparation and advisory services. Peapack Private provides wealth management, trust and investment services at the Bank’s headquarters in Bedminster, at private banking locations in Morristown, Princeton, Red Bank, Summit and Teaneck, New Jersey and at the Bank’s subsidiaries and PGB Trust & Investments of Delaware, in Greenville, Delaware.

The market value of the assets under management and/or administration (“AUM/AUA”) of Peapack Private was $9.3 billion at September 30, 2022, reflecting a 16 percent decrease from $11.1 billion at December 31, 2021 and a decrease of 10 percent from $10.3 billion at September 30, 2021. Continued market declines in 2022 further impacted the results in the September 2022 quarter, as the S&P was down another 5 percent in Q3 2022 (and down 25 percent for the nine months ended September 30, 2022). Effective July 1, 2021, the Bank closed on the acquisition of Princeton Portfolio Strategies Group (“PPSG”), a registered investment advisor headquartered in Princeton, New Jersey, which contributed approximately $520 million of AUM/AUA at the time of acquisition.

In the September 2022 quarter, Peapack Private generated $12.9 million in fee income compared to $13.9 million for the September 2021 quarter, reflecting a 7 percent decrease. For the nine months ended September 30, 2022, Peapack Private generated $41.7 million in fee income compared to $39.0 million in fee income for the same period in 2021, reflecting a 7 percent increase. The growth in fee income for the nine months ended September 30, 2022 was due to several factors, including the acquisition noted above, new business, partially offset by normal levels of disbursements and outflows and negative market performance.

Operating expenses relative to Peapack Private reflected increases due to overall growth in the business, new hires and the PPSG acquisition when comparing the three and nine months ended September 30, 2022 to the same periods for 2021. Expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel.

Peapack Private currently generates adequate revenue to support the salaries, benefits and other expenses of the wealth division and Management believes it will continue to do so as the Company grows organically and/or by acquisition. Management believes that the Bank generates adequate liquidity to support the expenses of Peapack Private 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 as of the dates indicated:

*(Dollars in thousands)*

|  | As of September 30, 2022 | June 30, 2022 | March 31, 2022 | December 31, 2021 | September 30, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Loans past due 90 days or more and still accruing | $— | $— | $— | $— | $— |
| Nonaccrual loans | 15,724 | 15,078 | 15,884 | 15,573 | 25,925 |
| Other real estate owned | 116 | 116 | — | — | — |
| Total nonperforming assets | $15,840 | $15,194 | $15,884 | $15,573 | $25,925 |
| Performing TDRs (1)(2) | $2,761 | $2,272 | $2,375 | $2,479 | $416 |
| Loans past due 30 through 89 days and still accruing (3) | $7,248 | $3,126 | $606 | $8,606 | $1,193 |
| Loans subject to special mention | $82,107 | $98,787 | $110,252 | $116,490 | $115,935 |
| Classified loans | $27,507 | $27,167 | $47,386 | $50,702 | $51,937 |
| Individually evaluated loans | $13,047 | $13,227 | $16,147 | $18,052 | $26,341 |
| Nonperforming loans as a % of total loans (4) | 0.30% | 0.29% | 0.31% | 0.32% | 0.56% |
| Nonperforming assets as a % of total assets (4) | 0.26% | 0.25% | 0.25% | 0.26% | 0.42% |
| Nonperforming assets as a % of total loans plus other real estate owned (4) | 0.31% | 0.29% | 0.31% | 0.32% | 0.57% |

(1) Amounts reflect TDRs that are paying according to restructured terms.

(2) Amount excludes $12.9 million at September 30, 2022, $13.5 million at June 30, 2022, $13.6 million at March 31, 2022, $1.1 million at December 31, 2021 and $4.0 million at September 30, 2021 of TDRs included in nonaccrual loans.

(3) Includes $5.1 million outstanding to a U.S. governmental unit at September 30, 2022; $6.9 million for one equipment lease principally due to administrative issues with the servicer and the lessee/borrower at December 31, 2021.

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

**PROVISION FOR CREDIT LOSSES**: The provision for credit losses was $599,000 and $1.6 million for the third quarters of 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, the provision for credit losses was $4.4 million and $2.7 million, respectively. The increased provision for credit losses for the nine months ended September 30, 2022, when compared to the nine months ended September 30, 2021, was due principally to loan growth of $370.6 million and an increase in unused lines of credit which require a reserve under CECL.

The allowance for credit losses was $59.7 million as of September 30, 2022, compared to $61.7 million at December 31, 2021. The decline in the allowance for credit losses (“ACL”) was primarily due to the Day 1 reduction of $5.5 million incurred in connection with the implementation of CECL on January 1, 2022 partially offset by the 2022 provision for credit losses of $4.4 million. The allowance for credit losses as a percentage of loans was 1.15 percent and 1.28 percent at September 30, 2022 and December 31, 2021, respectively. The allowance for credit loss ratio declined due to the Day 1 reduction and a 2022 provision for credit losses based on 2022 loan growth in lower risk segments that carry lower ACL coverage. The specific reserves recorded on individually evaluated loans were $2.4 million at September 30, 2022 compared to $4.2 million as of December 31, 2021. Total individually evaluated loans were $13.0 million and $18.1 million as of September 30, 2022 and December 31, 2021, respectively. The general component of the allowance decreased from $57.5 million at December 31, 2021 to $57.3 million at September 30, 2022.

The adoption of CECL resulted in a day 1 reduction of $5.5 million. The lower allowance was in part attributed to historically low charge-offs combined with the shorter duration of the loan portfolio employed in our CECL analysis. Further, the incurred loss method required significant qualitative factors, including factors related to COVID-19, and the use of a multiplier for potential losses on criticized and classified loans, neither of which are included within the CECL methodology. The CECL methodology utilizes significantly less qualitative factors as it uses economic factors and historical losses over a full economic cycle and calculates losses based on DCF on an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology.

On January 1, 2022, the Company adopted ASU 2016-13 *(Topic 326),* which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for Management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and Management judgment and is reviewed on a quarterly basis. When Management is reasonably certain that a loan balance is not fully collectable, an analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of management and the effect of external factors such as competition, legal and regulatory requirements, amount others. The allowance is available for any loan that, in Management’s judgment, should be charged off.

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

*(Dollars in thousands)*

| Allowance for credit losses: | September 30, 2022 | June 30, 2022 | March 31, 2022 | December 31, 2021 | September 30, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Beginning of period | $59,022 | $58,386 | $61,697 | $65,133 | $63,505 |
| Day one CECL adjustment | — | — | (5,536) | — | — |
| Provision for credit losses (1) | 665 | 646 | 2,489 | 3,750 | 1,600 |
| (Charge-offs)/recoveries, net | (4) | (10) | (264) | (7,186) | 28 |
| End of period | $59,683 | $59,022 | $58,386 | $61,697 | $65,133 |
| Allowance for credit losses as a % of total loans (2) | 1.15% | 1.15% | 1.14% | 1.28% | 1.42% |
| General allowance for credit losses as a % of total loans (2) | 1.11% | 1.10% | 1.09% | 1.20% | 1.27% |
| Allowance for credit losses as a % of non-performing loans | 379.57% | 391.44% | 367.58% | 396.18% | 251.24% |

(1) Commencing on January 1, 2022, the allowance calculation is based on the CECL methodology. Prior to January 1, 2022, the allowance calculation was based on the incurred loss methodology. Provision to rollforward the ACL excludes a credit of $66,000 for the three months ended September 30, 2022, a provision of $803,000 for the three months ended June 30, 2022 and a credit of $114,000 for the three months ended March 31, 2022 related to the off-balance sheet commitments.

(2) The September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 allowance coverage ratios include PPP loans of $48.7 million, $13.8 million, $9.6 million, $9.4 million and $1.9 million, respectively, in total loans. PPP loans are fully guaranteed by the SBA and as such do not have an associated reserve for those same periods.

**INCOME TAXES:** Income tax expense for the quarter ended September 30, 2022 was $7.6 million as compared to $5.0 million for the same period in 2021. During the nine months ended September 30, 2022, the Company recorded income tax expense of $19.2 million compared to $15.2 million for the same period in 2021.

The effective tax rate for the three months ended September 30, 2022 was 27.47 percent compared to 26.22 percent for the same quarter in 2021. The effective tax rate for the nine months ended September 30, 2022 was 26.32 percent compared to 26.65 percent for the same 2021 period.

The nine months ended September 30, 2022 and 2021 both benefitted from the vesting of restricted stock at prices higher than grant prices. The nine months ended September 30, 2021 quarter also benefitted from life insurance proceeds that were not taxable.

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

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

Capital was benefitted by net income of $53.7 million for the nine months ended September 30, 2022, which was offset by the purchase of shares through the Company’s stock repurchase program and an increase in the unrealized loss on securities, net of tax of $72.8 million. The Company repurchased 790,277 shares, at an average price of $34.84, for a total cost of $27.5 million during the nine months ended September 30, 2022.

The Company employs quarterly capital stress testing – adverse case and severely adverse case. In the most recent completed stress test based on June 30, 2022 financial information, under severely adverse case, and no growth scenarios, the Bank remains well capitalized over a two-year stress period. With a pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At September 30, 2022 and December 31, 2021, all of the Bank’s capital ratios remain above the levels required to be considered “well capitalized” and the Company’s capital ratios remain above regulatory requirements.

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

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio (“CBLR”) at 9 percent, effective January 1, 2020. Under the CARES Act, the Community Bank Leverage Ratio was temporarily lowered to 8 percent. The Bank did not opt into the CBLR and will continue to comply with the requirements under Basel III. The Bank’s leverage ratio was 10.79 percent at September 30, 2022.

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

*(Dollars in thousands)*

| As of September 30, 2022: | 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 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total capital (to risk-weighted assets) | $731,325 | 14.69% | $497,731 | 10.00% | $398,185 | 8.00% | $522,618 | 10.50% |
| Tier I capital (to risk-weighted assets) | 670,717 | 13.48 | 398,185 | 8.00 | 298,639 | 6.00 | 423,072 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 670,693 | 13.48 | 323,525 | 6.50 | 223,979 | 4.50 | 348,412 | 7.00 |
| Tier I capital (to average assets) | 670,717 | 10.79 | 310,685 | 5.00 | 248,548 | 4.00 | 248,548 | 4.00 |
| As of December 31, 2021: |  |  |  |  |  |  |  |  |
| Total capital (to risk-weighted assets) | $672,614 | 14.05% | $478,628 | 10.00% | $382,902 | 8.00% | $502,559 | 10.50% |
| Tier I capital (to risk-weighted assets) | 612,762 | 12.80 | 382,902 | 8.00 | 287,177 | 6.00 | 406,834 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 612,738 | 12.80 | 311,108 | 6.50 | 215,382 | 4.50 | 335,039 | 7.00 |
| Tier I capital (to average assets) | 612,762 | 9.99 | 306,538 | 5.00 | 245,231 | 4.00 | 245,231 | 4.00 |

(A) See footnote on following table

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

*(Dollars in thousands)*

| As of September 30, 2022: | 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 |
| --- | ---: | ---: | --- | --- | ---: | ---: | ---: | ---: |
| Total capital (to risk-weighted assets) | $733,988 | 14.74% | N/A | N/A | $398,309 | 8.00% | $522,780 | 10.50% |
| Tier I capital (to risk-weighted assets) | 540,464 | 10.86 | N/A | N/A | 298,731 | 6.00 | 423,203 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 540,440 | 10.86 | N/A | N/A | 224,049 | 4.50 | 348,520 | 7.00 |
| Tier I capital (to average assets) | 540,464 | 8.70 | N/A | N/A | 248,580 | 4.00 | 248,580 | 4.00 |
| As of December 31, 2021: |  |  |  |  |  |  |  |  |
| Total capital (to risk-weighted assets) | $700,790 | 14.64% | N/A | N/A | $382,944 | 8.00% | $502,614 | 10.50% |
| Tier I capital (to risk-weighted assets) | 508,231 | 10.62 | N/A | N/A | 287,208 | 6.00 | 406,878 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 508,207 | 10.62 | N/A | N/A | 215,406 | 4.50 | 335,076 | 7.00 |
| Tier I capital (to average assets) | 508,231 | 8.29 | N/A | N/A | 245,242 | 4.00 | 245,242 | 4.00 |

(A) The Basel Rules require the Company and the Bank to maintain a 2.5% “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) Common Equity Tier 1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall.

The 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 $200,000 per quarter to purchase additional shares of common stock. Voluntary share purchases in the “Reinvestment Plan” can be filled from the Company’s authorized but unissued shares and/or in the open market, at the discretion of the Company. All shares purchased during the quarter ended September 30, 2022 were purchased in the open market.

On October 27, 2022, the Board of Directors declared a regular cash dividend of $0.05 per share payable on November 28, 2022 to shareholders of record on November 10, 2022.

Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient common equity to support its planned growth for the immediate future. The Company continually assesses other potential sources of capital to support future growth.

**LIQUIDITY:** Liquidity refers to an institution’s ability to meet short-term requirements including funding of loans, deposit withdrawals and maturing obligations, as well as long-term obligations, including potential capital expenditures. The Company’s liquidity risk management is intended to ensure the Company has adequate funding and liquidity to support its assets across a range of market environments and conditions, including stressed conditions. Principal sources of liquidity include cash, temporary investments, securities available for sale, customer deposit inflows, loan repayments and secured borrowings. Other liquidity sources include loan sales.

Management actively monitors and manages the Company’s liquidity position and believes it is sufficient to meet future needs. Cash and cash equivalents, including interest-earning deposits, totaled $108.3 million at September 30, 2022. In addition, the Company had $497.9 million in securities designated as available for sale at September 30, 2022. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. Available for sale and held to maturity securities with a carrying value of $461.0 million and $103.6 million as of September 30, 2022, respectively, 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.

As of September 30, 2022, the Company had approximately $1.8 billion of secured funding available from the Federal Home Loan Bank. Additionally, the Company had $1.7 billion of secured funding available from the Federal Reserve Discount Window, none of which was drawn.

Brokered interest-bearing demand (“overnight”) deposits were $85.0 million at September 30, 2022. The interest rate paid on these deposits allows the Bank to fund asset growth at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of September 30, 2022, the Company had transacted pay fixed, receive floating interest rate swaps totaling $390.0 million in notional amount, which includes $100.0 million of forward-starting swaps.

The Company has a Board-approved Contingency Funding Plan in place. This plan provides a framework for managing adverse liquidity stress and contingent sources of liquidity. The Company conducts liquidity stress testing on a regular basis to ensure sufficient liquidity in a stressed environment. The Company believes it has sufficient liquidity given the current environment created by the COVID-19 pandemic.

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

## Market risk

As filed, 6,936 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 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.

The 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. The 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 loans;
- Limit residential mortgage portfolio originations to adjustable-rate and/or shorter-term and/or “relationship” loans that result in core deposit and/or wealth management relationships;
- Actively market core deposit relationships, which are generally longer duration liabilities;
- Utilize medium to longer term certificates of deposit and/or wholesale borrowings to extend liability duration;
- Utilize interest rate swaps to extend liability duration;
- Utilize a loan level / back-to-back interest rate swap program, which converts a borrower’s fixed rate loan to adjustable rate for the Company;
- Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;
- Maintain adequate levels of capital; and
- Utilize loan sales.

The interest rate swap program is administered by the ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. The Company is receiving floating and paying fixed interest rates with total notional value of $390.0 million as of September 30, 2022. The Company’s interest rate swaps include $100.0 million of forward starting swaps that extend swaps set to mature in 2023 for an additional five years.

In addition, the Company initiated a loan level / back-to-back swap program in support of its commercial lending business. Pursuant to this program, the Company extends a floating rate loan and executes a floating to fixed swap with the borrower. At the same time, the Company executes a third-party swap, the terms of which fully offset the fixed exposure and, result in a final floating rate exposure for the Company. As of September 30, 2022, $627.5 million of notional value in swaps were executed and outstanding with borrowers under this program.

As noted above, the ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The models are based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The models incorporate certain prepayment and interest rate assumptions, which management believes to be reasonable as of September 30, 2022. The models assume changes in interest rates without any proactive change in the balance sheet by management. In the models, the forecasted shape of the yield curve remained static as of September 30, 2022.

In an immediate and sustained 100 basis point increase in market rates at September 30, 2022, net interest income would increase approximately 1.3 percent for year 1 and 3.8 percent for year 2, compared to a flat interest rate scenario. The Company’s interest rate sensitivity models indicate the Company is asset sensitive as of September 30, 2022 and that net interest income would improve in a rising rate environment but decline in a falling rate environment.

In an immediate and sustained 200 basis point increase in market rates at September 30, 2022, net interest income for year 1 would increase approximately 3.2 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 7.8 percent, when compared to a flat interest rate scenario.

The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at September 30, 2022.

*(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 | $779,622 | $(37,658) | (4.61)% | 13.98% | 1 |
| +100 | 797,519 | (19,761) | (2.42) | 13.97 | — |
| Flat interest rates | 817,280 | — | — | 13.97 | — |
| -100 | 872,091 | 54,811 | 6.71 | 14.46 | 49 |

(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.

## Controls and procedures

As filed, 3,151 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the forms and rules of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’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 Company’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.

In connection with the preparation of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, our management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2022 because of a material weakness in our internal control over financial reporting relating to the design of the controls over accounting for credit losses in accordance with the CECL accounting standard, ASC 2016-13, Financial Instruments – Credit Losses including the timing of the operation of these controls.

We have taken certain measures to remediate the material weakness related to the design of the controls related to application of the CECL accounting standard, including designing and implementing formal procedures and controls related to the timing of the operation of such controls. While we believe that the efforts taken to date and those planned for remediation will improve the effectiveness of our internal control over financial reporting, these remediation efforts are ongoing and will require time to operate for management to be able to conclude that the design is effective to remediate the material weakness identified.

### Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there has been no change in our internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

## Risk factors

As filed, 1,552 characters.

Other than described below, there have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

**Inflation and increase in market interest rates and potential effects from a recession can have an adverse impact on our business and on our customers.**

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there has been a pronounced rise in inflation and the Federal Reserve Board has raised certain benchmark interest rates to combat inflation. As inflation increases and market interest rates rise the value of our investment securities, particularly those with longer maturities, would decrease further. In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation, rising interest rates, and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us. Further, the increase in market interest rates is likely to reduce our loan origination volume, particularly refinance volume, and/or reduce our interest rate spread, which could have an adverse effect on our profitability and results of operations.

Filed Nov 9, 2022.
Source: SEC EDGAR, the filing index for accession 0000950170-22-023570. Last ingested by Listed: Nov 6, 2026, 13:09 ET. No prices; not investment advice.